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Join us as we delve into the world of Bitcoin investment with Noah Kaufman, an emergency physician and financial planner. Discover the potential benefits and risks of adding Bitcoin to your portfolio, the significance of the upcoming Bitcoin halving event, and practical tips for self-custody and responsible investing in digital assets. Get expert insights on harnessing the power of digital assets in shaping your financial future.

Noah Kaufman is an emergency physician and financial planner.

He discusses the KevinMD article, “Bitcoin investment for doctors: risks, rewards, and the necessity of diversification.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast and get CME for this episode by clicking on the CME link in the show notes. Today we welcome back Noah Kaufman. He’s an emergency physician and financial planner. Today’s KevinMD article is titled “Bitcoin investment for doctors: risks, rewards, and the necessity of diversification.” Noah, welcome back to the show.

Noah Kaufman: Thanks. It’s great to see you, Kevin.

Kevin Pho: So Noah’s been on several times. Go to KevinMD.com/podcast; in the upper right-hand corner there’s a search bar where you can search his name to find his story in previous episodes. But let’s jump right into today’s article and get a little update on bitcoin and cryptocurrency. How did this particular article come together?

Noah Kaufman: Well, I think it’s a really interesting time. I think there’s still a lot of stigma among our colleagues, within our social groups and within medicine in general about atypical investment strategies. There are a lot of colleagues I’ve been speaking to who have an interest but still have a great amount of skepticism, which I think is warranted. So I was asked to write another article as an update, because I think we started doing this a few years ago. So this is the yearly bitcoin update.

Kevin Pho: All right, so a lot has happened since we last spoke. Bitcoin is more than 50 percent off its highs, and we’ve had several high-profile scandals, I would say, with FTX, the cryptocurrency exchange, among the most prominent. So where do we stand? We’re speaking at the beginning of September 2023. What’s the status of bitcoin and cryptocurrency today?

Noah Kaufman: Sure, absolutely. Well, it’s very interesting. I don’t have a crystal ball, first and foremost, and I have a pretty traditional asset allocation. My brother and I have a private equity fund, and we advise physician groups and others. And just so everybody knows, I’m not a champion of bitcoin as in “it should be half of your portfolio.” Bitcoin is an asset class, and like real estate or equities, it’s perhaps a part of a well-diversified portfolio. First and foremost, physicians and sophisticated capital allocators need to understand that although it has a place, we don’t have a crystal ball, and anything could happen. I think that’s reflected in the price of bitcoin and its volatility. It’s still a very small market cap compared to real estate, global debt or, obviously, equities. All these asset classes are well developed and well entrenched, and they’re where we should be allocating the majority of our money.

However, it’s not every day that a new asset class gets created, and bitcoin is such an asset class. It’s based on math, it’s based on code, and as such it’s the world’s first actual yardstick that is immutable and incorruptible, and I can get into that. It’s also still a very big experiment, and that’s why the price fluctuates the way it does. I think we’ll see price stability over time. And if it doesn’t go to zero, which I think is a low chance, but still a possibility, then I think it’s an asymmetric bet that’s worth at least a small portion of everyone’s portfolio, whether it’s half a percent, 50 basis points, 100 bips or 500 bips, which I think would be a pretty oversized weighting. I think it’s a worthwhile asset class.

To answer your question more specifically: As best we can see, and as best everybody can think, we’re at the end of a bear market. Bitcoin seems to follow these cycles where every four years the halving takes place, and the next one is due in about May of 2024, so we’re getting close. Typically, leading up to May, there’s a bear market for the final two years; it’s almost like an election cycle. Then, starting in May, the number of bitcoins produced every day, or every block, every 10 minutes, is going to get cut in half. So there’s going to be half as much new bitcoin, and when supply is cut in half and you have the same amount of demand, well, I think everybody understands what happens, and that’s what leads to increases in price.

Kevin Pho: So you said bitcoin may play a role as part of a diversified portfolio. You mentioned something like 0.5 percent, maybe going up to 1 percent, because of the potential asymmetry. Not every physician investor should invest in cryptocurrency. What kinds of questions should they be asking themselves to make sure they’re candidates to invest in cryptocurrency?

