Three and a half years ago, SMI provided a framework for the emerging Bitcoin and crypto phenomenon in our February 2022 article: Intro to Crypto. That article remains an excellent starting point for those unfamiliar with this potentially bewildering space. We recommend reviewing it first if you’re unfamiliar with crypto*, as this article builds on that foundation with an update of recent events.
[* Often referred to as crypto-currencies, that unfortunate label tends to be more confusing than helpful, given that most crypto projects more closely resemble start-up technology businesses. As with most things crypto-related, Bitcoin is the exception, which is why it stands apart from the rest of the "crypto" space.]
Critical distinction: Bitcoin vs. Crypto
Bitcoin (BTC) is the oldest and most recognizable name in the crypto space. Its market value currently comprises roughly 60% of the total crypto universe. While there are thousands of other “cryptos” chasing hundreds of different objectives, BTC stands apart. At this stage of the crypto world’s development, it’s fair to separate BTC from “everything else” and approach the two very differently.
Birthed in the throes of the 2008 Global Financial Crisis, the vision of early proponents was that BTC would be a decentralized, alternative form of money. Over time, BTC’s primary “use case” (or function) has shifted. While some BTC enthusiasts still dream of a day when we’ll all be buying daily coffee with BTC (i.e., using it as a primary currency), a new global consensus around its future role and function has gradually emerged as it has matured.
Rather than an alternative form of money, most BTC investors today tend to view it through the lens of a store of value. That may sound odd for an asset with such extreme historical price volatility, but it is BTC’s scarcity (enforced through its strict 21 million max limit) that appeals to investors wary of the continual debasement of fiat currencies by global governments and central banks. In many respects, today’s investors tend to view BTC similarly to the way they view gold: a separate asset class that can resist debasement and hold its value while all other forms of “money” become less valuable over time. (“Debasement” refers to devaluing fiat currencies, typically by inflationary policies like increasing the money supply.)
Bitcoin as digital gold
Naturally, old-time gold bugs scoff at the notion that this teenage upstart will ever fulfill the role gold has held for several thousand years.
But there is a strong generational tilt surrounding BTC. When one starts to think about BTC through the digital-gold lens, it becomes clear that BTC appeals to younger investors for many of the same reasons that gold appeals to older investors. The reality is that both groups include many who see the potential dangers of currency debasement and are looking for ways to insure against it.
Younger investors are more comfortable with digitally native assets. Many have grown up on the Internet, transacting in digital assets within video games, app stores, and the like. It’s not an uncomfortable leap to do the same thing with a digitally native asset like BTC in an online investing account.
The correlation of BTC with gold has dramatically increased over the past three years. This is important confirmation of its shifting store-of-value use case (as well as suggesting that institutional investors are becoming bigger players in the BTC space). Make no mistake, BTC continues to be much more volatile than gold. But as it matures, it’s easier to see how investors increasingly view these two assets similarly in terms of their resistance to currency debasement.
The shifting global reserve system
At the same time that inflation has pushed currency debasement to the forefront of investors’ minds, the 2022 Ukraine invasion and subsequent freezing/confiscation of Russian reserve assets sharpened the focus of foreign governments regarding the safety of continuing to rely on U.S. Treasury bonds as the primary global reserve asset. Many governments had been gradually shifting more of their reserves away from dollars and U.S. Treasuries prior to 2022, but the events of the past few years have created an altogether new sense of urgency.
As difficult as it is for many U.S. investors to imagine, one of the most important big-picture investment themes today is the transition from the largely unipolar monetary (U.S. Dollar) and reserve asset (U.S. Treasury Bonds) system to something new. The current system, under which the dollar is the readily convertible currency for the whole world and U.S. Treasuries are the default reserve asset for global savers (specifically governments and central banks), dates back to 1971 when President Nixon closed the international gold window, ending foreigners’ ability to convert dollars to gold. By historical standards, this system has lasted longer than most. It’s not clear what exactly will replace it, but there are plenty of signs that change is underway.
It’s hard to imagine what could replace the U.S. dollar as the primary global unit of exchange, but it’s not at all difficult to see that many countries are already voting with their feet against continuing to use U.S. Treasury bonds as the primary global reserve asset. The recent tariff experience provided the latest reinforcement of a trend that has been picking up steam since 2022. Within a week of the April 2 tariff announcement, global investor selling of U.S. Treasuries pushed long-term yields sharply higher, causing the Trump administration to abruptly pivot its tariff policies.
This was far from the first sign of foreign nations seeking to diversify their reserves away from U.S. Treasuries. Gold has doubled in price since late 2022, decoupling from many of its historical valuation relationships to interest rates following the Russian invasion of Ukraine. Not coincidentally, governments’ buying of gold through their central banks has soared in recent years.
This is the context in which BTC’s gradual acceptance by a growing proportion of global (especially younger) investors as “digital gold” is important. True, central banks aren’t buying BTC in an effort to diversify their foreign reserves away from U.S. Treasury Bonds and dollars — yet. But with countries making BTC legal tender for paying taxes and satisfying debts, that next step may just be a matter of time. Many investors who are long-time fans of gold view diversifying a bit of that into BTC as a way of potentially skating to where the puck is likely going, as opposed to where it is today.
Big regulatory shift clears way for institutional adoption
In our Intro to Crypto article three years ago, we identified regulatory risk as the greatest big-picture threat to digital assets. At that time, U.S. regulators were openly hostile to the industry, and it was uncertain whether action might be taken to kill crypto in its infancy before it became able to pose a significant challenge to the dollar and the rest of the traditional finance industry.
