- Joel Revill
The Case for Bitcoin in Generational Wealth
Generational wealth consists of financial assets that are passed down within a family, from one generation to the next. Managing generational wealth involves estate planning and investment strategies aimed at supporting the financial well-being of a family’s future generations and philanthropic interests.
Generational wealth is typically invested to preserve principal in real terms while allocating a portion of returns to fund the family’s expected distributions. Investment strategies tend to emulate “endowment-style investing” which seeks to remain invested throughout market cycles, minimize portfolio volatility, and grow principal balances at a rate greater than inflation.
Generational wealth managers typically construct diversified portfolios comprised of uncorrelated assets which may include publicly traded securities, alternatives such as hedge funds and venture capital, and illiquid investments such as real estate and mineral rights. These portfolios are designed to better withstand market corrections and achieve superior risk adjusted returns over the very long-term.
Does crypto fit into generational wealth?
In 2009 an anonymous person or group named Satoshi Nakamoto introduced Bitcoin, a peer-to-peer network designed to store and transmit value. Since that time, bitcoin and over 18,000 other networks built on distributed public ledgers have experienced unprecedented growth and adoption. The total market cap of these crypto assets now exceeds $2.2 trillion with user growth of over 100% per year; well ahead of the adoption rate ever experienced by the internet. In 2021, the number of crypto users nearly tripled, from 106 million in January to 295 million in December. Extrapolating a similar rate of increase in 2022, crypto is on track to reach 1 billion users by the end of this year.
For the question of managing generational wealth, we focus on bitcoin due to its dominant adoption rate among crypto assets and its unique “store of wealth” properties. We believe these two qualities, along with bitcoin's persistent lack of correlation to traditional assets over long periods of time, make it an attractive asset in which to invest generational wealth.
Bitcoin’s historical returns
Bitcoin launched in January 2009 but did not price until July 2010 when it began to change hands at $0.05 per bitcoin. Since that time, bitcoin’s returns have consistently and significantly outperformed traditional assets such as gold and equities.
Figure 1: Compounded Annual Returns of Bitcoin, Gold, and Equities 
To avoid “cherry picking” a favorable point in time for bitcoin’s performance, we calculated 3-year annualized returns rolling over time. Here we also introduce a hypothetical investment portfolio comprised of 60% equity and 40% fixed income securities ("60/40 portfolio"). This portfolio represents a traditional diversified investment portfolio against which we can compare bitcoin's performance.
As Figure 2 illustrates, 3-year annualized returns of bitcoin significantly outperformed the 60/40 portfolio over time. The median of bitcoin’s 3-year annualized returns was 111.5% compared to just 9.3% for the 60/40 portfolio. In addition, bitcoin's returns exceeded those of the 60/40 portfolio during 99.3% of the observed periods.
Figure 2: Rolling 3-Year Annualized Returns of Bitcoin vs. 60/40 Portfolio 
We then recalculated 60/40 portfolio returns assuming incremental investments in bitcoin. We began with a 60/40 portfolio and added 10 basis point increments of bitcoin, maintaining a 60/40 split for the remaining balance. With each portfolio, we calculated 3-, 5-, and 10-year annualized returns to understand the impact that a range of allocations to bitcoin would have across different time horizons.
As Figure 3 illustrates, even small allocations to bitcoin increased 3-, 5-, and 10-year returns dramatically. In fact, just a 5% position in bitcoin doubled the 10-year returns of a 60/40 portfolio.
Figure 3: Annualized Portfolio Returns with 0-10% Allocations to Bitcoin
What about volatility?
Bitcoin's impact on portfolio returns is not surprising given its significant outperformance relative to equities and fixed income. However, bitcoin has been a volatile asset. So, the question is whether bitcoin’s positive contribution to returns more than compensates for the increased volatility.
To answer this, we calculate risk adjusted returns using the Sharpe ratio, a measurement of a portfolio’s outperformance per unit of its volatility. All else being equal, portfolios with higher excess returns or lower volatility produce higher Sharpe ratios, and vice-versa. Sharpe ratios above 1.00 are considered good, as the asset or portfolio is generating excess returns relative to its volatility.
The Sharpe ratio is typically used to measure the change in risk adjusted returns when a new asset is added to a portfolio. But let's start with the Sharpe ratio of bitcoin as a standalone asset. On a trailing 3-year basis, bitcoin produced a Sharpe ratio of 1.79. By comparison, the S&P 500 produced a 0.95 Sharpe ratio over the same period while the 60/40 portfolio produced a 0.99 Sharpe ratio.
To again avoid “cherry picking” a favorable point in time for bitcoin’s performance, we calculated the 3-year Sharpe ratio rolling over time. As Figure 4 shows, bitcoin produced a Sharpe ratio consistently greater than 1.00 over time (88% of observed periods) with a median of 1.63.
