Hi friends,
Welcome to The ₿it Economy! I’m Rob, and each week I write a blurb about something I learned that’s broadly Bitcoin related. If you have thoughts, I'd love to hear from you. My goal is to shed a tidbit of info that I believe will get you thinking about the digital world around you. This week I have decided to change the format a bit and also share with you part one of a recent investment thesis I wrote on Bitcoin. And per usual, if you know anyone who would be interested, please do forward this along, send them to the archive, or have them subscribe here. 👇
- Rob
The Investment Case for Bitcoin
The introduction of Bitcoin in 2008 is arguably the most important event in global monetary history since the dissolution of the Bretton Woods system in 1971. Leading up to 1971, the United States suffered from massive stagflation which resulted in the removal of price controls in the financial system. As a result, central banks around the globe began to print currency as they deemed fit, slowly inhibiting the natural progression of market cycles. These factors and among others set the groundwork for a new monetary system, one that challenges the new standard we currently find ourselves in.
Though not at all immediate, the growth of Bitcoin as a new form of money is starting to accelerate. Ten years after its inception, Bitcoin regularly occupies news headlines and has even reached the US Congressional debate floor. As the world copes with the aftershock of 2020, these are three current trends that indicate Bitcoin is in pole position for significant growth within the next decade:
Global Economic Uncertainty
Political Agnosticism
An Alternative Investment for Millennials & Gen Z
Global Economic Uncertainty
Unprecedented monetary and fiscal stimulus have created a unique situation where the distinction between government and money are becoming less apparent. Government policy in response to COVID resulted in the closure and contraction of the economy. Due to the actions enacted by the government in response to COVID, federal budget deficit in June 2020 is equivalent to the entirety of the budget deficit in fiscal year 2019 and larger than the entire budget deficit of fiscal year 2018. Meanwhile, the Fed is monetizing a significant portion of said debt through its government bond purchase program.
The result of this money creation is inflation. As more dollars go into circulation, each individual dollar is worth less. As of mid-July, the M1 measure of money held by the public was up approximately 30% over six months earlier. If the Fed were to continue that M1 growth at that rate for another six months, the money stock would grow over 70% over the year. The broader M2 aggregate has likewise turned upward, though not quite as sharply. Mid-July’s figure was up 19% over mid-January’s, which would compound to over 42% annual growth.
Long-term interest rates will remain depressed, even while the issuance of sovereign debt soars. It is the culmination of longer-term trends that have been transpiring over the past decade. Money printing may well become the standard tool of policy for many years to come.
And if you are worried about the market overshooting, the traditional hedges are treasuries and gold. The former has not faired too well amid the pandemic and rising tensions between the U.S. and China while the latter has seen a significant surge to all-time highs. In the near term, bitcoin fits into the gold framework. By design its supply is limited and with and since late 2019 has had a relatively low correlation to the S&P 500, with a coefficient range of 0.25 and -0.15
As Congress debates another trillion-dollar stimulus package and the Fed ready to do whatever it takes (for as long as it takes), the next decade is primed for a conversation around money and economic policies.
The emergence of Bitcoin as the first digital form of money allowed us to bypass those “physical” limits of money, and scale them to the almost non-existing limits of the digital realm.
Political Agnosticism
In the U.S., Congress retains oversight responsibilities for ensuring that the Fed is adhering to its statutory mandate of "maximum employment, stable prices, and moderate long-term interest rates". To meet its price stability mandate, the Fed has set a longer-run goal of 2% inflation. The Fed’s control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly.
However, over the years this has not been the case. Despite the Fed's recent and strenuous efforts to support the economy's recovery through monetary ease, the White House wants more. The Fed’s decision to bring short-term interest rates down to just about zero does not, according to the president, go far enough. Though our modern political culture holds that the Fed is independent, other postwar presidents have bullied Fed chairmen egregiously. Whether in the 60s with President Johnson and President Nixon or present day with Donald Trump, the executive branch has always wanted to generate immediate and impressive economic growth at just about any cost.
Unlike the Fed, the Bitcoin protocol is mutually exclusive to government politics. Bitcoin is a monetary system outside the purview and supervision of the State, entirely without restriction. The Bitcoin protocol is programmed to be disinflationary, culminating in a constant monetary base without changes to the supply.
