The guest posts continue on the savings and retirement theme. But this time with a twist. Tuck in, this is a longer read.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ― Henry Ford.
We need to start talking about inflation, pensions, and Bitcoin.
Inflation erodes the capital value of savings and diminishes the burden of debt obligations. It also inflates the nominal value of assets held by lenders as collateral, making them appear to be worth more. So inflation simultaneously makes debts less significant, and balance sheets appear to be healthier. Governments are the largest borrowers in the world. They are therefore the largest beneficiaries of inflation, as the real value of their debt is diminished at the expense of the purchasing power of their currency. Tax revenues go up and government debt becomes a smaller percentage of government revenue raised from taxes. This is an old playbook, and it's the reason why government issued fiat currencies almost always eventually collapse.
There is a built in incentive for governments to dilute their currency to reduce their cost of borrowing, and one area that people need to start thinking about how this applies to is pensions. Government debt is growing from both deficit spending and interest- it's just a matter of at what rate, while it may ebb and flow inflation is unlikely to go away. So understanding this, means accepting that the money supply is very likely to continue to expand and dilute over time. It also means if you are counting on a pension payout, be it Defined Benefit, or Defined Contribution Benefit, IPP, PPP, or RRSP plan - the real world value of those benefits you receive at time of collection is likely to be inflated away.
Understanding this fundamental problem, we have to start examining how prolonged currency inflation forces us consider new ideas for growing and preserving the value of our hard earned money. It is why we have seen large pensions get more creative with their investments, and more aggressive in their asset mixes. It is also why Bitcoin is unique as an asset that can and should be incorporated into pensions and retirement planning.
21,000,000 /♾️ The permanently fixed supply of Bitcoin, capped at 21 million- might not strike universally today as a gold standard characteristic of an asset to hinge part of your planned retirement on. Consider the above problem that government money, essentially must continually expand - to meet the needs of new projects, and to degrade the value of the amount already borrowed. There will only ever be 21 million Bitcoin. That means if we are considering the title chart comparing the supply of Bitcoin to the balance sheet of the US Federal Reserve, that graph can essentially diverge infinitely. Bitcoin exists as a verifiably hard asset, in a financial universe built on planned infinite expansion. Now consider that Bitcoin is an asset that anyone in the world with a cellphone can buy, and that every government in the world has a debt problem. As the supply curves diverge further and further, Bitcoin will become an infinitely improving caliber of asset to be held for the preservation of value.
Volatility - Horizon is a crucial component of investing for retirement, and Bitcoin critics will point to its short term volatility as a reason why it can not be counted on as a vehicle for retirement planning. Bitcoin is volatile today and year to date it is down almost 40% in price. If you are planning to retire in the next 6 months, you might not want to go all in. I am not suggesting Bitcoin is the silver bullet, merely that pension committees and self-directed plan members alike need to start thinking about having an allocation to Bitcoin because of the inherent need governments have to print money to keep the current system going. The question of long-term concern about volatility can be looked at a few ways. To keep the length of this manageable I am just going to examine one.
Bitcoin today is roughly a $600,000,000 USD asset. The global market cap of gold is somewhere between 12-15 trillion USD. Stocks, real estate, and cash are in the hundreds of trillions. Your long-term view of the volatility concern in my opinion should be this- How big do you think Bitcoin as an asset can get? I say this for a few reasons but most importantly it stands to reason that the larger it becomes, the harder the needle becomes to move violently down. When we arrive at a point where 12 trillion USD have found their way to Bitcoin, it stands to reason that producing a 3 trillion USD outflow needed to crash the price would take a degree of collective panic orders of magnitude higher than the mere billions of dollars required to do it today. The bigger assets get, the less volatile they tend to be. Keep in mind, the total global money supply has to continually expand, at varying speeds. Even if Bitcoin for some reason stops gaining new users today - the asset would likely still grow over time even if it only continued to capture on a percentage basis the same amount of available money that it is today, but it is growing in new users. The Bitcoin network is adding users faster than the internet did in the late 90s. So think about that and ask yourself - Bitcoin is the fastest asset to reach 1 trillion USD ever. Is it more likely that over time Bitcoin will cease to exist or continue to grow, as a superior deflationary asset in an inherently inflationary world?
