Bitcoin will become the most liquid collateral in history
It’s all about liquidity. Liquidity or salability is a property very well looked for in assets, especially in safe assets. In times of uncertainty, you want to hold the most liquid assets, as any downturn will force you to liquidate some of your assets.
Imagine that your assets are 100% invested in real estate and you need to service some obligation immediately so you are forced to sell one of your precious apartments. As finding a buyer for real estate is not straight forward, you will have to sell your very illiquid apartment at half of the price you obtained it for.
At the same time, you want to hold the best collateral to protect your wealth, these are assets that have low probability of losing demand. People need places to live, reason why real estate is such a great collateral.
The best of both worlds is covered by government bond markets. These instruments are the most secure and liquid in existence. More importantly, the U.S. treasury market, which is bigger than USD 13T, is considered the most liquid and safest market there is.
The previous image shows U.S. treasuries yields over time. As yields are the inverse of the bonds prices, it’s pretty clear the world has been looking for security and liquidity increasingly for around 40 years.
In theory, cash should take this role. But cash’s legitimacy has been destroyed over time via the fiat system. Trust in fiat is deteriorating at such a fast pace that we have more trust in holding our wealth in negative yielding government bonds.
Such is the destruction of cash that we are storing wealth in:
- Treasuries that rely on debt that will never be able to get paid back.
- Stocks that will never be able to produce enough profits to justify share value.
Liquidity is a property really difficult to achieve. Besides treasuries and stocks, only corporate bonds and gold come to mind. Corporate bonds have great risks and gold’s value/proposition has been vanishing since quite some decades.
Interestingly, Bitcoin has multiple properties that makes it fit to be the world’s most liquid asset:
- New belief system: Bitcoin gives a fresh start and a new perspective to financial instruments as a new asset class. Bitcoin is a proven bearer collateral that doesn’t required any other component to be valuable, similar to gold in the early days and continues to have a huge network effect that increases its users on a daily basis.
- Global access: Liquidity is not any more restricted by country (U.S. treasuries mostly available for U.S. citizens, U.S. Stocks only available to privileged people, etc). Any person in the world can have direct access to Bitcoin.
- Verifiable fungible: there are no different Bitcoin sizes. Bitcoin is just one and it can be verified by anyone very cheaply, opposite to gold.
- Bearer asset: Bitcoin has no counter-party risk, unlike stocks and bonds that have central point of failure. Bitcoin depends solely on absolutely every market participant.
- Scarce: Bitcoin is provable scarce, which helps the belief system argument as people tend to think it will be more valuable in the future.
- Instant settlement: Bitcoin has instant settlement and it does not depend on trust on third parties to settle or having to wait long times for clearance.
- Bitcoin has future utility: Bitcoin’s promising utility as a tool for value creation as peer to peer money. Imagine micro-transactions happening on internet interactions that don’t require any central authority to function.
Humanity is craving for other forms of liquid collateral and Bitcoin is extremely well positioned to serve as the most liquid asset humanity has ever created.