Bitcoin is money not backed by the authority of the government. This simple characteristic was overlooked by countless officials, blinding them to the mere possibility of a new money like Bitcoin emerging. Despite small support (based on global population), Bitcoin has continuously progressed and established its monetary status as more economically significant than many national currencies.
"Money is one of the greatest instruments of freedom ever invented by man. It is money which in existing society opens an astounding range of choice to the poor man – a range greater than that which not many generations ago was open to the wealthy..” — FA Hayek
Bitcoin is by far the most decentralized digital asset, and it remains the only currency that can plausibly be said to be politically stateless. Bitcoin belongs to no one, and it relies on no one. It's ability to operate outside of a government's monetary scope, they can only restrict access at best. To do away with it, a buyer would have to purchase enough to make Bitcoin a trillion-dollar asset — thereby legitimizing it as digital gold. These qualities have proven bitcoin's resilience and have begun to attract investors from all walks of life. Governments can try to slow the inevitable, but it cannot be stopped, banned or eliminated.
An Alternative Investment for Millennials & Gen Z
On August 4, 2020, Bloomberg cited a note from JPMorgan strategist Nikolaos Panigirtzoglou that young investors often prefer bitcoin when choosing an alternative investment. These investors were taught at a young age to embrace flexibility and collaborate, and tend to be environmentally aware, socially tolerant, ethnically diverse, and entrepreneurial. The digital age is reframing the gen z and millennials' rapport to privacy and financial transaction. The trend is moving in the way of transparency and increased openness in every aspect of life.
These generations understand better than anyone that the current system is unfair. Since 1971, the purchasing power of $1,000 has lost 85% of its value. With the economic crisis that we are experiencing in 2020, and the monetary inflation battle that central banks around the world are engaged in, we are beginning to discover the limits of the current fiat financial ecosystem.
However, a favorable factor for a bitcoin establishment as a store of value is the transfer of wealth to both gen z and millennials. According to a study by the publication Coldwell Banker, approximately 68 billion dollars have passed into the hands of millennials, among whom there are 628,000 millionaires. This demographic segment is more open to digital investment alternatives compared to traditional products.
Bitcoin has never been more accessible to these young investors who are now coming into wealth. The data speaks for itself as Square, Grayscale and Coinbase have all seen an increase in revenue, users or both in 2020.
Square’s net revenue, including bitcoin revenue, was $1.92 billion, an increase of 64% year over year. Its gross profit, including from its bitcoin business, rose 28% year over year to $597 million. Cash App, Square’s popular payment service, achieved gross profit of $281 million, up 167% from last year.
In the second quarter of 2020, Grayscale experienced its largest influx of inflows in the firm's history, raising $751.1 million, nearly double the previous high of $388.9 million in the first quarter of 2020. Grayscale's steady increase in investments during a time where there's been a flight to cash and a large sell-off of "high risk" assets makes the data even more fascinating. As shown in the chart below, Grayscale's inflows have increased each week since the COVID-19 virus has disrupted the economy.
To further confirm millennial interest in GBTC, a report from Charles Schawb, which contained over 142,000 retirement plan participants, showed that the generation invested more in Bitcoin than they did the links of Disney or Netflix in Q3 2019.
Brian Armstrong, CEO of the digital asset exchange Coinbase, shared an image back in April that showed the exchange saw a record spike in deposits of $1,200. The company processed exponentially more $1,200 purchases of cryptocurrency than it does on a regular basis, with the percentage of buys (or deposits) of that amount growing from approximately 0.08% to 0.375% the day prior.
It remains exceedingly early in retail adoption. There are many interesting projects that have either just launched or will be doing so in the coming months that will continue to onboard more investors onto Bitcoin.
The Next Decade
Bitcoin is a non-sovereign, hardcapped supply, global, immutable insurance policy against monetary and fiscal irresponsibility. Each day, the value proposition of Bitcoin is strengthening as central banks continue to debase their currency. The digital currency politically agnostic and unlike the Federal Reserve, answers to no one. The growing trend of retail investors shows no signs of slowing down as companies aim to offer new products to expose not only investors but consumers to the bitcoin ecosystem.
Threads 🧵
Breakdown of long-form content into an easy to read and concise format.
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Final Quote 🎩
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Until then, have a great week! See you next Sunday.