Originally published: June 2021

Most asset classes have some degree of controversy.

Investors will debate endlessly regarding whether a stock is overvalued, whether bond yields make sense for the current environment, to what extent oil will be used two decades in the future, and so forth.

But few asset classes are quite as controversial as gold, bitcoin, and other alternative monies. Some people literally put every penny they have into them and trust nothing else, while other people can’t possibly see why they hold any value at all.

Others like me simply incorporate them into parts of a portfolio mix.

Since they are not cashflow-producing businesses or industrial commodities with analyzable supply and demand balances, the bull/bear gap is unusually wide when it comes to valuing things like gold or bitcoin, not just in terms of price but in terms of the very purpose for their existence as investable assets. Some people love them and will happily dollar cost average into 50% price crashes, while others dismiss them as yellow rocks and magical internet money and maintain zero position in the assets under any context.

And yet, it was illegal for Americans to own gold for about 40 years, from the mid-1930s to the mid-1970s. In some places today, it’s illegal to own bitcoin. Governments sometimes find them to be dangerous. How could something so useless, also be so dangerous? Useless things rarely get banned, and instead can be safely ignored as they work their way towards oblivion over time.

This article attempts to shed light on their popularity. So, rather than focusing on specific price forecasts in this article, I’ll be analyzing the reasons behind their use. If you’ve never held gold or bitcoin and don’t quite get what all the fuss is about, consider this your Rosetta Stone to understand why many people do value them.

From there, we can then determine in what economic environments their price is likely to go up or go down from an investment perspective, to see how they can be useful in the context of a diversified portfolio.

The Concept of Self-Custody is Rare

There are remarkably few financial assets in the world that you can hold for a long time without trusting a centralized counterparty to hold it for you.

The vast majority of assets, like stocks and bonds and cash accounts, are held by financial institutions on your behalf or rely on centralized databases listing you as an asset owner.

Real estate is the biggest asset class that you self-custody (in a manner of speaking), but it’s not portable or liquid or fungible.

Collectibles are often a self-custodied form of asset, but they’re not very fungible or liquid, meaning that each individual unit has various quirks such as date, condition, or type that make it hard to exchange for other goods or services. The same is true for gems.

That leaves physical cash, precious metals, and cryptocurrencies as the only asset classes that can be self-custodied and traded with others without a trusted/centralized third party, while also being sufficiently liquid, fungible, and portable. In other words, they are among a small number of money-like bearer assets.

If you think about it, it’s actually really hard to invent a money-like asset that derives value from itself. If you and me want to exchange fungible value in any arbitrary amount without a third party, online or offline, there are remarkably few ways to do it. Usually we don’t particularly want to do that so it’s not a problem (we’re fine with a third-party involved, like a credit card transaction), but if we think about how we would do that if we wanted to, there are surprisingly few options.

Just about any mechanism that we can exchange value with, in a way that is liquid and fungible, requires processing/verification by a centralized third party, and that third party can spy on the transaction or block the transaction. Physical cash, precious metals, and cryptocurrencies are the exceptions, where they can be both held and transacted with outside of any centralized third party custodian or verifier.

Physical Cash: Pros and Cons

Physical cash depreciates in value over time. Policymakers around the world target a positive inflation rate, often 2% or higher, and the amount of fiat currency in existence grows over time.

The word “fiat” means an authoritative declaration. Fiat currency is just paper or bits of information with no inherent value or supply caps, and thus is not something that usually self-organizes towards usage. It requires the government to mandate its use by force, which means by taxing other asset transactions, making taxes payable only in their government-issued currency, and in some cases implementing capital controls or banning competitor assets to their currency.

An exception to the rule that fiat currencies tend not to self-organize, would be that in various developing countries with particularly weak currencies, dollars or euros are sometimes traded in black markets or out in the open, and are considered a relatively hard form of money compared to the local alternatives.

An example of a developing market currency that historically has issues, is the Egyptian pound. Egyptians saw their cash savings lose half of its value against the dollar or euro practically overnight in November 2016, whether it was held in a bank or not. And that’s a country with 100 million people.

Over the past century, the strongest currencies, like the Swiss franc and US dollar, lost over 95% of their value. The average currency lost more than that, like around 98-99%. The worst currencies lost 100% of their value.

Even in a less extreme and more recent environment, the dollar lost about 40% of its value against official consumer price inflation since the year 2000.

The only way to counteract that is to hold cash with a bank to earn interest, and thus involve a counterparty. In particularly inflationary decades, the interest often isn’t enough to keep up with inflation. This chart shows T-bill interest rates minus the official CPI inflation rate since the 1930s; whenever it’s below zero it means T-bills (and by extension bank cash accounts that generally have similar rates) aren’t keeping up with inflation even when earning a yield.

And for longer-term savings instruments, here is a chart of the inflation-adjusted forward annualized rate of return of buying 10-year Treasury notes that year and holding them to maturity. You can see the three decades where bondholders got massacred, because the underlying dollars were devalued. During those times, anyone who bought Treasuries and held to maturity received annualized real returns of as low as -4% or -5% during the full duration of the note.

So, cash is useful as a medium of exchange and less-so as a store of value. It’s something we hold as working capital that we can usually expect to be reasonably stable a few years out (at least in developed countries), but not something that can be considered a long-term store of value outside of the financial system, and sometimes not even within the financial system.

Plus, the current iteration of fiat-only currencies is actually only about five decades old, as it became the norm in 1971. It’s a surprisingly recent system even though we take it for granted today.

And technically, cash does rely on a trusted/centralized third party (the government). It’s just that the trusted/centralized third party doesn’t need to be present for transactions to occur, and doesn’t need to hold it for you. As a bearer asset, cash can be self-custodied and exchanged with other people offline, with no direct counterparty.

Precious Metals: Pros and Cons 

Gold and silver are the longest-running fungible stores of value, stretching back thousands of years on multiple continents.

Since gold is nearly chemically indestructible and can be re-melted and re-forged any number of times, it basically lasts forever. Unlike industrial commodities that are regularly consumed, gold has a high stock-to-flow ratio, meaning that its supply/demand characteristics are more like a currency than a commodity. Since it is extremely malleable, it is easy to work into standardized coins or bars. And it’s shiny and resistant to most forms of degradation, which makes it ideal for jewelry.

There was a History Channel documentary a while back called “Life After People” that visualized what would happen to the cities and stuff we left behind if humans suddenly vanished. It basically tracks the decay process until everything we built turns to ruins, crumbling and rusting away. One of the few things that would last hundreds of thousands of years without changing, would be our vaulted gold. The gold vault stored under the New York Fed, for example, would be filled with water and long-buried, but the gold bars would be the same after a bit of cleaning.

