Bitcoin: Strategic Perspective 2040
The inaugural [Multicoin] fund currently focuses on seven core theses: store of value, privacy, confidential transactions, decentralized cloud, decentralized prediction markets, decentralized exchange, and alternative consensus.
Der Spiegel reported recently on the leak of a document from the German military outlining potential geopolitical threat scenarios in 2040. The document is called “Strategic Perspective 2040” and one scenario outlines “the disintegration of the West”. The original report is behind a paywall here. The Guardian has more detail here. Here we explore these doomsday scenarios and their relationship to the Bitcoin investment thesis. But before we do, let’s look into a recent press coverage for Multicoin Capital.
The story (briefly) refers to seven investment theses that Multicoin currently use: “The inaugural [Multicoin] fund currently focuses on seven core theses: store of value, privacy, confidential transactions, decentralized cloud, decentralized prediction markets, decentralized exchange, and alternative consensus.” A tantalizing glimpse for sure but more about their approach can be found here. In this post we’ll focus on the store of value thesis and try to get to the bottom of what utility value might act as a floor for Bitcoin as a store of value.
This series of forking attempts has only served to reinforce it’s supremacy, almost like a higher-order consensus, a social consensus as Vinny Lingham called it, an echo of it’s own economic consensus mechanism.
With the results of the recent Bitcoin fork now in, it appears that Bitcoin is (re)confirmed as the digital store of value. For years it’s been repeated (and usually ignored) that a deflationary currency like Bitcoin is unlikely to work as a medium of exchange, especially when its use as a store of value is so compelling. While, we may expect to see another one or maybe two failed attempts at forking, the last few days has heated up the race to find the crypto medium of exchange. This series of forking attempts has only served to reinforce it’s supremacy, almost like a higher-order consensus, a social consensus as Vinny Lingham called it, an echo of it’s own economic consensus mechanism. But store of value is a tricky concept to build an investment thesis around. In fact, what does it even mean?
According to Wikipedia, it’s anything that you invest in with a view to retaining purchasing power and which can be predictably useful when retrieved e.g. property, bonds, fine wine etc. Of course, as with the examples given, greater purchasing power or unexpected upside would be nice too. So it’s not enough to say that BTC is a store of value due to the large percentage of the fiat money coming in from retail, hedge funds and soon ETFs. In fact, if this was the investment thesis then it would be a very flimsy one, as Bitcoin would be all bubble with no utility i.e. it could end up being a very poor store of value. As Chris Dixon’s diagram on financial utility vs application utility show, all coins derive early value from speculation, where speculation provides what he calls financial utility. So what is the application utility underlying a store of value thesis?
Again it’s often been articulated, but never really accepted into mainstream thinking, that BTC’s utility is as a digital safe haven. This was a theme that regularly surfaced in the 2x fork wars. The argument was that by keeping a small block size, BTC would be better able to defend itself against highly coordinated / well-funded (e.g. state-sponsored) attacks. It was also implied that this would make BTC the cockroach of crypto, where small blocks would allows clients to continue to sync even when networks are throttled or DDoSed, allowing it to survive in the most hostile of environments. Crypto coins are also highly portable across borders and easy to hide. Keys can be printed on a page or memorized, making it hard to seize. They can be broken up into pieces so that if one member of a a family is detained, it would be possible for the remaining members to reclaim the coins. When we speak of gold as a safe haven, we usually mean from bad market conditions, not an existential threat. For Bitcoin we mean something a lot more serious… taking us back to the German military’s doomsday scenarios.
BTC is the ultimate hedge against catastrophe in all it’s forms. In this thesis, the (application) utility price of BTC may become a measure of the political, social and environmental risks across the globe. Already we see it being used in hyperinflationary economies like Venezuela and Zimbabwe. Under certain regimes, many citizens would be well-advised to retain a percentage of their liquid assets in crypto (Saudi princes are a recent example). Economic failures, climate disasters, war and famine and will continue to dislocate millions. The recent Euro crisis, with it’s destruction of the Greek economy, has shown how fragile political consensus in Europe is, so it’s no wonder the meticulous Germans are planning for contingencies. And perhaps it’s not a coincidence that Bitcoin has risen 10x in the year since Trump was elected, surpassing it’s previous all-time high in line with the escalating war rhetoric. There is an argument that says the world is crossing an economic fault line. Historically, major shifts in power when economies are reconfigured has triggered global wars. In one scenario, a drastically modified economic environment, say based on autonomous machines, would result in the loss of millions of jobs, causing discontent on a massive scale.
