By Matt Hougan, Chief Investment Officer, Bitwise
Compiled by: 0xjs@Golden Finance
I first heard about Bitcoin in February 2011.
At the time, I was working at ETF.com, managing a team of young financial analysts and running the world’s first ETF data and analytics service. We would meet weekly to discuss what was happening in the market. In February 2011, when the price of Bitcoin first broke $1, one of my analysts mentioned this historic “dollar threshold.” He then led a fascinating discussion about what Bitcoin is, how it works, and where it might become.
If I had invested $1,000 in Bitcoin after that meeting, that investment would be worth $88 million today. However, I left the office and went to get a cup of coffee.
I share this story because everyone—literally everyone—has felt this way. We all wish we had bought into Bitcoin sooner.
But what we overlook in these stories is that Bitcoin faced huge risks at the time.
For example, on the day I attended the $1 Bitcoin conference, the largest cryptocurrency exchange in the world was New Liberty Financial. Here are their terms of service.
In hindsight, it's easy to say I should have bought $1,000 of Bitcoin. But at the time, that meant wiring $1,000 to a random PayPal account. Add to that the custody, regulatory, technical, and government risks... throwing $1,000 at Bitcoin in 2011 was a huge gamble.
I’m sharing this story now for two reasons: first, so you don’t have to beat yourself up for missing out on investing in Bitcoin; second, so you can believe that things are different now.
In fact, I believe that today — right now — is the best time ever to buy Bitcoin on a risk-adjusted basis.
We Just Eliminated Bitcoin’s Last Major Existential Risk
Every investment involves weighing risk and reward. A lottery ticket could turn $1 into $1 billion, but your expected return is zero.
In the early days of Bitcoin, it was a bit like a lottery: There was huge upside, but equally huge risk.
For example, when Bitcoin was first launched, there was no guarantee that it would even work. Yes, the white paper was excellent. Logically, it seemed like it should work. But there had been many attempts to build electronic cash systems before Bitcoin, and they had all failed. (For an example, you can look at this 1997 NSA paper, “How to Mint Money: Cryptography for Anonymous Electronic Cash.”)
But in the early days of Bitcoin, there were other significant risks beyond the technology itself. For years, trading was a risk factor—early trading platforms were either unreliable or plagued by low trading volumes and poor operations. That changed with the founding of Coinbase in late 2011.
For a while, custody was also a risk factor - until established blue chip firms like Fidelity began offering both self-custody and institutional custody services.
In the early days of Bitcoin, there were legitimate concerns about money laundering, criminal activity, regulatory standards, mining centralization, and more.
What’s amazing about Bitcoin is that, over time, it has slowly but surely eliminated every one of these significant existential risks.
The launch of a Bitcoin spot ETF in January 2024 will allow us to overcome another major hurdle, providing regulatory clarity for U.S. institutional investors interested in entering this space.
But even after the ETF was launched, there was one major existential risk that kept lingering in my mind: What if the government banned Bitcoin?
US Strategic Bitcoin Reserve
This is the question I always ask in meetings when someone asks me, “What keeps you up at night?”
I've always wondered why the US, which famously confiscated privately held gold in 1933 to replenish its treasury, would allow Bitcoin to grow to a size that threatens the dollar's status?
To be honest, I didn't know the answer at the time.
When pressed on stage, I always remind people that the U.S. government “bought” gold from the public in 1933: I would say that if Bitcoin grows to a size large enough to challenge the dollar, then your investment has probably made a killing.
That's the best answer I can give.
But just earlier this month, President Trump signed an executive order establishing the U.S. Strategic Bitcoin Reserve. Just like that, the last major existential risk facing Bitcoin disappeared before my eyes.
Many people are wondering why the United States is doing this. Cliff Asness, founder of hedge fund AQR Capital, wrote immediately after Trump signed the executive order: "If cryptocurrency is a viable long-term competitor to the dollar, why on earth are we promoting the development of a competitor that directly competes with our dollar as the world's reserve currency?"
The answer, of course, is that Bitcoin is better than other alternatives. The best case scenario for the United States is that the dollar continues to maintain its status as the world's reserve currency. But if the day comes when the dollar's status is at risk, it is better for us to choose Bitcoin as an alternative than to choose currencies such as the RMB.
This is something I didn’t expect at first: Of course the U.S. will accept Bitcoin. It’s the best fallback on the market.
What does this mean for investors?
At Bitwise, we’ve already started to see the impact of this risk reduction. Two years ago, Bitwise clients typically allocated about 1% of their portfolios to Bitcoin and other crypto assets, a percentage they wouldn’t mind losing. This made sense given the possibility that Bitcoin could be banned or face other failures. But in today’s environment, the situation is different. We more often see clients allocating 3% of their funds to Bitcoin. As more people in the world realize that Bitcoin’s risk has been significantly reduced, I think this percentage will rise to 5% or even higher.
