Written April 11, 2021
Why would someone go all in on bitcoin as opposed to diversifying into other asset classes, particularly stocks? Why not hold an index tracking fund like the S&P 500?
The short answer: because, as the premier monetary medium, bitcoin will absorb the monetary premiums of all other assets, including stocks.
You may be unsatisfied with this answer, but a full answer to the question “Why not hedge against bitcoin with stocks?” requires us to forecast bitcoin’s expected value and then compare it with the expected return on equity.
Today, people typically measure economic value in fiat currency units. But rather than using fiat as a unit of account, we need to look elsewhere. My thesis is that bitcoin will absorb all other assets’ monetary premiums, so we can’t start by measuring in terms of units that are expected to be absorbed.
In this article, I’ll present an alternative model for valuing Bitcoin. This model considers money to be a mechanism for storing time. Once we estimate how much stored time Bitcoin might represent, then we can backport this to today’s fiat currency units. Finally, we’ll compare these expected returns against holding a market cap weighted stock market index fund.
First, let’s talk about trade, which will lead to money and then speculation.
Trade, Money, and Speculation
Humans trade. We do and give things in exchange for other things. The expectation of repayment and people’s feelings of gratitude make this possible. When someone does something nice for us, we feel like we owe them something in return. This feeling undergirds our ability to cooperate with strangers.
But what about cooperation at scale? How do we keep track of who owes who what? Money is the technology that scales cooperation. As Dawkins said, “Money is a formal token of delayed reciprocal altruism” (Dawkins, 1989).
We accept money because we speculate that someone else will accept it in the future. This speculation is the primary…