The Talmud offers investment teachings that have stood the test of time, but where could Bitcoin fit into one of its most iconic lessons?
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 came on the scene, and I am in awe of what it is sure to accomplish. I wonder: How would our ancestors have seen it and how can we use their teachings, applying the thinking of the ancient thinkers to our modern existence?
While money management strategies found in books from thousands of years ago may seem crude or irrelevant to us today, I have always tried to look beyond the words on the page and the meaning behind them to figure out what lessons they could teach us today. While chatting with a friend about this one day, we considered why Bitcoin could even be backed by Talmudic teachings.
the beginning of an idea
I’m not a religious person by nature, but it’s hard to avoid conversations that veer into that realm when sitting down with some of your Jewish friends who are keen scholars of the Talmud and all things Judaism. Then one night as I was sitting with one of these friends of mine, he mentioned the gemaraa 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 Mishna, which in turn serves as the first major writings of the Jewish oral traditions, spanning hundreds of years. However, the section my friend was referring to was a reading that reads as follows:
“R. Isaac also said: One should always divide his wealth into three parts: (investing) one third in land, one third in merchandise, and (keeping) one third available.”
The idea is that to invest your money properly, you need to divide your assets into three equal parts split evenly between land, cash on hand, and risky assets.
Therefore, this is what the traditional Jewish diversified portfolio would look like:
a third on land
Land, or if we generalize, real estate, is one of the most stable investments out there. Buying and holding 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 the expectations of the real estate market. growing at a compound annual growth rate of 10.7% from 2022 to 2031. So keeping a portion of your funds in real estate seems like a great way to preserve wealth and fight inflation.
A third party ready to deliver
We’ve all heard the phrase “cash is king,” and this is what the Gemara teaches us as well. Keeping a significant part of your wealth in cash is quite useful for a number of reasons. First, the importance of maintaining liquidity cannot be underestimated: borrowing money costs money and the possibility of paying off any kind of unexpected debt and remaining solvent should not be underestimated. On top of that, markets always move in cycles, and at times when liquidity is low and demand for cash is high, other assets tend to lose value. Therefore, having a substantial portion of cash on hand allows you to obtain various assets when they are undervalued.
A third party in merchandise
While the title might be a bit misleading, I take it that “commodity” refers to any kind of assets and ventures: my own business, stocks, commodities, pretty much those things you invest some money in hoping to that in the future, could generate a significant return.
Such assets generally do well when the market rises, appreciate in value, and can be sold for a sizeable profit.
Where does Bitcoin belong?
While the reasoning behind the mappings described in the Gemara makes sense to me, I was wondering how this might translate to the modern world and where Bitcoin might fit into the grand scheme of things. So the first thing my friend and I did as our conversation progressed was to define this investment idea in a more modern way, so we could make better sense of it in relation to the world we live in today.
Does Bitcoin fall into the “risky asset” category?
During our discussion, we came to the conclusion that bitcoin could easily fit into the “commodity” category, as it can be considered a risky asset due to its volatility, but an asset nonetheless. when looking comparisons of stocks and crypto investments it is obvious that both types of assets carry risk and that either of them could fall under the heading of “commodities”.
Does Bitcoin fall into the ‘cash’ category?
Another place where bitcoin might fit is in the “out of the box” column. Because of how easy it has become in recent years to move your money from fiat to bitcoin and back, it has reached a point where bitcoin adoption and the liquidity it provides has made it similar to cash, but perhaps with increased currency risk. This is especially true since BTC is freely trading against other major currencies like USD and EUR. Also, BTC is often a kind of “universal cash” to buy various other crypto assets and a growing 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 adopted blockchain technology in 2017 to manage your 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 cryptocurrency and one could refer to BTC as the “welfare cryptocurrency”.
Bitcoin is still a risky asset
While it’s clear that Bitcoin has characteristics that make it similar to cash and real estate, we conclude that it currently falls into the “risky asset” category more than anything else. However, it may be less risky than other assets that must be held in this category. Let’s compare bitcoin to some other “risky” assets below:
As demonstrated in the table above, calculate 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 from 2023; your maximum possible reduction based on your lowest prices within the same period; and its maximum possible ROI based on its highest closing prices within the same period, bitcoin offers relatively high returns, as well as relatively high risk.
Buying some bitcoins five years ago (in February 2018) and selling them in February 2023 would have provided the highest return among the listed assets. If one were lucky enough to sell at the highest price ever, Bitcoin would generate a return of more than 500%. Obviously, high returns inherently come with higher risks, and bitcoin also shows the highest possible drawdown mentioned above.
Is investing in Bitcoin religiously ethical?
“Any tool can be used for good or bad. It’s really the ethics of the artist who uses it.”
Contemplating the question of ethics has driven many intelligent men mad, but as we sat thinking about the role Bitcoin will play in the world, I thought of the above saying by visual effects legend John Knoll. While we were able to generate a lot of ethical ideas about Bitcoin, in the end my friend and I decided to focus on the most obvious problems it solves to see if they would benefit good or bad actors.
Decentralization: Bitcoin enthusiasts often tout this as the sole purpose of blockchain technology, and it certainly has its merits. Operating without a central authority aligns well with Jewish principles of autonomy and freedom.
Transparency: As the The Bitcoin network is open source and transparent, it helps to promote responsibility and honesty on the part of those who use it, which are ethically sound and align well with the truths that are appreciated by all humanity.
Usage: In its dark (web) days, Bitcoin was often used for illegitimate or illegal transactions: buying fake IDs, drugs, firearms, etc. This would certainly make Bitcoin unethical for many. However, in current times, cryptocurrencies such as Monero and USDT are often used for legal transactions and have perhaps inherited most of the unethical implications of Bitcoin.
A lesson that has stood the test of time
The importance of diversification cannot be overstated, and above I have shared a simple model that has stood the test of time. Obviously, the investment teachings of Judaism are thousands of years old and do not specifically consider bitcoin, but in any case, they provide us with an interesting thought experiment 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.