(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
Let’s start with a game. You can place your wealth in System A or System B, which would you choose?
There’s been a lot of talk recently about how to reform banking or what the ideal bank would look like. The discussions, as they should, focus on the “system” of banking - they aren’t concerned about bank valuation or share prices. Instead, it’s an exploratory exercise from a first principles perspective - how should a bank be designed. I’m guessing, if given the choice, most of you would choose to put your money in System A. However, as you probably figured out, your money is currently in System B. Fortunately, System A exists. It Is the bitcoin protocol. Bitcoin is a monetary protocol that gives property rights that cannot be seized to 8bn people. System A operates In plain sight. However, most of us are too distracted by its price and don’t appreciate the design principals of the system. Bitcoin's price is volatile, but the system is stable, very stable. The price of US banking stocks, relatively speaking, are not volatile, but the US banking system inherently is unstable, very unstable. Fractional reserve banking is inherently leverage, hence the instability.
“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” – Satoshi Nakamoto, the person, or group of people that invented Bitcoin
The financial system and the base layer technology that it runs on (money and credit) are currently in acute distress. For the avoidance of doubt, the system has been under stress for years and will likely continue to be due to its design (I wrote about this last year, if interested). I do not mean for that to sound hyperbolic. Instead, the history of financial crises and the magnitude of each event and the subsequent monetary solutions speak for themselves (look at the fed balance sheet overtime). To be clear, I appreciate and am aware of the fact that fractional reserve banking has been a fantastic tool for credit intermediation. Getting money to those that need it from those that have it and are seeking a return. It has lifted the human standard of living higher than one could have imagined. However, anyone that understands fractional reserve banking can appreciate that the system is inherently unstable. The challenges in the existing system are due to the amount of trust it takes to ensure stability. Recent weeks are rich with examples:
Banks made investment decisions (with depositor capital, as is design) trusting that the Federal Reserve would increase interest rates as forecasted when the investments were made
Rates were at 0% at the end of 2021 and the Fed said they would be “patient” on rate hikes. Yet, the Fed ended up hiking rates way faster than banks had expected (fastest rate hike in the history of modern capital markets – rates increased 57x in one year)
Consumers trust that Banks will not make investments with their deposits that will lose value (for those that actually appreciate that their deposits are merely loans to the bank). As a side note, banks are literally in the business of taking consumer money and lending it out – you have to trust their investment decisions, judgment, and that their incentives are aligned with yours
Consumers trust that when they go to a bank and ask for “their” money the bank has it
Banks trust that all depositors will not ask for their money at the same time
Consumers and business trust that the fed (12 people – monetary policy is set by 12 individuals!) will not debase the value of their money faster than 2-3% / year via inflation (the fed funds rate sets the price of capital, which indirectly influences supply of dollars in the system due to fractional reserve banking)
I think you get the point. Trust is everything. To be clear, while the tone of the above may come across as overly critical, I am not criticizing the current system. To say it is built on trust should not come as a shocker. However, a trust based system clearly has its problems. All problems are soluble. The only things that prevent humans from solving problems are the laws of physics and having sufficient knowledge.
The Bitcoin protocol is a credible solution to problems related to trust in the existing system. As I discussed here, the Bitcoin protocol has spawned a savings revolution. The Bitcoin protocol is the best savings technology ever invented. Bitcoin is a bank in cyberspace, run by incorruptible software, offering a global, affordable, simple, & secure savings account to billions of people.[1]
Bitcoin, with a capital “B”, is an internet wide distributed ledger, or blockchain that records the ownership of all bitcoin (lowercase "b"). bitcoin is a Digital Asset that is exchanged between two parties with no pre-existing trust. bitcoin the asset moves across the Bitcoin network with each movement permanently recorded on the Bitcoin blockchain. bitcoin is a digital bearer instrument (e.g., it bestows property rights to the owner).
Arguably, the greatest characteristic of bitcoin is its scarcity. Not only is bitcoin scarce, but unlike gold, it is provably finite. There will only ever be 21 million bitcoins. In contrast, we do not know how much gold exists in the crust of the earth. The quantity of any fiat currency, physical property, or credit instrument, in theory is unlimited and at the whims of individuals or countries that have the power to increase the respective supply. The provably finite nature is a result of the monetary rules being written in code and enforced by a decentralized network of individual computers. It is incredibly hard to change the Bitcoin code and all network participants are incentivized to abide by the monetary rules of the code (i.e., if you are an owner of or participant in the network there is no incentive to increase the supply as it would dilute your ownership of the network). No other asset in the world possesses an immutable monetary policy on the level of bitcoin.
“What about the price, Elliott?”. The price of bitcoin is volatile, but the system is stable:
The monetary policy of bitcoin is transparent, written in software, and does not change
The network runs 24 hours a day, 7 days a week. The network has had 100% uptime since 2014 and 99.98% since it went live in 2009
You don’t need permission to access your monetary value – there can be no “run-on bitcoin”
There is no counter-party risk in holding bitcoin – you don’t have to trust that someone will not lend your money
The Bitcoin protocol is a trustless system that allows you to store monetary value that cannot be confiscated, leveraged, diluted, or seized. The price is merely a distraction. If you ignored the price and were given the option to store your monetary value in the system detailed above or the existing system which, would you choose? The existing system has a problem. The solution exists, everybody just doesn’t know it yet. Bitcoin is a bank in cyberspace, run by incorruptible software, offering a global, affordable, simple, & secure savings account to billions of people.
No “Elliott’s hot take” this month, I think the above was a hot of a take as they come. Thanks for reading.
Who did what recently?
Amazon is developing an NFT platform set to launch as early as April 24. US-based Prime customers will be able to purchase NFTs tied to real-world assets. Link.
Starbucks launched its first paid NFT on Polygon as part of its Starbucks Odyssey rewards program. Up to 2,000 NFTs will be sold for $100 each. Each NFT is a unique piece of artworks inspired by the brand’s mermaid logo. The NFTs sold out in 18 minutes Link.
Interbank messaging company SWIFT is moving into a second phase of testing a product for transferring and settling central bank digital currencies (CBDCs). France, Italy, the UK and Singapore are participating in the tests. Link.
JPMorgan is ending its banking relationship with crypto exchange Gemini, while Coinbase's banking relationship with JPMorgan remains intact. Link.
Blockchain.com is winding down its asset management arm, which launched last April. Link
Meta is shutting down its NFT offering, less than a year after launching the platform on Instagram and Facebook. Link. Link. Tweet
The Federal Reserve's instant payments network, FedNow, is scheduled to launch in July. FedNow will allow businesses and individual customers of participating banks to send and receive payments 24/7, which may reduce the need for a central bank digital currency in the US. Link. Press Release.
Microsoft Edge is testing a self-custodied crypto wallet in its latest browser redesign. The wallet offers pricing info for assets in a user's wallet as well as a crypto-specific news feed. Link. Link. Tweet.
Salesforce announced Salesforce Web3, a suite of products that will help companies build, manage, and integrate NFTs into their businesses. It is also partnering with Polygon on an NFT-based loyalty program. Link. Link. Blog Post.
CCP Games, a blockchain video game developer, raised $40 million from A16Z.
Turnkey, a crypto custody startup, announced a $7.5 million seed round of financing from Sequoia, Variant and Coinbase.
Nasdaq plans to launch custody services for Bitcoin and Ethereum in the next three months. Link. Link.
[1] Michael Saylor. https://www.hope.com/