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1/ When I talk to my no-coiner friends/family about bitcoin, one of the main reasons they give for not investing is volatility (i.e. “I can’t put my money in an asset that can go down 50% in a week”)
2/ The cool part of bitcoin is looking at it in the context of modern portfolio theory, since it makes sense to rational individuals and most of the people I have conversations with are invested in the stock market
3/ Modern portfolio theory is about optimally constructing a portfolio to maximize expected return given a level of risk. It takes into account the Sharpe ratio, or your return/risk ratio (calculated as: expected return in excess of risk-free rate/standard deviation of portfolio)
4/ Rational investors will always try to maximize their Sharpe ratio. For example, a rational investor would choose a portfolio with a 10% expected return above the risk-free rate and 5% standard deviation over a portfolio with 20% and 15% respectively (Sharpe ratio of 2 vs 1.33)
5/ Here is where it gets interesting: bitcoin is a volatile asset with an asymmetrical return profile that is not correlated to the stock market
6/ This gives it a unique characteristic of being able to, with the right allocation and rebalancing for a given portfolio, both INCREASE the expected return and DECREASE the standard deviation, a silver bullet of diversification and a double boost to Sharpe ratio (cc:@cburniske)
7/ So, I propose a change in narrative for this new and incredibly powerful asset, at least for the time being when talking to traditional people
8/ Even though this liberative technology has the ability to disrupt current FIAT systems (of which all in history have eventually failed), the fact is most people don’t care about/understand this aspect now. However, they do care about/understand risk and financial returns
9/ My motive to tell friends and family about bitcoin is to protect them from what I see as the eventual downfall/hyperinflation of the US dollar, but if I can’t convince them to invest because of this “crazy” idea, I can reliably get them exposed using a traditional narrative
10/ So, let's tailor our conversations for our audience. Your grandpa may not be willing to invest in the "Tech" or "Hard Money qualities" of bitcoin, but if he can increase his Sharpe ratio, he may look into it as an investment vehicle
11/ I always mention I have no idea where bitcoin will go short term, and believe in not putting in more than you can afford to lose. That being said, I am incredibly bullish on the REAL price of bitcoin in the long term, and even more bullish on the liberation bitcoin provides
12/ I end my conversations with this thought: even if you don’t care about liberation or sound money, it’s fiscally irresponsible to ignore looking at your portfolio and seeing what adding a percentage of bitcoin can do for you given your acceptable level of risk...
13/ ...You’ll appreciate the increase in Sharpe ratio now, and most likely the freedom bitcoin provides in the not too distant future
14/ END.
