Albert Einstein once said that reality is an illusion, but a very persistent one. He could have easily made the same statement about money, only some of which has actual value. In Papua New Guinea, they use pigs for money. Even today, you can pick up a decent-looking younger wife for about five or six pigs. Using food as a mechanism to exchange value seems much less risky than using slips of paper. You can always eat the pigs, but those pieces of paper in your wallet are as useless as the plastic cards you use to dispense them.
If you’re okay with the entire monetary system being an illusion, you’re probably okay with the notion of bitcoin. Last week we asked, Is Investing in Bitcoin a Safe Haven Like Gold? At least one firm thinks so. ARK Invest calls bitcoin “the most compelling monetary asset to emerge since gold,” and thinks you ought to treat it like any other alternative asset class. Since bitcoin isn’t correlated to popular asset classes like stocks or bonds, it provides a form of diversification. Let’s talk about asset class allocation for a second.
Ask a CFA About Asset Class Allocation
One way you can learn about asset allocation is by studying for your CFA. This means your colleagues will see you in the conference room with your head down studying while they go out for Thirsty Thursday. If you’re lucky, the process only takes three grueling years. If you’re not, you may just never pass and say eff it. Or you can just imply you’re a CFA by quoting from the free refresher materials offered by the prestigious CFA Institute.
In CFA Program Level III, there’s a comprehensive document on Asset Allocation to Alternative Investments which says that pension funds have been allocating an increasing amount to alternative assets. Here’s an excerpt from the study materials we never wasted our time trying to memorize:
Between 2008 and 2017, most of the pension funds around the world substantially expanded their allocations to alternative asset classes. On average, pension funds in developed markets increased their allocation from 7.2% to 11.8% of assets under management (AUM) in 2017, a 63% increase.
Credit: CFA Curriculum
Why not just follow what the smart money does and allocate a similar amount of wealth to alternative assets? Let’s say 10% and keep things easy. Just remember, you’ll need a longer time frame before you can liquidate alternative assets (no less than 15 years says the CFA curriculum). If early retirement starts at age 62, then anyone 47 years or younger is eligible. If you have $150,000 in assets, then you might invest 10% in alternative assets – about $15,000.
You can then choose multiple types of alternative asset classes to diversify and make the whole process more interesting. Below, we’ve picked some of the more “fun” alternative assets, but there are plenty of others to choose from such as farmland and commercial real estate. :
We now have our mandate. We need to find the safest and easiest way to invest $5,000 in bitcoin. As with any asset purchase, we want to accumulate using dollar-cost averaging. Our requirements for an exchange include the following:
- Easy to use and safe
- Based in ‘the United States (half our readers are American and, we’re just not interested in exchanges domiciled in Malta or Samoa)
- Notable backing
- Among the largest by volume
- On good terms with the government
That first bullet point is perhaps the most important one. When it comes to bitcoin theft, you’re probably your own worst enemy. Countless horror stories are told about people who stored the wrong piece of information about their bitcoin holdings in the wrong place. We want an exchange that doesn’t give you enough rope to hang yourself, but also doesn’t treat you like an Apple user. We want to hold the bitcoin as close as possible – for something that doesn’t actually exist – and we want someone else responsible for its safety. One company that meets our criteria is Coinbase.
Buying Bitcoin at Coinbase
Founded in 2012, San Francisco startup Coinbase has taken in just over $540 million in funding from a long list of 57 investors that includes names like Andreessen Horowitz, DFJ, BBVA, the NYSE, The Bank of Tokyo. With a valuation of $8 billion, Coinbase even has their own venture fund to make investments with. More than 35 million people in over 100 countries use Coinbase for buying and selling cryptocurrencies with over $220 billion of crypto stuff traded on the platform. The company’s number one priority is “be the most trusted” and number two is “be easy to use.”
So far all our boxes are checked. You’ll have such an easy time trading bitcoin on Coinbase you won’t even notice the steep fees. Remember how we wanted to buy $5,000 in bitcoin? The fee on that is a ridiculous $73.41.
Never mind what other exchanges charge, 1.5% on both ends of a transaction is way too much when brokerage fees are pretty much non-existent. While it’s not hard to find other exchanges with much lower fees, we’re not going to make any exceptions to our aforementioned criteria. It’s also worth noting that Crunchbase is cooperating with the IRS. While that may sound “bad,” you can be sure the tax man will find out. You probably don’t want to have your money entrusted with an exchange that isn’t cooperating with the IRS, because bad things can happen. There are many other exchanges to choose from, but we’re going to pay the extra dollars for some peace of mind.
Other Bitcoin Exchanges
We aren’t just recommending Coinbase because of the referral link at the bottom of this article. We’ve been Coinbase customers for some time now, and actually looked to switch brokers last week because we believe their fees are just way too high compared to other exchanges. The problem is, none of the others we looked at fit the bill. Most were domiciled outside the U.S. in places like Malta. The largest by volume, Binance, is jumping all over the place after they left China. Another U.S. exchange and one of the oldest ones, Kraken, made the news when their CEO was getting into a pissing contest with the New York Attorney General. If we already view bitcoin as a risky asset class, why incur even more risk by picking exchanges that seem a bit iffy?
Sure, you can go buy shares of Grayscale Bitcoin Trust (GBTC) and pay their 2% management fee, but why add those extra layers of complexity? As we wrote about before, GBTC often trades at a premium to the underlying bitcoin value – like upwards of 20% at times – thanks to the morons over at Robinhood. While some pundits actually try to excuse this away by talking about “additional upside,” we want none of that. We’re willing to pay only what bitcoin is valued at today – minus the hefty commissions at Coinbase – and be happy to have not paid any “premiums.”
The same goes for anyone who thinks buying shares of MicroStrategy (MSTR) is a good way to invest in bitcoin. When a CEO decides to park upwards of $400 million of the company’s cash in bitcoin, he’s speculating on an alternative asset class instead of running the company. Stay far away.
Conclusion
If we consider bitcoin an alternative asset class, it becomes one of many we can choose from that will not be correlated to stocks or bonds. When your 401k is cratering because of “the Rona,” those bottles of Opus One or that Zao Wou-Ki painting won’t be. Similarly, bitcoin will be going its own way. If more institutions like ARK Invest see bitcoin as digital gold, it may even become a “flight to quality” asset.
If you’d like to buy some bitcoin, the easiest way is to open an account at Coinbase. They’ll even give you $10 in free bitcoin. You may not be able to upgrade your spouse with that loot, but Rome wasn’t built in a day.
