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February 2021
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The above triangle shows key financial assets accoring to three traits:
Each asset occupies some position within this triangle. The position of each asset on the triangle is according to my own view - you can position them differently, however I don't expect they are much off, to what is the general consensus. There are three directions:
Bitcoin is a perfect blend of liquid asset which is a pure speculation, with huge risk and huge upside potential, but at the cost of not having any internal "value". Government currencies and bonds are at least backed by the army, central bank, state and currencies are legal tender. If we would have a currency backed by precious metals, it will have extremely low risk, as all other assets will be prices against it limited supply. It will also be perfect store of value. On the polar opposites of both currency backed by PMs and Bitcoin are works of Art. They are hard to sell, are very risky, but as evidenced by hundreds of years of history - generally retain value. A mixture of these 3 properties can be found in Individual stocks and portolfios of stocks or equity ETFs. Generally equity ETFs tend to be less risky and more liquid than most single stocks. Real estate and land are a similar store of value as Precious Metals, but they are more risky and less liquid. We can choose to own assets which are everywhere within this triangle:
Copyright 2020 Pawel Stadowski
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In the last 10 years we have seen many major disrupting forces beginning to emerge within the world monetary system. I will not list them, but instead I want to focus, where the current trends in finance and technology can lead us. We can easily understand, that any of the virtual currencies circulating in the economy, will create incentives for the people who issue or create them first, at the expense of people who use them later. This happens in a different fashion with fiat currencies and cryptocurrencies. Fiat currencies lose value over time, as more units are created. So the global losses of all of its owners increase over time. However, the people who get them first and converted them to real assets quickly enough - accumulate more wealth than people who did it later. The maximum amount of units of a cryptocurrencies stays the same, however, their price follows an inverse trajectory comparing to fiat currencies. More adoption translates to higher price comparing with assets in the real economy. This means the early buyers (and inventors) of cryptos have huge economic advantage over recent buyers, without producing anything in the real economy besides just freezing consumption and allocating value in cryptocurrency. Both types of monetary systems: based only on Gold or only on Bitcoin are unsustainable in the long run. They give too much incentives not to the people who invent, produce and create the real goods and services, but to those who create, control and "invest" in monetary units. The reason for this is simple: the supply of Bitcoin or Gold is limited, but the amount of goods and services in the real economy can grow without limits. Which means savings value can also grow without limits. When Bitcoin/Gold supply is limited, every Bitcoin or ounce of Gold will be a claim on ever increasing amounts of real goods and services. This table presents summarizes what happens under each type of currency having monopoly in the monetary system: The last column presents a system which does not use any virtual currency, or virtual means of exchange. It is also NOT based solely on Gold or Silver as the only reference monetary units. People exchange work, their products and services for tokens which are direct claims on real assets:
People can also save in such tokens: without the need to save in cryptocurrencies or fiat currencies which are not backed by a real asset. Potential benefits of such monetary system are:
A monetary system where Precious Metals and equities are both legal tender, competing with each other without virtual currencies in the form of government fiat or crypto-currencies is not likely to emerge anytime soon, perhaps in few decades. The reason being: it is too different, from the one we are using know. The only three other possible systems besides current one, are:
From the government perspective, the option #3 is of course preferable. Metals backed currencies are second best for existing structures of power and Bitcoin based monetary system is the least desirable for them, as central banks will lose its primary tool. Perhaps thats why central banks accumulate gold but also stocks and corporate bonds - to stay relevant in future economic battleground in case they will lose control of their currencies. What I think will eventually emerge in this decade is a mixture of social credit scoring with gold-backed digital currency. Such system will naturally create a push-back from society and will make both physical precious metals and cryptocurrencies (and also stocks) more and more desired as stores of wealth. |