Transcription
A strategist at one of the largest investment banks in the world just completely removed Bitcoin from his model portfolio. After years of promoting Bitcoin as a critical piece of the portfolio for an institution, he's basically saying that he doesn't think that any large institutions or pension funds especially should be holding Bitcoin at all. The reasons that he gave for this are definitely worth listening to and are raising some serious questions for investors around the world.
Now, the most interesting piece of this news is not just that he's dropped Bitcoin from the portfolio, but it's also what he's swapped that allocation that he had for Bitcoin for. Let's break down why one of the most renowned investors in the world just dropped Bitcoin in his portfolio and what that means for you and your money.
A lot of investors have always looked at Bitcoin with a side eye, right? Like what am I supposed to do with this little digital money thing? It doesn't do anything. It doesn't produce any cash flows. And for a gold investor, the major thought is this thing can just disappear at any time and I can't hold it in my hand. How do we know that this Bitcoin thing can't just be hacked? Or also, I mean, if the internet goes down or if there's a blackout, then what value is this Bitcoin thing, right? Then my money would just be gone. So, what are you going to do with a Bitcoin in an apocalyptic scenario? I think all of these concerns are valid and definitely things worth thinking about. And one of them is the exact reason why one of the most renowned investors in the world, Christopher Wood, has dropped Bitcoin from his recommendations.
In a world where the dollar is losing its value on a global stage, investors are looking for ways to protect their hard-earned money. Right? The stock market's tough right now because valuations have gotten astronomical and fears of a bubble across the entire market remain constant even though the stock market just continues to keep pushing higher and higher. Now, gold and silver have always historically been a place to hedge against inflation and to protect your money by leaving it outside of the entire traditional financial system. And that goes for no matter where you are in the world or whatever your home currency is.
Christopher Wood is the head of strategy at one of the largest investment banks in the world called Jeffre and he's also been known as the best strategist in Asia for almost a full two decades. And when Christopher Wood makes a move, the investment world listens. Christopher very much so understands the dynamics of trying to protect money from inflation. And in fact, he also very much so has been a proponent of gold and silver in the past. In 2020, Christopher Wood actually added Bitcoin to his model portfolio, reducing gold exposure to initiate a Bitcoin position and he later increased that allocation up to around 10%. Now, this was interpreted as an extremely bullish move and an institutional level endorsement of Bitcoin as a potential store of value. alternative to gold.
Now, just the other day, Mr. Wood completely dropped his Bitcoin allocation from his flagship greed and fear model portfolio, citing quantum computing risks to Bitcoin security, and he reallocated that weight into physical gold and gold mining stocks. He said that advances in quantum computing could eventually weaken Bitcoin's blockchain security and by extension its appeal as a long-term store of value is not as strong.
But what exactly is the threat that quantum computing poses to Bitcoin? First, we have to understand Bitcoin as a digital money system. All right, that lets people send value to each other directly over the internet without a bank, a company, or any government in the middle. Ownership in Bitcoin is not based upon your name or your identity. It's based entirely on what are called cryptographic keys. And you can think about cryptographic keys the same way you think about a username and a password for a website or a social media site. Your username is something that is publicly facing, but then your password is something that you keep a secret and anyone who has both of these can log in as you. Bitcoin works in the same kind of a way. Your public key is the same thing as your username and your private key is essentially your password.
Now, the only difference is is that you don't get to manually create either one of these. And the math of the entire system of Bitcoin does that for you. And the math that's performed to create your public private key pair makes it practically impossible for anyone to be able to guess your password. Imagine you have a password that's so long and random that even if every computer on Earth were guessing nonstop to figure it out, it would still take longer than the age of the universe to be able to crack your password. That's how strong Bitcoin cryptography is against normal computers.
Now, the biggest threat to this form of cryptography are what are called quantum computers. But what is a quantum computer? Well, it's not just a faster laptop. It's a completely different kind of machine that uses the physics of the quantum world. Now, normal computers work with bits where a bit is always going to come out to being either a zero or a1. And quantum computers use what are called cubits, which can behave like a zero and a1 at the same time. And because of this, these computers can explore many possibilities simultaneously. This lets a quantum computer solve very specific math problems in ways that normal computers never would be able to. A quantum computer doesn't just go faster, right? They they work completely differently. A normal computer, if it was trying to guess a password, it would guess the passwords one by one. But a quantum computer can use math tricks to jump straight to the answer for certain kinds of problems. And one of those problems is the math behind Bitcoin.
There's the possibility that using what's called Shor's algorithm, a powerful enough quantum computer could look at a public key, look at your your username, and mathematically reverse that to figure out the private key or the password on the Bitcoin network. And if that could happen, then essentially anyone using a quantum computer this powerful could log into the most valuable Bitcoin wallets and pretend to be the owner or therefore spend them and send those Bitcoin wherever they'd like.
Now, it's important to note that Bitcoin has two different types of math, two different types of cryptography that are being used in the system. One of them is used for the digital signatures side of things, right? So this has to do with tracking the ownership of Bitcoin over the network. But then you have SHA 256 which is more essential to the ordering and the mining process and SHA 256 is not necessarily super vulnerable to the quantum computing risks.
