As money printing rolls back into fashion, we can either suspend our belief on what stable value is, or, unhinge our reality and watch fiscal fantasies flow forth in the form of unchecked money creation. If the solution to preventing another financial crisis, is a carbon copy of the previous, which served only to magnify the problem, then eventually the methodology reaches saturation, and cannot sustain its own weight. Printing money in order to paste over the systemic cracks, means instability is likely to increase in proportion to the insufficiencies of the patch-up job. Historically, money printing has lead to runaway inflation, and to pretend this time around will be any different is fanciful at best. The money makers who are desperately hoping to keep it under control are colluding in pathological delusion, delicately formulating partial truths in order to evade detection in their perpetual misrepresentation. The printed money sifts through the fingers of the ruling elite who take their cut, before the remaining slivers eventually reach the desperate hands of the commoner. Those who, in a post covid land, will be wondering why bother going to work at all if the government can just rain down dollars as required? The banality of chasing dollars via the daily grind will lose its’ appeal, if the big brother will pay all the bills.
Somewhere between these extremes there will need to be a reality check, possibly coming in the form of cryptocurrencies, and the frontrunner, Bitcoin. However, whilst its’ volatility remains high, the perceived price instability will not fit in with the supposed rigidity of our contemporary currency landscape. Seen as a seed project, Bitcoin is still in the nursery phase, it has taken root, it has broken ground and sprouted shoots, now it must reach for the light beyond the canopy above. In order to reach its greatest potential, it must grow substantially, and its the battle between long-term potential and short-term realisation which fuels the conjecture over value. If the value per coin in 2030 is to be millions of dollars in todays terms, the potential upside to investment is a no-brainer, but how does the price move from thousands, to millions, and what will be the fluctuations along the way?
What is the utility of Bitcoin, why is its’ price increasing, and why does it have such fluctuation in value? One argument against the utility of the cryptocurrency is that, while the nominal value is fluctuating to any great degree, it will not be accepted as a global mechanism of currency. It makes a fairly good point in this world where we can reasonably expect to know on any given day what a dollar will buy, be it a US dollar, Kiwi dollar, or an Argentinian peso? The value is in the denomination, and the belief that the structured group behind it, i.e. that government, is trustworthy enough to support the value of that denomination in the future. It follows from this to ask where the solid ground is within contemporary currencies, and what is the fluctuation or stability in our contemporary monetary system?
Firstly consider the way most of the largest successful companies have grown. Google’s rise from a small company in the mid-late 90s can provide an example of monetary value exploding into being. With two rounds of start-up funding to the tune of $100k and $1m respectively, Google then launched an IPO reaching a value in 2004 of $22bn, and went on to todays value at $600bn. The company’s monetary value leapt due to belief in its future potential. Jeff Bezos staked $250k of the initial $1m, and if he still held that shareholding today, its value would be around $1.5bn. Peter Theil was an early investor in Facebook with a $500k stake in 2004, and chose to sell much of his shares soon after their 2012 IPO, netting him some $400mn, yet if he was still holding those shares today, they would be valued over $5bn. These are high-end examples of where financial value is conjured up from broadly held belief in a product or service, even if Elon Musk (co-founder of PayPal with Theil) correctly states that Tesla shares are horrendously over valued, yet the share value continues to skyrocket. The value is carried on the belief in the projection of future growth, and future earnings, then formalised into value by wrapping it up in a ‘shares’ structure. The huge gains are speculative, and if you back the right horse, the gains are spectacular.
All of that is to say, this is one way money is ‘created’ in modern economies. Speculation, investment, being ‘in the know’, or, in the right social group, all open doors to wealth creation opportunities which make money appear like magic. In recent times, finance has become a majority revenue source, even for primary producers. The worlds largest companies have a finance wing which can make money, …from money. Tesla, General Electric, and Caterpillar all gain more from their finance or investment divisions, than from their core business or product sales. Similarly, the banking sector creates money by charging interest, in a multi-level distribution racket which starts at the reserve bank level, then filters down to the smaller institutions who all take a cut along the way.
