The Beauty of Bitcoin

I first heard of cryptocurrency back in 2013, when I attended a conference about the latest in financial services. Learning of my expertise, a Bitcoin advocate at the event wanted to hire me for some international asset protection.

Back then, one Bitcoin was worth $5.50, but he was so convinced of its future value he offered me 1000 Bitcoin (BTC) for a $5000 legal project. A digital currency that nobody can issue and nobody controls? It seemed like pure fantasy, so I politely declined.

Today that 1000 Bitcoin is worth $100 million.

Of course, I’m not the only one who missed that boat. There’s a story about the first-ever crypto-bought pizza selling for Bitcoin now worth $38 million, and many others like it.

I’ve been an international asset protection and business lawyer for 35 years now, and I’ve seen just about everything there is to see in financial services. When I declined the Bitcoin it wasn’t because I didn’t like the client or the work he offered, it was because I didn’t believe in the value of what Warren Buffet called “funny money.”

If he had offered $5000 I would have been all-in, but for 1000 Bitcoin? I had better things to do.

But I’ve since learned a great deal about Bitcoin (which recently hit a new record of $100,000), and given myself a master’s level course on what, exactly, money is.

Of course, money is any goods people assign value to, and over the last five thousand years that’s included everything from seashells to beads to fur skins to little bits of gold. Paper can also be money, but that’s a relatively recent invention.

Gold is probably the easiest form of money to understand and has been around perhaps the longest of all types of money. It’s shiny and pretty and heavy, and feels good in your hand.

Whether there’s an engraved image of Julius Cesar, Genghis Khan, or Lady Liberty, it has a certain intrinsic value because of its scarcity and the necessary labor and energy required to produce another  unit.

Compare that with paper money. Unlimited amounts can be produced with little effort and energy. When paper money was first printed, banks and governments were committed to ensuring that each dollar was backed by a certain unit of gold.

In 1920, for instance, every $20 bill was backed by an ounce of gold. That was called the “gold standard.” It was easier to carry around $20 bills than multiple ounces of gold, but the two were interchangeable. You could take your $20 bill to the bank and exchange it for a $20 gold coin or vice versa.

A lot has happened since then, including most notably when President Nixon ended this direct exchangeability between gold and dollars in 1971. Within a few years the value of gold spiked, and has mostly continued to rise from there. Gold has gone from $256 an ounce in 2001 to more than $2785 in 2024, a 10x leap.

But in reality, gold hasn’t gone up at all. Gold is a constant store of value. It requires time, labor and energy to produce and its ability to increase goes up by around only 2% per year, which is less than overall population growth. A century ago, a finely tailored suit cost an ounce of gold. The same can be said today. People buy gold because it holds value and purchasing power in the face of never-ending inflation and government money printing.

As for crypto, Bitcoin’s first transaction came in 2009. Ten Bitcoin were “mined” and sent to the first recipient, Hal Finney. The transaction itself was worth only pennies at the time but with today’s BTC value the transaction would be $1 million.

The total number of Bitcoin that can ever be created is 21 million and that amount will be reached through a process called “mining” (the production of new Bitcoin) sometime in the year 2140. As of now, 19.9 million BTCs are in circulation and 99.57% of the total 21 million will be in circulation by 2039. It will take until 2140, however, for the last Bitcoin to be mined.

Bitcoin for a number of people is digital gold. Like physical gold, it requires an act of mining to create a new BTC. That mining requires time, energy and money just like physical mining. And it’s even more deflationary than gold since the supply is finite in a world of growing people and money supply. Most importantly, governments create neither gold nor Bitcoin and have no real ability to control either the way they can control their own fiat currencies.

Of course, there are also differences. Bitcoin is much younger than gold (15 years versus 5000 years) and its acceptance as a form of money is only in its earliest stages, whereas gold is universally accepted as a store of value. It’s a physical commodity that you can hold in your hand and carry with you.

Bitcoin on the other hand can be transmitted in any amount from anywhere in the world to anyone, anywhere in the world in a nano second. You don’t need to hire a Brinks truck to transport it. An external flash drive or crypto wallet is discreet and easy to carry or exists online. You can even memorize your wallet access codes and carry nothing with you across borders and then access your wealth from another country anywhere. As one Bitcoin educator once said to me “Bitcoin is the only form of money you can carry around in your mind.” That’s pretty cool.