Now when it comes to this quantum threat in general, a quantum computer would need millions of logical cubits, uh, extremely low error rates and sustained operation that we're not really seeing from that technology yet. Right now, we're orders of magnitude away from the quantum computing threat on the digital signatures side of the math of Bitcoin. And when it comes to shot 256, it's not as much of a concern at all. So even some of the more optimistic projections put these threats decades away and not just years away. And it's also worth noting that if a quantum computer can break Bitcoin, then it's going to be able to break all of our other modern systems as well. all of our banking systems, uh, the internet and all of the security that's built into it today. Uh, government secure communications, stock exchanges, military systems would all be crafted as well. And Bitcoin is also designed to iterate, right? So, it's not a static thing. The Bitcoin code could migrate to postquantum cryptography. And in fact, it has upgraded its cryptography in the past. And the way that this works is that all of the participants of the Bitcoin ecosystem, uh, a majority of them just need to come together to agree to change the system. And once they agree with one another to change the system, then you can have a fork or a new version of Bitcoin that will then become the main way to use it.
The final thing I want to touch on here is that there's a lot of fear about SHA 256 because SHA 256 was actually invented by the NSA. And one thing that I found interesting is that the NSA has actually created back doors to the technology that they've put out for the public to use in the past. There was this thing that the NSA put out called the dual elliptic curve deterministic random bit generator. And this was a cryptographically secure random number generator that was also standardized by the NIST in 2006. And they are responsible for setting the standards for technology. Now it was later discovered that this had a built-in backdoor that could allow someone to know certain parameters to predict certain outputs. And this was all a part of a program that the NSA called, hear me out here, was called the Bullr Run program. And that was a secret, highly classified program to crack encryption of online communications and data uh run by the NSA. And this all came out because Edward Snowden actually leaked NSA documents that showed that the NSA very likely influenced the design of that cryptography to insert that back door.
Now, the difference between that incident and Shaw 256 is that with Shaw 256, uh, it's a completely open standard. It's all public, right? the way that it works and the math in it is a lot more simple and transparent and this has been out for 20 years and no back doors have been found and considering that you know there's a multi-trillion dollar opportunity if someone wanted to crack it uh it seems as if things are safe for now. So quantum computing does pose a real theoretical risk to Bitcoin, but the industry standard understanding here is that that threat is not imminent and Bitcoin has ways to be able to clear itself from danger's way through the upgrading of the system.
So, one of the top strategists in the world says that quantum computing is enough of a threat to take Bitcoin out of his recommendations for what would otherwise be permanent capital for large institutions. And he's replaced this 10% Bitcoin allocation with a 5% allocation to physical gold and 5% to gold mining stocks. Now, a lot of people in the gold community are going to feel pretty vindicated by a move like this, and they can now tell all of their Bitcoin people to go home.
Now, I am not a financial adviser. None of this is financial advice and definitely do not take financial advice from a random guy walking around a park talking to a stick. But the way that I look at all of this is that diversification is always key. Whether that means holding gold in physical form and in the form of ETFs or if that means holding Bitcoin, holding physical gold and also holding uh gold miners and getting cash flows or whatever that may mean for you. But eliminating one of the highest performing assets of the past decade that also has the potential to be the highest outperformer throughout the dd dollararization trend from your portfolio because of a theoretical concern might actually be the most risky thing that one could do.
Now, we also have to keep in mind here that we're talking about the difference between personal investments and investments that are being made on behalf of institutions, right? When you have a fiduciary duty to someone else, then you really have to be careful about making sure that you don't have any zeros that show up on your track record, right? You don't ever want to have something that uh could be a zero, which in the case of Bitcoin, if this quantum threat were real and it got there before the uh the the network upgraded, then well, that could end up in a zero. And as a fiduciary, that might not only be a problem for your track record, it could also end up in legal problems. So, just something to keep in mind when trying to consider this news that we've got from Christopher Wood.
Now, for a lot of people in crypto, this quantum threat is the reason why many people look for blockchains and crypto technology that already inherently addresses the quantum threat by having quantum resistant designs. And for other people, this whole talk about digital money and crypto is just a no-go all around. But I will continue to say that if this technology is the future, then not having any exposure to digital assets at all might be the biggest risk that you could take for yourself and your entire bloodline. If this is the way that things continue to go, there will only ever be 21 million Bitcoin, assuming that that isn't changed by consensus. And because of that, the price of them will be very likely to only go in one direction as you have infinite money printing. And not owning any Bitcoin in that world means that your children and their children will be in a even worse position of being able to acquire any for themselves as well.
But I don't know, maybe I've lost the plot. What did I miss? What did I get wrong? or how could I be looking at all of this differently? Let me know in the comments down below. I'm Keith D here to talk everything money and markets. And if you got anything from this at all whatsoever, hit that like button and subscribe. And also, if you haven't already, you got to check out my live show that I do with Ben Levit. It's called Memes and Markets. We go live every Tuesday and Thursday at 12:00 p.m. Eastern. We talk about stuff like this and much more. And you can discuss this stuff with us live. So, check that out in the first link in the description down below. And until next time, peace.