I'm no bitcoin bull. I'm not even a crypto-currency bull. I believe there's a better-than-50% chance that Bitcoin will eventually go to $0; I personally hope that's actually the case.

And yet, by the end of the year, I will be buying bitcoin for my family's overall portfolio. I'm not doing so as a long-term investment. Rather, I'm doing it as an insurance policy.

For investors who have a few years' experience under the belts and understand that they could lose everything they put into it, the idea is still worth considering. 

Pair of electronic hands and bitcoin symbol

Image source: Getty Images

The basics of bitcoin

Bitcoin represents a mammoth paradigm shift for investors. It's tough to wrap your head around what it actually is. No one has done a better job of breaking it down than Adam Ludwig -- CEO of cryptographic ledger company Chain -- in a public letter he wrote to Jamie Dimon, head of JPMorgan Chase.

Ludwig says that cryptocurrencies -- of which bitcoin is the largest and most popular -- are better understood as "crypto assets...a new asset class that enables decentralized applications." 

To understand what this actually means, Ludwig encourages us to think about it this way:

  • Stocks serve publicly traded companies -- allowing them to raise money in exchange for ownership.
  • Most bonds serve government agencies -- helping federal, state, and municipal groups raise funds that are repaid at a later date.
  • Mortgages serve landowners -- helping people buy homes in exchange for a 15 or 30-year payment at a specific interest rate.

While we primarily focus on stocks here at The Motley Fool, all three of these assets -- stocks, bonds, and mortgages -- can be bought and sold. 

Crypto-assets follow the same structure. They are primarily issued through initial coin offerings (ICOs) to help groups that are developing decentralized apps raise funds to make their apps better. Ethereum provides a platform for building decentralized apps -- it's a decentralized form of Microsoft's Azure or Amazon's Elastic Cloud. Filecoin helps you store data remotely -- a decentralized version of Dropbox or Alphabet's Google Drive.

Bitcoin's purpose is two-fold: it represents both a way to transfer currency without the need for a third-party like a bank, and an actual currency itself -- like dollars or euros.

There's no inherent value in a bitcoin: you can't eat it, use it to transport yourself, or plant it in expectation that food will grow. It is simply a store of value: because there are a capped number of bitcoins that can exist in the world, it -- theoretically -- becomes valuable.

If that's a tough concept to wrap your head around, compare it to gold: while it's pretty, it doesn't help living things survive in any way. Instead, its value comes from the fact that there's a limited supply of gold around the world -- and everyone has agreed that its valuable.

Why bitcoin could fall significantly

In reading Ludwig's view of crypto-assets from 30,000 feet, you'd think he was actually very pessimistic on the future of bitcoin and its brethren. Speaking to the real-world application of such tools, he says:

On almost every dimension, decentralized services are worse than their centralized counterparts:

  • They are slower
  • They are more expensive
  • They are less scalable
  • They have worse user experiences
  • They have volatile and uncertain governance

And no, this isn’t just because they are new. This won’t fundamentally change ... there are structural trade-offs that result directly from the primary design goal of these services, beneath which all other goals must be subordinated in order for them to be relevant: decentralization.

In other words, you can have either have an easy-to-use, efficient tool that's centralized -- or you can have a less-intuitive, inefficient tool that's decentralized.  

But you can't have both.

Because of that, if the world continues to function relatively smoothly, these cryptocurrencies won't mean much, and the value of -- in this case -- bitcoin will diminish over time as it's simply not needed.

Why I'm still buying bitcoin

In describing why he's even still on the crypto-bandwagon, Ludwig explains the one -- and only one -- facet where such assets beat centralized applications:

Censorship resistance.

...

Access to decentralized applications is open and unfettered. Transactions on these services are unstoppable. More concretely, nothing can stop me from sending Bitcoin to anyone I please. 

What kind of a world would we need to live in where such censorship resistance mattered? One in which government, societal, cultural and economic regimes started toppling. Since the Civil War, we have experienced nothing of the sort in the United States. But that doesn't mean we never will.

Don't get me wrong, I'm no doomsday-er. I don't have a bunker stocked with supplies to ride out a nuclear winter. Instead, I want to take the fact that we live in a world of Black Swans with both hands, and take simple steps to mitigate any disasters that could fall upon my family as a result. 

Already, Bitcoin is proving its mettle in countries in the middle of upheaval. A recent tweet by a bitcoin bull highlights the point:

While Americans like you and I might see no need for the currency, those in calamitous situations can vouch for their utility. An Iranian claims that bitcoin is "saving [him] from [a] gruesome situation of inflation and censorship," while a Venezuelan says bitcoin, "is used as a store of value to escape inflation and devaluation of currency." 

That, in a nutshell, is why I'm buying bitcoin: as an insurance policy of something calamitous happening in the United States. If forced to choose, I would hope that nothing of the sort would happen -- that bitcoin would eventually go to zero because we are able to continue living peacefully.

It's the same with large life insurance policies you get when you start a family. The thought of having to use it would be heart-breaking. You hope it never comes to pass. But you also realize it would be imprudent to ignore the risk of your family making ends meet without you around.

And while you may balk at anonymous anecdotes from Twitter, Nassim Taleb -- best-selling author, former trader, and professor of risk engineering at NYU -- has noted that bitcoin may not only be a great insurance policy for individuals, but society in general:

its mere existence is an insurance policy that will remind governments that the last object establishment could control, namely, the currency, is no longer their monopoly. This gives us, the crowd, an insurance policy against an Orwellian future.

Only buy what you're willing to lose

Much like a term life insurance policy, my approach to buying bitcoin is to only pay for what I'm willing to lose entirely. As longtime Motley Fool community member Tom Engle has said, "If it fails, a small investment is all I want. If it succeeds, a small investment is all I need." As such, I only plan to devote a maximum 1% of my family's portfolio to bitcoin. 

It might sound foolish, but in the unlikely event that bitcoin takes off, it could serve as an important reserve to call upon in times of need. That's how insurance policies are supposed to work.