Summary
- Have a sell discipline
- Bitcoin is speculative, volatile and has no fundamentals
- May go up a lot
- May go down a lot
- Useful for criminals
- Not useful for most transactions
- Competitor of gold
- NOT A GOOD INFLATION HEDGE
- Beware of competition
- Beware of politics
- Easy to lose
- Size your investment wisely
Bitcoin’s (BTC) market value exceeds a trillion dollars. A trillion dollars cannot be wrong!? Maybe it can. Every transaction has a buyer and seller. Understanding both sides’ reasoning and motivation is sound practice. This piece discusses both sides with a particular focus on Bitcoin as a hedge against inflation. Most of the insights here apply to all cryptocurrencies, not just Bitcoin.
First, a piece of general advice. If you are buying Bitcoin, establish a sell discipline with clear rules for when to sell. For example, hold it for one year. Or maybe when it rises or falls 50%.
In May 2017 I thought Bitcoin (BTC) was an innovation in the “store of value” market which I define as the market for something that protects against the devaluation of fiat currency. Gold is the standard in this market. At the time, one Bitcoin was trading around $2,300. I estimated that if all the existing Bitcoin plus the amount expected to be mined over the following twelve months were worth 1% of the total value of all gold, a Bitcoin would be worth $3,500. My personal rule was to sell at that price. Rules do not have to be perfect.
About a year ago, I updated this approach in “A Case for Bitcoin”1. That Bitcoin displaces some gold is a case for owning Bitcoin. The piece provides an estimate as to how much the value of BTC (plus Ethereum) would need to change to capture more of the store of value market from gold.
Last July, Bitcoin and Ethereum were worth about 10% of the total amount of gold. According to a similar calculation, the cryptocurrencies would more than double, and gold would decline about 12% if the total value of the three remained the same and cryptocurrency became 20% of the total value. I am not saying this will happen2. If you think it will happen, it is a case for Bitcoin. Feel free to use the framework of market share to come up with your own opinion on the relative value of Bitcoin and gold and use that to create a rule.
Serving as a store of value is a classic use case for Bitcoin and gold. The supplies of each are limited. The government can print paper (fiat) money thereby devaluing it (i.e. deflating the currency and consequently inflating the prices of goods and services). The argument for Bitcoin and gold is that they are immune from large increases in supply so they should maintain their value adjusted for inflation. A good store of value does not lose value.
“A Case for Bitcoin” begins with the volatility of BTC. Within the period from late 2017 to mid- 2024 BTC had an 80% drawdown and three drawdowns of more than 50%. By this measure, Bitcoin is a terrible store of value. It has proven to be an unreliable store of value over short periods. While it has appreciated since its conception, there is no guarantee of future appreciation.
The store of value market can be divided into (a) a protection against inflation; and (b) a protection against the collapse of civilizationi. Obviously, gold (physical, not a fund or futures) is better in the event of (b) given that the internet / blockchain might not exist. Governments and central banks hold a significant portion (~20%) of the world’s gold3. Gold has survived wars. I’m unclear as to the security of crypto as a reserve asset in the event of a cyber-attack. Governments may thus be reluctant to shift their gold reserve to Bitcoin.
Jewelry accounts for about one-half of the holdings of gold. It is more likely that gold is used in jewelry because gold has value than gold has value because of the demand for jewelry. If true, then jewelry itself is a store of value. Bitcoin will not replace gold in that market. If crypto creates doubts about the value of gold, then the demand and price of gold jewelry may suffer creating a downward spiral in the price of gold4.
My thesis is that if you are buying Bitcoin because of its limited supply, then it is competing with gold. The market for storing value will correlate with concerns regarding fiat currencies causing both Bitcoin and gold to move in the same direction. Bitcoin’s increase in market share would/should come at the expense of gold.
There may be more effective ways to protect against inflation than Bitcoin and gold. A key feature of a store of value is that you should reliably get out the value that you put in. The more dependable the protection of purchasing power, the better.
Gold has thousands of years of history of providing a store of value. The U.S. dollar’s (USD) record is brief. Recall that the USD was backed by gold until President Richard Nixon took our country off the gold standard on August 15, 1971. Over the last 53 years, inflation has averaged about 3.9% per year. An alarmist would point out that if you stuck a dollar under your mattress5 at the beginning of April 1972 and pulled it out 53 years later at the end of March 2025, it would have lost 87 cents of purchasing power. If that dollar had been put into one-month Treasury Bills, it would have earned 4.4% annualized. That dollar would have $1.26 of purchasing power.