Figure 4: Bitcoin Rolling 3-Year Sharpe Ratio 
While measuring bitcoin's Sharpe ratio over time provides an understanding of its risk / return characteristics, to understand whether its contribution to returns more than compensates for the increased risk we need to consider the correlation between bitcoin and other assets in the portfolio.
Adding imperfectly correlated assets to a portfolio can reduce overall volatility and increase risk adjusted returns. The practical challenge for traditional investment portfolios is that there are very few assets that offer a persistent lack of correlation to equity and fixed income securities over long periods of time. Bitcoin is a unique exception.
The correlation between bitcoin’s daily returns and those of the 60/40 portfolio was 0.29, 0.21, and 0.11 over the past 3-, 5-, and 10-year periods, respectively. This indicates almost no correlation between bitcoin and the returns of traditional assets. Thanks to this imperfect correlation, a small allocation to bitcoin can result in no added risk to a portfolio.
A variety of measures exist to ascertain risk. For investment portfolios we use Value at Risk ("VaR"), which quantifies the extent of possible losses over a specified period of time. We calculated VaR of the 60/40 portfolio using 3-, 5-, and 10-year data to understand the impact that a range of bitcoin positions would have across different periods of time. As figure 5 shows, an allocation of up to 5% in bitcoin over the past 3-, 5-, and 10 years resulted in no measurable increase in the risk of the portfolio.
Figure 5: Daily Portfolio VaR with 0-10% Allocations to Bitcoin
Given the substantial increase in returns with no added risk to the portfolio, it follows that a small position in bitcoin would significantly increase Sharpe Ratios. Figure 6 confirms this logic. The 60/40 portfolio produced Sharpe ratios of about 1.0 during the past 3-, 5-, and 10-year periods. Adding a small position in bitcoin substantially increased these Sharpe ratios. In fact, just a 5% position in bitcoin increased historical Sharpe ratios by roughly 1/3rd across all three time periods.
Figure 6: Historical Sharpe Ratio with 0-10% Allocations to Bitcoin
Bitcoin as a store of generational wealth
Bitcoin is a digital network that allows for the storage and transfer of value. There are many applications for bitcoin, but here we are focused on bitcoin’s unique properties to store wealth across time. The most important of which is an unchangeable policy written into bitcoin’s code that results in a predetermined and finite supply. Only 21 million bitcoins will ever exist, with approximately 19 million (90%) outstanding as of April 2022.
New bitcoins are issued in blocks during a verification process known as mining at an average rate of one block every ten minutes. The number of bitcoins issued in each block is reduced by 50% every four years. This reward will continue to halve every four years, gradually reducing bitcoin's “inflation” until the final bitcoin has been mined.
Why finite money supply matters for storing wealth
In contrast to bitcoin, government-issued currency not backed by a physical commodity (“fiat money”) is subject to an unknown and infinite supply. A perceived benefit of this unlimited money supply is the ability for central banks to manage credit supply, liquidity, interest rates, and money velocity. This may be helpful in smoothing economic cycles but invites the potential for governments to debase their fiat money thereby diminishing its qualities as a store of wealth.
This becomes particularly problematic when governments spend beyond their means. Deficits require governments to borrow, which in turn requires lenders to fund the government’s debt. Enter the central banks and a process known as debt monetization. Debt monetization is the process by which central banks increase money supply to fund government deficits.
Unfortunately, that is exactly what's happening today on an unprecedented scale. The US government ended 2021 with a staggering $2.8 trillion deficit. This shortfall, as shown in Figure 7, equated to 12.4% of Gross Domestic Product ("GDP'), among the highest levels on record.
Figure 7: US Government Deficit as a Percent of GDP as of Year-end 2021
As a result of the ballooning deficits, US government debt, shown in Figure 8, has been climbing for the past four decades and as of year-end 2021 stands at $28.4 trillion or 123% of GDP.
Figure 8: US Government Debt as a Percent of GDP as of Year-end 2021
So where is the central bank in all of this? As of February 2022, US Dollar money supply (“M2”) totaled $21.8 trillion, an increase of 11% from the prior year.
Figure 9: US Dollar Money Supply as of February 2022
Even more worrisome about this acceleration of M2 growth is the sustained levels year over year. During the past three years, M2 has grown 15% on an annualized basis. Figure 10 puts these numbers in historical context, with recent levels of growth not seen since the 1970s.
Figure 10: US Dollar Money Supply Percent Change from a Year Ago as of February 2022
Debt monetization typically depreciates currencies, lowers yields on government debt, and inflates prices for assets such as real estate and stocks - - a tempting mix of incentives for officials who are subject to short-term election cycles. But there's a hitch. Funding government deficits through debt monetization invariably leads to monetary inflation. And monetary inflation erodes the purchasing power of fiat money, reducing the real value of wealth over time. Debt monetization is in effect another form of taxation.
