Why #GetOffZero Gets Sensible Investors To Look Seriously At Improbable Bitcoin Based Solutions

GetOffZero.002

TLDR We used to think of positive interest rates like the law of gravity or the law of supply and demand – immutable. Yet negative interest rates is a very real phenomenon/problem today. In this topsy turvy world, even sensible  investors look seriously at improbable bitcoin based solutions. (The hashtag should be #getoffnegative but that is not getting traction like #getoffzero).

This update to The Blockchain Economy digital book covers:

  • Why sensible people pay to lend their money

 

  • Gold and the hope you are wrong story

 

  • The other obvious solutions look jaded at end of everything bubble

 

  • The improbable Bitcoin solution

 

  • Context & References

Why sensible people pay to lend their money

Paying money to lend money (aka Negative Interest Rates) is crazy. So why do sensible investors do this? The answer is simple. They aim to avoid a worse problem. 

With Negative Interest Rates you are guaranteed to lose a little. You do this to avoid the risk of losing a lot in some other asset.

The more secure the currency, the higher the interest rate that the Central Bank controlling that currency can charge. For example, the Swiss National Bank (SNB), caretakers of the famously stable Swiss Franc, can charge a premium for the right to lend them money. If you pay 1% a year, you will only lose 1% a year. if you earn 15% interest on a currency depreciating by 17% you do worse.

Gold and the hope you are wrong story

One investor suggests an allocation to Gold but in the hope that Gold price goes down. His logic is that if you allocate say 10% to Gold and it goes up 2x, that is probably because 90% of your assets have declined a lot. You can paint a scenario where Gold is valuable but Bitcoin is worthless (eg if there is no Internet or electricity) but that scenario is so awful that you hope it is wrong (even if you have some physical gold just in case).

Bitcoin has no obvious parallels as an asset class. Bitcoin is a bit like a currency and a bit like a commodity and a bit like a stock – yet different from all of them. If you want an analogy, Bitcoin is like gold but a) before gold had a long history of value and b) with a fixed hard limit to how much could ever be mined. Imagine somebody pitching gold before gold had an established monetary value and you come close to understanding Bitcoin by analogy.

Gold and Bitcoin are both anti-fragile bets. If the current macro story ends badly, both will do well. Gold is definitely a hope you are wrong story. Bitcoin is more nuanced.  A scenario where Bitcoin goes up 100x is likely to be scary and disruptive and bad for many assets, but there is also a hopeful scenario where Bitcoin gives people greater sovereignty over their data and other assets.

The other obvious solutions look jaded at the end of the “everything bubble”

The simplest way to avoid paying a bank to take your money on loan is to loan money to a Government or a Corporate. The more stable the Government or Corporate, the lower the interest rate. You also avoid bank counterparty risk. So risk-off capital floods into sovereign and corporate bonds. What happens when excess capital flows into an asset type – yes, you get bubbles and that means returns go down and risk goes up. So the bond workaround is not a good one.

Equities at the end of the everything bubble seem dangerous, valuations are high and highly dependent on central banks. 

Hard assets also suffer from the storage cost problem. For physical goods this is a very real issue; think of vintage cars, wine, art etc. There is the additional shelf life problem as any wine lover knows who has opened an old wine that got better as decades went by and then suddenly was “off” ie horrible to drink and worthless. 

So, looking at the alternatives to Bitcoin, none are looking that good at this stage of the cycle. One veteran investor was asked to come up with reasonably priced assets to buy. The best he could come up with was that labor is undervalued vs capital. 

That lack of obvious alternatives is pushing some investors to look at the improbable Bitcoin solution.

The improbable Bitcoin solution

Investors are like detectives, on the hunt for truth – preferably contrarian truth. The most famous fictional detective,  Sherlock Holmes says:

“When you have eliminated the impossible, whatever remains, however improbable, must be the truth”.

The improbable Bitcoin solution has 3 parts to it:

  • Safe low cost storage. This is a tough problem, but with such a big prize motivating so many upstarts and incumbents it will be fixed. It should be possible to deliver this at low cost as Bitcoin is a digital product; this is not like storing vintage cars/wine/paintings.
  • Allocation. You place an anti-fragile with maybe 1% of your capital into Bitcoin. If the everything bubble ends badly for other assets, Bitcoin will do well. If you lose 40% on 99% of your capital, you will need a 40x return on Bitcoin. That is feasible if there really is that level of disruption to legacy finance. As some wealthy people enjoy comparing themselves to other wealthy folks, that Bitcoin win will get them bragging rights on their yacht (as well as more yachts for sale at bargain prices). 
  • Use Bitcoin as collateral. Lombard loans have been a tool of the wealthy for a long time. A lombard loan (or lombard credit) is a type of secured loan, in which the entire loan amount is secured by a deposit at the bank that is providing the loan. Lombard loans can be secured by money held in bank accounts, life insurance policies, securities (like stocks or bonds) or other assets. For more go here. Today, Bitcoin would be considered far too risky for lombard loans and most legacy finance won’t offer Bitcoin deposits. This leaves the market open to upstarts. If it is an asset, it can be used as collateral. The only calculation is collateral to loan % and that is based on volatility; so Bitcoin as collateral is still an emerging story.

No investment is without risk. Bitcoin has risk. That is why 1% allocation is what some investors/advisers suggest. AIl risk is comparative. If other assets look risky, maybe that 1% allocations to Bitcoin starts to look a bit more sensible.

Context & References

Why Bitcoin Is Surprisingly Valuable And Stable As A Chair With Only One Leg

A Bitcoin Maximalist describes a real issue to worry about – it is not what the Bitcoin sceptics tell you.

The Path To Mainstream Adoption Of Bitcoin Is Not Through Legacy Finance Institutions, It Is Through The Excluded.

How Family Offices AKA Muppets On Steroids Are Writing The Future Of Fintech Blockchain And Wealth Management

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

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