This is an opinion editorial by Konstantin Rabin, a finance and technology writer.
As a huge supporter of all things crypto, and especially Bitcoin, my thoughts often drift to a time before this revolutionary technology appeared on the scene, and I stand in awe of what it is bound to accomplish. I wonder: How would our forefathers have looked at it, and how can we use their teachings, applying the thought of the old thinkers to our modern existence?
While the money management strategies that can be found in books from thousands of years ago might seem crude or irrelevant to us today, I have always tried to look past the words on the page and into the meaning behind them to figure out what lessons they might teach us today. One day, while chatting with a friend about this, we considered why Bitcoin might even be backed by Talmudic teachings.
The Start Of An Idea
I'm not a religious person by nature, but it is hard to avoid conversations that stray off into that realm when sitting with some of your Jewish friends who are keen students of the Talmud and all things relating to Judaism. So, one night as I sat with one of these friends of mine, he brought up the Gemara, a component of the Talmud that incorporates investment advice and is often praised for its simplicity and effectiveness. The 63 books of the Gemara serve as a commentary on the Mishnah, which in turn serves as the first major writings of the Jewish oral traditions, spanning hundreds of years. The section that my friend was referring to, though, was a reading that goes as follows:
“R. Isaac also said: One should always divide his wealth into three parts: (investing) a third in land, a third in merchandise, and (keeping) a third ready to hand.”
The idea is that, in order to invest your money in a proper way, you should divide your assets into three equal parts spread equally among land, cash on hand and risky assets.
Hence, this is what the traditional Jewish diversified portfolio would look like:
A Third In Land
Land — or if we generalize, real estate — is one of the most stable investments out there. Buying and holding onto land or any other type of residential or commercial real estate has been a practice for thousands of years and is just as valid today, with expectations of the real estate market growing at a compound annual growth rate of 10.7% from 2022 to 2031. Hence, keeping a portion of your funds in real estate seems to be great for wealth preservation and fighting inflation.
A Third Ready To Hand
We’ve all heard the phrase "cash is king," and this is what the Gemara teaches us too. Keeping a significant portion of your wealth in cash is quite useful for a few reasons. Firstly, the importance of remaining liquid cannot be understated — borrowing money costs money, and having the possibility to settle any sort of unexpected debt and remain solvent should not be undermined. Besides that, markets are always going in cycles, and at times when liquidity is low and the demand for cash is great, other assets tend to drop in value. Hence, having a substantial portion of cash in hand allows you to grab various assets when they are undervalued.
A Third In Merchandise
While the title might be a bit misleading, my understanding is that “merchandise” refers to any sort of risky assets and undertakings — my own business, stocks, commodities, pretty much those things that you put some money into hoping that in the future, they might yield a significant return.
Such assets usually do well when the market is going upward, they appreciate in value and can be sold for a sizable profit.
Where Does Bitcoin Belong?
While the reasoning behind the allocations outlined in the Gemara makes good sense to me, I wondered how this can be translated into the modern world and where bitcoin might fit into the grand scheme of things. So, the first thing that my friend and I sat there doing as our conversation progressed was to define this investment idea in a more modern way, to be able to make better sense of it with respect to the world we currently live in.
Does Bitcoin Fall Into The ‘Risky Assets’ Category?
During our discussion, we came to the conclusion that bitcoin could fairly easily fit into the “merchandise” category, as it can be considered a risky asset due to its volatility, but an asset nonetheless. When looking at comparisons of stocks and crypto investments it is obvious that both of these types of assets hold risk and that either one could fall under the “merchandise” heading.
Does Bitcoin Fall Into The ‘Cash’ Category?
Another place where bitcoin might fit in is in the “ready to hand” column. Because of how easy it has become in recent years to move your money from fiat to bitcoin and back again, it has reached a point where the adoption of bitcoin and the liquidity it provides has made it akin to cash, but perhaps with higher foreign-exchange risk. This is especially true since BTC is trading freely against other major currencies like USD and EUR. In addition, BTC is often a kind of “universal cash” for purchasing various other crypto assets and a growing list of goods and services.
Does Bitcoin Fall Into The ‘Real Estate’ Category?
Even though there are countries like the United Arab Emirates where the Dubai Land Department first adopted blockchain technology back in 2017 to manage its real estate market, I would not say that bitcoin can be considered real estate in the Talmudic sense.
However, one could certainly argue that BTC is the most stable of cryptocurrencies and might refer to BTC as the “real estate of crypto.”
Bitcoin Is Still A Risky Asset
While it is clear that bitcoin has features that make it similar to cash and real estate, we came to the conclusion that it currently falls into the “risky asset” category more than anything else. However, it may be less risky than other assets that should be kept in this category. Let’s compare bitcoin to a few other “risky” assets below:
| Asset/Metric | Five-Year ROI | Max. Drawdown | Max. Possible ROI |
|---|---|---|---|
105.8% | (71.4%) | 518.5% | |
57.9% | (12%) | 83.1% | |
11.7% | (22.9%) | 308.1% | |
58.7% | (13.8%) | 83.6% |
As demonstrated in the table above, calculating the five-year return on investment (ROI) for these “risky” assets based on their closing prices on February 6, 2018 compared to their closing prices on February 6, 2023; their maximum possible drawdown based on their lowest prices within the same period; and their maximum possible ROI based on their highest closing prices within the same period, bitcoin offers relatively high returns as well as relatively high risk.
Purchasing some bitcoin five years ago (in February 2018) and selling them in February 2023 would have provided the highest return among the listed assets. If one was lucky enough to sell at the all-time high price, then bitcoin would yield a return of over 500%. Obviously, high returns inherently come with increased risks, and bitcoin also shows the highest possible drawdown listed above.
Is Bitcoin Investment Religiously Ethical?
“Any tool can be used for good or bad. It's really the ethics of the artist using it.”
Contemplating the question of ethics has driven many a smart man insane, but as we sat there thinking of the role that Bitcoin is set to play in the world, I thought of the above saying by visual effects legend John Knoll. While we could come up with many ethical ideas around Bitcoin, in the end, my friend and I decided to focus on the most obvious problems that are solved by it to see if these would benefit good or bad actors.
Decentralization: This one is often touted by Bitcoin enthusiasts as being the entire purpose of blockchain technology, and it certainly has its merits. To operate without a central authority aligns well with Jewish principles of autonomy and freedom.
Transparency: As the Bitcoin network is open source and transparent, it helps to promote accountability and honesty by those using it, both of which are ethically sound and align well with those truths that are held dear by all of mankind.
Usage: In its dark (web) days, Bitcoin was often used for illegitimate or illegal transactions — buying fake IDs, drugs, firearms and so on. This would certainly make Bitcoin unethical for many. Yet, in the current times, cryptocurrencies like Monero and USDT are often used to conduct legal transactions, and have perhaps inherited most of the unethical implications from Bitcoin.
A Lesson That Has Passed The Test Of Time
The importance of diversification cannot be overstated, and above I have shared one simple model that has passed the test of time. Obviously, Judaism's investment teachings are thousands of years old and do not specifically consider bitcoin but, at any rate, they provide an interesting thought experiment for us today.
This is a guest post by Konstantin Rabin. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.