Treasury Bills are currently a hedge against inflation. Today’s yield is 4.38% on one-month Bills exceeding the 2.4% inflation rate for the twelve months ending March. The yields on Bitcoin and gold are always zero. After the financial crisis and in response to the pandemic, the Federal Reserve slashed interest rates to near zero. When interest rates are zero, there is no opportunity cost for owning non-producing assets such as gold and Bitcoin. Now, the cost is a bit over 4% annually. Treasury Bills are guaranteed by the U.S. Treasury and offer low volatility.
For longer periods, one of my favorite store of value / inflation protection assets is a Treasury Inflation Protected Security (TIPS). The U.S. Treasury promises a return relative to inflation. Currently, the promise is about 2% over inflation for a ten-year bond. That’s about as safe as it gets. The problem with TIPS is that they are taxed. After taxes, you are not keeping up with inflation. Gold and Bitcoin are taxed as well. Dividend and capital gains are taxed, but at preferential rates.
To keep up with inflation after taxes is challenging, which is a way of saying you must take risk, which also means that you may fail. Uncle Sam taxes nominal gains. If you earn 6%, you are taxed on 6% regardless of whether inflation was zero, 7% or any other value. For this reason, investors should favor low inflation environments. They are better off after-taxes earning 4% when inflation is 2% than earning 5% when inflation is 3%.
Stocks are another of my favorite assets for protecting against inflation. Inflation is a general rise in the level of prices for goods and services. In the face of inflation, companies will have higher revenue and higher costs. Let us say a company has $100 in revenue, $80 in costs, leaving a profit of $20. If inflation causes both to rise 10%, then the profit will grow 10% to $22 ($110 – $88). This will not happen to each company but should apply generally across all companies.
Stocks are volatile. They have been only about one-third as volatile as Bitcoin. Stocks have been slightly more volatile than gold. TIPS have been the least volatile of the bunch.
Another traditional inflation hedge is a basket of commodities. Figure 1 explains the loose relationship
Figure 1
between gold and the CPI. A broader basket of commodities appears to better than gold.
Because there are a variety of sources of inflation, a combination of cash, TIPS, stocks, and commodities can make sense.
I will offer a trading strategy for Bitcoin. Before I do, I’d like to make a case against Bitcoin and gold. Here are some quotes from Warren Buffet on gold. With the exception of decorative, they apply to Bitcoin. I especially like the comment on fear. Essentially, his criticism stems from the fact that these assets will never pay dividends, interest or grow (though their price will change).
“I have no views as to where (gold) will be (in the next five years), but the one thing I can tell you is it won’t do anything between now and then except look at you.” – Warren Buffett, CNBC’s Squawk Box, 2009
“Gold … has two significant shortcomings, being neither of much use nor procreative.
True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.” – Warren Buffett, letter to shareholders, 2011
“With an asset like gold, for example, you know, basically gold is a way of going long on fear, and it’s been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything,” – Warren Buffett, CNBC’s Squawk Box, 2011
Bitcoin is “probably rat poison squared,” – Warren Buffet Berkshire Hathaway 2018 annual shareholder meeting (related video).
Is Bitcoin as good as gold or better? A specious advantage of Bitcoin relative to gold is that it is easier to use as a currency to settle transactions. If you are transferring Bitcoin between wallets, the transaction time depends on network congestion. It typically takes 10 minutes to an hour for confirmation. Most platforms charge a 0.1% to 1% fee per trade. In Google maps, search for “Bitcoin ATMs near me”. I’m astonished how many there are leading me to believe there is a market. In a world of Venmo, Zelle, PayPal and credit cards, what is the point of using Bitcoin for transactions especially since transacting in Bitcoin creates a taxable event, like selling stock.
My best guess is that Bitcoin ATMs might be used to transfer money outside the U.S. (unbanked immigrants sending money home). Another use is by criminals who are privacy conscious. It is clear that criminals like Bitcoin. This raises the issue of competition.
Certain cryptocurrencies are favored by criminals due to their anonymity, ease of transfer, and difficulty in tracing transactions. Here are some of the most commonly used ones:
- Bitcoin (BTC) – Despite being traceable on the blockchain, Bitcoin remains widely used in illicit activities due to its liquidity and widespread acceptance.
- Monero (XMR) – A privacy-focused cryptocurrency that obscures transaction details, making it difficult for authorities to track.
- Tether (USDT) – Criminals use Tether for its stability and liquidity in cross-border transactions.
- Ethereum (ETH) – Some illicit actors use Ethereum-based smart contracts for fraud and money laundering.
Criminals are drawn to cryptocurrencies because they can bypass traditional banking regulations, use mixers and tumblers to obscure transaction trails, and take advantage of decentralized finance (DeFi) platforms that lack strict oversight. Is supporting crypto immoral because it provides liquidity to criminals?
