This is an opinion editorial by Leon Wankum, one of the first financial economics students to write a thesis about Bitcoin in 2015.
Evolutionary psychologists believe that the ability to "preserve wealth" gave modern humans the decisive edge in evolutionary competition with other humans. Nick Szabo wrote an interesting anecdote about how in his essay “Shelling Out: The Origins of Money.” When homosapiens displaced homo neanderthalensis in Europe circa 40,000 to 35,000 B.C., population explosions followed. It's difficult to explain why, because the newcomers, homosapiens, had the same size brain, weaker bones and smaller muscles than the neanderthals. The biggest difference may have been wealth transfers made more effective or even possible by collectibles. Evidence shows homosapiens sapiens took pleasure in collecting shells, making jewelry out of them, showing them off and trading them.
It follows that the capability to preserve wealth is one of the foundations of human civilization. Historically, there have been a variety of wealth preservation technologies that have constantly changed and adapted to the technological possibilities of the time. All wealth preservation technologies serve a specific function: storing value. Chief among the early forms is handmade jewelry. Below I will compare the four most commonly used wealth preservation technologies today (gold, bonds, real estate and equities) to bitcoin to show why they underperform and how efficiently bitcoin can help us save and plan for our future. For equities, I focus specifically on ETFs as equity instruments used as a means of long-term savings.
Detail of necklace from a burial at Sungir, Russia, 28,000 BP. Interlocking and interchangeable beads. Each mammoth ivory bead may have required one to two hours of labor to manufacture.
What Makes A Good Store Of Value?
As explained by Vijay Bojapati, when stores of value compete against each other, it is the unique attributes that make a good store of value that allows one to out-compete another. The characteristics of a good store of value are considered to be durability, portability, fungibility, divisibility and especially scarcity. These properties determine what is used as a store of value. Jewelry, for example, may be scarce, but it's easily destroyed, not divisible, and certainly not fungible. Gold fulfills these properties much better. Gold has over time replaced jewelry as humankind's preferred technology for wealth preservation, serving as the most effective store of value for 5,000 years. However, since the introduction of Bitcoin in 2009, gold has faced digital disruption. Digitization optimizes almost all value-storing functions. Bitcoin serves not only as a store of value, but also as an inherently digital money, ultimately defeating gold in the digital age. Bitcoin Versus Gold
Durability: Gold is the undisputed king of durability. Most of the gold that has been mined remains extant today. Bitcoin are digital records. Thus it is not their physical manifestation whose durability should be considered, but the durability of the institution that issues them. Bitcoin, having no issuing authority, may be considered durable so long as the network that secures them remains intact. It is too early to draw conclusions about its durability. However, there are signs that, despite instances of nation-states attempting to regulate Bitcoin and years of attacks, the network has continued to function, displaying a remarkable degree of “anti-fragility”. In fact, it is one of the most reliable computer networks ever, with nearly 99.99% uptime.
Portability: Bitcoin's portability is far superior to that of gold, as information can move at the speed of light (thanks to telecommunication). Gold has lost its appeal in the digital age. You can't send gold over the internet. Online gold portability simply doesn't exist. For decades, the inability to digitise gold created problems in our monetary system, historically based on gold. With the digitization of money, over time it was no longer comprehensible whether national currencies were actually backed by gold or not. Also, it is difficult to transport gold across borders because of its weight, which has created problems for globalised trade. Due to gold's weakness in terms of portability, our current fiat-based monetary system exists. Bitcoin is a solution to this problem as it is a native digital scarce commodity that is easily transportable.Storing Gold Versus Storing Bitcoin
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Divisibility: Bitcoin is purely digital, so its divisibility is much better compared to gold. Information can be subdivided and recombined almost infinitely at almost zero cost (like numbers). A bitcoin can be divided into 100,000,000 units called satoshi. Gold on the other hand is difficult to divide. It requires special tools and carries the risk of losing gold in the process, even if it's just dust.
