The Talmud offers investment lessons that have stood the test of time, but where does bitcoin fit into one of its best lessons?
This is an editorial opinion by Konstantin Rabin, a finance and technology writer.
As a huge supporter of all things crypto, and Bitcoin in particular, my mind often drifts to a time before this revolutionary technology appeared on the scene, and I was amazed at what it had to do. I wonder: How did our ancestors see it, and how do we use their teachings, applying the thoughts of the old thinkers to our modern existence?
While the money management strategies that can be found in books from thousands of years ago may seem crude or irrelevant to us today, I always try to look at the words on the page and the meaning behind them to find out what lessons can be learned. teach us today. One day, while talking to a friend about this, we wondered why Bitcoin might be supported by the teachings of the Talmud.
The Beginning of an Idea
I’m not a religious person, but it’s hard to avoid the conversation veering into that area when sitting with some Jewish friends who are avid students of the Talmud and all things related to Judaism. So, one night when I was sitting with one of these friends of mine, he brought up a Gemara, a Talmud component that contains investment advice and is often praised for its simplicity and effectiveness. The 63 books of the Gemara became a commentary on the Mishnah, which later became the first major text of the Jewish oral tradition, which is hundreds of years old. The part my friend is referring to is the following:
“R. Isaac also said: “That should be divided into three parts: (invest) one third in land, one third in merchandise, and (keep) one third ready to hand over.
–The Gemara, Tractate Baba Mezi’a 42a
The idea is that, to invest your money in the right way, you should divide your assets into three equal parts, spread between land, cash and risky assets.
So, this is what a traditional Jewish diverse portfolio looks like:
Third In The Land
Land – or if we generalize, real estate – is one of the most stable investments. Buying and holding land or other types of residential or commercial real estate has been a practice for thousands of years and as it is today, with the expectation that the real estate market will grow at a compound annual growth rate of 10.7% from 2022 to 2031. Therefore, save some of your funds in real estates are seen as good for preserving wealth and fighting inflation.
A third is ready to hand
We have all heard the phrase “cash is king,” and this is also what the Gemara teaches. Keeping a significant portion of your wealth in cash is quite beneficial for several reasons. First, the importance of remaining liquid cannot be underestimated – borrowing money requires money, and having the possibility to settle unwanted debts and remain solvent should not be destroyed. In addition, the market is always in cycles, and when liquidity is low and the demand for cash is great, other assets tend to decline. Therefore, having a large portion of cash on hand allows you to diversify your assets when they are undervalued.
Third In Merchandise
While the title may be a bit misleading, my understanding is that “commodity” refers to risky assets and ventures – businesses, stocks, my own commodities, things that you can put money in front of, they can generate significant profits.
These assets usually do well when the market is up, they appreciate in value and can be sold at a considerable profit.
Where Is Bitcoin?
While the reasoning behind the allocation outlined in the Gemara makes good sense to me, I wonder how this translates to the modern world and where bitcoin might fit into the grand scheme of things. So, the first thing that my friends and I sat there as our conversation progressed was to define this investment idea in a more modern way, to better understand the world we live in today.
Does Bitcoin Fall In The ‘Risk Asset’ Category?
During our discussion, we concluded that bitcoin could easily fit into the “commodity” category, as it can be considered a risky asset due to its volatility, but it is an asset. When looking at the comparison of stocks and crypto investments, it is clear that both types of assets have risks and may fall under the heading of “commodities”.
Does Bitcoin Fall In The ‘Cash’ Category?
Another place where bitcoin can fit is in the “ready to hand” column. Because it has been so easy in recent years to transfer money from fiat to bitcoin and back again, it has reached a point where the adoption of bitcoin and the liquidity it provides is almost the same as cash, but perhaps with a higher foreign exchange risk. This is true because BTC is freely traded against other major currencies like USD and EUR. In addition, BTC is often the “universal cash” for purchasing various other crypto assets and a large list of goods and services.
Does Bitcoin Fall Into The ‘Real Estate’ Category?
Although there are countries like the United Arab Emirates where the Dubai Land Department first used blockchain technology back in 2017 to regulate the real estate market, I would not say that bitcoin can be considered real estate in the Talmudic sense.
However, one could argue that BTC is the most stable cryptocurrency and could even call BTC “crypto real estate.”
Bitcoin Is Still a Risky Asset
While it is clear that bitcoin has the same features as cash and real estate, we come to the conclusion that it is now in 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 with some other “risky” assets below:
As shown in the table above, calculate the five-year return on investment (ROI) for these “risky” assets based on the closing price on February 6, 2018 compared to the closing price on February 6, 2023; the maximum possible drawdown based on the lowest price at the same time; and the maximum possible ROI based on the highest closing price at the same time, bitcoin offers a relatively high return as well as a relatively high risk.
Buying some bitcoins five years ago (in February 2018) and selling them in February 2023 will provide the highest return among the listed assets. If someone is lucky enough to sell it at the highest price, then bitcoins will return more than 500%. Obviously, high returns necessarily increase risk, and bitcoin also exhibits the highest drawdown mentioned above.
Is Investing Bitcoin Ethical?
“Any tool can be used for good or bad. It’s the artist’s ethics to use it.
– John Knoll
Contemplating the question of Ethics has driven many smart people crazy, but we are sitting there thinking about the role that Bitcoin is set to play in the world, I thought above said by the legend of visual effects John Knoll. While we can come up with many ethical ideas around Bitcoin, in the end, my friend and I decided to focus on the most obvious problem solved by it to see if this will benefit good or bad actors.
Decentralization: This is often referred to by Bitcoin enthusiasts as the goal of all blockchain technology, and it certainly has its merits. To operate without central authority in line with the principles of Jewish autonomy and independence.
Transparency: Because the Bitcoin network is open source and transparent, it helps to promote accountability and honesty by those who use it, both ethically and in line with the truth that all humans love.
Usage: In the dark days (of the web), Bitcoin is often used for unauthorized or illegal transactions – buying fake IDs, drugs, firearms and more. This will certainly make Bitcoin unethical for many. However, in recent times, cryptocurrencies like Monero and USDT are often used to conduct legal transactions, and may have the same unethical implications as Bitcoin.
Lessons That Have Passed the Test of Time
The importance of diversification cannot be understated, and above I have shown one simple model that has stood the test of time. Obviously, the investment teachings of Judaism are thousands of years old and do not consider bitcoin but, at any rate, they present 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.