I am a long-term, buy-and-hold investor and not an active trader. I invest for dividend growth instead of short-term capital gains. I’m the last person who would invest in GameStop stock, except for maybe Warren Buffet.
Crypto of any kind was not a part of my investing strategy. The majority of my net worth is held in total stock market index funds, and only around 10% of my investments are active investments. My active investments are in hand-picked dividend-paying companies. I like to invest in productive, cash-flowing companies or real assets, such as real estate, instead of financial assets, like currencies.
That changed in 2020 as I slowly started to open up to Bitcoin, and crypto more generally, as a viable asset. As I learned more about Bitcoin and the blockchain technology it was built upon, I saw it more as a buy-and-hold investment instead of a vehicle for swing trading.
There are three main reasons that I began to invest in Bitcoin. The first is bitcoin is a deflationary currency. Secondly, financial services have cropped up that allow me to turn crypto investments into income-producing assets. Last but certainly not least, I think the long-term outlook on Bitcoin achieving mainstream adoption is high.
Bitcoin — A deflationary currency in an inflationary world.
The total amount of Bitcoin available is finite. Currently, as stated on Bitcoin.org, there are around 18.5 million Bitcoins mined. However, the amount in circulation is even less because coins can and have been lost. If a hard drive that stores Bitcoin is lost or destroyed, those coins are gone forever. If someone loses their private keys or recovery phrase, they can no longer spend their coins rendering them useless.
Bitcoin has a limit to the maximum number that can be mined. Bitcoin.org explains that only 21 million Bitcoin can ever be mined, and the last coin won’t be mined until the year 2140. This limited nature of Bitcoin makes it poised to gain buying power over time.
Bitcoin is a deflationary currency. Unlike Bitcoin, the money we use today, known as fiat currency, loses buying power due to inflation. Often the rate of inflation is low, typically between 2 and 3 percent. But with all the money printing happening in 2020, high inflation is becoming increasingly possible.
The graph above shows a sharp increase in the M1 money supply for USD. With all this extra money in circulation, the purchasing power of our hard-earned dollars is likely to decrease even more.
Bitcoin is a great place to park cash to reduce your inflationary risk. Why store cash in an asset that the US government intentionally devalues over time. Instead, I think it makes more sense to store cash in Bitcoin as it doesn’t suffer from intentional devaluation.
You can earn interest on your crypto investments
The second reason I listed for my investment in Bitcoin was being able to turn it into an income-producing asset. Several fintech companies have cropped up that allow you to deposit crypto and earn interest on your deposits. For me, this changes the game.
No longer is Bitcoin a speculative play. Instead, I can deposit Bitcoin and earn a higher interest rate than I do on cash in a high-yield savings account. Interest is usually paid in the currency that is deposited. For example, an account with Bitcoin deposited will pay interest in Bitcoin. If you deposit Ethereum, then you will be paid in Ethereum.
Currently, I am earning 6% on the Bitcoin I have deposited, but my returns are not limited to 6% because the Bitcoin paid out can increase in value too. This creates a positive feedback cycle in which reinvested interest increases in value over time, which results in more interest. This reminds me of dividend growth investing more than it does stashing cash into a savings account.
Bitcoin is in the beginning stages of mainstream adoption.
The final reason I listed for my investment in Bitcoin is that I see a high likelihood of mainstream adoption. This year there has been a lot of news of banks and companies adopting bitcoin.
- America’s oldest bank, BNY Mellon, said that it would begin holding, transferring, and issuing Bitcoin through its system.
- Square has been buying bitcoin and has started allowing bitcoin transactions on its services.
- Tesla made a huge splash when it announced that it had purchased $1.5 Billion in Bitcoin.
The news above is just a few of the headlines I’ve seen in the past year. If you want to see other companies that have assets in Bitcoin, check out Bitcoin Treasuries.
I’m sure these companies are just the beginning of mainstream adoption. As more people adopt Bitcoin, the demand will drive up the price due to the limited supply mentioned before. In due time, Bitcoin and other cryptos will be available to be invested in via index funds and ETFs, at which point I think we will see more growth with more stability in Bitcoin’s future.
For the reasons stated above, I finally decided to begin dollar-cost averaging into Bitcoin. I am also buying Ethereum. I don’t plan on having large investments in either asset. Instead, I plan to use them as an alternative to my cash savings totaling no more than 1%-2% of my portfolio.
Disclaimer: This article should not be taken as financial or investment advice. This article was written for educational purposes only. Please do your own research before making any financial or investment decisions.
Disclaimer: The author currently has a long position in Bitcoin and Ethereum.