Couple all of these money creation mechanisms, then add in the derivatives market (the covert mass grave of banker created debt, speculated value to be somewhere between $12tn, and anywhere up to $1quadrillion) and it becomes obvious that money really is able to make more money, that is, if you have lots of it, or are part of the system which enables it. High speed trading is yet another example, whereby computer algorithms do all the work, every billionth of a second. It is independent of human input, as mortal tinkering is too slow, and susceptible to error, and/or emotion. “Making money” is not something which is done at a 9-5 job, thats earning a wage. “Making money” is now the plutocratic lovechild spawned by the tech era, mobilised by the banking system, and pardoned by political manipulation. These benevolent money creation strategies are revered as the framework which is driving humanity forward, but there is a sleight of hand which is benefitting those holding the cards, syphoning a little from the lot, with the potential downside that all the cards coming crashing down.
Underlying all this money creation, is the money itself. Modern currencies have stolen a march on the perception of stability, insofar as the perceptual units passed around are tangibly constant, i.e. a dollar note is a dollar, same as it was last year, same as it will be tomorrow. A worthy currency has many key attributes, which must include being durable, fungible, portable, divisible, recognisable, of stable value, and formerly, malleable. However, inflation, wealth creation, corporate creativity, banks creating interest, and money printing, means the number of dollar units on the planet right now is eternally increasing, watering down the value of that dollar unit. Perhaps the quality of malleability which was a function of precious metals has been hijacked by money printing. The sudden addition of $4.1tn to the balance sheet of the US Federal Reserve in April 2020, an instantaneous increase of 18% divined out of the ether by government fiat, should, in theory, devalue the US dollar. However, all nations have pulled the same lever, so whilst other countries are watering down their currencies simultaneously, the relative value holds up. Foreign exchange rates fluctuate with the fortunes of a nation, or can command a premium if that nation is powerful militarily. And all of this during a period of ‘stagflation’ where global growth is grinding to a halt. Many economies are under immense pressure as the effects of the pandemic force entire industries to shut down, removing income streams which were formerly seen as essential to the commonweal. The strained spokes on the wobbly wheel of fiat currency, are stretched beyond belief, so an alternative has been created which has the potential to diminish centralised tyrannical control, and distribute standardised value across the globe.
The alternative to rampant extension of unit supply, is to fix the number of units, yet allow the units greater divisibility. Bitcoin has a maximum supply of 21 million units (coins) which will be available, of which 18.6 million are already in circulation today, with the remaining 2.4 million to be earned by the validators (miners) over the upcoming 120 years. Bitcoin is divisible down to the 8th decimal point, so the smallest unit is equivalent to less than cents in todays money. Units below one bitcoin are known as satoshis, or sats, and there are one hundred million sats per bitcoin. A basic food item, say a burger, at 15USD today, will cost you 75000 sats if bitcoin is at 20,000USD. When Bitcoin is at USD500k, that will become 3000 sats, and at USD1mn, 1500 sats. If, at that point, the value of bitcoin was to fluctuate by USD5000, the value of that burger will change by 7.5 sats, or the equivalent of 0.0015 cents in todays money. More likely tho, once global adoption has taken place over the coming years, fluctuation will decrease, and stability will the norm. Whilst Bitcoin is finding its feet, the price remains speculative, particularly as parasitic day traders look to skim profits off the price variations, creating in turn, further volatility. As the price moves higher, more hodlers will be committed to the asset class, allowing a steady state price increase which will reflect its ongoing value.
