Is
Bitcoin the Future?
By John Mauldin
Dec 01,
2014
Bitcoin
is a topic of discussion almost everywhere I go. My introduction to Bitcoin
came when I was speaking at a gold conference in Palm Springs and three
bright-eyed, bushy-tailed college students approached me with a video camera and
asked for my thoughts on Bitcoin. Noting my confusion, they began to
evangelistically espouse the virtues of Bitcoin and tell me how it would save
us from the evils of the Federal Reserve. I kept from rolling my eyes (you do
want to encourage passion in the young) and mentioned a meeting that I had to
go to – at that very moment as it turned out.
Since
that time Worth Wray and I and our entire team at Mauldin Economics have done a
great deal of research on Bitcoin. We will soon release a video documentary
that is one of the best productions I’ve ever been involved with and that does
a good job of explaining both the controversy around Bitcoin and its
considerable promise. We talked with skeptics, enthusiasts, and people willing
to put up tens of millions of dollars betting on the future of Bitcoin.
Worth
Wray has written this week’s letter as a summary of what we know about Bitcoin.
Delving into its history and bringing us up to date, he also offers a glimpse
of the future. At the end of the letter I offer a few of my own thoughts on the
relationships among gold, fiat money, Bitcoin, and financial transactions.
If
nothing else, Bitcoin offers a provocative way to think of the future of money.
Now let me turn it over to Worth.
Is Bitcoin the Future?
.
By
Worth Wray
“Growth
demands a temporary surrender of security.”
–
Gail Sheehy
“When
people write the history of this thing, of bitcoin, they are not going to write
the story of 6 million to a billion. What is truly remarkable is the story of
zero to 6 million. It has already happened! And we’re not paying attention!
That’s incredible. That’s what had one chance in a million, and it already
happened.”
–
Wences Casares, Founder & CEO of Xapo
“[Virtual
currencies] may hold long-term promise, particularly if the innovations promote
a faster, more secure and more efficient payment system.”
–
Ben Bernanke, Chairman of the Federal Reserve, USA
Before
I teamed up with John Mauldin in July 2013, I worked as the portfolio
strategist for an $18-billion money manager in Houston that, among its other
businesses, co-managed (with an elite team of investors from the university
endowment world) one of the largest registered funds of funds in the United
States.
I
had a front-row seat for every investment decision in a multi-billion-dollar
portfolio for almost five years, and for a bright-eyed kid from South Louisiana
it was a life-changing experience that no graduate school in the world could
have offered… an opportunity to learn from some of the most experienced minds
in finance and hone the skills I would need to identify disruptive macro trends
and build more balanced portfolios with those forces in mind.
That
opportunity to learn, not just about investments but also how to think about
emerging trends, continues to inform everything I do today; and Morgan Creek
Capital Management’s Mark Yusko – a man who has built his career on
incorporating investment talent and macro themes into highly diversified
portfolios – continues to be one of my most important teachers.
In
the course of his daily business (which involves bouncing around the world
searching for new ideas and world-class talent), Yusko has evolved a rule for
vetting new ideas:
If I hear something once, I remember it. If I hear it
twice, I write it down. If I hear it three times, I do something about it.
It
sounds simple, as the most valuable investment insights usually are; but Mark
is not just talking about “new” ideas that appear on the front page of the New York Times or the
opening segment of CNBC’s Squawk
Box. He’s saying that in the course of tapping into a large pool of
truly world-class thinkers – who range from hedge fund legends like Julian Robertson
and Stanley Druckenmiller to venture capitalists like David Hornik and Marc
Andreesson – it pays to pay
attention.
Innovative
ideas can grow into consensus views and missed investment opportunities before
our very eyes in a world awash with information. With constant access to the web
through our computers, tablets, and smart phones, it’s easy for investors to
filter out valuable information in an effort to cut through all the noise; but
even still, it’s possible to catch emerging trends early enough in their life
cycles by holding to a homework rule: When an idea comes up over and over again
– especially when it’s validated by experienced investors who command and
influence vast sums of capital – it’s not necessarily time to buy, but it’s
time to do your homework.
And
when it comes to Bitcoin, I should have done my homework earlier.
Thank
goodness it’s still early…
Bitcoin
is a peer-to-peer digital currency that trades on public exchanges and can be
instantly transferred between any two people anywhere in the world with the
speed of an email…
and at FAR lower cost than for transactions processed through the traditional
financial system.
