Overall summary
- Central Banks now absorb risk and cannot move substantially away from free money
- No political or market will or incentives to take short-term pain for long-term gain. Reality is now short-term pain = political extinction. Therefore, keep printing.
- The system itself is the problem...so over-levered and dependent on free money that minor disruptions can cause major issues. “There are forces stronger than the Fed.” Hiyami > Powell > Lagarde. US 6.5% > 5% > 2.5%
- Jan 22 CB BS: ECB 10T, Fed 9T, BOJ 6T, PBOC 6T
- “Central Banks can control the supply of their money but they can’t make their people value it.”
- Fiat is now a liability, not an asset
- Just as a stock certificate is title to company capital, money is title to human time.
- People sacrifice their time for money which enables us to trade our time for the time sacrifices of others.
- A tool that can command human time (central bank printing) steals time, especially from non-asset owners, and redistributes it to current asset owners. Increases inequality. Disrupts signal value of prices.
- Solution must allow salability across time
- GBP oldest fiat GBP. 1 lb silver 370 years ago = 1 GBP. Today = 200+ GBP (99% depreciation)
- Silver depreciates 20-30% per year, more with higher price
- Gold depreciates c. 2% per year, more with higher price
- Bitcoin 10% depreciation to 2040 then 0% forever
- Bitcoin is not volatile — scarcity + adoption mean everything is getting cheaper relative to it
- Solution must allow salability across space
- Salability across space: fastest final settlement and no credit risk
- Solution must be adopted
- What do we need to believe to move to the bitcoin standard? That the dollar will depreciate relative to bitcoin over time (80% in past 2 years)
Focus: reserve assets. As CEO, why care about them?
CEO Job 1: executive
CEO Job 2: capital allocation — most important job
- How do we turn our liquid assets into illiquid assets, and back?
- What’s changed: now also about safety and volatility management of liquid assets (cash reserves)
What is new is the outsized role of central banks in our lives and corporate balance sheets. Cash is now a liability...no longer an asset.
“I believe that the most important decision that CEOs will make in the next ten years will be deciding to allocate to bitcoin.”
Sidebar: Fed Funds rate history
- 2000: up to 6.5%, then back off
- 2007: up to 5.25%, then back off
- 2019: up to 2.5%, then back off
- now...?
2000: Hiyami / BOJ
- “If you debase the currency you debase the country.”
- “Risk must be priced.” (takes rate from 0 to 25bps) >> political pressure >> capitulates, moves rate back to 0, and is out of a job
- Capitulated in 7 months
Dec 2018: Powell / Fed
- Dec 2018 Fed meeting day, markets -8% for the month
- Powell “balance sheet runoff (ending QE) is on automatic pilot” >> market tanks, Trump says he’ll fire Powell, etc.
- Next opportunity to speak, Williams (NY Fed president): “plans are not promises...we will reassess the data” >> market rockets up 15% in next month
- Greatest reversal of monetary policy in US history (speed + impact of reversal):
- Capitulated in 2 days
Mar 2020: Lagarde / ECB
- March 12th 2020, Italian vs German bond spreads wide
- “We are not here to close spreads” >> spreads widen
- “It is not the function or the mission of the ECB to close spreads” >> spreads widen further
- Walks back comments after press conference “I am fully committed to avoid any fragmentation”
- Revises press conference speed (first time ever)
- Capitulated in 2 hours
Mar 2020: Powell / Fed
- No level of pre-crisis irresponsibility must be allowed to have consequences
- Seen via actions: new Fed mandate is not price stability and full employment...it is decoupling risk taking from consequences
- Buys securities at unprecedented rate: c. 1 day’s worth of US GDP every month (via printing)
- Institutionalizing moral hazard
TL;DR a central bank can control the supply of their money but they can’t make their people value it.
Hiyami, Powell, Lagarde seem to have had no choice. They are up against forces far bigger than themselves. The economic choices they would like to make (short term pain for long term gain) are out of scope for them.
>> Their choice has shifted to short term pain for economic catastrophe and political extinction.
Therefore, keep printing.
Therefore, corporate reserves riskier and riskier.
The system itself is the problem...so over-levered and dependent on free money that minor disruptions can cause major issues.
