“The forces that hold the fiat money system together look fragile, particularly decades of low labour costs. Over the next decade, some of these forces could begin to unravel and demand for alternative currencies, from gold to crypto, could take off.”
The forces that hold the fiat money system together……..do you know what they are? Only collective belief.
I am constantly assailed by people who tell me bitcoin is “backed by nothing”. It is not correct, bitcoin is backed by its proof of work algorithm. I know if I receive a bitcoin it was mined at very great expense to someone. Specifically, energy was consumed to create it. Not so fiat money, which is free for central banks to produce and they do not hesitate to abuse that privilege. Gradually, that great fraud is being revealed as more and more people come to realise they subsidise the state through their acceptance of fiat.
Let’s look specifically then at the “bitcoin question” as Deutsche Bank calls it. There are 18.09 million bitcoins in circulation today. By December 2029 there will be 20.48 million. A perfectly predictable supply curve with an average inflation rate over the decade of 1.01% per annum.
At current prices then, the total issuance over the next decade is valued at $17.9 billion (13% of the current market capitalisation). For context, the Grayscale Bitcoin Investment Trust sold $250 million of bitcoin in Q3 2019. At that run-rate (which happens to be growing) they will consume half of all new bitcoin at the rate they are selling it today – just one company, that most of the world has never heard of.
I won’t labour the point too hard but even accounting for the possibility that bitcoin fails and goes to zero, it isn’t difficult to make a case that this asset is insanely undervalued.
his makes the point even more empathicall
y. Investments split by demographic. More millennials own The Grayscale Bitcoin Trust than own Berkshire Hathaway or Microsoft shares, yet it doesn’t feature in the top 10 of older people’s portfolios at all.
Young people do not trust fiat currency and one thing I’m sure of is, they will grow to like it less, not more.
We will be releasing a new report for investors in the next few weeks about the technology stack being built around bitcoin (consider it holiday reading). You can see from the graphic that a great deal is happening, I’m not going to explain it all here but I’ll touch on a couple of my favourites.
Atomic Swaps (top left on the chart)
When you send bitcoin to someone, you are effectively exchanging the ownership of a digital token with another person using cryptography. You give them a password to that part your money without them knowing your password or you knowing theirs.
An atomic swap works in the same way except this time you can swap different types of token. For example, imagine a digital token representing USD and one representing EUR. Using an atomic swap you can exchange those tokens with another party, without an FX broker or a bank.
It has massive implications for foreign exchange markets and for credit risk (since you cannot default on an atomic swap) each party simultaneously receives their token.
BTCPay (middle left)
This is the brainchild of software developer Nicholas Dorier. It enables websites and retail businesses to easily accept bitcoin with multi-currency integrations and support for micro payments on the lightning network. It is totally free and open source. A great piece of technology for aiding wider adoption. https://btcpayserver.org/ if you are interested.
The Chicago Mercantile Exchange (CME) launched its first futures products for bitcoin in late 2017. Since then they have lodged patents for “difficulty derivatives”. In bitcoin, mining difficulty rises over time as mining equipment gets better. This can leave miners with obsolete equipment and a loss making business when difficulty spikes. These derivatives will allow them to buy time and give some certainty about the returns they can achieve over the forecast life of mining equipment.
The mining industry is already huge but tools like this will help take some of the risk out of investing in mining capital and might bring some stability to a highly volatile space. Also, the trading opportunities between difficulty derivatives, energy prices and bitcoin prices will grow and grow.
The full report will cover them all with links for more details and also some forecasts as to how they might reveal themselves in practical applications.
The latest upgrade of Ethereum went live this week, known as Istanbul. It is the eighth hard fork of the protocol since it went launched (arguably, the fewer the better). The idea of the upgrade is to increase transaction volume (estimates are that this change will enable a visa like 3000 per second).
Ethereum is now entering a crucial stage of its life cycle, Ethereum 2.0 is scheduled for 2020 but as that date approaches it now faces challenges from bitcoin sidechains which have been promised for years but are now live and operational and can pretty much do all the things Ethereum can. For example the exchange BTSE is raising money on the Blockstream Liquid sidechain and not Ethereum, full story here.
Ethereum 2.0 is an entirely new blockchain and moving value from one to another is not trivial, akin to changing the engine of your car while driving on a motorway. The ecosystem has a mountain of talented developers but they need this to work and it is far from certain that it will.
The Raft of Medusa
Something rather different to finish this week. In the suburbs of Paris, the Yellow Vest movement continue their weekly protests. A local artist has mapped this story through his work, highlighting the inequality of the banking bailouts. Each piece he produced included his bitcoin QR code to generate donations, hence he came to prominence with bitcoiners. His portfolio can be found here.
His latest creation is The Raft of Medusa, originally an oil painting by Gericault that hangs in the Louvre in Paris. The Raft was a hastily constructed life boat built after a French frigate ran aground off the African coast due to the incompetence of the captain. 147 people boarded the raft and only 13 survived to be rescued.
A terrific allegory for the post 2008 era. Below you will find his video about the construction of the mural. If you happen to visit France, it is appropriately located for the theme, on the roof of the former gold foundry of the Banque de France in Ivry-sur-Seine.
As the artist says “we are all aboard the Raft of Medusa now”.