Written by Lucid Investment Strategies
D. Tyler Jenks and Leah Wald
We contend that the world financial system has journeyed down an unsustainable path where unconstrained debt growth has become uncontrollable. We believe that this condition will be resolved in one of five ways. In general, each of these five solutions eliminates the other four. These five solutions are 1) a bitcoin standard, 2) a gold standard, 3) a new commodity/currency basket, 4) economic growth, and 5) default on sovereign debt. In this series of five articles, we will examine each of these five solutions. In this first article, we will examine Bitcoin as a solution to the world debt problem.
According to The Institute of International Finance (IIF), the total world debt is roughly estimated to be $247 trillion. By the 2018 year end, the total world wealth was estimated to be $317 trillion. But most significantly, total world debt increased 394% over the past 20 years, from $50 trillion to $247 trillion, while total world wealth increased 133% over the same period.
To understand the nature and extent of the problem, it’s necessary to conceptualize the probable assets that are available to offset the debt. Simply put, a budgetary deficit is when you spend more than you receive during the year and a surplus is when you spend less than you receive during the year. Debt occurs when deficits exceed surpluses. Debt is increased by further running deficits; however, debt can be reduced by running surpluses.
Another way of reducing debt is to reduce wealth by using the proceeds of that reduction to pay down debt. When wealth becomes zero, it is no longer possible to use this method.
An additional way of reducing debt is increasing income, sufficiently, to use the additional income to pay down debt. You can also reduce expenditures, sufficiently, so that existing income can reduce debt.
The problem occurs when any and all combinations of these strategies is/are insufficient to pay down debt, which subsequently keeps growing.
The Relevant Numbers
It is necessary to examine the available assets at the world’s disposal that are “available”, i.e. can be sold or traded for debt reduction. Only major pockets of wealth will be considered during this examination.
The following are important data points. These are difficult numbers to come by and even more difficult to assess. After examining numerous sources, the following numbers seem to be most statistically reliable. Even so, these numbers can vary as much as +/ — 20% from source to source.
-World Gross Domestic Product (GDP) is estimated to be $80 trillion, with the 10 biggest contributors being:
The United States $19.4 trillion
China $12.2 trillion
Japan $ 4.9 trillion
Germany $ 3.7 trillion
The United Kingdom $ 2.6 trillion
India $ 2.6 trillion
France $ 2.6 trillion
Brazil $ 2.1 trillion
Italy $ 1.9 trillion
Canada $ 1.7 trillion
Total $53.6 trillion (52% of total GDP)
-According to the Credit Suisse Global Wealth Report, the total world wealth is $317 trillion:
National Net Wealth:
The United States $98 trillion
China $51 trillion
Japan $23 trillion
Germany $14.5 trillion
The United Kingdom $14.2 trillion
France $13.8 trillion
Italy $10.6 trillion
Canada $8.3 trillion
Australia $7.6 trillion
-According to Savills World Research the total value of world real estate is estimated to be $228 trillion:
Residential $168.5 trillion
Commercial $ 32.3 trillion
Agricultural/Forestry $ 27.2 trillion
-According to The CIA World Factbook the Total World Money is estimated to be $80 trillion:
China $25 trillion
The United States $14 trillion
Japan $8.9 trillion
European Union $8,1 trillion
Germany $3.2 trillion
The United Kingdom $3.1 trillion
France $2.3 trillion
South Korea $2.1 trillion
India $2.1 trillion
Hong Kong $1.8 trillion
Brazil $1.7 trillion
Italy $1.7 trillion
Australia $1.6 trillion
Canada $1.5 trillion
Taiwan $1.4 trillion
Spain $1.3 trillion
Switzerland $1.3 trillion
-The total world stock market capitalization is approximately $73 trillion. The prior high was in 2007, before the financial crisis, at $65 trillion.