Fungibility: Gold can be distinguished for example by an engraved logo, but can be melted down and is then fully fungible. With bitcoin, fungibility is “tricky”. Bitcoin is digital information, which is the most objectively discernible substance in the universe (like the written word). However, since all bitcoin transactions are transparent, governments could ban the use of bitcoin that has been used for activities deemed illegal. Which would negatively impact bitcoin's fungibility and its use as a medium of exchange, because when money is not fungible, each unit of the money has a different value and the money has lost its medium of exchange property. This does not affect bitcoin's store-of-value function, but rather its acceptance as money, which can negatively impact its price. Gold's fungibility is superior to bitcoins, but gold's portability disadvantages make it useless as a medium of exchange or a digital store of value.
Scarcity: Gold is relatively scarce, with an annual inflation rate of 1.5%. However, the supply is not capped. There are always new discoveries of gold and there is a possibility that we will come across large deposits in space. Gold's price is not perfectly inelastic. When gold prices rise, there is an incentive to mine gold more intensively, which can increase supply. In addition, physical gold can be diluted with less precious metals, which is difficult to check. Furthermore, gold held in online accounts via ETCs or other products often has multiple uses, which is also difficult to control and negatively impacts the price by artificially increasing supply. The supply of bitcoin, on the other hand, is hard-capped, there will never be more than 21,000,000. It is designed to be disinflationary, meaning there will be less of it over time.
Bitcoin's annual inflation rate is currently 1.75% and will continue to decrease. Bitcoin mining rewards are halved roughly every 4 years, according to the protocol’s code. In 10 years, its inflation rate will be negligible. The last bitcoin will be mined in 2140. After that, the annual inflation rate of bitcoin will be zero.
Auditability: This is not a unique selling proposition for a store of value, but it is still important because it provides information about whether a store of value is suitable for a fair and transparent financial system.
Bitcoin is perfectly audible to the smallest unit. No one knows how much gold exists in the world and no one knows how much US dollars exist in the world. As pointed out to me by Sam Abbassi, bitcoin is the first perfectly, publicly, globally, auditable asset. This prevents rehypothecation risk, a practice whereby banks and brokers use assets posted as collateral by their clients for their own purposes. This takes an enormous amount of risk out of the financial system. It allows for proof of reserves, where a financial institution must provide their bitcoin address or transaction history in order to show their reserves.
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Bitcoin Versus Bonds
In 1949 Benjamin Graham, a British-born American economist, professor and investor, published „The Intelligent Investor“, which is considered one of the founding books of value investing and a classic of financial literature. One of his tenets is that a "balanced portfolio" should consist of 60% stocks and 40% bonds, as he believed bonds protect investors from significant risk in the stock markets.
While much of what Graham described then still makes sense today, I argue that bonds, particularly government bonds, have lost their place as a hedge in a portfolio. Bond yields cannot keep up with monetary inflation and our monetary system, of which bonds are a part, is systematically at risk.
This is because the financial health of many of the governments that form the heart of our monetary and financial system is at risk. When government balance sheets were in decent shape, the implied risk of default by a government was almost zero. That is for two reasons. Firstly, their ability to tax. Secondly, and more importantly, their ability to print money to pay down its borrowings. In the past that argument made sense, but eventually printing money has become a “credit boogie man”, as explained by Greg Foss,
Governments are circulating more money than ever before. Data from the Federal Reserve, the central banking system of the US, shows that a broad measure of the stock of dollars, known as M2, rose from $15.4 trillion at the start of 2020 to $21.18 trillion by the end of December 2021. The increase of $5.78 trillion equates to 37.53% of the total supply of dollars. This means that the dollar's monetary inflation rate has averaged well over 10% per year over the last 3 years. U.S. Treasury Bonds are yielding less.
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The return that one could earn on their money tomorrow, by parting with that money today should theoretically be positive to compensate for risk and opportunity cost. However, bonds have become a contractual obligation to lose money when Inflation is priced in. In addition, there is the risk of a systematic failure. The global financial system is irreversibly broken and bonds as a foundation of it, are at high risk.