To make matters worse, even those investing in government treasuries today are losing real wealth. Treasury inflation-protected securities ("TIPS") are a proxy for the return on government debt adjusted for inflation. TIPS are a form of US Treasury bond indexed to inflation, which means that the yield on TIPS equates to the real interest rate earned by those who invest in treasuries. As Figure 11 reveals, the real yield on 10-year US Treasuries declined into negative territory two years ago and currently stands at -0.52%. In other words, investing $1,000 in government debt today will return $949 inflation adjusted dollars in 10 years.
Figure 11: 10-Year Treasury Inflation-Indexed Security as of April 2022
Where would you rather store generational wealth?
Governments seem increasingly comfortable running larger and larger deficits despite the inescapable fact that they are saddling themselves with debt that can only be absorbed by inflation, higher taxes, or default.
Because debt monetization is a necessary component to fund government deficits, money supply is influenced by officials with misaligned incentives and an infinite supply of money. Bitcoin’s money supply, on the other hand, is finite and unchangeable.
US Dollar supply has grown at an annualized rate of 15% over the past three years with no change in sight to the government deficits underlying the problem. Bitcoin, on the other hand, is growing at less than 2% annually, a rate which is programmed to steadily decline to zero. A sound money standard, like that of bitcoin, is far superior for storing generational wealth than that of inflationary, fiat-based standards.
Bitcoin presents a compelling investment case when viewed through the lens of traditional generational wealth management. Bitcoin's unprecedented rate of adoption, persistent lack of correlation to traditional investments over long periods of time, and sound money supply make it an attractive asset in which to invest generational wealth. Allocating just 5% to bitcoin substantially improved the risk adjusted returns of a traditional investment portfolio, increasing 3-, 5-, and 10-year annualized returns by 700-1,000 basis points while adding no measurable risk to the portfolio.
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 As of April 2022. Source: coinmarketcap.com
 As of January 2022. Source: Crypto.com Research
 We began with a hypothetical portfolio comprised of 60% equities (S&P 500 Index), 40% fixed income (Barclays Aggregate Bond Index) and 0% bitcoin. We then analyzed hypothetical portfolios blending incremental 0.1% positions in bitcoin while maintaining a 60/40 ratio of equity to fixed income for the balances. Return, risk and Sharpe ratio of each portfolio were measured across 3-, 5-, and 10-year historical periods. A variety of measures exist to ascertain risk. We use Value at Risk (VaR), a statistic that quantifies the extent of possible financial losses within a portfolio over a specified period. To calculate risk adjusted returns we use the Sharpe Ratio which measures the profit of a portfolio in excess of the risk-free rate, per unit of standard deviation.
 As with any asset, the value of bitcoin can go up or down and there can be a substantial risk that you lose money buying, selling, holding, or investing in bitcoin. You should carefully consider whether trading or holding bitcoin is suitable for you in light of your financial condition. Past performance is not indicative of future returns. Prospective investors are not to construe the contents of this document as a recommendation to purchase bitcoin. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.
 As of April 2022. Source: casebitcoin.com
 As of April 2022. Source: coinmarketcap.com
 The Sharpe ratio is calculated by dividing the excess return of a portfolio by the standard deviation of its excess returns. SPDR S&P 500 ETF as of April 2022. Source: Yahoo Finance
 Weekly data from April 2017 through March 2022. Source: casebitcoin.com
 Correlations fall within the range of -1 to 1. A correlation of 1 indicates perfect positive correlation. A correlation of -1 indicates perfect negative correlation. A correlation of or near 0 indicates that there is no relationship between asset returns.
 VaR is measured by assessing the amount of potential loss, the probability of occurrence for the loss, and the timeframe. For example, if a portfolio has a Daily VaR 1% (5-year lookback) of 2%, there is a 99% confidence that the portfolio will not have a daily loss larger than 2%, calculated using 5 years of historical data.
 Source: messari.io
 When bitcoin launched in 2008, the reward was 50 bitcoins. In 2012, it halved to 25 bitcoins. In 2016, it halved again to 12.5 bitcoins. Today miners earn 6.25 bitcoins for every new block mined. Because the time it takes to mine a block varies based on mining power and network difficulty, the exact time the block reward is halved varies as well. Assuming current mining power remains constant the last bitcoin will be mined in 2140.
 As of December 2021. Source: St. Louis Fed
 M2 includes cash, checking deposits, savings deposits, and money market securities. Because of its wide definition, economists tend to watch M2 supply as an indicator of the total money supply. Data as of February 2022. Source: St. Louis Fed
 As of April 2022. Source: St. Louis Fed
 A 5% allocation to bitcoin increased 3-, 5-, and 10-year annualized returns by 709, 749, and 1,025 basis points, respectively. Daily VaR (1%) decreased by 15, was unchanged, and increased by 23 basis points, for the 3-, 5-, and 10-year periods, respectively.