While
a lot of people have experimented with digital currencies in the internet age,
Bitcoin’s mysterious creator, “Satoshi Nakamoto,” was the first person to solve
the issue of “double spending” in a completely decentralized network, meaning
that all transactions are made directly between parties, with no middlemen, yet
in a way that is verifiable across the entire network and virtually impossible
to counterfeit.
Much
like the internet itself, the Bitcoin hive is essentially a distributed network
of computers and people that are relying on a common technological process –
the Bitcoin protocol – to confirm and validate every transaction made, using a
unit of account called a “bitcoin” that can be broken down into fractions,
thereby enabling previously impossible micro-transactions.
The
genius behind the Bitcoin protocol is an element of the system called
the “blockchain” – essentially a giant, globally shared ledger of every
bitcoin and every transaction in the history of the network. Whenever two people follow through
with a transaction, it is broadcast throughout the entire network, and the blockchain
expands as that exchange is automatically lumped together with other
transactions in a new “block.”
While
it requires a MASSIVE amount of computing power to verify, confirm, and record
every transaction that occurs within the network, it’s basically a self-funding
system.
Bitcoins
are created through a process called “mining,” which happens to be the same
mathematical process that seals blocks of new transactions onto the blockchain
by verifying that every exchange is valid and using real bitcoins. By rewarding
“miners” with new bitcoin for devoting their time and computing power to
maintenance of the blockchain, the Bitcoin protocol provides the incentive for
the network to continue running in a completely decentralized manner.
In
the early days, the mining process could be competitively and profitably run
from a series of graphics cards linked to a home computer, but in recent years
bitcoin mining has become a BIG business. Today, a lot of the mining is done on
massive server farms in places like Iceland, where temperatures are cool and
power is cheap.
There
is an upper limit of 21 million bitcoins that can ever be minted, and the protocol is designed to
release a “reward” of a new bitcoin every 10 minutes until every unit of the
digital currency has been created. As of today, roughly 13.5 million bitcoins
have been mined, with roughly 7.5 million to go.
Source: Coinbase
On
paper, Bitcoin is an elegant and efficient way to streamline a global payments
system; but in practice, the web of businesses and support structures around
the Bitcoin protocol must pass a wide range of tests, from storage security and
compliance to the creation of tradable derivatives and merchant adoption,
before any kind of digital revolution can begin.
That
said, Bitcoin – or
something like it – has the potential to do for finance what the internet has
done for communications and commerce… and we’re already six years into the
process.
When
I heard about Bitcoin for the first time, I dismissed it almost immediately. It
seemed like a half-baked scheme cooked up by a bunch of technically skilled but
financially naïve computer nerds to disrupt a global financial system that none
of them really understood.
Early
adopters espoused ideas about freeing the individual from the tyranny of a
government-controlled money supply; but in order to pull off their grand
vision, Bitcoin’s programming forefathers had to convince enough people to put
their trust in the system – without governments shutting them down in the
process. It seemed unlikely.
In
the early days – 2009 and 2010 – a single bitcoin traded for pennies… – but its
value was basically unknowable. The digital currency had virtually no daily
trading volume; its price swung around wildly (volatility that only became more
pronounced over time); and aside from experimental transactions within a small
online community, it was virtually useless as a reliable unit of account or
medium of exchange.
Internet
legend has it that the first real-world Bitcoin transaction was a long-distance
arrangement made on May 18, 2010, between an American programmer named Laszlo
Hanyecz and a fellow enthusiast he met on the Bitcoin Talk forum. Apparently,
Hanyecz offered to pay 10,000 bitcoins to anyone willing to buy him pizza, and
an Englishman took him up on the offer… making an international phone call to a
Papa John’s in Jacksonville, Florida, in exchange for roughly $25 in bitcoins
at the then-current exchange rate.
I
can’t help but wonder if that Englishman turned around and spent his 10,000
bitcoins or saved them for a rainy day. At today’s US dollar exchange rate,
they would be worth nearly $3.8 million.