There is an irresponsible amount of credit in the market. In recent decades, central banks have had very loose debt policies and nation states have incurred large amounts of debt. Argentina and Venezuela have already defaulted. There is a possibility that more countries will default on their debt. This default does not mean they can’t pay back their debt by printing more money. However, this would devalue a national currency, causing inflation and making most bonds with their comparatively low yields even less attractive.
For the past 50 years, when equities have sold off, investors fled to the “safety” of bonds which would appreciate in “risk off'' environments. This dynamic built the foundation of the infamous 60/40 portfolio — until that reality finally collapsed in March 2020 when central banks decided to flood the market with money. The attempt to stabilize bonds will only lead to an increased demand for bitcoin over time.
Graham's philosophy was first and foremost, to preserve capital, and then to try to make it grow. With bitcoin it is possible to store wealth in a self sovereign way with absolutely zero counterparty or credit risk. Bitcoin Versus Real Estate
Given the high levels of monetary inflation in recent decades, keeping money in a savings account is not enough to preserve the value of money. As a result, many hold a significant portion of their wealth in real estate, which has become one of the preferred stores of value. In this capacity, bitcoin competes with real estate, the properties associated with bitcoin make it an ideal store of value. The supply is finite, it is easily portable, divisible, durable, fungible, censorship-resistant and noncustodial. Real estate cannot compete with bitcoin as a store of value. Bitcoin is rarer, more liquid, easier to move and harder to confiscate. It can be sent anywhere in the world at almost no cost at the speed of light. Real estate, on the other hand, is easy to confiscate and very difficult to liquidate in times of crisis, as recently illustrated in Ukraine, where many turned to bitcoin to protect their wealth, accept transfers and donations, and meet daily needs.
In a recent interview with Nik Bhatia, Michael Saylor detailed the downsides of real estate as a store of value asset. As explained by Saylor, real estate in general needs a lot of attention when it comes to maintenance. Rent, repairs, property management, high costs arise with real estate. Commercial real estate for example, is very capital intensive and therefore uninteresting for most people. Furthermore, attempts to make the asset more accessible have also failed, with second tier real estate investments such as real estate investment trusts (REITs) falling short of actually holding the asset.
As Bitcoin (digital property) continues its adoption cycle, it may replace real estate (physical property) as the preferred store of value. As a result, the value of physical property may collapse to utility value and no longer carry the monetary premium of being used as a store of value. Going forward, bitcoin's return will be many times greater than real estate, as bitcoin is just at the beginning of its adoption cycle. In addition, we will most likely not see the same type of returns on real estate investments as we have in the past. Since 1971, house prices have already increased nearly 70 times. Beyond that, as Dylan LeClair points out in his article-turned podcast, “Conclusion Of The Long-Term Debt Cycle”, governments tend to tax citizens at times like this. Real estate is easily taxed and difficult to move outside of one jurisdiction. Bitcoin cannot be arbitrarily taxed. It is seizure and censorship resistant outside of the domain of any one jurisdiction.
