For Financial Advisors, Bitcoin Is the Next Nasdaq

Financial advisors like to talk about how Bitcoin is just a substitute for the Nasdaq because of its price volatility and high correlation to stocks.

They are more right than they know, but for the wrong reasons. In the 2020s Bitcoin will likely prove to be the driver of investment returns in investors’ portfolios, just as the top Nasdaq-listed companies were in the prior decade. Financial advisors had better position their clients accordingly.

Upgrading bitcoin from Amazon to Nasdaq

In late 2020 I argued that Bitcoin was the next Amazon. So much has changed since then that this view needs revision. While I still think that Bitcoin’s future percentage returns are on the same scale as Amazon’s were over a decade ago, framing Bitcoin’s investment potential today in terms of a single company is now too limiting.

Today a better analogy is the elite members of the Nasdaq. At over $20 trillion of total market capitalization, this index (and its primary constituents) were the primary creator of wealth for stock investors in the decade that ended last year. The top seven companies in the index – Apple, Microsoft, Alphabet (Google), Amazon, Tesla, Nvidia, and Meta (Facebook) – accumulated approximately $11 trillion of total value, roughly $10 trillion (i.e. 90%) of which was generated in the last decade.

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But circumstances have changed for this extraordinarily successful group of companies. They face rising hurdles, especially (1) regulation and (2) rising inflation (and therefore interest rates).

Regulatory hurdles for the Nasdaq darlings

Prior to the U.S. election in November 2020 I opined that the regulatory risk to bitcoin was already lower than the regulatory risk to the giants of the Nasdaq. Public opinion had already turned against these titans of the data industry, as concerns about election tampering, manipulation. Terms like “surveillance capitalism” entered the vernacular.

Congress was increasing its scrutiny of the industry as the public realized that these companies swindle us by

1. giving us near-zero-marginal-cost-to-produce services that are worth far less than the data we feed them
2. destroy our privacy by hoovering up our data and selling it to third parties
3. effectively hack the primitive portion of our brains by providing serotonin hits for “likes” and interactions that are addictive in nature and make us unhappier overall
4. reduce our ability to concentrate and reason due to such constant stimulation
5. create polarizing and hatred-cultivating echo chambers
6. spread misinformation that can result in the weakening of democracy
7. turn journalism into a clickbait-driven business model, and
8. possibly even destroy jobs and livelihoods by accelerating the rate of automation in the American economy.

That was before the appointment of a competition regulator who seems keen on reigning in the internet monopolists and intensifying moves by European regulators who were already on the same path. Suffice it to say that the uphill regulatory path for the elite members of the Nasdaq has steepened further, which makes it less likely that they will repeat the 10x return in this decade that they achieved in the last one.

The great inflation of the 2020s

To understand Bitcoin’s importance for the coming decade, start with inflation. Inflation is impossible to predict since it incorporates a large social and psychological component. It can take time for the crowd to change its expectations for the future, demand higher wages today, negotiate to lock in future wage rises, and complete the inflationary wage/price spiral. But there are plenty of inflationary drivers that don’t depend on unpredictable human psychology, and these factors are screaming for sustained higher inflation. Following are a few of the biggest inflationary factors:

De-globalization (re-shoring of supply chains) due to the pandemic and rising geopolitical conflict among great powers (most recently manifested in the Ukraine war) reduces global access to both inexpensive commodities and cheap labor. This raises overall production costs for goods and services.

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Domestic labor pool shrinkage due to the boomers (second largest generation in history) exiting the workforce cannot be offset by new labor force entrants because generation Y is so much smaller. This raises overall production costs for goods and services. The overall demographic picture globally is similar. Falling birth rates in the last few decades have created smaller and smaller cohorts of young adults entering the workforce. Less labor means higher inflation.

Elevated government deficit spending due to numerous factors, including payment of entitlements, necessitates greater government borrowing and monetization of government debt. This increases the quantity of money chasing goods and services.

Because of these inflationary drivers, smart analysts of the 2020s have drawn comparisons to both the 1940s and the 1970s. Both were periods of high consumer price inflation in which consumer price inflation significantly outstripped interest rates, which helped the economy manage its debt. Moreover, today the total debt level as a percent of total economic output is much higher than in either of those periods, which makes the potential inflation all the more appealing.

In the 1940s gold ownership for investment purposes was prohibited. That didn’t stop many Americans from owning it and protecting their purchasing power. In the 1970s gold was the single best-performing major asset. Gold investors made approximately 30% annualized. By contrast, stocks returned just 5% annualized. With inflation averaging over 7% annually, stocks lost at least 2% of their purchasing power per year in that decade. Bonds lost 4% annually in real terms.

This brings us to digital gold, a.k.a. bitcoin. With roughly $600 billion of total network value, Bitcoin has approximately the value (in nominal terms) of the sum total of the top seven members of the Nasdaq a decade ago. And Bitcoin could easily accrue another $10 trillion of value this decade like those companies did in the prior one.

The Nasdaq had a great run last decade. Recent price action suggests that may be ending. Bitcoin’s price has also had a rough ride recently. But given that bitcoin is the hardest monetary asset ever invented, and the forces of inflation seem likely to endure, I expect bitcoin to be the must-own asset of the 2020s.

Read More: Lessons I’ve Learned About Crypto as an Advisor