What do Bitcoin and a bottle of bourbon have in common?
Not much, you would assume.
For the philosophically minded, a bottle of bourbon is many things. For example, it's a nice piece of glass that makes for far better decor than a 2L of box wine.
It's also versatile and quite fun to consume: whip up an Old Fashioned with bitters or a Manhattan with cherry and Vermouth.
For some people, a bottle of bourbon is also a pretty great investment (and one that's delivered enormous financial upside.)
And as for Bitcoin…. even if you don't understand what the heck a digital currency is anyway, you know one thing for sure: it has nothing in common with a bottle of bourbon. And it sure as heck isn't half as fun.
But that's where you'd be wrong.
Here are 5 similarities between Bitcoin and a bottle of bourbon (and why it's a good time to give both a shot.)
1) They're both among 2020's best-performing assets.
In a year so unprecedented that "unprecedented" was the word of the year, slightly strange things were happening in the financial markets.
In addition to the usual contenders like gold and commodities, two somewhat surprising asset classes outperform the market to deliver the year's best returns: rare whiskey and Bitcoin.
"Whiskey investment returns have surpassed that of the S&P 500, Bitcoin (this may now be debatable) and Gold." - Value the Markets, December 2020
Bitcoin was named amongst "the best alternative investments to buy in 2021" by Bloomberg and an asset particularly qualified to "withstand the vicissitudes of the 21st-century economy".
The Bloomberg Galaxy Crypto Index of digital coins was up about 65% in 2020 and returns from stocks, bonds, and commodities.
Whiskey, in comparison, delivered far more modest returns of only 20.4% - but still outperformed traditional markets. While 20-21% returns might pale compared to the meteoric rise of Bitcoin, it's crucial to remember that whiskey appreciates in the long term. And over the long term, investments in rare whiskey have delivered consistently high returns of 21% a year or a compounded gain of 546% over the last 10 years.
A 21% annual return means that prices increase by a factor of almost six times every ten years - an extraordinary ROI, mainly when sustained for over a decade.
In comparison, the S&P 500 has an annual average return of only 13.6% over the past 10 years, despite being a significantly more risky proposition.
During this period, comparably low-risk assets such as gold appreciated only 7.9% over the last decade, which equates to only 0.76% year on year., not even beating inflation.
The boom in whiskey, crypto, and other alternatives have been driven by 3 key reasons:
investors seeking to protect their savings against inflation
investors searching for financial upside beyond what is possible on traditional markets
investors seeking financial security through safe-haven assets in a time of economic uncertainty.
2) Their values are governed by the intrinsic laws of supply and demand (limited number of Bitcoin in supply, limited whiskey).
"If and when there's a sudden surge in interest in assets of any kind – be it Bitcoin, gold, or whiskey – when there isn't enough supply to go around, prices skyrocket. This is what is happening with both whiskey and Bitcoin as more and more investors buy items that appreciate in the face of inflation." - Value the Markets, December 2020
Unlike traditional assets available through financial markets, the price of whiskey and Bitcoin is influenced not by market forces but also through an intrinsic value determined fundamentally by supply and demand.
The reason rare whiskey bottles see massive valuations is not because of their flavor, finish, or fluctuations in fiscal policy.
They command such price tags, quite simply, because of the invisible hand that defines economic value: scarce supply and surging demand.
The skyrocketing demand for Scotch has far outstripped the production capabilities of Scotland's 120 malt whisky distilleries, which can produce a maximum of 35 million liters of single malt annually. While demand has grown year-to-year, production has not increased significantly.
While new distilleries have opened and closed distilleries are reopening, it will take decades before enough mature stock to match the exponentially increasing demand.
Furthermore, a substantial proportion of rare whiskey becomes even more limited as it is consumed by connoisseurs.
2020 saw demand for whiskey investments and surged which caused a shortage in supply.
As noted by Bloomberg, "Suddenly COVID-19 creates the perfect conditions for a whiskey bull market: Supply and demand are tilted in the investors' favor."
Like whiskey, Bitcoin values are defined purely by the laws of supply and demand. There are only a finite number of Bitcoin in circulation: 21 million bitcoins can be mined in total. Once miners have unlocked this number of bitcoins, the supply will be exhausted.
In fact, the production of Bitcoin is on a steadily downwards trajectory. The annual increase in new Bitcoins is set to drop below 2% in 2021, further contributing to the steady rise of BTC prices as demand increases while supply plummets.
Meanwhile, demand continues to surge as institutional adoption and investment in the currency have increased. Value has continued to soar, keeping Bitcoin in a consistently bull market for most of 2020 and all of 2021 so far.
This trend is set to continue, with Bloomberg noting that "Bitcoin's unique attribute of defined and limited supply [that] will keep the price of the benchmark crypto on a relative out-performance trajectory vs. most commodities, currencies and the crypto market."