The
second time I heard about Bitcoin (about a year later), it sounded a lot more
interesting as a medium of exchange; but it seemed imminently doomed by
regulation. The virtual currency had risen from a price around of $0.0025 the
day of Laszlo Hanyecz’s pizza purchase to nearly $30 in early 2011 as Bitcoin
became the basis for real-world transactions within the Bitcoin community… and
the preferred medium of exchange for nefarious activities on the web.
Following
the embarrassing release of US diplomatic cables to the general public in late
2010, the US government organized a financial blockade against the
hacker/whistleblower Julian Assange and his nonprofit firm WikiLeaks. When Bank
of America, Visa, Mastercard, PayPal, and Western Union refused to transmit
donations to WikiLeaks, the nonprofit started accepting donations in Bitcoin.
As
the price of Bitcoin began to rise, it saw another big uptick in volume when an
online black market named Silk Road launched in early 2011, enabling the sale
of illicit drugs and forged IDs exclusively in exchange for Bitcoin.
Business
boomed, and the Bitcoin community expanded from computer nerds to mischievous
hackers and anonymous drug dealers who wished to skirt the financial system
and/or the eyes of the law. And for the libertarians and anarchists who
embraced Bitcoin as an anti-QE investment at this stage, it essentially became
an enlightened bet against corrupt governments.
Within
a few months the price of Bitcoin surged to nearly $30… and then Mt. Gox, the
most popular Bitcoin exchange, was hacked and trading suspended for several
days in June 2011.
In
the following months the price collapsed by roughly 90% to less than $3, but
that was not the end of Bitcoin.
“Naturally
there were teething issues,” my friend Grant Williams explained in his April
2013 letter, “Bit Happens,” “exchanges were hacked and wallets full of bitcoins
stolen after being left unprotected on users’ computers; and [there was] much
bad press… but slowly and steadily the marketplace weathered the growing pains
and, as more and more merchants began accepting payment in bitcoins, the
community broadened into something more than just a weird underground
movement.”
Trading
volume increased in the months that followed, and the price of Bitcoin trended
upward, albeit in volatile fashion with two 35%+ drops in 2012:
But
Bitcoin generally stayed under most investors’ radars until March 16, 2013,
when a banking crisis in Cyprus sent savers across southern Europe scrambling
for a way to get their money out of harm’s way.
Google
searches for the word bitcoin
surged to all-time highs.
Source: Google Trends
Although
the financial risks to the Cypriot banking system were rather obvious to
economists in the months leading up to the panic, it struck almost without
warning for most citizens, explains Sovereign Man’s Simon Black:
On
Friday, March 15, 2013, practically everyone in [Cyprus] went to bed thinking
that everything was just fine. Many had probably gone to the bank that very day
to do business, or logged on to an Internet banking platform.
Yet
the very next morning, they woke to a completely new reality: the nation’s
banks were broke, and the government was in no position to rescue them.
All
the promises they had been told about government guarantees and having a
‘well-regulated’, sound banking system turned out to be lies. The government
proclaimed a bank holiday, and banks remained closed for the next several days.
Accounts were frozen and ATM withdrawals were limited to only 100 euros a day.
Eventually
the plan materialized [as a hard-line demand from the island nation’s German
creditors]: substantial portions of deposits over 100,000 euros would be
confiscated in exchange for equity in the banks. (Just imagine – Bank of
America, RBC, or Lloyds takes your money and gives you stock certificates that
subsequently plummet in value!)
And
for everyone else, severe capital controls were instituted – some of the worst
in decades.
Here
again we see a peculiar property of Bitcoin: its value is bid up in a time of
desperate uncertainty, and it is able to circumvent the traditional banking
system and government-imposed restrictions on capital flows.
Savers
in Cyprus could convert their cash to Bitcoin in an effort to escape local
capital controls, but most of their funds had already been locked up in the
bank holiday, aside from 100 euros a day, which in aggregate had a meaningful
effect on Bitcoin’s price.
The
burning question at that moment was how much Cypriot savers could expect to
recover. Their fate was a warning to savers in other fragile Eurozone member
states. With the rising fear that the same kind of policies could be imposed on
their countries next, savers in Greece, Spain, Portugal, etc. started
abandoning their euro-denominated bank accounts for the “safety” of Bitcoin.
In
the event of contagion and banking collapse, Bitcoin balances could be moved
out of the country rather than getting clogged in the system… and so the price
naturally surged to a peak of $230 by early April 9, 2013.