It’s hard to find big and accessible earth deposits of it, and it requires processing many tons of rock to get a tiny amount of gold, so only about 1.5%-2.0% gold is dug up each year as a percentage of the current amount that is estimated to exist above-ground. Gold has a 1.5%-2.0% average annual monetary inflation rate, in other words. This has historically been about the same rate as world population growth, so the amount of gold per capita has been pretty consistent over time.

A 1-ounce gold coin could buy you a top-notch outfit a century ago, and can buy you a top-notch outfit today. No more, no less. Based on estimates by the World Gold Council, there is only around one ounce of above-ground gold per person in the world.

If you stick physical cash somewhere and come back to it decades later, it will have lost most of its purchasing power. In contrast, if you stick physical gold somewhere and come back to it decades later, chances are it will have retained most or all of its purchasing power, unless you bought right at the top of a rare gold bubble like in 1980 or 2011.

However, in any given 5-year or 10-year period, it could easily lose or gain 25%+ of its purchasing power. Additionally, gold is subject to taxes when sold, and in the physical market is usually bought at a premium to spot and sold at a discount to spot, since the middlemen need to earn a profit to make a liquid market. So, it’s not great for everyday use, unless countries decide to peg their currencies to it. It’s best used as a long-term store of value. There are debit cards that can be linked to gold accounts to make it a medium of exchange, but that introduces a trusted/centralized counterparty.

Plus, it’s risky to hold a lot of gold in self-custody due to the risk of theft. Vaulting services can safely hold larger amounts of gold, but this ironically centralizes it, and over the past century, most countries went through one or more periods of gold confiscation where vaulted gold was taken from the owner. There are very few jurisdictions in the world where someone could have vaulted gold with a third party a century ago and successfully passed it to their grandchildren, for example.

Silver and platinum are similar to gold as self-custodied stores of value, but they are more of a hybrid between currencies and commodities, and as such have lower stock-to-flow ratios and more volatility. Platinum also tends to have less liquidity and bigger frictional costs when physically bought and sold.

Overall, gold is a better long-term self-custodied asset than cash. Many wealthy people retain a small amount of it for disaster insurance.

Cryptocurrencies: Pros and Cons

In 2008, Satoshi Nakamoto put together a number of existing technologies, with his own innovations added to the mix, to create the concept of digital scarcity. There were a number of predecessors that solved parts of the problem, but this was the first one that put enough pieces together to become a big success.

Bitcoin is an open source decentralized public ledger, with a built-in incentive mechanism for miners across the distributed network to verify transactions in exchange for fees and block subsidies, where people use a set of public and private keys to transact without a centralized third party. There are also thousands of nodes, that anyone with a normal computer and internet connection can run, to verify the network and push back against various types of miner collusion.

Kind of like fiat currencies, each individual bitcoin or fraction of a bitcoin has no industrial use outside of the potential payment and store of value properties that it has. Bitcoin is just a ledger, keeping track of values assigned to different addresses, and your private key entitles you to control the coins associated with that address. There are deeper technical nuances like UTXOs, but that’s the basic idea.

You can self-custody your private key on paper, on a hardware wallet, stamped on a titanium plate, or memorized in your head with a seed phrase. You can even split your key into several parts and hold each part in different ways in different locations.

However, unlike fiat currencies, there is no central authority that can change the Bitcoin network’s monetary policy, issue more bitcoin, block transactions, or take bitcoin from an address.

Bitcoin is digitally native, unlike gold and cash. Gold and cash can only be transacted with offline, unless they are willing to rely on a trusted/centralized third party (at which point they lose the property of being self-custodied and censorship-resistant). Bitcoin can do that online and across borders. It’s a digitally-native money-like bearer asset.

That’s why it’s so polarizing. At first glance, Bitcoin and other cryptocurrencies seem silly and without intrinsic use. But when you go down the list of attributes and compare bitcoin to fiat currencies, it is better in most ways other than volatility. It has no industrial use, but the simple concept of a wide network effect of uncensorable transactions wrapped around its strict monetary policy with no leader, makes it an interesting form of global internet money that has rapidly grown in value since inception. It reached 100 million users faster than the internet or smartphone usage did, and became the fastest asset in history to touch a $1 trillion USD market capitalization from inception.

There are even small custom USB sticks that hold bitcoin and have to be destroyed to be spent. They can be passed around like large-denomination dollar bills physically, and eventually put back online when spent. They’re physical bearer assets.

Image Source: OPENDIME

In a May 2021 interview, Ross Stevens, the executive chairman of NYDIG, which partners with institutions for bitcoin-related services, spoke about Bitcoin’s use-case:

Nothing beyond a store of value is necessary for Bitcoin to be extraordinarily valuable for the world. Having said that, for the first time in history, we have an electronic bearer asset, never had one of those before. It’s called Bitcoin. And we have an open source monetary network; we’ve never had one of those before either. It’s also called Bitcoin. That together can achieve cash finality, meaning final settlement anywhere in the world, anytime, any day, 24/7 365, liquidity in any currency pair you care about.

So let me explain the mechanics. You think about the base of layer of cash, think about US dollars the base layer, like I can give it to you, you can give it to me, there’s no other- that *is* the settlement, that is final settlement. If I write you check, that’s a second layer solution, or a credit card might be third layer solution, so there are more and more abstractions of money on the base layer of cash.

Bitcoin the asset is the base layer. There’s something called Lightning, which is a second layer solution. Think of it like a check but it can move at light speed. And so an example of the mechanics are, I can today in New York turn my US dollars into bitcoin, I can move it up to the Lightning network and this is all in milliseconds, I can zip them anywhere in the world on Lightning network at light speed, they receive that wherever it is in the world and can do an FX trade of bitcoin into dollars if the receiver wants to receive dollars (editor note: or euros, or yen, or anything else). So what has happened is, you’ve moved fiat over Bitcoin rails, so it’s a fiat to fiat transaction, you’ve done it instantly and for free but for a tiny bid/ask spread on the FX trade. There’s no merchant fee, there’s no interchange fee, there’s no fees. It’s a different set of rails; it’s a totally new set of rails, instantly and for free.

[…]

And a great example of this, and this is not a game this is serious, this is life or death, is what’s going on in El Salvador. So Strike, Jack Maller’s firm, what they’re allowing people from the US who want to give remittances to people in El Salvador- I don’t know if you know this but 24% of the GDP in El Salvador is remittances. Mexico is 4% to put it into perspective.

