In a day in which everyone, including the BIS, appears to be talking about cryptocurrencies after last week's China-induced crash, here is one of the more insightful takes on the future of cryptocurrencies, and how thay fit into the existing/legacy fiat system, courtesy of the latest Sunday note by One River Asset Management's Eric Peters.
“Any other thoughts on the matter?” he asked. We’d spent quite some time discussing Bitcoin, Ethereum, and copycat cryptocurrencies popping up faster than North Korean nukes.
I mostly listened, he knew far more about the subject; blockchain, distributed ledgers, mining, halving, hash rates.
Unlike the S&P 500 realized volatility’s collapse to 8%, these new creations are realizing at 90%. Which makes them attractive to day-traders, adrenaline junkies, who launched 100 crypto hedge funds just last month.
It’s the millennial’s wild west. Like all generations, they’ve discovered a new frontier, with few rules, seedy saloons, gunfights, corpses.
As our earthly unknowns disappear, we find new ones in the ether. Which is where money belongs; it’s not real, it’s an abstraction, an age-old illusion.
As a golden myth captured mankind’s imagination, we built our societies upon a rare yellow metal. For 2,500 years we fought, killed, conquered. Until governments tired of the arbitrary spending constraints imposed upon them by a scarce element. So they invented today’s fiction, a printed promise, fiat currency.
Seigniorage is the difference between that currency’s market value and its cost of production – that spread is a source of vast wealth and power. And in all human history, not a single government has willingly forfeited such a thing. Nor will one ever. Only after a hyperinflationary depression, confronted with revolution, do governments sometimes relinquish their power to print (Zimbabwe most recently).
Consequently, the future of cryptocurrency is not as it seems. Once private markets perfect cryptocurrency technology, governments will commandeer it, killing today’s pioneers. Then with every cryptodollar, yen, euro and renminbi registered on their servers, they’ll have complete dominion over money, laundering, taxation.
They’ll track every transaction. Imposing negative interest rates in an instant. There will be no hiding, no mattresses. And in a deflationary panic, they’ll instantaneously add an extra zero to every account, their own especially.
As a bonus, here are several additional observations on the "money illusion" in Peters' trademark style:
James Marshall discovered gold at Sutter’s Mill on Jan 24, 1848. The California gold rush sparked the largest mass migration in American history; 300k dreamers flocked west between 1848-1855. They toiled to unearth 750,000 pounds of yellow metal in those 7yrs; worth $15.4bln at today’s price. Satoshi Nakamoto invented Bitcoin on Halloween 2008, and released his creation into the ether. $100bln of cryptocurrency has been magically mined in these 9yrs; equivalent to 4,860,000 pounds of gold. And both are at once valuable despite being valueless.
The US government holds 8,133 tons of gold reserves, larger than the next three largest nations combined (Germany 3,381 tons, Italy 2,452, France 2,437). Most of ours is held at Fort Knox, the most secure safe on earth. In today’s dollars, America’s metal mountain is worth $335bln. Which pales in comparison with the $1.2trln of US currency in circulation, and a small fraction of the Fed’s balance sheet, which exceeds $4trln, most of which - like cryptocurrency - was magically mined since 2008.
On Friday September 8th, US Federal debt jumped by $318bln, roughly equal to America’s entire gold reserve. Total Federal debt surpassed $20trln that day. Like our $1.2trln of currency in circulation, it’s backed by nothing but a promise. And in truth, that promise is to repay bondholders with freshly minted promises. Naturally, with such an abundance of circular pledges swirling, it is worth asking what money really is? We quite obviously don’t know. Or perhaps the nature of money is not fixed, but rather, forever evolving.