But
with more trading volume than the exchange could handle, problems arose, and
hackers attacked, forcing another trading halt and making off with over $8.5
million in customer bitcoins. Then the idea of widespread levies on Cypriot
bank accounts was dropped, and fears subsided across the Euro area. The price
of a bitcoin fell more than 60%, although it remained far above its pre-crisis
peak of $47.
With
the virtual currency in the news and on the periphery of my radar screen, this
was the third time I was forced to think about Bitcoin. I assumed the price
surge would be the beginning of a government crackdown and the likely legal
death of the experiment… so I continued to ignore it as an investment
opportunity. Wrong again.
Bitcoin
fell back into relative obscurity for several months, as indicated by Google
searches:
Source: Google Trends
But
rather than cracking down on Bitcoin itself, the US government went after
nefarious dealers like Silk Road and effectively found itself invested in the
virtual currency (which it later auctioned off to the general public).
Despite
the price collapse, Bitcoin had caught the world’s attention, and venture
capitalists started pouring real money ($88 million in 2013 compared to $36
million in 2012) into a wide range of related businesses, from wallet providers
and exchanges to payment processing and other financial services. That meant
not only an injection of capital but also a massive influx of expertise into an
industry still dominated by inefficient and/or poorly run firms.
At
that moment, it started to seem that Bitcoin might just change the world.
Bitcoin
downloads spread like wildfire across the emerging world by the summer of 2013…
…
and the search term bitcoin
was suddenly more popular than ever:
Then
China’s state-owned TV station, CCTV, aired a documentary on the
crypto-currency around the same time that serious cracks started to show in
China’s “miracle” economy. Suddenly China’s credit markets were acting more
erratically than during the global financial crisis, and Bitcoin saw its
greatest surge in demand to date – again as a way of circumventing the
traditional banking system and the limited mix of financial assets available to
Chinese investors.
As
China’s interbank market began to freeze in the summer of 2013, John and I were
watching closely. Here’s an excerpt from the August 31, 2013 Thoughts from the Frontline,
“How
Do I Hate Thee”:
The
next chart shows the recent price spike in the Chinese SHIBOR (their short-term
interbank rate, more or less equivalent to LIBOR). It is difficult to trust any
of the economic data (positive or negative) coming out of China, so we really
do not know whether China's growth story is simply moderating or whether we are
seeing a hard landing in progress; but the sudden shock in interbank lending
rates is an important sign that all is not well in the Middle Kingdom. The big
question: is the recent SHIBOR spike a harbinger of a banking crisis, or does
it presage an RMB devaluation? Interbank rates do not spike from 3% to 13% (in
about 2.5 weeks) in a healthy economy, and a big event along these lines in
China would have enormous implications for global growth.
As
I’ve written over the course of the past year, John and I have been nervously
watching China’s slowdown and have voiced real concern over the possibility of
capital flight if and when a debt crisis bubbles over; but we clearly
underestimated the role that Bitcoin was already playing in China.
By
late November 2013 demand for the virtual currency had grown so fast in the
People’s Republic that BTC China quickly became the largest Bitcoin exchange in
the world, and over 100,000 bitcoins were trading every day in China alone:
The
price of Bitcoin surged by more than 10x, from $87 to over $1000, as Chinese
savers piled in…
...
until emerging-market central banks in places like China, India, Taiwan, and
Thailand started to grasp the threat that Bitcoin’s rise posed in a world where
US monetary policy was tightening and capital flows could reverse dramatically.
While
the People’s Bank of China did not explicitly ban owning or mining Bitcoin, it
issued a statement in December 2013 saying that the virtual currency was “not a
currency in the real meaning of the word” and that “it cannot and should not be
used as a currency circulating in the market.”
In
addition to firm language intended to cool the speculative fever among Chinese
investors, the State Council mandated a series of prohibitions on Bitcoin
trading and forced banks and other payment institutions to refrain from dealing
in the cryptocurrency… warning that virtual currencies like Bitcoin posed “a
risk to the public interest and legal status of the renminbi.”
In
other words, the People’s Bank of China all but spelled out that Bitcoin was an
avenue by which local savers could circumvent long-standing Chinese capital
controls. If Chinese investors continued to pile into Bitcoin, they could set
up a situation where capital could leave very quickly in the event of a panic…
or, in the meantime, the money could leave temporarily and then “round-trip”
its way back into the Chinese economy, seeking the benefits afforded only to
foreign investors.