So a housekeeper in New York sends a hundred dollars to her sister in El Salvador. Before Strike and before Lightning, the way that transaction worked, they would go through Western Union, the sister would go to Western Union in El Salvador, a hundred dollars would turn into sixty (editor note: due to fees, which vary but are quite high in percent terms on most remittances), the sister would have to be fearful of gangs hanging outside the Western Union. And what a lot of people don’t realize is there aren’t a lot of Western Unions in El Salvador, so the sister might have to drive hours on a bus, to get the sixty.

Now fast forward to today, what has Strike done with Lightning Labs? That sister takes her hundred dollars in a Strike app, buys (fractional) bitcoin, that bitcoin zips to El Salvador across the Lightning network, her sister gets it in El Salvador, does an FX trade instantly and for free. So a hundred dollars doesn’t turn into sixty; it turns into 99.8 dollars. There’s no trip to Western Union to battle the gangs. There’s no hours of bus and taking that day out of your life every single week just to survive. And 6-8 weeks ago there were 10-15 signups per day. There’s 15,000-20,000 signups a day now. It is changing lives every single day.

-Ross Stevens, May 2021

Indeed, Strike became one of the most-downloaded apps in El Salvador in the initial weeks of being released. And then even more notably, a couple weeks after that interview, El Salvador passed a law making bitcoin legal tender in the country. This means that transactions are not taxable and merchants have to accept bitcoin for payment if possible.

I spoke with Elizabeth Stark, the CEO and co-founder of Lightning Labs at the 2021 Bitcoin Conference about the Bitcoin network’s use-cases in emerging markets on June 5th, and about four hours later during the capstone speech of the afternoon by Jack Mallers, the president of El Salvador made that surprise announcement.

The biggest risk for the Bitcoin network since inception is that, ever since Satoshi put all the tech pieces together to make this concept work, there are thousands of copied and altered cryptocurrencies that compete with the original Bitcoin. By existing and attracting buyers, these other coins threaten to undermine the supply limit, since although bitcoin itself is limited, if people buy into tons of cryptocurrencies, the whole space becomes very diluted.

It’s fine for there to be a handful of other viable blockchains, such as smart contract platforms and such, but when there is a huge number of competing protocols, it creates a diluted mess. But the fact that this mess exists is an inherit risk of the Bitcoin network; there’s no way to block someone from copying the open-source distributed software and creating their own version.

Their copied version isn’t bitcoin, since it isn’t recognized by Bitcoin’s node network. Similarly, if I copy the text of Wikipedia, I still can’t copy the millions of links from websites around the internet pointing to the real Wikipedia, and can’t bring over the countless individuals that continually update the real Wikipedia to update my version instead, and thus I can’t copy its network effect. However, if enough variant copies exist and drain traffic from the real Wikipedia towards themselves, it could theoretically dilute the concept over time. Bitcoin has dealt with this threat from altcoins for 12.5 years, and it remains an ongoing risk.

For the Bitcoin network to succeed, it needs to maintain a robust network effect against competitors over the long run, through the course of multiple bull/bear crypto cycles. A powerful country can enforce the use of its fiat currency, and gold has no major competition by other atomic elements for the properties of money. Bitcoin, on the other hand, must maintain market share by the quality of its own properties and userbase against competition, via first mover advantage and the resulting path-dependent network effects and security advantages that come from being first and biggest.

Specifically, other cryptocurrencies can copy the Bitcoin network’s code and run a similar ledger, but without the massive hash rate and node network, their copied protocol would be orders of magnitude less secure than the real one and thus they don’t tend to catch on for long periods of time. Most of the coins that came in Bitcoin’s wake ended up being too centralized, where a rather small number of individuals have the capacity to change its monetary policy, and it’s hard for individual users to run a full node and verify the entire money supply because they make technical trade-offs that require large amounts of bandwidth or data storage to process. Most of them are easier to do a 51% attack on as well.

Some people consider the Bitcoin network to be old technology already and propose that one or more altcoins will inevitably surpass it, but keep in mind that the internet still runs on TCP/IP, which is five decade old technology, and with no end in sight for its usage. Similarly, the USB protocol has been around for nearly three decades now and going strong, and it continues to be upgraded with new versions that double the speed each time and tend to be backward compatible with older versions.

When the purpose of something is to be decentralized and robust with a wide network effect, simple slow-changing technology that earns a wide network effect is optimal. That doesn’t mean a protocol can never be displaced, but once it hits critical mass, it’s quite a challenge to do so. More complex technologies can be built on top of those protocols to expand their use.

Similarly, the Bitcoin base layer gets updated slowly (the latest update in progress is a privacy and multi-signature update called Taproot), and there is faster development on the secondary Lightning network layer, and even more development in the broad ecosystem of apps and services and hardware wallets that utilize the base layer and/or the secondary layer. Bitcoin’s base layer is purposely lightweight and is designed in such a way that even decades from now as the blockchain grows (assuming it exists and is successful), anyone should still be able to run a full node.

So, each of the three types of self-custodied assets of cash, gold, and bitcoin has pros and cons. That doesn’t mean they’re all equal, but it means that each of the three categories has certain strengths and weaknesses, and will attract different types of users, and/or will attract the same users but in different types of environments.

Why Self-Custody? Who Cares?

We’ve established how rare it is for an asset to be able to be personally held and transacted with, without relying on a trusted/centralized third party, while also being liquid, fungible, and portable. Government paper, rare long-lasting elements, and digitally-scarce networks with sufficient scale to keep away copycats, are the main three. Gold is thousands of years old, the current fiat version of the US dollar is about 50 years old, and bitcoin is about 12.5 years old.

In other words, this is money that references itself for its own value; something that two strangers on a street could transact with, even if they don’t want any of the same things as each other, which rules out barter as an option.

But the next question is, why should we care about that? Shouldn’t criminals be the only ones who care?

Not necessarily. Whether a person finds this property of self-custody to be worthwhile or not often depends on where they came from, what their life experiences are, and how much they trust the financial system and/or government in their area.

In other words, there are plenty of use-cases for money-like bearer assets.

Use-Case 1: Normal and Emergency Backup

It’s advisable to have some physical cash on hand for mild problems or outright emergencies.

Have you ever been at a restaurant, with only cards and no cash, and for some reason the cards don’t work? Suddenly you don’t have the ability to exchange value with someone, and yet you owe them for the meal. Apart from the practical annoyances of fixing that situation, most people obviously hate that feeling, since it is embarrassing and disempowering. It’s good to carry cash.

From there, we can imagine more important scenarios. If you’re traveling in a foreign country, especially one that’s less developed, losing your forms of payment could be a big problem. Imagine if you don’t have cash on you, and your cards don’t work or aren’t accepted. What do you do?

