Why One of the Smartest Investors Bought Bitcoin and Thinks You Should Too – The Motley Fool - STRATEGIES TO EARN MONEY



Why One of the Smartest Investors Bought Bitcoin and Thinks You Should Too – The Motley Fool

On the What Bitcoin Did podcast, ARK Invest Chief Executive Officer Cathie Wood shed some light on Bitcoin (BTC -0.82%). Maybe the most intriguing, but not most important, part of the interview was that she finally disclosed for the first time when she originally bought Bitcoin. Back in 2015 Wood purchased $100,000 of Bitcoin when its price was hovering around $250. That investment is worth about $7.5 million today. 

Wood’s faith in Bitcoin has only grown since 2015. When her firm started researching the world’s first cryptocurrency, she said they quickly realized Bitcoin had the potential to be “one of the most profound innovations of our time.”

Gold, the dollar, and Bitcoin

During the initial research of Bitcoin, Wood and her team worked with one of the world’s most prominent economists with expertise in monetary policy, Art Laffer. Laffer served under President Ronald Reagan on the Economic Policy Advisory Board and has been active in economic policy on the national and international stage ever since. 

Wood said that it was Laffer’s analysis of Bitcoin that led her to make her first purchase. She said that Laffer was in awe of the dynamics behind Bitcoin. As she put it, Laffer said that he had been looking for a currency like Bitcoin “since we went off the gold exchange standard.” 

Before the U.S. abandoned the gold standard in 1973, the value of the dollar was fixed relative to the price of gold. It’s considered by many that the gold standard mitigated the issuance of money and subsequently quelled inflation because the amount of physical gold held by a government acted as a limit to the creation of new money.

After the gold standard was dropped, there was little to dissuade the government from printing more money or manipulating monetary policy. When a government can control the money supply it can finance any agenda or project regardless of how popular it may or may not be. This is simplified to maintain brevity but theoretically, all it has to do is print more money and it can come up with the funding. Today, the dollar lacks traits of intrinsic value that it had when it was on the gold standard and it is almost constantly inflated to finance government budgets.

As the government takes on more costs, it subsequently increases its debt burden. To get a better idea, we can take a look at the U.S. national debt, which has increased more than 6,500% since 1973. Some debt is considered healthy, but a balance sheet with an exorbitant amount of liabilities compared to assets can spell trouble for economies when those debts eventually need to be paid. 

Like gold, but better

Laffer wasn’t a huge fan of the current monetary standard and once he discovered that Bitcoin had many characteristics superior to gold he was sold on its potential. Bitcoin one-upped gold. Unlike gold, Bitcoin is private, digital, easily divisible, and rules-based. 

Let’s unpack that one by one because Wood believes that each of these characteristics makes Bitcoin even more valuable than gold. First, because Bitcoin runs on a blockchain, which means that all transactions are encrypted and pseudonymous. Transactions on its blockchain cannot be altered and they can only be halted if the user doesn’t have sufficient funds. 

Second, Bitcoin is digital. This makes it much more portable than gold and even the dollar. Bitcoin holders only need a digital wallet on their phone or computer to hold or transfer value. If you lose your phone, the funds are protected and you can access funds by entering your unique password on another device. In addition, digital money serves an integral role in the age of the internet that gold or the dollar falls short of.

Bitcoin is also easily divisible. Even though its price sits at around $20,000 today, users can send and receive fractions of Bitcoin with just the press of a button. No need to carry spare change, find larger or smaller bills in your wallet, or carry around gold bullions (although of course almost no one does that). 

Lastly, Bitcoin runs on specific rules. There is a limited supply that cannot be inflated or manipulated. That means no government can meddle in how it operates or even block transactions. 

Most importantly, it does all of this without any centralized authority overseeing it. Instead of one person or agency running it, computers, referred to as nodes, around the world run the Bitcoin blockchain to ensure that it remains decentralized and operates without any interference.

Bitcoin’s potential

When considering all of this, Wood needed no further convincing. She made her original purchase and continues to hold on to that original investment. But since 2015, much has changed. Bitcoin hit a high of nearly $70,000 in November 2021 and its ascension to prominence has even led to publicly traded companies like Tesla holding some on their balance sheet as an alternative to cash, further legitimatizing it as a viable asset. 

It’s been nothing short of an astronomical rise. Yet, Wood believes Bitcoin has more in store. In her and Laffer’s opinion, Bitcoin could have a value roughly equal to that of the entire U.S. monetary base. During their research in 2015 when they originally posited this, that figure was about $4.25 trillion. If Bitcoin’s market cap reached that mark it would mean one Bitcoin would be worth near $215,000 — a far cry from its current $20,000 price. 

So what’s Wood’s best advice? Have patience. She said that by investing with a time horizon over 10 years and ignoring price fluctuations “you’re going to win.”

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