Returns - There are two ways to look at this in my opinion. One is, how can we expect Bitcoin to appreciate in price compared to other investments over time? The other is to invert that question and consider how will other assets compete with Bitcoins ability to endlessly appreciate in price? As the money supply continues to expand over time the value gap between the value of government currency with an unlimited supply and Bitcoin with a permanently fixed supply will only become more dramatic. The other assets that would typically comprise a pension fund will also struggle to maintain pace with Bitcoins appreciation due to scarcity. Stocks, real estate, and bonds - are all instruments priced in fiat currency today. They all should have soft potential price maximums. Referring to the previous section, a bet on say the stock market versus Bitcoin over the long term, is a bet on equities ability to continue to grow by hundreds of trillions of dollars, compared to Bitcoins ability to grow from it's current size to 5 trillion, and then 10, and beyond. Bitcoins theoretical market cap will be reached when it has consumed every single unit of fiat currency. The question should be, what sectors or asset classes will be poised to outperform Bitcoin, when they are all paid for and priced in the money which is simultaneously leaking value and they already compose huge chunks of the global asset market?
Risk Hedge - today Bitcoin trades in high correlation with the stock market. This is a conversation about long horizon time planning. The same argument about reduced volatility over time, should lead to an at least corollary argument that Bitcoin will eventually also decouple from tech stocks. 5 Countries & Governments currently own Bitcoin, it's future likely is to be held by many more.
In this case the best way to think about it is, how do we view the long-term performance potential of the stock market, against the inflationary pressure created by necessitated money printing. My guess is that over time traditional assets will be a riskier bet, than a single transparent network that has a permanently fixed number of units. Again we are looking at this from the lens of long-term assets to build your portfolio for retirement around. Which would you rather place a 20 year bet on today? The fastest growing, most viral technology in human history - which is built on planned scarcity? Or an increasingly risky mix of equities required merely to outrun prolonged inflation?
What are some possible paths to incorporating Bitcoin into a pension strategy?
Holding BTC inside a pension. It's happening already. The Houston Firefighters’ Relief and Retirement Fund (HFRRF) announced in 2021 that it was investing $25 million in bitcoin, the first time a U.S. pension fund invested in cryptocurrencies. Bitcoin is digital property. The idea of property being digital is new a concept to wrap your head around, but physical property has long been a stable of pension funds. The basic concept of holding BTC in a pension is not as absurd as you might think.
As an alternative in Canada you might be have the ability to allocate or self direct pension funds into a Bitcoin Exchange Traded Fund like Purpose Bitcoin ETC - trading as BTCC. Bitcoin ETFs hold Bitcoin as the only underlying asset, and so while you don't get the benefits of participating in owning actual Bitcoin going this route, you will from a retirement planning perspective enjoy the long-term price appreciation of the scarcest asset in the world.
In the absence of either of those options holding Bitcoin outside of your pension, as a tool to offset the long-term inflation risk to your benefits. Bitcoin as a parallel investment for those counting on pensions, offers insurance against the erosion of the real world value of pension benefits.
Custody of actual Bitcoin scares many but is always preferable to an investment in a product where Bitcoin is the underlying asset. This will be more and more evident over time. Digital assets are a new idea today but this attitude will pass. Possessing and storing your own Bitcoin is more secure, keeps them more liquid, and prevents any possibility of seizure or confiscation.
Bitcoin is a novel, and maturing financial instrument. We need to start thinking about how to incorporate it into the existing framework of retirement planning. I believe it is the apex predator of inflationary monetary policies, which pensions and pensioners are especially vulnerable to.
About the guest author - Scott started in the insurance industry in 2008, holding various sales leadership roles with Canada Life before becoming an advisor in 2016. In 2022 he made the decision to transition to the world of Bitcoin and in his current role with Bitcoin Well he is using his experience in traditional financial services sales to help Canadians and Canadian Companies make informed Bitcoin purchases. Scott is a Bitcoin enthusiast and a graduate of Wharton Business Schools Economics of Blockchain and Digital Assets. firstname.lastname@example.org
Note from The GAB - this website is not giving advice. When incorporating cyrpto (or doing any investing outside of an RRSP or TFSA) into your retirement plan, please consider the taxable nature of any gains made in this volatile marketplace. Never invest more than you're willing to lose.