Understanding the true potential long term upside for Bitcoin is no simple task. However, there is one principle that can help us understand what the risk/return expectations are. Everything comes down to understanding what it means to place an asymmetric bet.
Asymmetric bets are investment opportunities where the potential upside is much higher than the downside. Allocation to Bitcoin is one of the greatest asymmetric bets that investors have access to today. Few understand just how incredible the opportunity is. Let's take a moment to break down this asymmetric investment opportunity.
For an asymmetric bet, the downside can be measured in whatever you choose as your allocation sizing. Let's just say you have a 5% allocation to Bitcoin for this example. If by some catastrophic chance, Bitcoin goes to zero, your risk exposure has been completely minimized by position sizing. Your losses are capped. The absolute most that you can lose in this scenario is 5%.
Now let's take a look at the upside of an asymmetric bet on Bitcoin. Calculating the upside all comes down to how big your expectations for Bitcoin are. If you see Bitcoin as digital gold 2.0, then Bitcoin can go to ~$500,000 as it gobbles up gold's market cap. However, I would argue that Bitcoin is not just as good as gold, it improves on all of its store of value qualities immensely, and is likely at least a 10x improvement as such.
GOLD IS NOT THE ONLY "STORE OF VALUE" MARKET CAP BITCOIN WILL EAT INTO
Bitcoin is still just a drop in the bucket compared to the other assets as depicted below. All of these assets continually compete against each other for "store of value" supremacy.
Bitcoin Competes With ALL "Store of Value" Assets
Gold, Art, and Collectible Cars are often used as a store of value in traditional investing. However they are cumbersome to custody, difficult to transport due to its weight and size, expensive to verify authenticity, lack divisibility and are only relatively scarce compared to Bitcoin.
Real Estate is a well known store of value investment vehicle. However, there are also significant downsides compared to Bitcoin. It is an illiquid market, maintaining property can have high costs, it is not divisible if you wish to liquidate any of your holdings, and you have to deal with the government laws and regulations within your property's jurisdiction.
Government bond yields have been crashing to new lows for the last 30+ years. In the early 80s you could get 15% yield on a 10-Year Treasury Bond. Whereas reality today is that you will be lucky to get near 2% yield.
Take these projections and factor in the unprecedented amount of fed money printing and loose fiscal spending by our government and you have a simple recipe to reach $1M per Bitcoin in the near future.
SIZING YOUR BITCOIN BET
If we can say that the potential upside roughly ranges from 2x in the near future to 20x in the longer term. Using these numbers is how you decide how you should size your bet. The answer to that depends on what you are trying to achieve with your portfolio. To keep things simple, let's frame it as follows:
Assume your asymmetric bet has only two outcomes:
A) You lose your stake entirely.
B) Your position achieves the desired upside.
Then the percentage allocated to any single bet you make boils down to how confident you are to win. The more likely you think this will happen, the more you should bet on the outcome.
If you think there is 0% chance Bitcoin can reach 10x it's price, then you should not allocate ANY money at all. If you think there is 100% change BTC will 10x then obviously you should allocate ALL your money to that. At the same time the larger Bitcoin gets the less likely it will disappear overnight. The risk of losing it all is thus decreasing with adoption.
In reality, there is no such absolute certainty on either side of a bet. You will always end up somewhere in the middle ground. For our investors, we recommend up to a 5% allocation to Bitcoin for their investment portfolio. If you have any interest or further questions about our Bitcoin LP fund, please feel free to reach out. We would love to hear from you!