Bitcoin Institutional Investor Analysis
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Bitcoin Institutional Investor Analysis LedgerMan, LedgerStat Capital1 Opening Premise History has shown that there is a 100% chance that FIAT money fails. It is just a matter of time. Some currencies last for a decade, some a couple of decades and still others such as the US dollar or the British pound have lasted multiple decades before losing most of their value. The fact is, all government issued currencies have failed over time. According to Austrian economic theory, money is a an economic good like any other. It’s marginal cost of production is zero and that is why it always fails. The issuers of FIAT money always print more of it in order to try and solve other problems other than just being money. Whether it is printed for social welfare, to pay for wars to bail out banks or to manage markets, we are currently witnessing government issuers of paper money attempting to solve more of the world’s problems with printed money. This inevitably leads to its failure. History has also shown that those that understand this concept and allocate a specific portion of their portfolio to gold and rebalance annually have benefited. Their portfolios have substantially increased returns with less risk. Since bitcoin was introduced a decade ago, it is inheriting the characteristics of hard/sound money with its fixed amount and increasing stock to flow ratio. With the recent drop in bitcoin price combined with its improvement in fundamentals, we believe an institutional investor is compelled to at least “’do the work” on bitcoin to determine if there is a possibility that bitcoin can become “digital gold” and perform the role that gold has performed for so many years as the “hard money” alternative to government-issued paper money. Even if the chance of success is small, a tiny allocation may still be warranted given its expected value. For example, a 20% chance of bitcoin taking a 10% market-share from gold over the next decade would be 20%*10%*$7.5 trillions = $150 billion market cap compared to its current $60 billion. There are plenty of markets and use cases for bitcoin that lead to much higher expected values, the most important point is that bitcoin actually has all of the characteristics necessary to be the best money the world 1 For more information visit www.ledgerstatcapital.com LedgerStatCapital.com ©2018 LedgerStat Capital, LLC Bitcoin Institutional Investor Analysis has ever seen and the mere possibility of this happening demands that one must do the research and determine for yourself what the possibilities are. It is our view, that Bitcoin is the most revolutionary technological development since the industrial revolution. The Bitcoin White Paper made the term “digital scarcity” a reality and thus made it possible to have such thing as digital money. This development will continue to revolutionize monetary economics. If our analysis is correct, Bitcoin could become the most widely used form of “money” and it has the potential to become the numeraire in monetary economics. That is, the standard by which all other money is valued. This is a large claim but, it is a very real claim because Bitcoin, due to its fixed supply of 21 million units and strict monetary policy of issuance, has already become the hardest form of money ever invented by mankind2. History shows that mankind has always sought to place its excess capital or savings in the hardest form of money, or where it will be treated best. This is a fundamental human trait, and is captured in Gresham’s Law which states that “bad money drives out good”. Or said another way, people will spend money that they believe is depreciating and will save or hoard money that they believe is increasing in value. As a superior form of money (in terms of its characteristics) we believe Bitcoin will increase in value for years to come. Bitcoin is already on the path of evolving from an internet collectible to a Store of Value. If that is true. You can’t afford not to do the work. The Bitcoin Standard, by Saifedean Ammous is a great place to begin to learn about bitcoin, however Saifedean spends the first 8 of 13 chapters talking about money, what it is and society’s need for hard money. He approaches bitcoin from an Austrian perspective and concludes that for a society to advance, it needs hard money and that bitcoin is the hardest form of money the world has ever seen. If this is true, and because there is a non-zero chance that bitcoin succeeds, an individual can’t afford to say it is “too tough” or “I’ll pass on this”. If a better form of money comes along, the old money dies and the impact on those holding onto the old money are financial 2 Credit for this observation goes to Saifedean Ammous, author of The Bitcoin Standard: The Decentralized Alternative to Central Banking. 2018. New Jersey, John Wiley & Sons. LedgerStatCapital.com ©2018 LedgerStat Capital, LLC 2 Bitcoin Institutional Investor Analysis ruin. Conversely, the early adopters have the opportunity to be rewarded for their willingness to do the work. “Bitcoin is not a currency for a government; it is a global currency for the people.” Wences Casares A Brief History of Money The history of money does not begin, a mere five-thousand years ago with the introduction of gold in place of barter. I credit Nick Szabo in his article Shelling Out as introducing me to the notion of money as speech and that anthropological studies show carvings going back one hundred thousand years communicating value amongst each other through ledgers. Over time those ledgers which were meant to keep track of who owes what to whom evolved into easier forms of exchange. Approximately fifty-thousand years ago, depending on your location in the world, man used beads/shells/glass/rai stones to pass/keep/store the ledger amongst their particular tribe. At its core, money remained a ledger and the entries upon that ledger were secured by scarcity of the item securing that slot. The most important characteristic of money is obviously scarcity, without scarcity, anyone can print more slots on the ledger which would be ruinous for that money and for that society (just look at our own society post 2008 bail-outs). Other features became important within the society for trading, for milestone events like birth, marriage and for generational transfers. This ability to communicate more effectively has adapted over time. Eventually, it appears as though about five thousand years ago gold/silver emerged as a means to communicate value between tribes and among nation states. Characteristics of Money LedgerStatCapital.com ©2018 LedgerStat Capital, LLC 3 Bitcoin Institutional Investor Analysis Source: Vijay Boyapati. Medium.com These precious metals served the purpose of being both universally recognizable and scarce. The metals were also durable, portable and divisible which helped hasten their ultimate acceptance. However, about 500 years ago, money needed to be more easily divisible and portable so a market developed for warehouse receipts and other forms of institutional issued paper that was backed by a claim on real physical gold. This second layer on top of gold was not perfect. There were times when the issuer printed more claims than actual gold and there were collapses, but these paper notes had incredibly useful features that the market decided were worth that risk. Most countries had their own currencies that were backed by gold. These gold-backed paper notes served as money until about 19143. Below is the history of FIAT currencies since that time period. It is one of complete failure relative to gold. 3 The Bitcoin Standard, Saifedean Ammous LedgerStatCapital.com ©2018 LedgerStat Capital, LLC 4 Bitcoin Institutional Investor Analysis Just as in the past, when society’s need to communicate value more effectively was met with a new form of money, similarly, I believe that the central banks and governments which control our present fiat monetary system are notorious for distorting the ledger or otherwise “print money” in order to serve other purposes other than as a Store of Value. These other uses become enormous and cumbersome and eventually crash the system as we witnessed in the epic failure of the financial system in 2008. Subsequently, the monetary experimentations have become more dangerous and widespread. Fortunately, there is another experiment that was started at the same time that is now 10 years old called bitcoin. It is a harder form of money with a higher stock to flow ratio than even gold. In addition to scarcity, bitcoin is better than gold in most of the remaining features.4 It also offers that it is censorship resistant. It is my expectation that privacy, fungibility 4 The Bitcoin Standard, Saifedeane Ammous LedgerStatCapital.com ©2018 LedgerStat Capital, LLC 5 Bitcoin Institutional Investor Analysis and ease of use will improve with time. This brings us to the Store of Value. When people choose not to spend or consume and thereby save money they want their savings to be in a form that will hold its value over time. This is where the present-day case for Gold and Bitcoin is very interesting. As we all know Government issued money is continually being diluted and thus loses value or purchasing power over time. It appears as though the bubble in all asset prices is a direct result of savers being forced out of dollars and into other forms of speculation in order to store value. Historically, when thinking about savings people have had a choice about what form of monetary good to hold.