Über uns 1 Classic CRYPTO: FRIEND OR FOE? This article originates from In Gold We Trust report 2018, which can be downloaded at https://ingoldwetrust.report/reports-archive/in-gold-we-trust-2018/?lang=en Subscribe to the In Gold We Trust report at https://ingoldwetrust.report/igwt/?lang=en The In Gold We Trust report 2020 will be published on May 27, 2020. Ronald-Peter Stöferle & Mark J. Valek 2 Crypto: Friend or Foe? “There is going to be one cryptocurrency that will be the online equivalent of gold, and the one you’d bet on would be the biggest.” Peter Thiel Key Takeaways • Bitcoin: As with gold, the money supply cannot be arbitrarily manipulated, which could make the cryptocurrency a good store of value. • Cryptocurrencies are digital and therefore indispensable in the internet age. If Bitcoin proves itself, the cryptocurrency could become increasingly relevant as digital gold. • Gold-backed cryptocurrencies could bring some stability to the crypto world and make it easier to spend gold on a daily basis. #igwt2018 3 Crypto and Gold: Related Asset Classes? “Bitcoin is about the network effects. The first network effect is speculation. People have been collecting and speculating in gold and silver and sodium bicarbonate for centuries. The second network effect is going to be merchants accepting Bitcoin because people are holding it speculatively. Then merchants are going to start using it as payment themselves because they accept it.” Trace Mayer Cryptocurrencies experienced a meteoric rise in 2017. Where do they come from and why are they here? Seasoned Nobel laureates expressed their skepticism about cryptocurrencies several times in the past year – probably because this new phenomenon does not fit into the mindset of the mainstream-representatives of the economics profession. Even among gold sympathizers, crypto proponents and critics are roughly in balance. This ambiguity is quite surprising, because Bitcoin is viewed by some as a digital alternative to gold. After all, the creation of cryptocurrencies was supposedly inspired by the yellow precious metal. Therefore, Bitcoin is often referred to as “digital gold”. “30th anniversary of Black As we wrote in the chapter “In Bitcoin We Trust?” in our In Gold we Trust report Monday, when markets dropped 2017, Bitcoin – like gold – cannot be inflated by a central bank.1 Furthermore, 23% in a day. In crypto we just neither gold nor Bitcoin is anyone else’s liability, which is why they do call that Monday.” not harbor an immediate counterparty risk. Both offer protection Alexander Tapscott against negative interest rates and the demonetization of fiat money.2 Bitcoin can be viewed as a fiat money in the narrower sense that imitates a commodity money.3 Like gold, bitcoins also have to be mined, but digitally. The production of new bitcoins requires substantial computational power and electrical energy, which ensures a kind of digital scarcity due to the difficulty and time lag of the mining process. Unlike gold, Bitcoin is from the outset limited to an absolute total amount that is already established today: there will never be more than 21mn bitcoins, all of which should be mined by 214o. Bitcoin is programmed to issue a certain number of new coins approximately every ten minutes. Since its creation in 2008, this amount of newly created bitcoins has decreased every four years. Today we are at 12.5 bitcoins every 10 minutes; in 2020 we will be down to 6.25; and in 2024 to 3.125. — 1 See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121 2 See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121 3 See “Theorie des Geldes und der Umlaufsmittel”, Ludwig von Mises, München und Leipzig: Duncker & Humbolt, 1912, p. 46 4 A year ago we had already pointed out the similarity between gold and Bitcoin in terms of their respective stock-to-flow ratios (SFR). While gold has an SFR of about 64 years, Bitcoin’s is about 25 years. Current stock to flow-ratio: Bitcoin & Gold 70 60 50 40 ratio - 30 Stock to flow 20 10 0 BTC Gold Sources: World Gold Council, bitcoinblockhalf.com, Incrementum AG “It’s all about relative supply Bitcoin’s SFR will continue to increase over time as the number of newly created curves – the supply curve for bitcoins halves every four years. In 2024, the SFR will be approximately 119 bullion is far more inelastic than years.4 The SFR of Bitcoin will then be ceteris paribus about twice as is the case for paper money. It high as that of gold. For some, this makes Bitcoin the ultimate store of value, really is that simple.” one that might even be superior to gold in the future. David Rosenberg Stock to flow-ratio over time: Bitcoin and Gold 600 500 400 ratio - 300 Stock to flow Stock 200 100 0 2012 