The availability of alternative cryptocurrencies and the ability to create new ones is an obvious threat to Bitcoin. It also undermines the argument that there is a limit that can be mined. While true of Bitcoin, it is not true of cryptocurrencies as a whole.
Bitcoin enjoys a first mover status. The reliability of its blockchain has established its credibility so people trust that it works. Its total value reflects its status. There are weaknesses to Bitcoin’s approach which give competitors opportunity. The electricity to maintain Bitcoin’s blockchain is expensive6. It is slow to transact. It is not as anonymous as some other cryptocurrencies; and it is volatile. I have pointed out that Bitcoin deserves value as a competitor to gold. Ironically, I am now pointing out that competition is a risk to Bitcoin.
Another recent competitor is Trump Coin ($TRUMP), a meme cryptocurrency associated with President Donald Trump. The digital asset was introduced shortly prior to his 2025 inauguration, and has been promoted as being associated with his brand and political movement. The Trump Organization and affiliated entities reportedly control around 80% of the token supply. The coin has drawn scrutiny from lawmakers and ethics experts, with concerns about its potential use for anonymous political donations and influence-buying. Trump announced a private dinner event for the top 220 holders of the coin, which led to a 50% price surge. The dinner is scheduled to take place on May 22, 2025, at Trump National Golf Club in Washington, D.C.
The previous paragraph checks the boxes on competition and use by criminals. It also illustrates another issue. The government has a long history of supporting different assets via regulatory and tax policy (e.g., mortgage interest deduction and farm subsidies). Investors enjoy lower tax rates on long-term capital gains and qualified dividends on stocks. Bitcoin and commodities are taxed at higher rates. All of this can change.
In a world that makes sense to me, the U.S. government would favor the U.S. dollar and protect its status as a reserve currency. Americans have a lot of dollars in aggregate. A strong dollar helps people with dollars. In such a world, the government would put hurdles on cryptocurrency. We may be in a different world, one run by people who think the government is too powerful, too big, is too indebted and spends too much. Somehow, they might view weakening the dollar as a means to their end. Another world might include a leader with a financial interest in a specific cryptocurrency. Hard to imagine, but might such a leader give in to the conflict of interest? Might he or she signal favor for one particular cryptocurrency by inviting large holder of his favored cryptocurrency to a private dinner? (Recent news: A stablecoin launched by Donald Trump’s World Liberty Financial crypto venture is being used by an Abu Dhabi investment firm for its $2 billion investment in crypto exchange Binance, according to one of World Liberty’s co-founders.) The point of this musing is that politics can impact the market for cryptocurrencies as well as for specific cryptocurrencies. The recent shift within the S.E.C. and on banking regulations favors cryptocurrencies. Political winds can shift.
History provides examples. The U.S. government restricted private ownership of gold in 1933 when President Franklin D. Roosevelt issued Executive Order 6102. This order required U.S. citizens to surrender most of their gold holdings to the Federal Reserve in exchange for paper currency. The restriction was reinforced by the Gold Reserve Act of 1934, which officially transferred all privately held gold to the U.S. Treasury and raised the price of gold from $20.67 to $35 per ounce.
Private ownership of gold remained illegal in the U.S. until December 31, 1974, when President Gerald Ford signed Executive Order 11825, repealing Roosevelt’s order and restoring Americans’ right to own gold.
That confiscation or forced selling of gold seems weird for those of us living in 2025 to contemplate. That is an example of an unusual risk for a store of value asset. There is another risk related to cryptocurrency that’s worth mentioning.
It is estimated that between 3 to 4 million Bitcoin, roughly 14% to 20% of the total supply—has been lost due to forgotten passwords, misplaced private keys, or destroyed hardware. Some
reports suggest the number could be even higher, with early adopters and miners losing access to their holdings before Bitcoin’s value skyrocketed.
Once Bitcoin is lost, it is permanently inaccessible, as there is no way to recover private keys unless they were backed up. Some individuals have tried using advanced recovery techniques, but success rates are low.
The risk associated with the loss of a password is distinct from that of the loss due to the failure of an exchange. The history of Bitcoin losses due to exchange failures is quite dramatic. One of the most infamous cases was the Mt. Gox collapse in 2014, where 850,000 BTC—worth nearly half a billion dollars at the time—were lost. Even today, creditors are still waiting for payouts.
Exchange failures happen for various reasons, including hacks, mismanagement, and fraudulent practices. Since 2009, at least 16 major crypto bankruptcies have occurred, with five crypto exchange failures in 2022 alone. If that is a concern, you might consider “cold storage”. Devices like Ledger and Trezor store Bitcoin offline (not advice).
