Performance of different asset types over time
Not all assets are created equal. Some appreciate in value, others lose value over time. This is evident in the things we consume, such as the groceries we eat or the clothes we wear. But the same is true of assets that do not visibly deplete, but nevertheless lose value over time through wear and tear, such as a car running for miles or a building without active maintenance.
Less obvious is how assets that are not depleted through consumption or depreciated through use also vary in their performance over time. Traditionally scarce assets, such as gold or land, are good at maintaining their value and growing in relatively steady proportions relative to the global economy. Ownership stocks in successful companies typically generate additional returns by putting scarce capital to work.
Ultimately, it’s about the asset’s DNA: its inherent properties determine how the asset’s value will evolve over time. If we put all these different types of assets in one image that characterizes their respective nature, it would look something like this:
Fiat currency: decline by design
This high-level image is missing something: modern currency. Gold was a currency until not so long ago, but didn’t lose its link with paper currency until 1971. Since 1971, we have been in a truly abnormal era of human history – a 50-year deviation from the 75,000 years of documented use of hard money. For the very first time, we are involved in a monetary experiment where money is fiat currency, currency by decree only – no asset coverage whatsoever.
Most important to our focus, however, is the guiding principle at the heart of fiat money: decay by design. Central bankers and governments believe that it is best for the economy that you spend or invest your money, rather than store your income as savings, and they have designed the currency to yield 2 percent of its value per year. loses to impose that assumption.
Like Paul Tudor Jones put it“If you own cash these days, you know that your central bank has a stated goal of reducing its value by 2 percent per year.” Simply put, this math means that the dollar’s value is designed to decay exponentially over time due to monetary inflation:
If we take this exponential decay trend and fit it into our logarithmic view of the different asset classes, we get something like this:
Bitcoin: the only thing they make less of
The latest entrant to the series of global money competitors is bitcoin. Bitcoin’s performance over time is not tied to global economic output or a policy target of losing 2 percent in value every year.
Instead, bitcoin’s performance has been linked to increasing scarcity, meaning that its design is based on a simple mathematical concept of declining issuance over time. To take the general simplification of what gives land its value (“it’s the one thing they don’t make anymore”), we can say about bitcoin: “It’s the one thing they make less and less of.”
You might think it’s better to own something they don’t make more of, instead of something they make less and less. And indeed, it wouldn’t be inaccurate to say that land is a greater value than bitcoin these days because they make less from it than bitcoin. But what’s more important to individuals than what is greatest asset today is how the assets they own will perform over time – to borrow the words of Tudor Jones again, an investor’s goal is to get on the fastest to ride a horse.
When a great painter dies, the value of their existing work skyrockets. Why? Because investors are guaranteed that the painter will produce less work. There will be no newly added stock at all. As such, all market demand must provide for existing supply, and everyone knows it, creating willingness to pay to raise for some of the new scarce work.
At its core, this is the concrete economic benefit of bitcoin. No other resource in history has used mathematics to provide a credible guarantee that supply is steadily declining in the future. The simple reality of this is that bitcoin’s design gives it the scarcity of gold today, with the added rocket fuel of increasing scarcity lending the death of a famous painter to their life’s work. Except the supply shock happens every four years, so there’s an even stronger incentive for holders to go ahead with each consecutive halving.
In short, increasing scarcity causes bitcoin’s value to rise exponentially over time. When we look at bitcoin’s price history in linear terms, the trend is so dramatic it’s hard to understand:
By looking at the same data in logarithmic terms and tracking how the price appears to rise after each Bitcoin Halving event, Plan B was able to make its convincing stock-to-flow model. This model suggests that the halves themselves (and the increase in scarcity they cause by definition) are at the heart of Bitcoin’s exponential rise so far, and ostensibly in the future:
When we narrow the red line above to a simplified version for our big set of asset types, we get something like this:
Speculative Attack: Taking advantage of the diverse nature of currencies
The two types of modern currencies we’ve looked at now have very different DNA. The first, fiat currency, is designed to decline exponentially in purchasing power over time. The second, bitcoin, is designed to increase exponentially in purchasing power over time.
This extremely simplified representation of the nature of the US dollar and bitcoin also contains the implications of a world-changing economic reality.
In 2014, Pierre Rochard wrote “Speculative Attack”, outlining how the divergent nature of the value of dollars and the value of bitcoin over time creates fertile ground for brave individuals to borrow dollars to buy bitcoin and repay that debt in the future:
Importantly, this is not a recommendation or a guarantee that the above mechanics will work accordingly. However, if the logic in the earlier parts of this piece is sound and the economic reality that underpins bitcoin and the dollar has set them deterministically on divergent paths to the future, the option is there.
Indeed, that is what MicroStrategy has already acted upon. In December 2020, after the entire public company treasury had already been deployed in bitcoin, MicroStrategy has issued $ 650 million in convertible debt to buy more bitcoin. In an environment of dramatic dollar pressures and investors desperate for any kind of return, the terms of the deal were attractive to lenders and MicroStrategy quickly secured the debt and put the money in, Buy 29,646 Bitcoin at an average price of $ 21,925 per bitcoin. A month later, MicroStrategy is up more than 50 percent on its “speculative attack.”
If the mechanisms described here are accurate, more individuals and entities will take advantage of the opportunity presented in them – not as a gamble, but as a deliberate strategic move to exploit the fundamentally different designs of the two currencies.
The entire world is facing a tremendous economic incentive to borrow dollars, buy bitcoin and pay off the debt when enough time has passed that the value of the bitcoin holdings and the borrowed dollars have meaningfully diverged. Acting on this carries significant risk, and requires a person or entity to be willing to repay the debt they incur, either for the years before the purchasing power divergence manifests or in the event of an unexpected total disaster (e.g. losing keys). That said, if the representation of reality in this article is correct, buying bitcoin is the highest and best use of a dollar of debt. Even more individuals and entities will use this asymmetry for personal gain in the future.
The logical conclusion to this trend is that ultimately no one will be willing to borrow dollars if they can just buy bitcoin themselves with those dollars. And once the world has reached that level of understanding of bitcoin, the ‘game over’ fiat currencies simply cannot withstand the economic realities that bitcoin imposes on them.
Bitcoin will continue to rise while fiat currencies will continue to decline. It’s in their DNA.
This is a guest post from Croesus. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.