What if you memorized a bitcoin wallet seed phrase and could access it anywhere in the world with an internet or satellite connection if need be, even if all your stuff on your person gets stolen?

Or how about a financial/electrical crisis?

In 2015, during Greece’s economic crisis, a run on banks resulted in bank withdraws being limited to 60 euros per day. You’d have to wait in long lines just to get a trivial amount of cash. Having some cash or gold or bitcoin on hand before that problem began, was a good idea.

In 2017, when Puerto Rico was devastated by a hurricane and the whole territory was without power, businesses couldn’t accept credit cards, and cash was needed for everything. But many banks were closed and others were limiting withdraws to $100/day. Again, there were massive lines at banks and the handful of working ATMs. Bitcoin would have not been very useful in that environment, but physical cash and gold or silver would be.

Alternatively, if you’re in an emerging market and your local currency inflates greatly (unfortunately not a rare occurrence, affecting billions of people in their lifetimes), then having gold or bitcoin is very helpful for preserving value, alongside other finite assets like real estate.

For any number of these situations, having some physical cash and/or some gold/silver coins and/or bitcoin stashed around for times of emergency is a good idea. Each has moments where they could shine, and what they share in common is that they involve people taking direct possession of some portion of their assets with no counterparty risk.

Use-Case 2: Banking the Unbanked

About two-thirds of the population in El Salvador is unbanked. There are billions of people in the world without access to banks.

However, many of them have access to inexpensive mobile phones and basic internet connections, and that number is growing rapidly as technology keeps getting cheaper. It’s ironically easier to get someone a phone than a bank account these days.

This was the premise behind Bitcoin Beach, an effort over the past couple years by charities and bitcoiners to use Bitcoin’s Lightning network to provide basic banking services to the population. Users could do instantaneous peer-to-peer transactions with their phones and store their assets as BTC or convert to USD. Strike’s CEO, Jack Mallers, then began focusing on that country for using the Lightning network for international remittances (as I quoted Ross Stevens describing earlier), which is simply the application of software to make something far more efficient than it used to be, much like how software has eaten other legacy industries.

Here in 2021, El Salvador’s president noticed that success, and along with the legislature, decided to make bitcoin legal tender in the country and to actively promote its use. The point isn’t that El Salvador is a model of international success; indeed it’s a very troubled country. However, for people following the progression here from Bitcoin Beach through efficient remittances through legal tender, it’s not quite as surprising, and in fact El Salvador’s challenges are what led various communities to bring these bitcoin-based technologies to the country and use it as a testbed.

It remains to be seen how successful it will be, but the fact that people have more options now is an improvement.

A number of other politicians across a half-dozen other countries in Latin America also expressed public interest in similar bitcoin measures. We’ll see if any of them follow what El Salvador has done.

The second act to this real-time experiment is that El Salvador’s president also announced that the country will develop more of its volcanic renewable geothermal energy for bitcoin mining. Electrical transmission infrastructure is very expensive to build, which means even cheap sources of energy often go unused in the world.

One of the advantages of bitcoin mining is that it can go to where the energy is, rather than most other types of energy demand that require energy being transmitted to where they are. This allows a new energy source to be rapidly monetized. So, sources of renewable energy that might not have otherwise been economical for exporting energy or otherwise transmitting it long distances, can potentially be developed for use with localized bitcoin mining to generate revenue.

Then, at a later date, mining could optionally be reduced and additional infrastructure can bring that fully-developed energy to other types of demand.

Use-Case 3: Protection from Questionable Authorities

Article 12 of the UN’s Universal Declaration of Human Rights asserts that privacy is a human right. Arbitrary interference with someone’s privacy is considered an infringement of human rights.

Of course, those rights are commonly infringed worldwide anyway.

When corporations and governments can freely interfere with your privacy, it brings them a step closer to being able to infringe on speech or other rights. Lack of privacy is less of an immediate concern in benign political environments, but the majority of people on Earth live in regions that don’t have full rights of speech and expression. Many governments ban certain speech, certain religions, certain relationships, certain protests, and certain transactions that other countries consider obvious human rights to be able to do. And benign political environments can turn into more problematic political environments over time, which is why many people seek to protect privacy even in those benign political environments.

Basically, under this Article 12 way of thinking, people have a right to privacy, and have a right to use technology that protects their privacy from various entities, and only under the context of reasonable suspicion of a crime should governments be able to take lawful measures to gather information to prove the crime. Much like how people can use security systems to protect their property, they can use encryption to protect their information, including their transactions. The difficulty or burden of effort therefore gets placed on the entity (either government or corporate or individual) that wants to try to violate someone’s privacy or to block their transactions.

Reuters reported in early 2021 that Russia’s opposition leader and anti-corruption lawyer, Alexei Navalny, uses bitcoin donations among their list of tools, as Russian authorities often attempt to block their funding:

Russian authorities periodically block the bank accounts of Navalny’s Anti-Corruption Foundation, a separate organisation he founded which conducts investigations into official corruption.

“They are always trying to close down our bank accounts – but we always find some kind of workaround,” said Volkov.

“We use bitcoin because it’s a good legal means of payment. The fact that we have bitcoin payments as an alternative helps to defend us from the Russian authorities. They see if they close down other more traditional channels, we will still have bitcoin. It’s like insurance.”

Similarly, a long social media thread by Bernard Parah, founder and CEO of the bitcoin-saving app Bitnob, expressed the experience that many Nigerians face, and explains why peer-to-peer bitcoin transactions are so popular in Nigeria:

Nigeria’s central bank, as it struggles with a long-term inflation problem, banned its financial institutions from interacting with cryptocurrency. This hasn’t disrupted peer-to-peer bitcoin trading and transactions, which continue to be robust in the country and in many other Sub-Saharan African countries.

Popular podcaster Anita Posch has an ongoing series dedicated to studying the usage of bitcoin in Africa, and interviewing people involved with it in those regions. Posch has traveled to Zimbabwe to study the Bitcoin network’s use-cases there.

Similarly, in an article called Check Your Financial Privilege, Alex Gladstein of the Human Rights Foundation examined the Bitcoin network’s use-case in certain developing markets. He also recently appeared on the The Investor’s Podcast to discuss the human rights angle of the Bitcoin network. Here was an interesting part of the conversation:

So for Venezuelans to go through this has been nothing short of totally heartbreaking. However, there are a lot of folks who got involved early, like earlier, a lot of young people, a lot of young folks figured it out in 2015, ’16, they were mining at the time. One of these guys I interviewed, he actually helped start Ledn, which is one of the larger industry services now based out of Canada.