Gold and crypto assets have no intrinsic value – they have no future cash flows to discount. Despite that, let us say that you have decided to invest in gold, Bitcoin or some other non-
productive asset. Here is an idea for a disciplined approach to trading Bitcoin given that you are relying on someone else having a reason to pay more than you paid for it. The approach I suggest is a trend-following one. These approaches have their limits so you should be aware of the risks. Buy when the asset is moving up; sell when it is moving down. Such strategies “tend to give good downside protection and to perform well in up markets7”. I favor this strategy because you can participate in the upside while reducing downside risk. This strategy performs well when the asset trends upward and offers protection if it trends downward. It will not protect against sudden declines. It will do poorly in a volatile, sideways (oscillating) market.
Disclaimers: The following is a hypothetical (a.k.a. paper) portfolio, not actual performance. Future performance may be worse. These returns do not include investment management fees or commissions. We assume a 0.2% transaction costs for this performance. Past performance is no guarantee of future performance. I am not recommending investing in Bitcoin.
I call the strategy PGP. PGP is not just for Bitcoin. I’ve used something similar for stocks. PGP stands for “Pretty Good Protection” or “Pretty Good Participation” depending on the direction of Bitcoin. PGP is designed as a trading strategy to provide a significant proportion of the gains while significantly reducing losses in protracted down markets. In this case it shifts investment allocations between BTC and cash. The goal of PGP is to reduce the downside risk (protection) while keeping much of the upside (participation).
The process is simple while the actual returns are unproven. Calculate the average price of Bitcoin over the last 120 days (the “width”).
Buy when the current price is above the average. Sell if it is below. A current price above the average indicates an uptrend. A current price below the average indicates a downtrend.
I would be shocked if the future performance of this strategy were as good as the history I am about to show. I picked the 120-day window because it was the best of about 25 I tested.
Over the almost ten-year period from May 25, 2015 through May 2, 2025, Bitcoin rose 40,000%. It experienced a maximum drawdown of 83%. PGP returned 81,300% with a drawdown of 64%, which is less than BTC, but still large. You would have been invested about 62% of the time. The following chart shows the value of a long-only position in Bitcoin with PGP using a 120-day window.
The shaded areas indicate periods invested in Bitcoin.
The following plots show summary performance for PGP over the same historical period using various widths (number of days) to calculate average price.
The top panel shows the hypothetical returns of the PGP strategy, and the bottom panel shows the maximum drawdowns. The horizontal lines are the values assuming Bitcoin was held for the entire period. All of the maximum drawdowns are below the maximum drawdown for BTC alone. All of the drawdowns are around 65% for widths close to 100. From this evidence, one might have some confidence that PGP could reduce the maximum drawdowns. One cannot be confident in the returns of PGP relative to buying and holding BTC. Several of the observations are higher and most are lower. Buyer beware.
The question is whether the reduction in downside is worth the trouble. As I stated, it is important to have a sell discipline especially for an asset with no intrinsic value – one that essentially relies on popularity. The value of PGP is that it provides an example of a discipline for selling should BTC decline. The advice to have a sell discipline pretty much applies to all investments.
My final piece of advice is also a generality. Size your investment wisely.
Disclaimer: I do not own any cryptocurrency, though I have in the past.
i I do not hold myself out to be an expert on prepping, but I’ve watched Walking Dead, Mad Max movies, The Omega Man, and Last Among Us (not an exhaustive list). Here’s my opinion on the subject. Obviously, you need food, water, guns, medicine. Ideally you have electricity off the grid. What’s critical is that you need formidable allies. Having a skill useful in the environment will help. Sadly, investment advice will not be highly valued. I’m resigned to being toast. Without allies, gangs / militias or whatever will just take your stuff and maybe your life. Barter may work for a while. Money will surface. Maybe it will be gold. It will not be Bitcoin. As gangs defeat other gangs and merge, they will become larger. Governments, mainly autocracies, will form. History will repeat.
2 In July 2024, BTC was $62,676. Now it is at $97,000.
4 Diamonds provide an example. They were used as a store of value in diamond rings and as stones. See the excellent movie Marathon Man starring Dustin Hoffman. The emergence of lab-grown diamond disrupted the diamond market causing a decline in natural diamond prices.
5 Investment advisors do not favor the mattress because they do not get fees on those assets.
6 Estimates suggest Bitcoin’s annual electricity consumption is around 127 terawatt-hours (TWh)—more than the entire country of Norway – Forbes
7 “Dynamic Asset Allocation Strategies”, Perold and Sharpe, Financial Analysts Journal 1995, p 156