-Total sovereign wealth fund assets are $7.5 trillion:
China $1.6 trillion
UAE $1.3 trillion
Norway $1.1 trillion
Saudi Arabia $ 0.7 trillion
Singapore $ 0.6 trillion
Kuwait $ 0.5 trillion
Hong Kong $ 0.5 trillion
Qatar $ 0.3 trillion
The United States $ 0.2 trillion
Australia $ 0.1 trillion
Kazakhstan $ 0.1 trillion
-According to Willis Towers Watson’s Thinking Ahead Institute, the total value of pension funds in the world, the 300 largest, is approximately $18.1 trillion. The top 20 funds account for 41.1% of the total.
-Out of the 300 largest pension funds:
The United States has 133
The United Kingdom has 25
Canada has 18
Japan has 17
Australia has 17
Switzerland has 9
Germany has 9
Denmark has 8
Sweden has 7
-The 10 largest pensions funds in the world:
Government Pension Investment Japan $1.44 trillion
Government Pension Fund Norway $1.06 trillion
National Pension South Korea $ .58 trillion
Federal Retirement Thrift USA $ .53 trillion
National Civil Pension Fund (ABP) Netherlands $ .49 trillion
National Social Security China $ .46 trillion
California Public Employees USA $ .34 trillion
Canada Pension Canada $ .28 trillion
Central Provident Fund Singapore $ .27 trillion
PFZW Netherlands $ .24 trillion
-The total value of mutual funds in the world is approximately $40 trillion:
US $18.0 trillion 45%
Europe $14.4 trillion 36%
The Asia-Pacific $ 5.2 trillion 13%
Rest of World $ 2.4 trillion 6%
-The total value of Exchange Traded Funds (ETFs) in the World is $5 trillion.
-The total value of hedge funds in the world is $3.1 trillion.
-According to the World Gold Council, the total world gold supply is approximately $7.5 trillion. This assumes a total gold supply of 187,200 metric tons. Only a small percentage of this is held by individual countries. The following are the 20 largest sovereign holders:
US 8.1 thousand metric tons
Germany 3.3 thousand metric tons
IMF 2.8 thousand metric tons
Italy 2.5 thousand metric tons
France 2.4 thousand metric tons
Russia 2.1 thousand metric tons
China 1.8 thousand metric tons
Switzerland 1.0 thousand metric tons
Japan .7 thousand metric tons
Netherlands .6 thousand metric tons
India .6 thousand metric tons
European Union .5 thousand metric tons
Taiwan .4 thousand metric tons
Portugal .4 thousand metric tons
Kazakhstan .3 thousand metric tons
Saudi Arabia .3 thousand metric tons
The United Kingdom .3 thousand metric tons
Lebanon .3 thousand metric tons
Spain .3 thousand metric tons
Austria .3 thousand metric tons
Belgium .2 thousand metric tons
Philippines .2 thousand metric tons
These numbers are not inclusive but we believe they are adequate. We welcome additions, deletions, and corrections. Many of the categories include other categories, in whole or in part. For example, pension funds are generally composed of stocks, bonds real estate and other categories. Mutual funds include stocks, bonds, cash, currencies, and even real estate. We are assuming most readers can make similar observations. Sovereign wealth funds are often commodity based but also hold stocks, bonds, currencies, and real estate. As mentioned above, there are considerable differences in estimates of the numbers presented, +/- 20% should be assumed.
Even so, these numbers and categories are to us conclusive. They paint a picture of a grotesque imbalance with an ever-growing total debt dwarfing wealth. They also demonstrate the growing inequality of distributed wealth within regions of the world, countries, and families. We have concluded that these trends are no longer viable and will soon force, through one of five alternatives, a solution. In this, and the following four articles, we will examine each of these solutions.
Bitcoin As A Solution To The Debt Problem
If Bitcoin climbs to $10 million per Bitcoin, it could provide the world community with a stable currency, replace sovereign currencies, and act as the reserve currency of the world incapable of inflation or deflation. It would represent the ultimate “Store of Value”.
Is this feasible? Probably not. But we believe it is possible and we believe it offers the greatest benefits with the least collateral damage to the least number of individuals, corporations, institutions, and countries. Most importantly, it would provide a permanent fix, a quality that none of the other solutions provide.