Perhaps, most importantly, both gold and Bitcoin have won the battle of Gresham’s law vis-a-vis the dollar. Gold has increased (or the dollar decreased more accurately) 300% since 2009 while Bitcoin has increased an astonishing 89,000% against the dollar. But Bitcoin has also won the Gresham war against gold as well, increasing nearly 30,000% in value against an ounce of gold.

Interestingly, many Bitcoin clients that I represent have purchased gold, silver, and other precious metals as a form of diversification from their crypto holdings. They fled the dollar as they didn’t trust the government manipulation and wanted to avoid the ongoing devaluation of fiat currency.

Conversely, clients with significant gold holdings are only now starting to understand and appreciate the similarities between their tried-and-true yellow metal and Bitcoin. But while gold owners may be late to the Bitcoin party, more and more of them are understanding the value of Bitcoin and are seeking exposure to it. Gold owners who have used gold not only as a store of value but also as a financial tool to accomplish other things, also best understand the notion of leveraging a hard asset (which doesn’t produce income) in order to create a new income producing asset from nothing.

Again, the similarities between gold and Bitcoin are substantial despite the more volatile nature of Bitcoin. They both can be leveraged, loaned, leased, and hypothecated in many ways and with little or no risk. They both can be used as collateral to obtain fiat loans at very low interest rates. This is because the lender is taking no risk. If the value of the gold or Bitcoin collateral falls, the lender simply gives the borrower a margin call. The borrower either puts up more collateral to maintain their loan or risks their underlying collateral being sold to pay it off. Another way to protect against the additional volatility of Bitcoin is to purchase “doomsday” hedges. They generally only kick in in extreme situations and therefore aren’t all that expensive to buy.

In a real-world example, if I wanted to borrow fiat money (i.e., dollars) against my Bitcoin, I might need a ratio of 3- or even 4 to 1 to get the loan. With Bitcoin at $100,000, let’s say I wanted to borrow $33,000 and the lender was willing to do so against my Bitcoin. The lender would say “Ok, but if BTC falls to under $35,000, you will need to provide more collateral or it will trigger a margin call and your Bitcoin will be sold.”

Of course I don’t want my Bitcoin sold, because Gresham’s law says I value one BTC more than $100,000 and at least three times more than $33,000. So I know I don’t want to part with my Bitcoin even if it goes down in value in the short run. I know in the long run: Governments will keep inflating the money supply and thereby devaluing the dollar and Bitcoin will go up. What do I do?

You structure a doomsday hedge into the equation that goes up in value if—and only if— Bitcoin falls below the $35,000 strike price and you assign the hedge to your lender. The cost of the hedge is really quite nominal because the value of Bitcoin would need to fall 65% ($100,000 to $35,000) before the hedge becomes relevant. Because that scenario is considered unlikely, a financial institution will sell that hedge to you for a very low price.

Of course the same type of hedges are used when gold or even stocks are used to collateralize transactions, but here is where Gresham’s law has tipped the scale once again in favor of Bitcoin. Because the value of BTC is rising exponentially vis-a-vis fiat currencies like the dollar, people are willing to pay substantially more to attract Bitcoin “deposits” (to use a banking term) than for fiat currency deposits. And this is where the magic of Bitcoin as a financial instrument comes into play.

A financial institution will pay significantly more for me to deposit my BTC with them than I would need to pay a financial institution to borrow fiat currency loan against my BTC collateral. This is truly an arbitrage situation between two different currencies or forms of money in which I’m lending my money in a position of strength with a better currency, Bitcoin, and borrowing in the weaker currency, dollars.

If structured correctly, I can actually use the difference in interest rates to borrow dollars for whatever I want to do (invest, spend, save, buy real estate, gold, etc.) and use the monthly earnings from my Bitcoin generated returns to repay the loan. Wow!!  I can literally use my Bitcoin to create new wealth and even spend that wealth if I want; and then allow the earnings from my Bitcoin interest to pay off the original dollar loan. If the price of Bitcoin crashes, my loan is protected by the doomsday hedges which prop up the value of my collateral until the loan is repaid from my Bitcoin earnings. In this way, you really can have your cake and eat it too.

