Is it really going to be Bitcoin though?
Wogan May
723

Hi Wogan

Let me start with some general thoughts and then move to the specific. First of all, when we invest we are always dealing with uncertainty. Framing the debate as what will or won’t happen isn’t therefore an effective approach. Rather, you try to push back the shadows of uncertainty as far as you can by thinking carefully about what the drivers of value are and what the range of assumptions around those drivers might reasonably be. That allows you to develop a range of scenarios. The next step is to assign probabilities to those scenarios and derive, based on the information at hand, what the expected value of that invesmtent might be. If the expected value of an investment is positive, it may be a rational investment and the next question is the position-sizing. A high-return, low probability investment with positive expected value merits a smaller allocation than a lower-return, higher probability investment.

In my paper, I suggest a framework that you can use for (a) developing your own scenarios around private- and public-sector adoption of a cryptographic non-sovereign monetary store of value and (b) deriving the value of those scenarios. I then invite you to assign your own probabilities to those scenarios. I then point out that even if you assign a 5% probability to a Bitcoin becoming a store of value (SoV) for private sector purposes only or a 2% probability to it becoming a SoV for private and public-sector purposes, it’s a rational bet for many investors to make in small size.

I gather from your post that you struggle most with the prospect of state treasuries adopting Bitcoin as a SoV. Do you think there is zero chance of any such adoption? Really? Or would you assume some lower level of adoption multiplied by some lower probability? I gave you the building blocks so you can make your own calculation. You don’t, however, seem to object as much to the notion of Bitcoin being a private sector SoV. Just that alone could be worth several trillion USD and would make a small investment in Bitcoin rational for many investors.

Addressing some of your specific points in turn:

  1. Security: Securing gold is a hard and resource-intensive thing to do. Maybe it’s a more familiar paradigm for you, but it’s not easier than securing Bitcoin.
  2. Interestingly, 89% of foreign reserves are in the form of fiat currencies of foreign countries, which requires a far higher degree of trust on the actions of a handful of foreign decision-makers than Bitcoin does. Even a significant portion of countries’ gold reserves (the other 11% of foreign reserves) are physically held in vaults in foreign countries. Bitcoin offers countries the chance to hold their reserves in a form that requires far less trust.
  3. A permissioned blockchain requires trust, so it would just put us back where we started with fiat reserves. The real innovation here is the trustlessness, the censorship-resistance that a permissionless blockchain provides. Until 2009 no one had figured out how to do that. A permissioned blockchain is just a database in the end. Nothing revolutionary there.
  4. Post-apocalyptic scenarios are over-used and not that relevant in practice. First, I don’t think solving for post-apocalypse is a good use of time relative to the likelihood of it happening or of you or I individually surviving it. Second, I’m sure you’re a really nice guy, but after the apocalypse, I’m not going to swap my can of tuna for your bar of gold.