This article is titled “The Long and Winding Road to $10 million Bitcoin”. We can picture that road. It looks something like this:
Bitcoin and the cryptocurrency space is in total disarray. However, the journey of a thousand miles begins with a single step.
The first step was taken in The White Paper by Satoshi Nakamoto.
The second step was taken by those people who believed in the fundamentals of the concept.
The next several steps were stumbles and fall with the introduction of centralized projects introduced as “improvements” to the original. To date, Bitcoin is the only completely decentralized concept, which is distinguished by its absolute limit on supply. Bitcoin has no legal structure, no copyrights, no trademarks, no executives, no board of governors, no board of trustees, no executive committees, and no budgets. No one to change the rules; no one to inflate the supply. Bitcoin is open source and available to all.
Bitcoin will never die as long as we can buy it from you or you from us. This is its great strength and Achilles Tendon. It allows anyone to steal its genius without recourse. Over 4,000 projects have done just that. All of these projects have crippled the entire space. None of them provide what Bitcoin promises, nor can they.
Bitcoin stands alone, but almost no one understands this, not participants, not investors, not institutions, not regulators, not sovereign entities. Tiny progress has been made with the S.E.C. drawing a distinction between Bitcoin and every other cryptocurrency.
Too little, too late.
The damage has been done and the tremendous promise has diminished. Just as the markets have responded to the confusion by gutting the appreciation of market cap and price of all participants, we believe the market will recognize and embrace the uniqueness of Bitcoin. But, not yet.
The next big step in this journey will be the utter decimation of altcoins, ICOs and the realization of the important attributes of Bitcoin. That process has begun, but the regulators must regulate. We believe they will. During this time, Bitcoin will continue to lose value, but at a much slower rate than its competitors.
At some point, this process will find a conclusion; maybe this year, possibly next year, probably the following year. To us, this is all very clear. What is not clear is what steps will then be taken. The rest of this article will lay out what the road ahead might look like for Bitcoin to take its necessary role in this macroeconomic landscape.
The Road Ahead
Bitcoin is a market-driven asset; the most democratic market-driven asset in history. Its price movement is based on pure supply-demand economics. The supply is fixed a known quantity. The only variable in this price equation is demand. When demand rises, so does the price. When it falls, so does the price.
Why did the price increase from pennies to $20,000 over 7 years? Demand.
Why has it fallen from $20,000 to $3,200? Lack of demand.
This is the quintessence of market forces at work.
This corrosive consumer confusion is due to the plethora of competing stories, projects, alternative coins, ICOs, regulatory indecision, and regulatory jurisdictions. This has become so intense that there are very few incremental buyers. The price will continue to deteriorate until this condition changes until the opaque again becomes transparent.
Let’s stipulate that Bitcoin survives and the vast majority of competing projects do not. This antidote dissipates confusion.
Adoption will quickly increase, individual by individual, as the fog of confusion clears. As a democratic market driven asset, Bitcoin increases in price with each individual decision to purchase Bitcoin with fiat money.
The list of the pockets of wealth that we have included in the statistics above will one by one begin buying Bitcoin. This will occur immediately after this bear market ends. We will attempt to identify where the significant potholes lie in the road ahead and which pockets of wealth will help to pave over those potholes.
What will the road ahead look like?
Here is our roadmap:
When the final bottom is in, which we believe will be below $1,000, the road will be clear up to $6,000. Above $6,000, there will be minor bumps at $7,500 and also at $8,500. The range between $10,100 to $11,100 will be the second major challenge. Above that, resistance will fall quickly. However, additional resistance appears at $13,750, and $17,500, which will be tested and overcome. New highs above $19,666 remain the final barrier.
At this point the media is frenzied. Price, price, price. Full speed ahead.
Now, the road is smooth, the steps quicken. The pockets of wealth come into play. Hedge funds, family offices, and additional individual investors, those who missed the previous three bull markets, flood the market at a quickening pace. Bitcoin’s market capitalization dominance rises to over 90% speeding the deterioration of remaining altcoins. Investor psychology quickly shifts from caution to certainty. $50,000 and $100,000 are temporary but significant hurdles. Momentum players of all stripes increase their holdings, further forcing latecomers to act.