Or the less dramatic end of the spectrum, a recent JP Morgan client note, sees AI hype at bubble levels that may lead to a large stock market correction. Debt bubbles remains a threat: with various commentators suggesting the next recession will be triggered by any one of (or combination of) national, consumer or corporate debt. While these would usually be part of the normal expansion and contractions of economic activity, another serious downturn so soon after the still raw experiences of 2008, could trigger social upheavals if the current fragile recoveries are reversed.
So what does this mean for crypto? Assuming there is a safe haven thesis, how does this play out?
We could start to model how this hedging against geopolitical risk might play out, and maybe it’s tempting to start with the 2,000 or so billionaires that control almost eight trillion dollars in assets. Or maybe go further and start with the 33 million people (0.7% of the population) who own more than $1M and control 45.6% of the wealth, equating to $116.6 trillion (1. link to report is below). These groups represent the target market for crypto hedge funds. However, the most interesting part of this analysis is that Bitcoin as a geopolitical contingency can work for anyone who can afford to put some savings aside. The combined assets of people over the $100K threshold is about $220 trillion. Let’s call this second group the Coinbase / ETF community. That suggests that a model where 10% of these people have moved 1% into crypto would explain the value of today’s total crypto market ($220B at the time of writing). A recent Spencer Bogart post shows that 30% of millenials preferring crypto over governmment bonds. Assuming that figure includes treasuries then that’s $2.3T market to eat into (not to mention a new threat scenario to add to the above, as the US Government looks for new customers). This suggests there is plenty of potential to build on that $220B base.
So we know Bitcoin is increasingly used as a digital safe haven. We know there are plenty of reasons to need a safe haven in the near future. But what other cockroach protocols are out there that might one day replace Bitcoin?
When it comes to pure store of value maybe a “stablecoin” like Basecoin could win out? But we tend to side with Stefano Bernardi on this one, as it seems likely that this coin would not be stable during “an exceptional event”, the very time you need to rely on a safe haven asset. Or maybe something backed by a more tangible utility value like Ether? But why tie your wealth to the success or failure of one smart contract platform, when there are so many out there and they are all competing so aggressively. The anonymity provided by Zcash may give it an edge over Bitcoin in the future but it has it’s own challenges to face first: it needs to prove out it’s own cockroach credentials as and when governments will undoubtedly make moves against it. Our biggest concern regarding BTC is power-hungry proof of work-based consensus: both it’s greatest strength and a worrying weakness. It certainly doesn’t align well with being a cockroach in a hostile economic environment. However, without Bitcoin’s eight years of proven security, none of the alternative consensus approaches are field tested or decentralised enough to be considered as safe haven currencies.
Essentially the store of value for the dystopian minority ends up reinforcing the safe haven for the mildly concerned, prudential majority.
For those who are not planning for Armageddon and instead are just looking for a port in a storm, a quarterly re-balanced, network value-weighted basket of cryptocurrencies will do fine. But for those who are looking for the ultimate insurance policy in case of disaster, then Bitcoin wins out for now. As this safe haven scenario props up Bitcoin’s utility price, it also secures its place as one of the leading currencies in our crypto basket, ensuring even more hodlers. This is the most interesting effect: essentially the store of value for the dystopian minority ends up reinforcing the safe haven for the mildly concerned, prudential majority.
As for 2040… well we can’t wait to find out how this plays out. The potential is unprecedented but the threats are serious. A week in crypto is a year in other industries, so 23 years is hard to call. It could well be that renewables and decentralized power grids provide proof of work with a stay of execution. It is clear we have enough ideas in progress to scale this to support all of global economic activity. There will be webs of interworking chains, with millions of highly-liquid tokens being exchanged with zero friction. There will be multiple networks valued in trillions of dollars or a TBD future reserve currency. Will Bitcoin be one of the networks that make it? If it is, and we think it just might well be, it will all be down to thirty years of resilience as the crypto cockroach.
And I wonder if the German military will take a large position in Bitcoin after reading this ;-)
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- https://publications.credit-suisse.com/tasks/render/file/?fileID=BCDB1364-A105-0560-1332EC9100FF5C83 (note numbers were updated to reflect 2016 rather than 2013 figures and an error in the first version).