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Bitcoin Versus ETFs
Exchange-traded funds (ETFs) emerged out of index investing, which utilizes a passive investment strategy that requires a manager to only ensure that the fund's holdings match those of a benchmark index. In 1976, Jack Bogle, founder of the Vanguard Group, launched the first index fund, the Vanguard 500, which tracks the returns of the S&P 500. Today, ETFs manage well over $10 trillion. Bogle had a tenet: active stock picking is a pointless exercise. I recall him stating multiple times in his interviews that over a lifespan, there is only a 3% chance that a fund manager can consistently outperform the market. He concluded that average investors would find it difficult or impossible to beat the market, which led him to prioritize ways to reduce expenses associated with investing and to offer effective products that enable investors to participate in economic growth and save. Index funds require fewer trades to maintain their portfolios than funds with more active management schemes and therefore tend to produce more tax-efficient returns. The concept of an ETF is good, but bitcoin is better. You can cover a lot of ground through an ETF, but you still have to limit yourself to one index, industry, or region. However, when you buy bitcoin, you buy a human productivity index. Bitcoin is like an “ETF on steroids”. Let me explain :
The promise of Bitcoin should at least be on everyone's lips by now. A decentralized computer network (Bitcoin) with its own cryptocurrency (bitcoin), which, as a peer-to-peer network, enables the exchange and, above all, the storage of value. It is the best money we have and the base protocol for the most efficient transaction network there is (Lightning Network). It is very likely that Bitcoin will become the dominant network for transactions and store of value in the not too distant future. At that point, it will act as an index of global productivity. The more productive we are, the more value we create, the more transactions are executed, the more value needs to be stored, the higher the demand for bitcoin, the higher the bitcoin price. I've come to the conclusion that instead of using an ETF to track specific indices, I can use bitcoin to participate in the productivity of all of humanity. As you might expect, bitcoin's returns have outperformed all ETFs since its inception.
Bitcoin Returns Versus ETFs Returns
The SPDR S&P 500 ETF Trust is the largest and oldest ETF in the world. It is designed to track the S&P 500 stock market index. The performance over the last decade (October 26, 2012 to October 25, 2022) was 168.0%, which translates to an average annual return of 16.68%. Not bad, especially given that all an investor had to do was hold.
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However, over the same period, bitcoin‘s performance was: 158,382.362%. More than 200% per annum. We've all heard the phrase that past performance is no indicator of future performance, that may be true. But that is not the case with bitcoin. The higher a stock goes the riskier it becomes, because of the P/E ratio. Not bitcoin. When bitcoin increases in price, it becomes less risky to allocate to, because of liquidity, size and global dominance. The Bitcoin Network has now reached a size where it WILL last (Lindy Effect).
We can therefore conclude that bitcoin is likely to continue to outperform ETFs going forward.
Bitcoin has other advantages over an ETF. First, it has a lower cost structure. Second, the latter is a basket of securities held by a third party. You are not free to dispose of your ETFs. If your bank, for whatever reason, decides to close your account, your ETFs are gone too. Bitcoin, on the other hand, cannot be taken away from you or denied access so easily. Additionally, bitcoin can be moved across the internet at will at the speed of light, making confiscation nearly impossible.Conclusion
Bitcoin is the best wealth preservation technology for the digital age. An absolutely scarce digital native bearer asset with no counterparty risk that cannot be inflated and is easily transportable. A digital store of value, transferable on the world’s most powerful computer network. Considering that the Bitcoin network could theoretically store all of the world’s wealth (Global wealth reached a record high of $530 trillion in 2021, according to the Boston Consulting Group), it may well be the most efficient way we humans have found to store value ever. By holding bitcoin your wealth is going to be protected, likely increasing it by 10x,100x, maybe 500x, during this early monetization process. If you hold out for the next few decades.
In closing, I'd like to revisit Jack Bogle, who was a huge influence on me. As described by Eric Balchunas, Bogle‘s life work is addition by subtraction. Getting rid of the management fees, getting rid of the turnover, getting rid of the brokers, getting rid of the human emotion and the bias. His entire life's work had been in a similar direction, and as such, I think bitcoin fits well with his investment ethos. Bogle’s primary philosophy was “common sense” investing. He told Reuters in 2012. “Most of all, you have to be disciplined and you have to save, even if you hate our current financial system. Because if you don’t save, then you’re guaranteed to end up with nothing.” Bitcoin is very similar to what Bogle envisioned with passive mutual funds. A long term savings vehicle for investors to place their disposable income with low cost and little risk. Don't be distracted by bitcoin's volatility or negative press, to quote Jack Bogle: stay in the course. We're just getting started, stay humble and stack sats. Your future self will thank you.<phoenix-ad