Pause here for a moment to consider Bitcoin at $100,000. At this price, the market capitalization of Bitcoin is $1.7 trillion. Where did the money come from? It came from the worldwide stock market of $73 trillion. It came from hedge funds with assets of $3.1 trillion.
Gold assets, $7.5 trillion, represent an important potential demand for Bitcoin. We believe that the single most important barrier to Bitcoin’s price is overtaking the value of the gold supply. At $100,000, Bitcoin begins to challenge gold as a store of value. We believe that gold investors will not be reluctant to make this switch. Assets begin to move from gold to Bitcoin, slowly at first, and then rapidly.
If gold investors are reluctant to sell gold for Bitcoin, its price will have to rise to $400,000 to equal the gold stock. If we are correct and gold is sold for Bitcoin, this equilibrium will be reached at lower prices.
In a future article, we will examine how a gold standard is a solution to the world debt problem. A gold standard is a more probable choice for world governments and thus the necessity of Bitcoin challenging gold cannot be overstated.
If we have to wait for $400,000 to be reached then the demand has come from the Cowboys, those investors with free-hand in asset selection. Now the road becomes narrower, bumpier with many twists, turns, and switchbacks. Much more difficult to navigate. The pace will slow.
Three things must occur at this price level to continue the run up to $1 million. First, the core developers must have delivered on the promise of speed, transparency, and cost. Already much has been accomplished. We assume that developers, worldwide, will begin abandoning non-Bitcoin projects and return to the fold. The non-tech world must have confidence in the integrity of Bitcoin. Second, institutions must begin to embrace Bitcoin, but Bitcoin, not in words but in action. Fidelity will play an enormous role in institutional adoption. It is one of the institutional giants. It has pioneered enormous foresight, innovation, and reliability to the financial framework we today enjoy. It has over 26 million accounts, 27 million investors, and almost $7 trillion AUM. Fidelity has taken great interest in Bitcoin. Thirdly, regulators, not only in the U.S. but worldwide, must make absolutely clear the distinction between Bitcoin and all others.
This accomplished, the road to $1 million will smooth and straighten. The hurdles will be $1 million both psychologically and financially. At $1 million, Bitcoin will have a market cap of $18 trillion. It will be in the major league of asset classes and pockets of wealth. It will be a contender. As the fastest growing asset class in world history, it will no longer be ignored by pension funds, sovereign wealth funds, institutional money managers, endowments, financial institutions, and even governments. These will fuel the trip, at high speed to $10 million.
Is that a big jump? Absolutely! Is it possible? Yes.
Why $10 million? At that level, Bitcoin would provide a sufficient reserve to alleviate the world debt burden. Bitcoin would be worth between $180 trillion and $210 trillion (depending on when that price was reached). Assuming world debt had reached $500 trillion at that time, remember it has grown by 394% over the past 20 years, Bitcoin would represent a 40% reserve against the debt.
What would a Bitcoin Standard look like? The Bitcoin Standard by Saifedean Ammous provides a detailed framework of previous reserves against sovereign fiat. The subtitle, “The Decentralized Alternative to Central Banking”, indicates his major objective in writing this book.
Ask yourself, who then would own Bitcoin? The answer, if we assume a $10 million Bitcoin, is central banks, the banking system, large institutions, and sovereign wealth funds.
How did they get them? They bought them from you.
Why did you sell them? At what point were satisfied with your gains? Each of us will be incented at very different levels to take our profits.
Each pocket of wealth that we have described has its own objective. The objective, at this point for central banks, is to save the system and keep their power intact. They have only five choices and none of them are good. This is their best choice. We will explore the other four in our next articles to examine why we believe Bitcoin is the best alternative of the five.
Do we believe Bitcoin will be chosen? That is the wrong question.
The right question is: will there be a choice?
Alternatively, will the economic disequilibrium force resolution, probably default?