2016 2020 2024 2028 2032 BTC Gold Sources: World Gold Council, bitcoinblockhalf.com, Incrementum AG — 4 See “In Bitcoin We Trust”, In Gold we Trust report 2017, pp. 113-121 5 Bitcoin: A Challenge to Gold? “The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin.” Jack Dorsey Since Bitcoin has catapulted itself into the limelight with its spectacular rally in the past year, some analysts have seen the position of gold as safe haven threatened. It is often said that Bitcoin could challenge a large part of gold’s market capitalization. However, the market capitalization of Bitcoin is still just under USD 150bn, while gold has a market capitalization of over USD 7tn. But there is a key reason why Bitcoin could gain some ground over gold with respect to their respective market capitalization in the future. That is the fact that our lives are becoming increasingly digital. With the emergence of the internet and e-mails interpersonal communication has changed fundamentally. Today, direct global communication in real time, made possible by instant messengers of all kinds, has become an integral part of life. Similarly, with the emergence of Bitcoin a fundamental change is about to happen as people share value units peer-to-peer across the internet. The Millennials in particular should play a decisive role here. Growing up as “digital natives”, they are cultivating a lifestyle very different from that of their parents –a digital one. Just as some female Millennials of today look forward to a digital bouquet delivered via smartphone on Valentine’s Day, digital gold in the form of Bitcoin could be more real for this generation than an actual gold bracelet or ring. “If you are a millennial and you The digital revolution is not leaving its mark on just the financial world. The are faced with hyper-expensive “digital natives” of today are the financial clients of tomorrow. As Bitcoin and other equities, hyper-expensive bonds cryptocurrencies threaten the very existence of banks, they have to devise new and hyper-expensive real estate, ways of thinking about how best to respond. One possibility would be to integrate your opportunity set for wealth the emerging asset class around Bitcoin into their business models in order to creation over the future is neutralize the threat of a widespread loss of customers. troublesome. By the invention of a new asset class that has Bitcoin should be of interest not only to innovative commercial banks but also to phenomenal upside and also has central banks themselves. Today, key central banks hold some of their assets in a use as a reserve asset, you have physical gold. This serves as a safety buffer for their national currencies. It cannot given millennials an opportunity be ruled out that central banks will be able to supplement this safety for wealth creation.” buffer with Bitcoin as a new reserve facility in the future.5 Yet to date, no Raoul Pal central bank has hinted at doing so, but the idea seems to make sense. Mario Draghi, president of the ECB, has though already indicated that European commercial banks could hold Bitcoin positions in the foreseeable future.6 — 5 See “2018: The Year Central Banks Begin Buying Cryptocurrency“, Eugene Etsebeth, Coindesk, December 17, 2017 6 See “European Banks Could Soon Hold Bitcoin, Admits ECB President”, CCN, February 8, 2018 6 “Blockchain is fascinating and Due to its decentralized set-up Bitcoin as an independent asset could undoubtedly there are all kinds of applications acquire geopolitical relevance, provided it proves to be an invulnerable investment for it. But the ultimate killer-app over the next few years. For a few lateral thinkers Bitcoin already seems to have is the boring old nondilutive this geopolitical component. They argue, why else would the hitherto hesitant US reserve asset, which is Bitcoin.” regulator suddenly approve Bitcoin futures, less than a week after the Mark Hart announcement by Russia, China, India, and Brazil to launch a new gold trading platform? It is commonly known that China and Russia have begun to massively increase their gold holdings in recent years and are thus working towards de- dollarization.7 The lateral thinkers therefore consider it possible that the US has seen through this scheme and views Bitcoin as a new alternative in the geopolitical intrigue of global currency competition. While US-affiliated Japan also seems well-disposed to Bitcoin, Russia and China have opposed the cryptocurrency. The Chinese government has even tried several times to crack down on Bitcoin through bans and tough regulation.8 Of course, these are hypothetical interpretations of recent events, which may seem a bit far- fetched – but such interpretations are not absurd.