Cryptocurrencies

Fidelity (3300 billion) – “It is no longer a question of whether to buy Bitcoin, but how much”

A very rare asset

The first lines are devoted to the finite money supply of bitcoin:


The total supply is limited to 21 million bitcoins. Miners receive a reward – freshly created bitcoins – for each new block generated, accepted, and added to the bitcoin transaction chain. This reward is halved every 210,000 blocks, or approximately every four years. As of May 2020, the reward is only 6.25 bitcoins per block (around $ 200,000 as of this writing). This system creates an asymptotic supply curve synonymous with scarcity. Today, around 18.6 million bitcoins out of a total of 21 million have been created, but it will take many more years (120, roughly) to mine the last bitcoin.

For the author, ” the decline in the supply of bitcoin makes it a rare asset. Unlike fiat money that central banks are, it seems to me, ready to print endlessly “. Like that, things are said …

The demonstration continues with a perspective using the famous model of Stock-to-Flow valuation. This model is very simple. It measures the number of years it takes to double a given stock. The higher the number of years, the rarer the asset in question.

After having made it clear that past performance does not in any way guarantee future performance, the Director of Global Macro nevertheless argues that the model pleaded for a bitcoin at $ 24,000 in 2020, then $ 463,000 by 2025

Then comes the MetCalfe’s law. The latter says that the value of a network grows much faster than its number of users. According to this law, Jurrien believes bitcoin adoption is at the start of an exponential phase. Which bodes very well for bitcoin as this exponential demand faces limited supply.

Gold vs Bitcoin

The author then compares the cryptocurrency and the barbarian relic:

Gold has a long, almost undisputed, history as a store of value and a hedge against inflation. It was used as currency long before King Croesus invented coins. Gold has served as the backbone of global trade for millennia. The United States was built on the gold standard. Gold served as currency until 1944 before becoming the reserve asset backing the dollar. But since 1971, after President Richard Nixon abandoned the Bretton Woods agreements (and the gold standard), we have entered the era of “fiat money”. We will come back to that.

For years Nixon, gold reserves are less and less important in the international monetary system. While gold represented “half of foreign exchange reserves in 1970“, It now does not represent“no more than a tenth“.

Fidelity argues that this discrepancy is related to the printing press that has been running at full speed since the 2008 crisis. A rhythm ” breathtaking »Illustrated by the fact that the Fed’s balance sheet now represents 35% of GDP, or more than at the end of the Second World War. As a result, gold has become attractive again in recent years. But also bitcoin, which is a form ” digital gold “.

As for which of gold or bitcoin is the best store of value, Fidelity points to the fact that the IRS and the US Treasury could hit bitcoin. ” Uncertainty about its regulation could affect demand », We can read in the paper which recognizes however the superiority of the cryptocurrency in view of its absolutely finished stock.

Indeed, gold production is not decreasing: “ at the current rate, the gold stock doubles every 60 years. In other words, gold is scarce, but is not becoming increasingly scarce, unlike bitcoin “.

Bitcoin at $ 460,000 by 2025?

Neither gold nor bitcoin offers a return. But the same goes for global bond yields which are close to zero. Bloomberg reports that there are $ 18 trillion in negative yielding debt in the world. Even in the United States, real rates have been negative since mid-2019. […] This is not a “detail”, but rather a major development: Gold and Bitcoin have become competitive with bonds, given the current low interest rates. In a world traditionally invested at 60/40 (stock market / debt), gold and bitcoin will in my opinion find a place in the 40% bracket.

In this context, knowing that the bitcoin weighs less than $ 1 trillion, its potential leaves one dreaming of. What will Bitcoin be worth when it is added to the list of “assets in which it is possible to invest (Stock market + bonds)” which represents 160 trillion dollars ? Remember also that the world’s gold stock is worth approximately 11 trillion !

Jurrien then makes a comparison between gold and the stock market, recalling that the latter is not a protection in the event of hyperinflation:

At the beginning of 1919, one US dollar was worth nine German marks. In November 1923, that same dollar could buy 4.2 billion marks … […] But the mark having lost all its value, German stocks, even very expensive, were not worth much in other currencies. And this is where gold comes in as perhaps the ultimate store of value during an episode of hyperinflation.

The following superb chart shows, however, that in the long term, the stock market and bonds yield much, much more. But only if the gains of the previous year are systematically reinvested. We can see the evolution of the purchasing power over the long term (since 1700) of fiat money, the stock market, bonds and gold.

Gold is the new star since the Nixon shock

This graph means thata $ 1 note of 1700 would have a purchasing power of $ 65 in 2020. A gold dollar would have a purchasing power of $ 94. Or very little compared to a dollar in the form of a stock market share which is now worth nearly $ 4 billion. The success of the stock market shows that reinvesting dividends is an exponential process. “The stock market therefore offers protection against inflation while offering dividends, the accumulation of which leads to a snowball effect.“, Declares Jurrien. The result is more or less the same whether we start from 1700, 1800 or 1900.

However, everything changes after 1970, after the United States left the Bretton Woods agreements by abandoning the Gold Standard. Since then, the yellow metal offers a higher return on investment than bonds and much faster than (official…) inflation. It is even on a par with the stock market.

To conclude, let us remember that we are entered an era of oil scarcity in 2018. And given that this oil operates more than 95% of the world’s machinery, it is possible to be very worried about the prospects for economic growth and the value of the fiat currency …

Add to that historic high debts serving negative real rates, and it does make sense to anticipate a period of high inflation conducive to stores of value. Or at least to make them an increasingly large place in its investment portfolio to replace certain bonds.

Jurrien Timmer does not say anything else at the conclusion of his paper. So it’s only a matter of time before the fourth largest investment fund in the world buys Bitcoin …

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