If the complaint levelled at Bitcoin lays in the large swings in value, sometimes 10-15% in a day, a better understanding of scarcity as a key market force is required. True scarcity, a key driver behind the value of gold, is derived by supply and demand forces, and the core belief of worth which that asset holds. If more people want to hold that asset, and supply is limited, the value appreciates accordingly. Bitcoin cannot be extended, added to, printed, watered down, or altered… the number of units is set. As the world wakes up to this, in parallel with realising the falsehood of fiat currencies, the demand to be holding an asset with an appreciating value, where all other currencies are fading, is going to rise. The choice will be simple, hold an asset with an infinite supply of a devaluing unit, or an asset with a finite supply of an increasingly valuable unit.
For the doubters who swallow the distortion that energy consumed by crypto is some degree of magnitude out of whack with its utility, think for a moment about the resources going into keeping the lights on within the incumbent system. The energy used to run the computers, the lighting, air conditioning, security, cash movement, marketing programs, commuting of staff, and slush funds for executives, across entire countries, at the retail branch, secondary lender, merchant bank, shadow banking, and reserve bank levels, are too large to attempt to equate. That is without mention of the financial cost required to keep those lights on, and the multi-layered wealth syphoning which occurs at each level of the fiscal system. Bitcoin has no staff, no management, very little real estate, and no cooking the books to benefit a privileged few.
Bitcoin represents an evolution in the capacity of humanity to raise the standard of fairness across all people. The removal of tampering with the value of currencies for the benefit of the wealthy elite may be about to end. A non-corruptible currency heralds an honest approach to monetary policy which will not favour debt creation as a means of stimulating economic growth. Currency wars have been historically used as a means to an end for dominant nations to subjugate less powerful economies, fueling the frictions which lead to hot-wars. A decentralised currency removes borders from economic dominance battles, allowing better market flows which are outside of governmental manipulations, leading to true market price discovery for goods. In turn, this will heavily disturb the global marketplace in the short term, as various sectors adjust to life free from subsidies and sanctions, but eventually the new standard will raise the bar for nation-state equality.
At the personal level, it’s the paradigm shift from the incumbent monetary system, to a decentralised sovereign digital asset which will be most difficult for newcomers to accommodate. Moving from a trusted third party (banks) to facilitate the security of one’s wealth, to a trust-less network where one assumes full responsibility for one’s assets, represents a seismic shift in mental approach. Renouncing long held reliance and trust in a banking system, is as significant a shift as that of a religious awakening, or a religious denunciation, or any other shift in ones’ core beliefs. The switch to crypto requires a monumental leap of faith, from the lazy reliance on our contemporary banking practices, to a new self-responsible approach with a product which manages financial security as a core feature of its’ system. As global banking's internal frauds are exposed by the integrity of a more equitable system, the eventual realisation will compel the incumbent to review it’s policies, and scramble to adjust to a less self-serving model.
Finally, it must also be understood that the Bitcoin future is as a store of wealth, rather than a transactional currency. There are many other cryptocurrencies which will cater to the varying needs of payment systems, smart contracts, lending, derivatives, and possibly also, governance. The technology has emerged and is proliferating, the inevitable change is happening, all that remains is to decide at which level you can no longer delay your entry to it. The greatest challenge will be the mental shift away from nanny state monetary management, to a self responsible and trust-less one. This leap of faith will be most difficult for entities or individuals entrenched in the status quo, as the mere idea of sovereign security is diametrically opposed to the well heeled. Starting now, adventurous investors are buying in, which will be followed by alert companies, then banks, and finally each nation-state will need to adopt a position by purchasing Bitcoin to anchor their reserve currencies in a solid store of wealth. At each step will be larger investment sectors, with increasingly permanent retention plans, whilst simultaneously the quantity of Bitcoin sellers will be tapering off, leading to significant demand and decreasing supply, adding further price jumps at each stage. Bitcoin is set to become the standard unit of account against which all other currencies will be valued, along the way holding the fiat system to account for its inequity.
Ideas presented in this blog include influences from, The Bitcoin Standard - Saifedean Ammous, Life After Google - George Gilder, and the online project of Ray Dalio with a book he is currently writing and sharing online at https://www.principles.com/