The Rule of 72 and 0.01

The Rule of 72 is a financial rule that is believed to have been first documented in “Summa de arithmetic” in Venice, Italy, in 1494. I find it interesting that Venice is the believed birthplace of this rule because Venice was foundational for developing modern financial markets via their early development of financial instruments such as government bonds and non-redeemable debt-based money. In this case, the Rule of 72 has stuck around for centuries because it simplifies one of the laws of investing—compounded interest.

The Rule of 72 is a cheat code for figuring out how long it will take your invested money to double given a fixed rate of return. To use the rule, all you need to do is divide 72 by the expected rate of return. The answer tells you how many years it will take for your money to double. Without diving too into detail about the true math of how this works, 72 is used because it’s a close estimation that the formula for compound growth over time would actually use. Further explanation for why 72 works well for accurate estimations is that 72 is tied to the natural logarithm of 2 (~0.693) which is a key value for determining how many times your money needs to compound before it has doubled.

With the math explained, let’s use the S&P 500 as a base case example. If we assume that the annual return of the S&P 500 is 10% we can easily apply the Rule of 72. 72 divided by 10 equals 7.2 years. This means that if you invest in the S&P 500, you can expect your money to double every 7.2 years assuming the annual rate of return is 10%.

Now, let’s do the same math equation with Bitcoin. While Bitcoin launched in 2009, there was extreme price volatility during the first couple of years and these annual returns tend to skew the actual expected return. As in, in the early days of Bitcoin, it went from having no dollar value to $0.01 to $0.10 to over $100 by November of 2013. These insane annual returns will be removed for the purpose of this illustration. Using prices of each year dating back to 2014, Bitcoin still has a compound annual growth rate of over 50%. While 50% is not possible forever, over the next couple of years, or even a decade, it is feasible. At a 50% rate (72 divided by 50) an investment in Bitcoin would double roughly every 1.44 years. If we want to be conservative and use 40% (72 divided by 40) as our annual growth rate it would double about every 1.8 years. Going even further conservatively at 30% (72 divided by 30) an investment into Bitcoin would double roughly every 2.4 years.

Obviously, the math does not predict the future and does not guarantee anything will happen. The math also does not factor in the 4-year cycles that Bitcoin has previously operated in. These 4-year cycles, shown through history, have seen Bitcoin go up for 3 years and down for 1 year before repeating. However, each new cycle has brought higher highs and higher lows regarding the price of Bitcoin, meaning if you zoom out, your returns are preserved. I also personally believe that the 4-year cycle of Bitcoin is going away given the worldwide adoption and overall maturity of the asset occurring, but until the 4-year cycle fails to present itself, I will treat that as a rule of Bitcoin.

Regardless of these variables that potentially muddy the math above, if you believe in Bitcoin as an asset and believe that it will continue to take an increasing percentage of the world’s total addressable market (TAM) $900 trillion of wealth, there is arguably no better solution for parking your wealth and zooming out for years if you want a high rate of return.

The math portion of this based on history is complete. Let’s now move away from a multi-century-old formula and instead look fully to the future in a hypothetical way.

In level setting, I firmly believe Bitcoin is the greatest asymmetric opportunity in human history. I have said this multiple times and frequently use this statement in conversation. The scenario below explains why.

To emphasize this, we are going to use 0.01 Bitcoin as the unit of measure. As of the time of writing, 0.01 Bitcoin is worth about $960. For this example, this is all the Bitcoin you own: 0.01 Bitcoin. You own 1 one-hundredth of a Bitcoin. Let’s see what that could mean:

If the Bitcoin thesis plays out and the world goes on a Bitcoin standard and everything is priced in Bitcoin, since Bitcoin has a fixed supply, your 0.01 of Bitcoin would not only provide you with a fixed stake in all the Bitcoin (21 million total coins ever) but also a fixed stake in everything that exists in the world. This is so because if everything is priced in Bitcoin, you would have a fixed amount of the total money and therefore, the total ability to own a fixed amount of everything existing that is proportionate to your ownership in Bitcoin. Crazier, is that your 0.01 holding of Bitcoin grants you ownership of a fixed amount of everything that exits forever, not just currently existing.

The math is that holding 0.01 Bitcoin in this scenario would grant you value proportionate to 1 divided by 2,100,000,000 of everything in the world as this is the same equation that would portray your total stake in the Bitcoin network. Using the TAM of wealth from above ($900 trillion) that would mean that 0.01 of Bitcoin, or 1 divided by 2,100,000,000 of everything ($900 trillion) would be worth $428,571 in today’s prices. This hypothetical scenario is based on the fact that the Bitcoin Standard thesis plays out however this scenario lacks in the fact that it uses values for everything today. I believe the future will have prosperity we currently fail to understand and if that comes true, the potential value for that prosperity is much higher than the value we received from using today’s wealth in our equation.

There has never been something in humanity’s history that offers you a potential fixed stake in everything in the world. In a world operating on a Bitcoin Standard, anyone holding Bitcoin has a stake not only in Bitcoin, but the world, and the future. This is the most asymmetric bet in human history.

Obviously, there is a broad spectrum of outcomes for the future of Bitcoin. I cannot read the future for when, or even if, these events will happen. I do know if adoption grows and Bitcoin continues to fix itself in the investment portfolios of every individual, corporation, and nation-state, it will continue to grow. I also know, that in the event humanity returns to a world of scarce money via a Bitcoin Standard, like when it operated under a gold standard, there will be even further growth of the network. Even if your base desire is to outperform the market, it may make sense to hold just a little Bitcoin so you, or your family, can capture the potential infinite upside of what occurs in the event the world adopts a Bitcoin Standard. You can only lose what you put in (if Bitcoin goes to zero), but you can gain infinity if the thesis plays out.

Stack SATs.

The views and opinions expressed here are for entertainment purposes only and should, in no way, be interpreted as financial or investment advice. Always conduct your own research when making an investment or trading decision, as each such move involves risk. I am not a financial advisor and do not claim to be qualified to convey information or advice that a registered financial advisor would convey to clients as guidance. Nothing contained in this e-mail/article constitutes, or shall be construed as, an offering of financial instruments, investment advice, or recommendations of an investment strategy. If you are seeking financial advice, find a professional who is right for you.