The concept of an insurance policy is straightforward. A contract is created between a policyholder and an insurer. The contract states that the insurer is legally required to pay for losses outlined by the insurance policy when they occur.
In exchange for having their losses covered, the policyholder must agree to pay a premium to the insurer over time. Policyholders pay for the right to insurance and only use it when necessary.
These insurance policies can cover many different types of assets or risks. There is fire insurance, flood insurance, home insurance, medical insurance, and many more. The largest insurance companies will offer policies for any and all of these use cases.
But maybe the largest insurance company in the world does not actually look like an insurance company at all.
This was the idea proposed to me by two investors yesterday at breakfast. Their point was that bitcoin could be the largest insurance company in the world.
Let me explain.
Some people are buying bitcoin as insurance against currency debasement. Others are buying bitcoin as sovereign default insurance. Some are buying because they want insurance against undisciplined monetary and fiscal policy. Some are buying for insurance against seizure. And others are buying bitcoin for insurance against economic censorship.
Just as there are different insurance policies that serve different purposes, Bitcoin is different things to different people. And just as most policyholders don’t want to ever have to use their insurance, most bitcoiners realize that bitcoin’s success will likely come on the heels of major issues in the legacy financial world.
But how exactly is bitcoin insurance? First, a bitcoin holder pays a one-time premium (cost to purchase their bitcoin), rather than an on-going premium. If the bitcoin holder bought early, the premium is cheap. If they wait to buy much later, the premium will likely be much more expensive.
Second, if bitcoin is going to be the asset that investors seek safety in during times of economic uncertainty or chaos, then there is an inverse relationship to catastrophe in the legacy financial system. Bad things happen in the legacy system, bitcoin gains in value. We saw this when high inflation hit the United States. We saw this in countries where seizure of assets became prevalent. And most recently, we saw this when banks in the United States were failing and bitcoin gained in value.
When confidence in the legacy system is rocked, people want an alternative that is outside the system. There are very few options these days, especially given how digital and hyper-connected everything has become. Bitcoin serves as a “payout” when bad things happen in the old system. The decentralized, global nature of the asset increases the resilience and accessibility for billions of people.
Another point worth mentioning — rather than have to trust that an insurance company will honor an insurance policy in times of crisis, bitcoin provides a programmatic digital product. You don’t have to submit your claim. The insurance company can’t make a unilateral decision whether to uphold the policy or not. Bitcoin is not owned or controlled by any one person or organization. You don’t have to trust anyone. The asset and network can be audited by anyone, at any time, from anywhere in the world.
Don’t trust, verify.
This idea of bitcoin as a large insurance company is noteworthy because it opens up the possibility that open-source software could introduce a new type of insurance against events that were previously uninsured. No insurance company is going to write you a legitimate policy against high inflation. They won’t write you a policy against government seizure of your assets. The insurance companies historically have not covered hyperinflation or economic collapse.
These tail risks are too obscure and too hard to measure. They don’t fit into the insurance company model. But bitcoin was built in such a way, and has been adopted by people around the world for specific purposes, that now make it clear that bitcoin is serving as an insurance against catastrophe.
I hope we never have to see bitcoin succeed because of outright failure in the legacy system. That would bring a level of pain that most people could not endure. We are talking double-digit unemployment for many years, people going hungry, no heat or power for families with young kids, violence becomes prevalent, etc. Just study any nation who has gone through a similar event and you will understand immediately why we should avoid those events as much as possible.
However, on the off chance that any of these economic risks occur, I think it is prudent to have some insurance. Bitcoin provides that insurance in a unique way. Given that you also don’t have to pay a persistent premium, but rather only a one-time premium to acquire the asset, the risk-reward seems heavily skewed in favor of the bitcoin holder.
If this insurance thesis is correct, you also don’t have to hold a large amount of bitcoin for it to work. A mere 1-3% allocation in a portfolio should be highly effective at countering the negative side effects of these economic risks.
Bitcoin has become a $500+ billion insurance product that is used by hundreds of millions of people around the world. There was no CEO, marketing team, board of directors, or insurance sales departments. It is a great product that serves a real pain point, which benefits from word-of-mouth. We have learned over the last few decades that those are the hallmarks of technology products that eventually dominate markets for decades.
Let’s hope the insurance expires worthless, but I wouldn’t be willing to bet my financial future on it.
Hope you all have a great weekend. I’ll talk to everyone on Monday.
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