Thesis Summary

Bitcoin (BTC-USD) is seen by many as a dangerous and volatile asset. While there is a truth to this, given the current state of the financial system and economy, I argue it is more irresponsible not to have any exposure to cryptocurrencies. Allocating a small percentage of your portfolio to cryptos could help reduce overall volatility and potentially yield incredible returns. There is no true price of Bitcoin, but there is certainly a value, and we have to believe this will be reflected in the long term.

Source: Forbes.com

The most frustrating thing about explaining cryptocurrencies to people is that they are never concerned about how they work, but rather what the price will be. Should I buy it now? How much will Bitcoin be worth in 6 months? The truth of the matter is no matter how hard people try to determine the future price of Bitcoin, nobody knows. It may be worth nothing in 5 years. However, I recommend owning Bitcoin because, ultimately, it has value.

The same principle applies to stocks. Nobody knows for certain where stock prices will be in six months, but the principle of owning stocks is sound because you are buying a share of something that produces value. Companies are complex systems that use tools and human labor to create things we want. Likewise, Bitcoin can be seen as a tool, which does indeed fulfill people's needs to some degree.

While I struggle to understand the nitty-gritty of the matter, Bitcoin does have the functionality to replace a great deal of our monetary and financial system. Through blockchain technology transactions can be made quickly and accurately no matter where you are in the world.

In Zimbabwe and Venezuela Bitcoin has aided thousands if not millions of people to protect their wealth and even transact through bitcoin. To Americans, this may sound like a moot point, since we have incredibly liquid and deep capital markets and a financial system that sits at the center of the whole world. But does this mean we don't "need" bitcoin?

While the stock market has provided us an incredible rally over the last two decades, it has become increasingly clear to economists and regular fold alike that the system upon which this is built is on very shaky foundations. What was once labeled "extreme" and "temporary" has now become commonplace (ZIRP and QE). What before were levels of debt only ever seen during wartime periods, have now become normal, with many western countries including the U.S. surpassing 100% debt/GDP ratio.

The bottom line? The only way out of this much debt is either default or inflation. Given that the U.S. can print as much money as it wants, the latter is a much more likely scenario. Gold has already reached an all-time high, and the Fed even came out today and openly admitted it will happily "tolerate" higher levels of inflation. Inflation, however, may only be the tip of the iceberg. The backbone of the monetary system, banks, could soon face a systemic collapse much like in 2008. This could come from several places; derivatives, corporate debt, sovereign debt, and also emerging market debt.

Bitcoin acts as a "hedge" against inflation. It is naturally deflationary since the amount is limited. But Bitcoin can also act as a means of exchange, which is something we might also need one day if the financial system collapses. In other words, it acts as a hedge against a systemic collapse. This seems farfetched, but banks closed their doors in Greece in 2008, and in the U.S. during the 1930s.

Circling back to our stock comparison, it is not enough to buy a single cryptocurrency. The best option is to diversify your holdings amongst a few. Here are my top three picks:

First and foremost, Bitcoin remains the most popular and useful cryptocurrency by far. When it comes to currencies in general, widespread use is an important factor, and it is likely that if today the world were to turn around and start using cryptos daily, Bitcoin would sit at the base. Bitcoin can also be seen as the gold of cryptocurrencies. Other cryptos may be quicker in terms of processing transactions, but Bitcoin has the perception of being the most secure.

The second most important crypto to own is Ethereum (ETH-USD). If Bitcoin were to ever be displaced, Ethereum would be the one. This cryptocurrency can be seen as much more than an exchange mechanism. Ethereum is built on a much more robust platform which hosts thousands of decentralized apps and "smart contracts". Ethereum's uses go well beyond the monetary space, which makes it a must-own in my portfolio of cryptos.

Lastly, why not leverage the technology of cryptocurrency with the intrinsic value of an age-old store of wealth? This can be easily done with PAX Gold (PAXG). These can be seen as digital gold tokens backed by 1 troy ounce. Paxos is a New York-based company and the tokens are redeemable for LBMA-accredited London Good Delivery gold bars.

Bitcoin and other cryptocurrencies have made many people millionaires. While it will be hard for these coins to experience the same exponential gains, they have now become a viable and real alternative to centralized fiat currencies. They are the ultimate hedge against systemic collapse and incredibly secure ways of storing wealth if kept properly. (cold storage)

Disclosure: I am/we are long BTC-USD, ETH-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Here's Why Bitcoin Is A Must In Your Portfolio - Seeking Alpha