But he and his brothers were mining bitcoin for a couple of years there and they ended up having to escape. The government came with like an armed squad and seized all their mining equipment. Thankfully no one got hurt. The government was very perplexed. They saw the mining equipment and they thought that they meant they got the bitcoin. But that’s not how it works. So they were able to use the bitcoin to start a new life in Canada. I thought that was really amazing.

I interviewed another guy who escaped to Argentina. He got involved in some sort of dispute with the government where they claimed he was a criminal, even though he wasn’t, but now he’s able to send money back to his mother who is in Venezuela in bitcoin. She uses it to support herself. There’s just so many stories like this.

And I think for me, one of the most powerful things as someone whose family went through the Holocaust, was this idea of like, you could flee your country and back then you only brought what was on your back, like the clothing on your back. But today you can bring your wealth with you, which is truly remarkable.

And I’ve given advice to people who are, for example, leaving Iran these days, help them out on this. People are selling their homes and they’re converting to bitcoin and they’re getting on a plane, getting the heck out, and they’re bringing it with them in this digital format. People are sending money in and out of Syria to people who are stuck there.

People have escaped countries like Sudan. I interviewed a guy from Sudan, which has a horrible inflation problem that their inflation is in the hundreds. They have an inflation rate of something like 150 or 200%. And he’s living in Europe and he’s sending the hardest money around back to his family in Khartoum. And they’re able to get by through that. We’re early here. Again, I think the estimate based on Coinbase numbers is that maybe 10% of Americans have interacted with Bitcoin or cryptocurrency.

The global number is lower than that, especially in these emerging markets. If the global is two percent and America’s 10%, it’s probably way less than that in a lot of these emerging markets, but hey, in some of them, look at Turkey, man, look at Argentina, look at Nigeria. These are huge countries, 200 million, 100 million, 45 million people. They’ve got the highest per capita usage in those countries. So it’s a changing world.

Similarly, Gladstein documented the usage of bitcoin as a payment and savings technology in Afghanistan, to work around problems related to an underbanked population and where women and girls are often threatened for working or owning property. Bitcoin’s self-custodied aspect became especially useful of some of them:

A few of the women did keep their bitcoin from 2013. One of them was Laleh Farzan. Mahboob told me that Farzan worked for her as a network manager, and in her time at Citadel earned 2.5 BTC. At today’s exchange rate, Farzan’s earnings would now be worth more than 100 times the average Afghan annual income.

In 2016, Farzan received threats from the Taliban and other conservatives in Afghanistan because of her work with computers. When they attacked her house, she decided to escape, leaving with her family and selling their home and assets to pay brokers to take them on the treacherous road to Europe.

Like thousands of other Afghan refugees, Farzan and her family traveled by foot, car and train thousands of miles through Iran and Turkey, finally making it to Germany in 2017. Along the way, dishonest middlemen and common thieves stole everything they brought with them, including their jewelry and cash. At one point, their boat crashed, and more belongings sank to the bottom of the Mediterranean. It’s a tragic story familiar to so many refugees. But in this case, something was different. Through it all, Farzan was able to keep her bitcoin, because she hid the seed to her Bitcoin wallet on a piece of tiny, innocuous-looking paper. Thieves could not take what they could not find.

Basically, as volatile as bitcoin is, it’s an asset that is available to almost anyone in the world with a smartphone or any other internet connection (a 4.7 billion total addressable userbase and growing), with a finite supply cap, that since inception has had a tendency to appreciate against currencies and especially against the highly-inflationary currencies that are common in emerging and frontier markets, albeit with big ups and downs. Since the Bitcoin network has its own payment rails (especially with Lightning as the secondary layer), it also gets around various inefficiencies or outright blockages in existing payment systems. Even for places without cable internet, there are bitcoin satellites covering most of the world’s land mass at this point, meaning one can transact in bitcoin even when off the grid.

Bringing it back to the United States and other developed countries, all sorts of content producers deal with de-platforming from third-party online payment services for expressing certain views. Whether we agree with their views or not, it’s not hard to see why some of them have turned to BTCPay Server and other bitcoin payment software in order to strengthen themselves against de-platforming.

Back in 2015, a popular comparison made its way around the media; federal law enforcement reached a point where it seized more cash in the United States per year than burglars did, and that doesn’t even include the impact of state or local law enforcement.

Chart Source: Washington Post

A lot of that cash is seized from criminals. But someone doesn’t need to be found guilty of a crime, or even charged with a crime, for police to take physical cash or other assets from them. After that increase in public awareness, the practice seemingly got more pressure and reported numbers started to move back down.

Later, the Washington Post reported in 2018 about a number of examples of civil forfeiture that didn’t involve a crime, and it often took months to get the cash back. And it’s a disproportionate burden for low income people that don’t have the resources to initiate a lawsuit to get their property back. From the article:

Here’s Wikipedia’s overview of the subject:

Civil forfeiture in the United States, also called civil asset forfeiture or civil judicial forfeiture, is a process in which law enforcement officers take assets from persons suspected of involvement with crime or illegal activity without necessarily charging the owners with wrongdoing. While civil procedure, as opposed to criminal procedure, generally involves a dispute between two private citizens, civil forfeiture involves a dispute between law enforcement and property such as a pile of cash or a house or a boat, such that the thing is suspected of being involved in a crime. To get back the seized property, owners must prove it was not involved in criminal activity. Sometimes it can mean a threat to seize property as well as the act of seizure itself. Civil forfeiture is not considered to be an example of a criminal justice financial obligation.

Proponents see civil forfeiture as a powerful tool to thwart criminal organizations involved in the illegal drug trade, with $12 billion annual profits, since it allows authorities to seize cash and other assets from suspected narcotics traffickers. They also argue that it is an efficient method since it allows law enforcement agencies to use these seized proceeds to further battle illegal activity, that is, directly converting value obtained for law enforcement purposes by harming suspected criminals economically while helping law enforcement financially.

Critics argue that innocent owners can become entangled in the process to the extent that their 4th Amendment and 5th Amendment rights are violated, in situations where they are presumed guilty instead of being presumed innocent. It has been described as unconstitutional by a judge in South Carolina.  Further, critics argue that the incentives lead to corruption and law enforcement misbehavior. There is consensus that abuses have happened but disagreement about their extent as well as whether the overall benefits to society are worth the cost of the instances of abuse.

And as reported by the Washington Post in 2020, Homeland Security seized over $2 billion in cash going through airports between 2000 and 2016, with 70% of cases involving no arrest. People generally had to go through months of legal action to get it back, if they get it back at all. They have the burden of proof to prove their right to have their own cash, rather than the burden of proof being on those who confiscated it.

If it’s this much of an issue in the United States, imagine the corruption that people in developing countries face with arbitrary confiscations.