Noah Kaufman: Absolutely. Well, first and foremost, I would be careful about using the term “cryptocurrency,” for a couple of reasons. We’re starting to use the term “digital assets.” Cryptocurrencies are the things for criminals, and that’s what worries me; it’s mostly scams. There’s bitcoin, and then there’s everything else. Ninety percent of my digital asset allocation goes into bitcoin every day, through a DCA, a dollar-cost averaging auto-buy mechanism. The rest of cryptocurrency I actually dabble in with about 10 percent of funds, but that’s because I’m a gambler. Look, I’m an ER doc. I love risk, and I love taking those bets.

To answer your question: Because it’s an asymmetric bet, and because you’re only putting in half a percent, or 100 basis points, I don’t think there’s a lot of risk. I don’t think any physician would really be in trouble if they lost half a percent of their net worth because bitcoin went to zero. So I do think it’s an appropriate risk, as it were, for just about everybody, because the question is: Would you wager half a percent? And that’s independent of your beliefs. You can scoff at bitcoin; you can think it’s going to zero. I try to be objective. I have no idea what’s going to happen, but the technology is very interesting. It’s the only network that’s never been hacked. It’s a fascinating invention, actually.

As such, you’re presented with a new asset class that is about to face the pressure of buying from ETFs that are eventually going to be approved. Look at what happened to gold 15 or 20 years ago, when it was approved as an ETF. The buying pressure alone puts bitcoin, by the calculations, at 180K, which is however many X from here. So that’s what an asymmetric bet is: You could lose half a percent of your net worth, or a quarter percent, or whatever you decided to allocate, or it could go up in value 10X, or even, in the crazy bullish cases that are hard to even imagine, 100X. That’s totally reasonable: 100X from here would be $2.5 million or so per bitcoin, and there’s a lot of math that makes that very realistic as a possibility. I know it sounds impossible, but unfortunately, the purchasing power of the dollar has been going down, down, down, so what’s the purchasing power of a bitcoin at that point? It’s kind of a scary potential future.

But that’s an asymmetric bet, and as such, I think the bigger risk is not having exposure to something in your portfolio that has asymmetry, whether it’s bitcoin or micro caps or whatever, that can move the needle for you. Because I think most of us see that we’re fighting a scarcity mentality right now, and we’re fighting interest rates versus inflation. None of us thought inflation would go to 8 or 9 percent. That is mind-blowing, and the Fed is fighting it hard. But do we go back there, like in the ’70s? Do we go up and down through a volatile time? It’s possible, and if that happens, we could see a lot of global debt, and a small piece of all the asset classes, get sucked into the black hole that is bitcoin. If that grows from a $700 billion asset to a multitrillion-dollar asset class, a $10 trillion asset class like gold is, or $15 trillion, or whatever it is, you’re already talking about $500,000 or $600,000 bitcoin. So I think it’s appropriate for just about everyone, and you need to mitigate risk through position sizing. That’s what we advise our clients.

Kevin Pho: Let’s talk about the actual mechanism of purchasing bitcoin. Full disclosure: I own bitcoin myself, through Coinbase. But I know there are other ways of owning bitcoin, and with the collapse of FTX and these exchanges, what’s your confidence that these exchanges will continue to be healthy going forward? In my personal experience, Coinbase is sometimes not as user-friendly as something like Fidelity or Vanguard, and it’s sometimes not as straightforward as buying a traditional exchange-traded fund or equity. So talk to us about the mechanism of buying bitcoin, and if a physician listening to this is maybe interested in doing so, talk about some of those options.