3) They're both contrarian/independent assets that rise despite volatile/weak equities (and thus have boomed during the pandemic)
"Along with gold, people are stashing away Bitcoin and even whisky as they search for hedges."- Bloomberg 2020
As a result of their intrinsic values based on supply and demand, whiskey, cryptocurrency, art, and other alternatives remain largely immune to the fluctuations and forces that drive unpredictability on traditional markets.
This has ensured that alternatives as an asset class remain primarily uncorrelated to the rest of the market.
As a result, these assets perform independently of or even contrarian to most mainstream assets, which offers investors the opportunity for outsized returns even when markets are weak or unpredictable.
In the world, "It should be noted that the whisky market is fundamentally different from conventional commodities and traditional financial markets, with little discernible correlation." While the global financial market began to decline in February 2020, whisky saw a "lock-down boom as rich hit the bottle," as noted by Forbes.
Like whiskey, Bitcoin has maintained a low correlation to traditional asset classes, including broad market equity/bond indices.
J.P Morgan has recently noted that institutional adoption has seen Bitcoin clearly "decouple from traditional markets like the Standard & Poor's 500 Index of US stocks, and [display] a clear inverse relation to the US dollar."
As summarized eloquently by Bloomberg at the peak of the pandemic, "In uncertain times, Bitcoin is a hedge independent of the hegemony."
As whiskey, cryptocurrency, art, and other alternatives remain largely immune to the risks typically associated with financial markets, it's hardly a surprise that both Bitcoin and whiskey have surged despite - or because of - the economic turbulence that defined 2020.
4) They're both safe haven assets and a high-performing hedge against inflation.
"Investors Hoard Gold, Bitcoin and whiskey to Soothe Inflation Fear" - Bloomberg 2020
When markets are shaky, investors typically pour capital into "safe havens"—asset classes that perform well during turbulent times.
In a time of unprecedented quantitative easing, investors are concerned that the US Dollar will depreciate and trigger hyperinflation. As a result, investors have sought out safe-haven assets to safeguard against inflationary risk, tumbling yields, and uncertain equities.
Whiskey's reputation as a safe haven asset has been well-deserved and well established in the decade of low-yields that followed the financial crisis.
In the words of Bloomberg, "Investors seeking financial shelter during times of economic volatility naturally head towards tangible assets – and the Scotch cask investment market has benefited enormously from this influx of new investors." - as it tends to do during times of recession.
Or, as expressed more directly by Forbes in 2020, "Given the world is almost certainly in the midst of another recession, now is probably a good time to buy [Scotch]"
And Bitcoin, once considered the purview of libertarian investors and tech geeks, is fast becoming a mainstream hedge, now widely considered the "digital equivalent of gold."
As noted by Bloomberg on September 3, 2020, "The COVID-19 crisis [serving as a] catalyst for Bitcoin's transformation into a safe haven asset like gold", with a growing number of investors turning to Bitcoin as "a store of value amid concern that huge stimulus injections to counter the pandemic will stoke inflation and weaken the dollar."
As Bitcoin matures, volatility is at a historical low vs. the Nasdaq 100 Stock Index on a risk-adjusted basis. JP Morgan's recent analysis indicates that Bitcoin volatility appeared to be stabilizing for the long term.
Unlike its 2017 bull run, the price of BTC this time around is backed by solid fundamentals, with growing investor demand, widespread institutional adoption, futures participation, and metrics that indicate firm fundamentals behind valuations.
5) They're both a great way to beat the market - and they're accessible to all. Not just the 1%.
All the similarities between Bitcoin and bourbon so far have outlined the benefits they offer you as an investor.
Now we'd like to talk to you as an individual, like every person on the street. The one who knows that financial markets were made to just enrich institutions and the 1%. The one who's sick of the system and - like those radical Redditors who short squeezed wall street - want to beat the 1 percenters at their own game.
The most important similarity between Bitcoin and bourbon is the opportunity they offer you. Every investor who knowingly or unknowingly participates in the legacy financial system with every dollar saved in the banks and every dollar spent on a credit card is supporting the 1%.
Bitcoin and bourbon offer you - and me, and everyone - the opportunity to opt-out of a financial system that wasn't built by people like you or for people like you.
They offer you an opportunity to participate in a system built by people like you; tech-savvy, independent individuals who knew there had to be a more efficient, more modern, more transparent, and secure way to be in control of their own money.
The chance to opt-out (entirely or in part) and forge your own, independent financial pathway.
A financial system built by -and for- the rest of us. The average investor. The 99%.
Central to DEFI Spirits is the education of how to get started if you want to learn more.
We will never give you financial advice, but you will find alternative ideas to invest.
If not now, when?