People easily get their funds seized when transporting cash or gold through airports, especially over international borders. And people fleeing war-torn areas or failed states generally have trouble bringing anything of value with them. The neat thing about bitcoin is that the private keys can be transported in an app in a password-protected phone (and nearly 4 billion people have smartphones now), or can even be memorized as a seed phrase. It moves invisibly and with encryption.

Encrypted money, both as a potential store of value and transaction network, makes it difficult or impossible for questionable authorities to block transactions or seize funds, or even know that there are funds to seize (like traveling with a smart phone or memorized seed phrase that accesses a bitcoin wallet, rather than physical cash).

Legitimate authorities generally don’t like the existence of that technology either, since like any form of technology it can be used for malicious intent, but ultimately it comes down to what degree of privacy and self-autonomy people should have, and who the burden of proof should be on to seize assets or block transactions.

That is why the Human Rights Foundation, a nonprofit organization chaired by Garry Kasparov that deals with human rights issues around the world, has been a proponent of the Bitcoin network and operates the HRF Bitcoin Development Fund.

Criminals are often early adopters of new technology, since they have a strong incentive to be innovative in that way. But that doesn’t mean the technology itself is the problem; new discoveries and their applications are inevitable. Banning bitcoin (which at the end of the day is really basic albeit elegant tech) amounts to banning information; banning the use of an open source decentralized public ledger with numbers to access it. That’s why in developed countries with rule of law, the emphasis has been on regulating it and ensuring the government gets their share of capital gains taxes.

As a similar case, criminals were early adopters of beepers in the 1980s, but that didn’t make beepers themselves bad. Here’s a snippet from a July 1988 Washington Post article:

When a drug dealer is in trouble, he sometimes dials 911. But he isn’t trying to reach the police.

Instead, this message is sent to a drug courier wearing a beeper that displays messages dialed from a phone: 911 means the police are closing in.

Although paging devices, or beepers, have grown in popularity throughout the labor force — doctors, delivery people and journalists often use them — they also have become a staple in the drug business, posing fresh problems for law enforcement and threatening to tarnish the image of a booming high-tech industry.

About 6.5 million beepers are in use in the country, according to officials, although it is difficult to estimate what percentage is used for drug trafficking. U.S. Drug Enforcement Administration officials said that beepers, which have been used by bookies and cigarette smugglers, were introduced in the drug market about five years ago by Colombian cocaine organizations. Now, federal narcotics agents estimate that at least 90 percent of drug dealers use them.

Now that the Bitcoin network is a bit more mainstream (no longer the early Silk Road days), it’s relatively easy for algorithms to sort through the public ledger and so it’s not a great platform for criminals. The analysis firm Chainalysis, which serves law enforcement agencies and private institutions in terms of analyzing public blockchains, determined from multiple annual studies that only 0.5%-2% of cryptocurrency transactions are used for illegal activities in a given year.

Chart Source: Chainalysis

Investment banks alone have paid over $331 billion in fines for various illegal activities in the fiat currency system since the year 2000.

So when, for example, Colonial Pipeline gets hit with a $4.4 million ransomware attack using bitcoin as the medium of payment, it’s important to be aware of total numbers and relative scale of these things, rather than just narratives about what bitcoin is used for with individual examples. And in this case, because the coins associated with the Colonial Pipeline ransomware attack could be tracked and the hackers apparently didn’t store their funds in a private hardware wallet, a large portion of the funds were taken back.

There have been multiple studies to determine what percentage of global GDP consists of illegal activities, or more broadly, the size of the “shadow economy” which consists of illegal and semi-illegal economic activity.

A July 2010 paper by the World Bank determined that the shadow economy consists of 17.2% of GDP across 162 nations on a weighted-average basis between 1997 and 2007. Investopedia has an article that collects multiple studies across the years, with 12-14% being common estimates for multiple studies, with low-end studies pointing towards maybe only 7%. A study by the US BEA determined that during about a century of data, adding theft from businesses, illegal gambling, prostitution, and drug trafficking would add 1-4% to US GDP per year, and that doesn’t include theft from individuals, human trafficking, or a variety of other shadow economy activities. The UN Office on Drugs and Crime estimates that the annual amount of global money laundering is 2-5% of global GDP. An often-cited old study found that 80% of cash has traces of cocaine on it.

In other words, at a 0.5% to 2% use case, bitcoin and the broader cryptocurrency space may ironically have a lower share of criminal activity than fiat currency on a percentage-of-transaction basis. And if we think about it, that makes sense. Criminals wouldn’t necessarily want to do their nefarious deeds on an immutable public ledger, susceptible to tracking and analysis. The old-school suitcase full of cash in private is still better for that purpose in most cases.

There are some blockchains that have stronger privacy features than the Bitcoin network, but they make trade-offs like less-reliable security/verification, in order to do that.

In other words, the Bitcoin network is a privacy enhancement over many types of banking activities, especially when using lightning or some of the other privacy methods, and the upcoming Taproot update will further enhance privacy to some extent. But it’s not as private as physical cash against serious on-chain analysis.

Use Case 4: Defense Against Negative Rates or Cash Phase-Outs

During recessions, central banks often cut interest rates by several percentage points. After decades of this, developed country interest rates are all stuck around zero, with little more room to cut rates.

They can go mildly negative, to -0.5% or so, because people will pay for security rather than having all their cash under their mattress. But if rates go to say -4%, a lot of people would likely pull their cash out of banks. They wouldn’t sit there and let their $1000 turn into $960 on year one and then turn into $921 on year two, and so on.

A 2019 IMF article called “Cashing in: How to Make Negative Interest Rates Work” describes the issue well:

In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.

When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.

Because of this floor, central banks have resorted to unconventional monetary policy measures. The euro area, Switzerland, Denmark, Sweden, and other economies have allowed interest rates to go slightly below zero, which has been possible because taking out cash in large quantities is inconvenient and costly (for example, storage and insurance fees). These policies have helped boost demand, but they cannot fully make up for lost policy space when interest rates are very low.

One option to break through the zero lower bound would be to phase out cash.

That article links to a 2018 IMF working paper that tackled the same subject in more detail. Due to the challenges of entirely phasing out cash, however, they instead propose splitting the monetary base into two parts, where physical cash would devalue vs cash stored in the financial system by a rate that is equivalent to the negative rates applied to deposited cash, so that negative rates are effectively applied to physical cash as well. There’s no escape from deeply nominal negative interest rates, in other words.