Noah Kaufman: Sure. Well, Coinbase is a perfectly fine place to buy bitcoin. It’s one of the biggest; there’s a lot of big money supporting Coinbase, and it’s doubtful they’re going to fail. However, that being said, owning bitcoin on Coinbase and not self-custodying, owning it on a centralized exchange, is nuts. It defeats the whole purpose. It doesn’t make any sense whatsoever, as people learned with FTX, which was also huge, with guys like Tom Brady, who had $400 million worth of bitcoin or whatever he had on FTX, and with Voyager and Celsius. And look, I lost probably 20 bitcoin through Voyager. Luckily, I’ve got a lot of stuff in self-custody, and I’ve got bitcoin in multiple different buckets, hot wallets and cold wallets. But to not take custody of your own bitcoin at this point, after all these collapses, is nuts. The government could come in and confiscate bitcoin, and of course this is conspiratorial and out there, and I don’t actually believe it’s the case. I think the actual base case is that everything’s fine on Coinbase, but I would recommend that everybody take self-custody of their bitcoin.

There are a lot of ways to do that. There are multisig wallets, where you can hire companies to help you with legacy, inheritance and trusts. You just need a good plan. It’s like keeping the original stock certificate, or silver and gold in a safe. Bitcoin in a cold wallet is the only really safe way that I would recommend holding bitcoin.

In terms of buying it, I don’t use Coinbase, because, like you said, I don’t like centralized exchanges, though I have to use them to get exposure. I don’t have any affiliation with these companies, but I do daily cost averaging through Strike, which is an app, and through River Financial, which is an app. Again, no disclosure; I just do a daily buy through them. Then I have it set up so that every 0.05 bitcoin I accumulate, which is every 10 days or something, gets transferred to my cold wallet, my cold storage. I just put that address in there. It’s very easy to do. For physicians, it’s easier than stitching. It’s something you have to learn, but it’s pretty easy. So Coinbase is fine to buy, and there are other places that are fine to buy. I highly recommend taking it off into cold or hot storage at any point in time and taking self-custody. Just make sure you have a good plan. Make sure you’ve backed up your private key and have it written down on a piece of paper that you give to your brother in San Francisco and your brother in New York, or whatever family, and then put it into a safe deposit box or something like that.

Kevin Pho: Now, you make taking custody of your own bitcoin sound quite easy, but you actually went through a lot of terms that may be unfamiliar to people who don’t know the process. There’s a little bit of a learning curve here, right? We’re talking thousands, if not tens of thousands, of dollars, and again, it’s not as easy as a traditional Vanguard or Fidelity account. There are actually several steps to take custody of your own bitcoin. So I just want to be clear: What kind of comfort level should a physician have with that system in order to move forward with that step?

Noah Kaufman: Yeah, absolutely. Well, it’s tough. I don’t think the technology has caught up yet, but I think it will. There are companies like Ethos, which I’m advising, full disclosure, that are trying to make it easier through wallets where you only have to memorize three words and the key is stored on the secure element of your phone, and there are some other companies. Hot wallets you can download to your phone, and with cold storage, it’s as easy as watching a couple of YouTube videos. I think it’s worth becoming comfortable with it, and I do think it’s going to get easier and easier, just as all technologies do.

I also, look, do consulting work on this with physician groups, and I’m not cheap, and it usually takes 15 or 20 minutes, maximum, to really walk through the steps of A, B and C. And you always do test amounts. If you send $5 or $20 to an address and a wallet, you see it show up, and you say, “OK, I feel good about that,” before you send more. It’s extremely rare to actually have problems. The process is really easy, and I think feeling comfortable with it takes a little bit of time, but again, I think it’s worthwhile for physicians to have an understanding, no matter what your belief is on it.

Kevin Pho: Let’s talk about the status of a spot bitcoin exchange-traded fund. I know BlackRock, which is obviously one of the largest firms, applied for one, and we’re just kind of waiting on the SEC’s approval. So what’s your forecast on that? Should physicians simply wait for a spot bitcoin ETF, rather than dealing with cold storage and all that, and wait for that to come to fruition before dabbling in bitcoin?