From
its peak in early December 2013, the price of Bitcoin fell more than 40% before
finding its bottom. And the average daily trading volume in China fell from
over 100,000 in November 2013 to only 2,000 today.
As
if the crackdowns in China and other emerging markets in December 2013 and
January 2014 were not enough, rumors began to swirl in February that the
world’s largest Bitcoin exchange, Mt. Gox, had been hacked and more than $460
million in customer Bitcoin had been stolen.
In a
Wired magazine
article published in March 2014, “The
Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster,” Robert McMillan
explained it was not just one-time event but a “years-long hack,” dating back
to the June 2011 incident. “According to a leaked Mt. Gox document… hackers had
been skimming the company for years.”
Mt.
Gox quickly went offline and collapsed into bankruptcy. It was a devastating
blow to confidence in the entire Bitcoin system. With the shock that client
accounts could be so insecure for so long, the value of Bitcoin plummeted
another 60%+ in the following months.
With
the successive blows, Bitcoin fell from nearly $1,200 in early December 2013 to
less than $360 by April 2014 – a whopping 70% loss.
And
then I really started paying attention.
At a
dinner following John’s annual Strategic Investment Conference in San Diego,
Raoul Pal (author of Global
Macro Investor and co-founder of Real
Vision TV) helped me to see Bitcoin in a totally different light. He
explained that Bitcoin could be as transformative for finance as the internet
has been for commerce and communication, and it could happen FAST… especially
if central banks and governments mismanage the next global downturn to the
detriment of a highly leveraged, highly interconnected financial system. Or, in
a less extreme scenario, the Bitcoin protocol could quietly but steadily
replace the decades-old payment system that underpins the current system.
Up
to that moment I had never really taken the time to understand the technology
behind Bitcoin or how it could change the world… but the sudden fall in
valuation was interesting. I had seen a lot of chatter about Bitcoin’s wild
price swings in the media and on Twitter (feel free to follow us at @WorthWray
and @JohnFMauldin),
and I had heard wild claims from Libertarians and anarchists that this Bitcoin
would soon replace the US dollar and all other forms of fiat money. I knew
Bitcoin was an interesting way that money could flow freely around
government-imposed capital controls in the emerging world. But until that
moment I completely failed to grasp what Bitcoin could really mean for the
global financial system.
I’ll
omit the finer details of my conversation with Raoul, but suffice it to say
that it kicked off the six-month research project that has inspired and enabled
this letter... and pushed my wife, Adrienne, and me to start buying some
Bitcoin of our own… not as an all-out bet on Bitcoin’s future but as an option
on its development. Either Bitcoin becomes a new foundation stone of the global
financial system – delivering a handsome return in the process – or it will
give way to something even more powerful. It’s a pretty binary range of
outcomes, but it’s worth taking on some exposure with a small percentage of our
savings.
In
an effort to understand how Bitcoin could continue to mature, I sat down with
Barry Silbert, founder of the Bitcoin Investment Trust. As one the most active
venture capitalists in the industry (with investments in over 30
bitcoin-related portfolio companies through the Bitcoin Opportunity Corp),
Barry has gone all-in
on Bitcoin and Bitcoin-related businesses.
He
believes the halting rise of Bitcoin from 2009 to 2014 is just the beginning…
and that the virtual payment system may be approaching a big inflection point
as Wall Street takes the baton from Silicon Valley.
Barry
thinks about Bitcoin adoption in five general phases:
- Experimentation
phase (2009 – 2010)
- No
real value associated with Bitcoin. Hackers & developers playing
around with the source code. Experimenting with Bitcoin as a medium of
exchange.
- Early
adopters phase (2011 – 2013)
- Interest
from investors and entrepreneurs started to grow with substantial press
coverage in the wake of the Silk Road bust. First generation of
Bitcoin-related companies (exchanges, merchant processors, wallet
providers, etc.) started. Potential began to shine through poor
management.
- Venture
capital phase (2013 – present)
- World-class
VCs started investing in Bitcoin companies, and rapid ramp-up is already
outpacing the early days of the internet. VCs poured more than $90
million into Bitcoin-related businesses in 2013 and are on track to
invest more than $300 million in 2014 (compared to $250 million invested
in internet-related businesses in 1995).