NBER Working Paper 25416, published in 2019 and featuring Larry Summers as a co-author, further discussed the issues that paper currency presents against substantially negative-rate policy:

Second, if the deposit lower bound is overcome, our model predicts that negative policy rates should be an effective way to stimulate the economy. This could happen if banks over time become more willing to experiment with negative deposit rates, and depositors do not substitute to cash, or if there are institutional changes which affect the deposit lower bound. In Section 4 we consider under which conditions this could happen. An example of such policies is a direct tax on paper currency, as proposed first by Gesell (Gesell, 1916) and discussed in detail by Goodfriend (2000) and Buiter and Panigirtzoglou (2003) or actions that increase the storage cost of money, such as eliminating high denomination bills. Another possibility is abolishing paper currency altogether. These policies are discussed in, among others, Agarwal and Kimball (2015), Rogoff (2017a) and Rogoff (2017c), who also suggest more elaborate policy regimes to circumvent the zero lower bound.

What we saw in 2020 was that instead of turning to deeply negative rates, governments relied more heavily on pro-inflationary fiscal policy (which is the same as the 1930s and 1940s; the last time the zero bound was reached, as part of the prior apex of the long-term debt cycle).

Ultimately I think that’s the more likely route in the long-term; that greater use of fiscal policy at the zero bound will be used to kickstart the next cycle, and that over-use of monetary policy involving a situation like -4% nominal interest rates is unlikely. However, it’s important to follow these sorts of influential papers to see how policymakers are thinking about policy.

Here in 2021, China has been testing a central bank digital currency that can a) more easily track or block transactions, b) can set up expiration dates on money to ensure it is spent rather than saved and c) can automatically deduct money from or freeze accounts associated with individual entities. Here are some snippets from an April 2021 WSJ article:

China has indicated the digital yuan will circulate alongside bills and coins for some time. Bankers and other analysts say Beijing aims to digitize all of its money eventually. Beijing hasn’t addressed that.

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The money itself is programmable. Beijing has tested expiration dates to encourage users to spend it quickly, for times when the economy needs a jump start.

It’s also trackable, adding another tool to China’s heavy state surveillance. The government deploys hundreds of millions of facial-recognition cameras to monitor its population, sometimes using them to levy fines for activities such as jaywalking. A digital currency would make it possible to both mete out and collect fines as soon as an infraction was detected.

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More than 60 countries are at some stage of studying or developing a digital currency, according to research group CBDC Tracker.

Agustin Carstens, head of the Switzerland-based Bank for International Settlements (the central bank of central banks) also had an interesting quote on CBDCs over the past year:

For our analysis on CBDC in particular for general use, we tend to establish the equivalence with cash, and there is a huge difference there. For example in cash, we don’t know for example who is using a hundred dollar bill today, we don’t know who is using a one thousand peso bill today. A key difference with a CBDC is that central bank will have absolute control on the rules and regulations that determine the use of that expression of central bank liability. And also, we will have the technology to enforce that. Those two issues are extremely important, and that makes a huge difference with respect to what cash is.

Is it surprising that a significant minority of people would turn to yellow metal, or create a bearer asset network backed up by encryption, to avoid these sorts of things with a portion of their savings?

While it wouldn’t be ideal to put everything into physical cash, physical gold, or self-custodied bitcoin, having a nonzero amount of one’s net worth in those types of assets is prudent.

Investors Don’t Have to Self-Custody

Some societies are more collectivist or individualistic than others, and then within those societies, various members range across a spectrum of how much they trust the system.

I think a big portion of one’s perception on this topic of gold or bitcoin is shaped by life experiences or disposition. Growing up in a smooth environment where things just “work”, with no major currency failures or oppressive regimes, leads one to trust institutions more. They are fine with the concept of centralization, and giving up certain rights in exchange for certain conveniences.

From that perspective, gold is thought of as a plaything for cranky old men who yell at the Fed, and bitcoin is thought of as a casino millennial asset and/or criminal’s paradise.

However, by expanding our perception of different lived experiences throughout the world, we can see why these sorts of assets can be desirable to many people.

And when it comes to investing in these self-custodied assets, an important fact of course is that not everyone has to self-custody them.

As long as someone understands why someone might want to self-custody them, and understands why their use as assets that have the property of being able to be self-custodied is valuable, they can invest in those assets through custodians if they’d prefer, or if for regulatory reasons they have to.

In other words, the inherent ability of these assets to be self-custodied as bearer assets is a critical part of their value proposition, but not every user needs to self-custody their allocation to them. They can hold cash in a bank, buy a gold ETF, buy gold miners, buy bitcoin via a fund or custodian, and so forth if they’d prefer or otherwise need to.

Understanding the Pushback 

Back in 2016, the World Economic Forum had a blog article called, “Welcome to 2030: I Own Nothing, Have No Privacy, and Life has Never Been Better,” by Danish politician Ida Auken. The World Economic Forum followed this up with a 2017 social media campaign that included themes from that article.

The article and media campaign emphasized how the world is shifting more and more towards using services rather than ownership. For those that aren’t familiar with it, the World Economic Forum hosts the annual Davos gathering of politicians and business leaders from around the world to influence policy and share ideas.

In the article, Auken envisioned a semi-utopian and semi-dystopian outcome by 2030 where people have access to whatever they want as a service thanks to AI and robotics, but they own basically nothing and their every move is tracked with no privacy. In the narrative, some people live out in the countryside, having fled from this regime. Auken’s 2030 imagined self is worried about those folks in the narrative, and very happy with her life despite some of the disadvantages relating to privacy, and views many of the steps taken as necessary.

This media campaign got a lot of renewed attention in late 2020 in response to the World Economic Forum chairman Klaus Schwab’s 2020 Time Magazine cover article and media campaign, “The Great Reset“, which was about responding to the pandemic crisis with re-alignments about global priorities.

It led to some online viral conspiracy theories portraying Schwab almost like a James Bond villain or Illuminati ring leader with a master plan, leading places like the Reuters Fact Check team to look into the matter and indeed regard them as conspiracies.

After this viral activity, the World Economic Forum went back and deleted a number of their 2017 tweets and the original 2016 blog post. They must have realized that the campaign wasn’t great marketing. The version on Forbes from back in 2016 still exists as of this writing.

I think both the initial campaign and the viral conspiracy pushback, for better or worse, are instructive. They crystalize some of the cultural divides out there, and it’s important to see how some people envision the world and how other people really see things differently.

People took things too far when interpreting the scope of these articles and media campaigns, but they also understandably saw encroachment on autonomy, privacy, and property by policymakers and political influencers, when it comes to the general direction of where things are headed.

So, it’s not surprising that a significant subset of people prefer to self-custody some of their assets in one way or another, and bearer assets like gold, silver, and bitcoin are popular for that reason. They don’t want to “own nothing and be happy”; they want to take custody of monetary assets.