Those concerns have largely been eliminated over the past three years. The election of the first openly pro-crypto president (perhaps too pro-crypto for some tastes!) and his appointment of several advisers with deep ties to the crypto industry have led to a much friendlier regulatory regime. Steps to normalize BTC and crypto within the financial framework are underway across the federal and state levels, with new positive developments happening every week.
Possibly the most transformational step came last year when the long-anticipated approval of a wave of spot-Bitcoin ETFs was granted. These ETF approvals signaled acceptance by the investment regulators. They also provided a vital bridge for institutional investors to enter the space. Prior to these ETFs, buying and selling BTC (like any crypto) was difficult, scary, and frankly just too risky for most advisors and institutions. That changed instantly once the BTC ETFs were approved and began trading.
Importantly, this also started the process for many advisors and institutions to begin thinking about BTC as they would any other major asset class. This ability to easily include it within their broader asset allocation framework became immediately apparent, as the BTC ETFs gathered over $94 billion in assets in less than 18 months. These ETFs collectively hold roughly 5% of the total BTC supply today.
Further validation of crypto as a mainstream financial asset continues to roll in regularly. Just last month, Standard & Poor’s announced it would soon replace Discover Financial Services in the S&P 500 Index with Coinbase, the largest global crypto exchange.
Updating crypto’s maturing use cases
While BTC deserves most of our attention at this stage, that’s not to say important developments haven’t also been occurring in the rest of the crypto space. Specifically, two primary use cases have emerged:
Cross-border asset flows.
This goes way beyond providing ways for bad guys to move money across borders. Anyone who has dealt with a U.S. bank — or with a foreign bank as a U.S. citizen — in the past 15 years can immediately grasp the appeal of being able to do what you want, when you want, with your own assets. The promise of instant, seamless crypto transactions stands in stark contrast to the heavily regulated, ossified U.S. financial/banking system.Regulatory overreach has made it burdensome, or even illegal, to do simple things like withdraw as much of your own cash as you want. Industry consolidation has made the largest U.S. banks so indifferent to the needs of all but their very largest customers that it’s hard for smaller businesses, much less individuals, to get reasonable banking services without having to jump through hoops and provide intrusive information and personal guarantees.
Various crypto projects are working on cutting through these bottlenecks and red tape, allowing the free flow of capital around the globe, instantly, without layers of fees.
Tokenization of financial assets.
This refers to the process of creating a digital representation of a physical asset (such as a stock, bond, or piece of real estate) on the blockchain. That digital token can then be bought, sold, moved, and so on. This can broadly be thought of as “modernizing the relatively ancient world of traditional finance,” which still operates under largely the same rules as it did 50 or more years ago.Most investors never stop to think that in our instant-everything economy, trading most financial assets is only possible during a 6-7 hour window each day — and impossible on weekends. This isn’t a huge problem for longer-term investors. But it’s wild to think you can order an item on Amazon after the market closes one day, and often have it physically delivered to your house before the stock market opens the next day! In that light, crypto’s 24/7 trading hours make a lot more sense.
Moving your assets from one institution to another today involves signing a bunch of forms and then often waiting weeks for the transfer to be completed. Trading a foreign stock is often impossible if it’s not on a select list at your broker, and even then will often cost an extra $50 each way for the privilege. Anyone who has participated in a real estate transaction knows you’re looking at multiple hours, usually during the work day, to handle all the paperwork.
Crypto projects are working on solutions to all of these (and many other) traditional finance problems. The goal is for any crypto asset, in theory, to be represented digitally (i.e., tokenized), allowing 24/7 access to trading or moving it (with the side benefit of this being available from anywhere in the world if a person can obtain an Internet connection).
Conclusions
The most important takeaway today is the distinction between BTC and “everything else” in crypto. At this point, the rest of crypto includes a lot of promise, but also a lot of rubbish. And it’s still early enough that almost every non-BTC project still has serious “go to zero” risk.
BTC, on the other hand, has passed the regulatory survival test. It has generated a broad enough global consensus regarding its primary use case that its survival is all but assured at this point. It has made the leap into institutional and even governmental adoption.
Now, all of that is a different thing altogether than saying an investor needs to have exposure to BTC. You don’t.
That said, if an investor believes gold has a compelling use case — and SMI obviously believes this to be the case — then it’s worth considering if it’s worth having at least a small degree of exposure to BTC as well, strictly on the demographic argument that BTC fills a similar role for the upcoming wave of younger investors that gold fills for today’s older investors. It’s a diversification play, if nothing else, though one where an investor needs to take their different levels of volatility into account. A small BTC holding alongside a larger gold allocation makes sense.
The good news is SMI investors already have a small degree of BTC exposure, which is probably all most of them need. Specifically, the new RAA ETF, which constitutes 50% of SMI’s DAA allocation, includes an allocation of 0-3% BTC. An SMI investor with half their portfolio allocated to DAA currently has 0.75% of their total portfolio allocated to BTC (50% DAA strategy allocation x 0.5 RAA x 3% BTC allocation). That’s probably a reasonable top-end level of exposure for most SMI members (RAA sometimes owns less BTC, but never more than 3%). For those who want more, it’s easy to add via FBTC or any of the other BTC ETFs.
Yes, opportunities exist in other cryptos, like Ethereum, Solana, and many others. Similar to the way venture capital invests in early-stage technology companies, it’s certainly possible to do exceedingly well. But it’s highly specialized, time-consuming, and the opportunity for complete failure is high. As with many other corners of the investing world, most investors don’t need these assets in their portfolios and are probably playing with fire allocating to them in any significant way. Stick with BTC for now and let the rest of the industry mature before trying to pick the winners.