- Wall
Street phase (2015?)
- Institutional
investors, banks, and broker-dealers begin moving money into Bitcoin.
Rising price and volume (in addition to development of derivatives)
become the catalyst for mass adoption as retail investment follows.
- Global
consumer adoption phase (?)
- Only
happens if (a) companies continue to innovate and make it easier for
consumers to buy, hold, and spend Bitcoin, (b) volume expands
dramatically so that large merchants can start accepting payment in
Bitcoin, and (c) Bitcoin awareness continues to rise with these
developments.
If
Barry is right, Bitcoin’s continued rise depends on (1) Wall Street money
flowing in to deepen the digital currency’s trading volume and fuel the
development of hedging instruments, (2) continued innovation to make Bitcoin
more secure and more user friendly, (3) broad acceptance by merchants as a
medium of exchange, and (4) an explosion in public awareness.
It’s
impossible to know for sure yet… but it looks like all four of those are taking
place.
While
search volumes have moderated, the trend in broad public interest is rising.
Source: Google Trends
And
while the price of Bitcoin has continued its downward trend, it seems that the
network continues to deepen and mature.
Over
time, many investors have realized that it was not a problem with the Bitcoin
protocol that allowed the security breach at Mt. Gox or the frequent theft of
unsecured bitcoins, it was inadequate security – basically, poor business
practices – at the exchanges and wallet providers. Rather than exposing some
flaw in Bitcoin, the collapse of Mt. Gox revealed the desperate need for better
management and the opportunity for improving the services that surround the
Bitcoin network. And the venture capital community has certainly responded.
This
year, by the end of Q3 2014, over $290 million of venture investments had
flowed into Bitcoin-related businesses, compared to the $250 million that
poured into internet-related businesses in 1995.
Source: CoinDesk
And
the trend toward greater average daily trading volume has continued to rise.
Source: Blockchain.info
Not
only is real money starting to flow into the growth industries surrounding
Bitcoin, but real businesses are starting to accept bitcoins as payment. At the
end of Q3 2014, the top eight companies accepting payments in Bitcoin had
annual revenues totaling more than $85 billion, and among them was Dell.
Source: CoinDesk
The
price of Bitcoin may swing dramatically in the coming days, months, quarters,
and years. The currency may not survive in its current form… but the technology
underpinning it is not going away any time soon.
If
you ask me whether I truly believe that in 2050 the main medium of exchange
will be paper money, the very quick answer is that I don’t. I also think there
is a better than reasonable chance that it won’t be a fiat currency. But will
it be Bitcoin? My best guess is that it will not be Bitcoin as currently
constructed but rather an evolved version.
I
know the following will be somewhat controversial, but work through with me on
what I hope will be a helpful way to think about money in general. The current structure
of Bitcoin carries the same inherent flaw that gold does (and to some extent
the euro, too): in a world of ever-increasing abundance, gold is massively
deflationary and provides unreasonable “rents” to those who hold it. Even given
that inherent flaw, it has been the most stable store of value for millennia.
To
think about what money will be in the future you have to shake off the chains
of the past and your preconceived notions of what money is. Money is not just,
or should I say, is more than a medium of exchange. It is also a medium of
information. It tells us what the marketplace wants and the price it is willing
to pay for a particular good or service. The (often fatal) flaw in fiat
currencies is that they manipulate and distort the information contained within
the currency, thereby damaging the information flows involved in the exchange
of goods and services. For instance, the practice of quantitative easing
engaged in by major central banks has encouraged money to go into certain
markets (such as stocks), distorting the information reflected in the price.
Rather
than looking for the information provided by the market and adjusting our
investments and purchases accordingly, we are forced to focus on the
information provided by the Federal Reserve and its quantitative easing. To
confuse the actions of the Federal Reserve with the actions of the market is to
miss the point that the Federal Reserve is actively manipulating the market for
its own purposes, however positively motivated.
Advocates
of gold believe that a gold-backed currency would eliminate that price
distortion, and they have a point. However, if we were to decide to use gold as
the sole basis for our currency, we would have to value it at some order of
magnitude higher than it is today in order not to create massive deflationary
instability. I’m not sure that $10,000 or even $20,000 per ounce of gold would
be nearly high enough, given the massive amount of sovereign debt in the world.