Just as a stock certificate is title to company capital, money is title to human time.
People sacrifice their time for money which enables us to trade our time for the time sacrifices of others.
A tool that can command human time (central bank printing) steals time, especially from non-asset owners, and redistributes it to current asset owners. Increases inequality. Disrupts signal value of prices.
What does Bitcoin have to do with any of this?
Conclusion: Bitcoin is not volatile (once one thinks in Bitcoin) — fiat is volatile
- Price of college / prime real estate / long-dated liabilities (insurance, mortgage, retirement) etc. is volatile in fiat, but keeps getting cheaper in bitcoin
[1] What is money?
- Technology for making our wealth today available for consumption tomorrow
- Monies have always co-existed along a continuum of soundness (good money >> bad money)
- Subject to competitive network effects
- No money has ever been the best, or lasted forever ... money is just a good, it’s about tradeoffs
- What is unique about money: we value it not for its own sake but for its prospective exchange utility — vessel needs to keep its value long enough to allow us to trade it for things we want in the future (vacation, college, property, retirement, etc.) — we want what the money can do for us in the future
[2] Is bitcoin an excellent money?
Key dimensions: salability across time, and salability across space
- Salability across time: will money keep its value through time or will it depreciate
- GBP
- Oldest fiat today (371 years old)
- 371 years ago 1 pound of silver bought 1 GBP
- 5 Feb 2021 1 pound of silver bought 174 GBP
- What changed? Silver did not change i.e. weight and properties unchanged. The fiat depreciated over 99%
- But silver supply still grows 20-30% per year, so depreciates completely vs. bitcoin every 3-5 years.
- Gold
- Far better and more reliable store of value vs. silver because scarcer and lower supply growth (c. 2% / year). Much better money vs. silver but still grows.
- 2% / year growth i.e. inflation, so depreciates completely vs. bitcoin every c. 100 years.
- ...and supply is effected by demand (i.e. rises with demand)
- Bitcoin
- 90% mined ... remaining 10% mined up to 2040, the locked at 21M
- Supply entirely unaffected by demand — the first store of value in human history wherein supply is not effected by demand ... better at being gold than gold due to saleability across time
- Therefore bitcoin better at being gold than gold (doesn’t inflate)
TL;DR anything money that inflates vs. a non-inflating money will be worth less over time.
- Salability across space
- Fiat
- Excellent on this dimension
- But slower vs. bitcoin on final settlement therefore credit risk
- In-country settlement c. 3 days
- International settlement c. 5 days — 1 month
- Gold
- Hard to transport
- Hard to securely store
- Paper gold subject to fiat flaws
- Bitcoin
- c. 500,000 final settlement transactions per day
- Final settlement in c. 1 hour
- Regardless of size, entity, etc.
- First electronic bearer instrument, so no credit risk
- Better at being fiat than fiat (faster settlement and no credit risk)
Summary
- Bitcoin best money we’ve ever had
- More salable across time (doesn’t inflate)
- More salable across space (fastest final settlement and no credit risk)
Cost >> use of energy
- Bitcoin consumes c. 10 million humans of energy
- Energy scarcity is not our issue — it is ability to move energy to where humans live
- But mining can be done anywhere since it’s just a math problem...therefore locate mining where energy is already abundant
- As bitcoin’s price rises, mining will be the most profitable use of energy in human history that does not need to be located near human settlement to operate
- The only profitable long-term mining for bitcoin will be via renewable energy
- Historically: challenge to move power to people
- with bitcoin: enables moving people to the power
- City placement historically based on trade routes etc. (pre-power)
- Will evolve to move to cheap energy >> human flourishing ... bitcoin incentivizes this via profit motive
Stone Ridge >> for firm’s resources
- Liquid reserves in bitcoin since 2017
- Great question: what do we have to believe to be true to move to the bitcoin standard (from fiat)?
- If only think about point-to-point risk (i.e. time risk), the only thing we have to believe is that the dollar will depreciate relative to bitcoin.
- US dollar
- How Stan’s position in the fund is doing today — down 25%
- How crypto positions in fund are doing today (believe they’re net flat or slightly up)
For Stan