I recently explained this to a longtime gold bug client of mine. He loves gold more than anything but also said he didn’t want to miss the boat on Bitcoin. We put the above strategy into place. He used $1 million to buy Bitcoin. That’s now his asset forever and for all time. We took out a self-liquidating loan for $300,000 which matures in four years. He immediately took the $300,000 he leveraged out of his Bitcoin to buy another $300,000 in gold. Of course that was his choice. He could have purchased a $300,000 condo in Belize, or a euro denominated cash flow investment in Europe. It was essentially free money.

If Bitcoin goes from $100,000 to $1 million in four years, all the upside belongs to the client. But if Bitcoin tanks, the doomsday hedges protect his Bitcoin, and the $300,000 loan gets paid off either way regardless of Bitcoin’s price. In the worst-case scenario, he gets his original Bitcoin back in four years (regardless of the value), but he also now has a new asset, i.e., $300,000 of gold plus any price appreciation on the gold that happens over the next four years. He now has new wealth that he didn’t have before.

Nobody knows what Bitcoin will do in the short run. Maybe it’s a coin toss.  But in this case, it truly is a heads-I-win, and tails-I-win anyway. Furthermore, there’s never been any four-year period since the inception of Bitcoin where Bitcoin has appreciated any total amount less than 250%.

Gresham’s law mandates it must go up because people are using an ever depreciating and infinite form of money called dollars to try and buy a finite asset called Bitcoin. It’s like premium ocean front property. They simply aren’t making any more of it and over the long run the price can’t go down.

One more thing to keep in mind as investment funds, global fortune five hundred companies and even governments such as El Salvador have begun to stockpile Bitcoin is that there will simply never be enough Bitcoin to go around. The smallest unit of Bitcoin which is eight decimal places to the right of zero is called a “Satoshi.” Initially, the number was so small it was nearly impossible to quantify. But now that a Bitcoin has grown from a few cents to a hundred thousand dollars, a Satoshi in turn has grown to just under one tenth of one U.S. cent. Going forward, I believe that values will be expressed in Satoshi’s rather than Bitcoin because very few people except only the very richest families and companies will be able to interact in Bitcoin.  

In fact, keep in mind that there are 58 million millionaires in the world when measured in U.S. dollars. There are only 21 million Bitcoins which means that for even the very wealthiest people, there simply aren’t enough Bitcoin for each millionaire to own even one. At present only 2% of all Bitcoin wallets hold one Bitcoin or more. For the other 98% of BTC owners, their measuring stick is really a Satoshi. For a Satoshi to go from 0.1 cent to 1 cent doesn’t sound like much, but in Bitcoin terms that is a rise from $100,000 to $1 million. Many Bitcoin experts believe that will be Bitcoin’s next move upward in its next up cycle whether this year or next. 

As an asset protection attorney, I always recommend that my clients, no matter where in the world they are, diversify their assets. That means currency, real estate, metals, stocks, bonds, and now Bitcoin. Bitcoin isn’t just a store of value like gold, it’s an innovative tool that can collateralize loans for anything you can imagine and even create new wealth from nothing. To me Bitcoin is the newest innovation in technology and an important part of wealth planning for anyone’s long term asset protection and growth.

So use your Bitcoin. Spend it, save it, and invest it all while you keep it too! That’s the truly unique beauty of Bitcoin that few people really understand. As one of my Bitcoin experts once told me: “The time to sell your Bitcoin is NEVER!” So, learn how to use Bitcoin to your and your family’s benefit and you will never regret buying your first Bitcoin, even at today’s price.

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Joel Nagel is an international asset protection and corporate lawyer who heads SOFOS Partners, a unique shared family office (SFO) with global interests in banking, insurance, sports, media, real estate development, hospitality, and timber. Limited spaces are available in his SFO for qualified individuals and existing domestic family offices seeking to diversify their holdings internationally with bespoke offshore solutions. Learn more at Nagel Law.