Playbook #029: Bitcoin
🖼️ The Big Picture
Bitcoin (BTC) is in a really interesting position today. Many see it as having gone “mainstream” in 2021. Corporations are adding it to their balance sheets. Hedge funds are trading it. Wealth management firms are putting more of their wealthy clients’ fortunes into it. And 86% of people have now heard at least a little about BTC.
With this shift, the wealthy have taken their position on the best strategy for Bitcoin. It’s most similar to buy and hold real estate, where the objective is to:
- Buy and hold for the long term (to gain appreciation and avoid capital gains tax)
- Earn a return (with BTC, you can earn 3 - 6% interest when you store it)
- Borrow against your equity for tax-free income
Here’s a quick breakdown why:
It’s arguably a better form of gold. With inflation above 6% and climbing, people would normally be stockpiling gold as a “store of value” and hedge against inflation. However, gold is down 3% in the last year, and only up 50% in the last 5 years. Because it’s infinitely easier to transport and trade, supporters argue that Bitcoin is a far superior form of gold.
This is important to understand, as many people who first hear about Bitcoin think of it as something to buy and sell goods with, a “currency.” But we don’t exchange services using gold. We store it, and it’s the same idea with Bitcoin.
Bitcoin has become “digital property,” and you can now borrow against it. In 2014, the U.S government officially classified Bitcoin as property, not a currency. The government did this so they could tax every bitcoin transaction as a capital gain — and cash in on the fast rising price action. But savvy investors have used this classification to their own advantage, and created ways to use BTC as collateral for a loan, much in the way you can use your home as collateral and take out a loan for some other purpose.
Here's an example of how this works with Real Estate: let’s say you bought an investment home for $250,000 ten years ago, and it’s now worth $1 million. If you sell it, you’ll have to pay capital gains taxes on the difference ($750k).
On the other hand, you could do a cash-out refinance and pull out $700,000 tax free, leaving 30% equity in case home prices drop.
The same rules apply to Bitcoin, and you can do the same thing. Because of BTC’s price volatility, borrowing against it is a little trickier today, however, this is how the rich are thinking about BTC in the long term.
You’re still early, as evidenced by the price volatility. Michael Saylor predicts that one day in the future, whether it’s in 10, 20, or 30 years, BTC will be very stable and only go up maybe 3% per year. Today, you still need to be able to stomach 20% drops.