Gold and Bitcoin Pricing Environments

Fiat currency loses value over the long term, but in most cases is stable in the short term. These other assets are far more volatile in the short term, but historically have held or increased their value over the long-term.

Due to this volatility, there are bull and bear markets for gold and bitcoin. This makes sense, because there are environments where fiat currency is rather robust, and other environments where fiat currency is being devalued.

There are some reliable signals that investors can use to evaluate these types of environments. Let’s separate gold and bitcoin because they operate very differently so far in terms of pricing environments.

Gold Pricing

Gold is mainly a risk-off asset. In the long-run, it is correlated to broad money supply growth while in the intermediate-term it is more correlated (inversely) to inflation-adjusted interest rates.

For example, here’s a recent history of the gold price in red vs real 10-year Treasury rates:

Chart Source: St. Louis Fed

Gold is a zero-yielding asset with frictional costs, but whose supply is scarce and changes very slowly. When real rates on currencies and sovereign bonds are heading lower, and especially when they are negative, gold becomes a lot more attractive than fiat currency. Conversely, when real rates are strongly positive, gold tends to be out of favor.

This makes sense. When a 10-year Treasury offers you a 7% annual yield while inflation is 3%, you get a 4% real rate of return. Gold would be less attractive in that environment due to the high opportunity cost of earning a strongly positive real yield with Treasuries.

On the other hand, if the 10-year Treasury offers you a 2% annual yield while inflation is 4%, you get a -2% real rate of return. Gold is way more attractive in that environment since the opportunity cost is negative. Gold is both scarce and ironically higher-yielding in that environment.

In that sense, gold is not specifically an inflation hedge; it’s a hedge against negative real yields (albeit in practice, the deepest negative real yields tend to occur in times of high and sharply-rising inflation).

However, while real interest rates can give us a good idea of direction, they don’t tell us much about magnitude. What approximate magnitude should gold be valued at? That’s the age-old problem of evaluating a non-cashflow asset, or a money-like asset.

People often compare the gold price to broad money growth, but they forget to take into account the fact that gold has an inflation rate too, albeit a low one. The above-ground supply of gold grows at an average of a bit over 1.5% per year over the long run, thanks to mining. It’s important to factor that in when comparing gold to fiat money supplies. NYDIG had a good chart of gold’s annual new supply rate in their November 2020 research piece:

Chart Source: NYDIG

Here’s an annual chart, with over a century of data, that shows the estimated global gold market capitalization compared to the US broad money supply:

There were some periods on the chart where gold was really cheap according to this ratio. In the 1950s and 1960s, this was because gold was suppressed by the government via the gold peg. Eventually that arrangement broke in 1971 and gold revalued much higher to a market clearing rate. Similarly, there was a deep commodity bear market in the late 1990s and early 2000s, and gold became unusually cheap for several years.

Other periods on the chart were bubbles. In 1934, the US government devalued the gold peg, which marked the price of gold up by about 70% in dollar terms overnight. In the late 1970s, as inflation roared and real interest rates hit as low as -5%, gold bubbled up to extremely high levels. In 2011, after the global financial crisis, introduction of quantitative easing, and real 10-year interest rates getting almost as low as -2%, gold had a third bubble.

Here’s a monthly resolution version of that chart, covering the five decades of gold’s comparatively free-floating price period. I added the inflation-adjusted 10-year Treasury yield on the right axis:

Next, this chart separates the gold market capitalization from US money supply, and shows them separately in absolute terms:

Lastly, here’s the log version of that previous chart, which more clearly shows gold tending to spike when rates become deeply negative:

Bitcoin Pricing

Bitcoin is more challenging, because it’s a newer asset with a smaller market capitalization, and more volatility. Unlike gold, it tends to be a risk-on asset more often than not.

So far, bitcoin’s biggest correlation is with its own supply cycle. Every four years, the number of new coins generated by the algorithm every 10 minutes gets cut in half, and there tends to be a “post-halving” bull run. Here’s the bitcoin price in log form, with halving points annotated:

Chart Source: Blockchain.com

If we look at on-chain data, the percentage of bitcoin held by long-term holders tends to decrease during bull markets and increase during bear markets, as the protocol goes through these big distribution cycles:

Chart Source: Look Into Bitcoin

With the Bitcoin network, we’re basically witnessing something being monetized in real time. It was the fastest asset to touch a $1 trillion market capitalization, and reached 100 million estimated users in fewer years than the internet did from its launch.

The market is essentially trying to estimate the Bitcoin network’s total addressable market in real time, like a growth stock, while taking into account various risks including network effect dilutions from crypto competitors, the prospects of government bans, and various security concerns ranging from the diminishing block subsidy to the potential tail risk impact of quantum computing.

Is its total addressable market only 10% of gold’s market cap (which it already reached) before trending downward towards irrelevance, since unlike gold, the Bitcoin network has to constantly fend off dilutive competitors in every bull cycle? Or 50%? Or 100%?

Or could it eventually be worth 200% or 300%+ of gold’s market cap, since it’s digitally native and thus easier to access and build on with secondary layers and a variety of apps, and has been recognized as legal tender in some areas?

Ultimately, the answer isn’t known yet, which is why it’s so volatile. Rather than being a store of value now, I prefer to describe it as an emergent store of value. According to on-chain data and exchange data, somewhere in the ballpark of 2-3% of people globally own or have owned it. It is a 12.5 year project that has been wildly successful but that still faces existential challenges and risks, and the market is trying to judge its probability of success, and trying to define what success would even look like.

Like other risk-on assets, it is significantly tied to liquidity. Whenever real rates become high or liquidity shocks happen, bitcoin tends to crash. When liquidity is abundant and broad money supply growth is happening quickly, bitcoin tends to do well. But that’s in the broader cycle of its supply creation and overall network effect and user adoption.

Summary Thoughts

Hopefully this piece was helpful in showing why bearer assets like gold and bitcoin are considered valuable to a substantial minority of the population.

Some people want to take custody of money-like assets that resist debasement, and the percentage of people that feel this way generally depends on political and economic conditions in their area, and specifically how well their local fiat currency is holding up in terms of positive real interest rates and maintenance of stable purchasing power.

To imagine this, we often have to put ourselves in someone else’s shoes to see what they experience.

In addition, bitcoin opens up the possibility of permissionless local and international payments and internet-native money for micropayments and other use-cases. It also results in simple apps to give unbanked populations some degree of banking services. It’s an evolving field and it’s hard to say what the ecosystem will look like 5-10 years from now, but it’s a space I plan to continue to monitor and remain optimistic about.