Noah Kaufman: That’s a great question. I think the problem is that the moment an ETF is launched, it’s most likely going to be front-run first. Again, disclaimer: I have no crystal ball, and I have no idea what’s going to happen. The market is forward-looking, so you could ask, “Well, why isn’t it front-run now? Why isn’t the price of bitcoin $180,000?” I think those are valid questions; I wonder the same thing myself. That being said, when a bitcoin spot ETF is approved, because I think it’s a matter of when and not if, I think they’ll probably all be approved at the same time, so the SEC and the government aren’t seen as showing favoritism toward BlackRock, which is obviously intimately tied to the Fed and involved in all kinds of machinations of the U.S. dollar system and the Federal Reserve and Treasury system. Grayscale is probably going to be switched over to an ETF, and obviously there are a lot of other ETF applications right now. BlackRock throwing its hat into the ring kind of shows that if anybody’s got the inside word that it’s going to be approved, it’s BlackRock.

So the forecasts are that there’s an 80 percent chance it’s going to be approved. Even if it’s pushed back, it’s eventually going to be approved, and my guess is that it’ll be approved just in time for the halving. Once that happens, the buying pressure is going to be enormous, because then every pension fund and every mutual fund can get exposure to it, and it’s a very tax-efficient, very low-risk way to get exposure to physical bitcoin. By “physical bitcoin,” I mean actual bitcoin, not derivatives such as paper futures or rehypothecated bitcoin. Because of that, I think that once the bitcoin ETFs are approved, along with the halving that’s coming, there’s a good chance we’re going to see bitcoin fly to $100,000 a bitcoin, four times where it is now, or even $200,000 a bitcoin, and it might even go a lot higher before coming back. Volatility, of course, is a big part of this.

So I think if you wait, you run the risk of buying when everybody buys, and I’m not sure I would recommend buying bitcoin to physicians if it were more de-risked, if you didn’t have that asymmetric upside. Getting into bitcoin at $200,000 a coin, you have to have a really long-term vision. You have to think it’s going to go to $1 million or $2 million eventually, by 2040, that it’s going to be something you leave your family, and that it’s not going to be hacked by quantum computers, or some other zany, bearish downside scenario where bitcoin doesn’t pan out, which, by the way, is plausible. So I would not really recommend that friends, family or clients get into bitcoin at $200,000 a coin, or $100,000 a coin. You don’t want to FOMO into anything; it’s the whole “buy low, sell high.”

Right now we’re in the midst of a bear market. Bitcoin has been going up and down, and if you look at the chart, it’s following a really tight channel. It’s been obeying this channel pretty well, we haven’t seen a break of it, and right now we’re on the bottom side of the channel. So I think this is the time to get interested in it, and maybe to put a little speculative allocation toward it, depending on your risk tolerance. So I wouldn’t wait. As a matter of fact, we can revisit it next year, and if something happens, I’ll be the first to change my mind and go back to talking about real estate, which is the largest part of our private equity investment portfolio.

Kevin Pho: We’re talking to Noah Kaufman. He’s an emergency physician and financial planner. His KevinMD article is titled “Bitcoin investment for doctors: risks, rewards, and the necessity of diversification.” Noah, let’s say I’m a clinician listening to you, and I’m interested in perhaps taking the next step. Let us know what that next step is, and maybe you can end with some take-home messages.

Noah Kaufman: Yeah, absolutely. I think the next step, and look, it’s really easy, and again, I have no affiliation, and I don’t get any money or any referral or anything, but I would download the Strike app or the River Financial app. I’m personally using River right now. You could use Coinbase, but the fees are a lot higher, and it’s kind of wonky to get around. I would go in there. It’s a very simple interface, and you just start buying $10 worth of bitcoin a day and see what it’s like, or $20, whatever you feel comfortable with. Then you can watch a video, download any type of wallet, like a Muun wallet, M-U-U-N, or a Green wallet, and transfer the bitcoin you buy to your own wallet, and just experiment with teeny little amounts and get to know it. There’s a great book out there; it’s the main bitcoin book, by Saifedean Ammous. I don’t remember its exact name right now, but you can find a bitcoin book, if reading is your knowledge consumption modality. Otherwise, just get on and watch a little YouTube video. I would just get started.

Kevin Pho: Noah, thank you so much again for sharing your perspective and insight, and thanks again for coming on the show.

Noah Kaufman: Yeah, absolutely. It was a pleasure to be here, Kevin, and as always, we’ll keep updating people as time moves forward. It’ll be interesting to see what happens.