On Friday we gave a talk about bitcoin to a group of investment professionals. The audience ranged from large state pension fund managers, CFAs, noted academics and even a Federal Reserve president. There was enough intellectual wattage in the room to light up a small city.
Here’s what we learned: knowledge about crypto currencies, even after all the attention of the last year, remains very low. One speaker asked, “How many of you understand bitcoin?” Less than 5 hands went up out of +70 attendees.
The aim of our talk was to demystify bitcoin and put it in the physical realm. Too often we find that those who want to learn about it get tied up in knots on the technology and price volatility and just walk away. The recent price action, which spans $12,000 – $19,000, just confirms the general belief that bitcoin is “unanalyzable”.
The inspiration for our chat comes from one of our favorite books (link at the end of this section): “A History of the World in 100 Objects”. The work delivers on the title’s promise by highlighting 100 items from the British Museum and tying them to the broad sweep of global history. Instead of dates, wars and king lists, you see the range of human activity through works of art. It is a wonderful construct.
Here’s the first 5 items of our “Bitcoin in 10 Objects” list. We’ll conclude tomorrow with the final five.
Item #1: A 5-inch depth aluminum briefcase.
The cases from Zero Halliburton are popular but pricy at $560. Still, they are popular items among a certain clientele, since they hold exactly $1 million in $100 bills and have sturdy locks. The handcuffs you see in spy movies that often accompany this item are, apparently, optional.
Item #2: A $100 Bill.
While economists tend to think about money as an abstract concept, the US Federal Reserve knows that physical currency is very much a part of global wealth storage and transfer. There are currently $1.2 trillion of $100 bills in circulation, most (80% or so) outside the US.
Importantly, global demand for $100 bills remains very strong. Since 2000, growth in circulation is up 205%, or a CAGR of 7%. By comparison, the amount of $20 bills in circulation is only up by 79%, or a 3.5%.
Item #3: High denomination euro notes (100, 200 and 500 euros)
Demand for high denomination notes isn’t unique to the US dollar. The total amount of 100/200/500 euro notes outstanding totals 562.6 billion euros, or $686 billion at current exchange rates. Growth rates for circulating notes are even higher than those for the $100 bill, since the euro itself is much newer.
And if you thought the European Central Bank was getting rid of such notes after deciding to eliminate the 500 euro bill, think again. As those notes go away, the ECB is replacing them 1:1 in value with 100 euro notes.
The upshot to #2 and #3: there is tremendous global demand for physical cash. So much so that just between genuine $100 bills and 100/200/500 euro notes, there is some $1.8 trillion outstanding. Every human on the planet (7.6 billion people) could have over $200 in high denomination dollars/euros just with what is in circulation today. And there is certainly more on the way…
Item #4: An iPhone loaded with a TOR browser
You know what a smartphone does, but you may not be familiar with the TOR browser. This is bit of software you can download and it acts much like Apple’s Safari or Google’s Chrome offerings in allowing you to view web pages.
The one key difference: it makes your web surfing essentially untraceable. And no, this is not the product of some nefarious global hacker collective or a Russian plot. The US government developed TOR and still funds its maintenance.
How does this apply to physical currency? A briefcase (#1) with a million dollars (#2) weighs about 28 pounds and is quite noticeable. But if you can store wealth online via your smartphone and do so stealthily (#4), that’s a better solution.
Item #5: The original bitcoin white paper by Satoshi Nakamoto
Bitcoin turned nine years old back on January 3rd, and the very first block of coins mined had the following message: “Chancellor on brink of second bailout for banks”. So while we don’t know who wrote the original paper outlining the bitcoin protocol (Nakamoto is a pseudonym), the intent of the offering seems clear. Create a new form of currency with a fixed supply that is not controlled by governments.
The one thing we learned from the conference last week was that bitcoin is essentially an economic Rorschach test. One b-school professor called it a bubble because his students all like it (and what could they know?). A long time market watcher said it couldn’t be “money” because it is too volatile. Price churn, in his book, meant instability and that cannot be a feature of a valuable currency.
In the end we think that regardless of price level or constituent base, bitcoin became popular – and pricey – because it is a substitute/partner to the world’s desire for portable wealth storage. The Federal Reserve and the European Central Bank are in this business, and quite successfully so. Bitcoin managed to muscle its way into the same market.
Tomorrow, we’ll look at the second tranche of 5 items. These relate to how to value bitcoin against our “Cash money substitute” paradigm and what can go wrong (or right) from here.
Link to buy “A History of the World in 100 Objects” on Amazon: https://www.amazon.com/History-World-100-Objects/dp/0143124153/ref=sr_1_1?s=books&ie=UTF8&qid=1516123088&sr=1-1&keywords=history+of+the+world+in+100+objects