But
even supposing that we (as a global system) could somehow manage to deal with
the logistical nightmare of moving to a single, physical, commodity-backed
currency, future growth in the world would soon overwhelm the limited supply of
gold, and the prices of goods and services would deflate over time, creating
their own backlash. History buffs will recall William Jennings Bryan and his
famous cry, “We [mostly referring to farmers] will not be crucified on a cross
of gold!”
Now
some might see ever-falling prices as a good thing, but they would induce a different
type of instability in the system. Given the overwhelming extent of global
debt, I think the chances of moving to a physical currency based on gold are
slim to none, and Slim left on the morning train. Go back and read the economic
history of the latter half of the 1800s in the US. From one point of view it
was a golden era of growth and prosperity driven by huge leaps in technology.
But it created serious problems for many of those on the lower economic rungs.
If you think income inequality is a problem today, then you won’t like what
happened in the late 1800s.
The
leaders of that era came together to try to create a new system that could
prevent the frequent panics and crashes that were inherent in the financial
system of the day, and eventually we got the Federal Reserve and other
ostensible improvements. But that does not mean the current system of central
banks and fiat currencies does not have its own flaws. We should not limit our
thinking to the economic systems of the past or present as we think about a
future economic system. How do we create a truly stable, equitable, and
efficient basis for exchange?
While
I think that Bitcoin as currently configured has limitations, the technology of
the blockchain is one of the most potentially revolutionary developments of the
last century. I think we evolve to Bitcoin 2.0 or 3.0, using the same
blockchain technology, but with a way to make the new currency a truly stable
medium of information that can be easily exchanged for goods and services.
Why
not create a currency that is backed by a number of commodities, with gold
perhaps as the backbone? Why even limit ourselves to commodities? Bitcoin as
currently configured could be part of the basket. Anything that can be
represented in a digital form and has a reasonably stable long-term value could
be considered.
All
I want from my currency is to be able to buy and sell goods and services, make
investments, and have a reasonable expectation as to what my currency will be
worth in terms of purchasing power if I hold it for months or years.
I
think that some of the clever venture capitalists who are exploring Bitcoin
will join forces with one or more large international investment banks and
create something along those lines. And once someone shows the way, breaking
the chains of the past, we will have a period of innovation rivaling the
Cambrian explosion.
The
vast majority of my purchases are electronic today. I think that percentage
will continue to grow. Frankly, I really don’t care what happens inside “the system”
after I wave my iPhone over the new Apple Pay device (or use my credit card). I
just want to walk out of the store with my purchases. (In the not too distant
future there will be an extremely tiny RFID chip embedded in my hand, or at
least on my person, which will also serve 100 other purposes.)
The
Bitcoin blockchain technology allows for the most secure electronic
transactions ever devised. Its adoption and acceptance seem inevitable to me.
It will be used to validate everything
we purchase: stocks, homes, investments, airplane tickets, etc. It
will be a far cheaper and much more secure way to validate your ownership of
anything, from your home to your stocks.
The
blockchain will form the basis for the perfect medium of information exchange
(at least as perfect as we humans can create), which in turn will be the basis
for whatever electronic medium of financial exchange we evolve in the future.
The market (that would be you and me) will move to whatever new medium serves
our purposes best.
Satoshi,
as technologically brilliant as he (or she or they) was, was limited in his
understanding of economic exchange. He was trying to create electronic gold. To
some degree, he was confusing technology with money. He was trying to overcome
the flaws of our current monetary system (a very laudable goal, I might add)
but limited himself to thinking within the box in which the current monetary
system placed him.
The
next generation of Bitcoin developers are going to crawl out of that box and
create whole new realms of possibilities. Once you realize that money is just
information, and all you need to do is to provide the most stable mechanism of
the transfer of information, you turn thinking about money on its head.
This
is going to be massive amounts of fun to watch.
Thanksgiving
and its aftermath has been a relaxing time for me, letting me charge my
batteries for the rather large amount of work that I must do before the end of
the year. There is a lot to think about. While there are a few potential trips
in December, I will spend the bulk of my time here in Dallas before my travel
schedule picks up next year.
It’s
time to hit the send button. I think I will close the letter without my usual
personal comments. Have a great week!
Your
excited about all the innovations coming in our future analyst,
John Mauldin
0 comments:
Publicar un comentario