Sound Money

Bitcoin is in the process of monetisation whereby people adopt a digital, decentralised, global, censorship resistant store of value. Historically adoption cycles have centred on the halving, with an accumulation phase pre-halving, a parabolic phase post-halving and a bear-market thereafter (I wrote about this here). Preston Pysh and Stephan Livera explored the possibility that bitcoin may avoid another bear-market in this podcast. I particularly liked the importance Preston placed on language in the adoption process. In this article I argue that bitcoin cycles should still be expected beyond 2021. After years where gold dominated as the world’s store of value, the first principles of money have been lost. This language needs to be re-learnt before bitcoin’s incredible ability to store value is realised and significant proportions of the world’s long-term capital are allocated to bitcoin.

Learn Spanish in Spain; learn bitcoin on the internet

The bitcoin adoption process can be compared to learning a new language. Like bitcoin, learning a language can be challenging. Languages incorporate vocabulary, grammar, accents and other subtle nuances. Bitcoin incorporates economics, cryptography, politics, computer science and game theory. Some people attain fluency quickly, others grapple with the content for years, some speak a little bit in passing, others don’t care to try, and some think it’s a stupid language.

But if you live in Spain, you better learn some Spanish.

Bitcoin is the digital store of value for the internet. Those who transact on the internet*, will likely be forced to learn bitcoin.

*Being native to the internet is only one reason for bitcoin adoption. To understand the others, we need to glance back to bitcoin’s characteristics: decentralised, global, censorship resistant and store of value.

Returning to the language metaphor, I think there’s a long way to go before we’re communicating in this language and I think it helps to consider gold’s experience. While many bitcoiner’s dismiss gold, there’s lots to learn from the similarities between these assets. Just like bitcoin is undertaking a mental and cultural process of monetisation, gold undertook this process thousands of years ago.

Gold is still engrained in culture, whether we understand it or not

Gold was so superior at being the world’s store of value for thousands of years that it became engrained in culture (I wrote about gold & bitcoin’s store of value characteristics in this article. Everyone speaks gold’s language. We say, “good as gold”, “the goose that lays the golden egg”, that’s gold” or “golden child” but rarely do we think about the reasons why. We just know that gold has value and that it holds value over time.

We abstracted the primary understanding away from first principles and then forgot about them. Similarly, you don’t think about how a car works when you drive. Most of us don’t even know how a car works. We just drive a car and it serves its purpose. Well, gold served its purpose as a store of value and we enshrined it within culture and language.

Bitcoin is causing us to relearn the first principles of money and understand stores of value. Without these principles it’s difficult to understand the power of this technology and make meaningful capital allocations. But clearly there is still some way to go in the learning process because bitcoiners are still a niche community in 2020. Most people still think that bitcoin is a speculative investment, or worse a scam. The sheer size of bitcoin’s market cap ($420bn) tells us that it’s a drop in the ocean vs. traditional financial markets. Bitcoin is growing and traditional capital is filtering iin, but it’s a challenging process for finance professionals who oversee most of the world’s capital.

Spanish is difficult for 40-year old Brits

Logic suggests that finance professionals should have the inside lane to learning bitcoin’s language. But the first principles of money have been neglected within traditional universities and industry bodies. Finance professionals don’t understand store of value and the importance of gold nearly as well as they should. Believe me, I work in traditional finance. Professionals are very hesitant to adopt bitcoin because they don’t speak the language. Not because they’re stupid, but because they’re speaking another language. And after years of working in traditional finance they’re very well versed at their current language, which makes them less receptive to learning new languages.

It’s like a 40-year old Brit trying to learn Spanish for the 1^st time. Most of them give up and just expect Spaniards to speak English.

Democratization of finance; front-running the insiders

The challenge posed by bitcoins language to entrenched finance professionals creates a particularly interesting dynamic where retail investors have front-run traditional finance. Usually traditional financial players are the first to gain access to new listings via their investment banking connections. But traditional finance has only really started to pick-up on bitcoin in 2020, 11 years after its invention.

Institutional allocations to bitcoin are an important feature of the 2020-2021 cycle, which I expect will surpass most people’s expectations. But percentage allocations to bitcoin (and gold) remain incredibly low. Yes, MicroStrategy have gone all-in, but listen to Paul Tudor Jones and Stanley Druckenmillar… These guys are fringe early bitcoin adopters amongst traditional finance and they’re only allocating about 1% to bitcoin. There’s a lot more gas in the tank for another cycle beyond 2021.

Summary

1. Gold is still culturally enshrined as our store of value but in an abstract fashion
2. Very few people understand the language of money and stores of value, from first principles
3. Bitcoin is causing the first principles of money to be re-learnt but this is a process
4. We’re probably a long way away from enshrining bitcoin into culture like gold
5. Traditional finance struggles to speak bitcoin’s language, slowing the process
6. There’s an opportunity to front-run the insiders and democratise finance through bitcoin

I’m not saying that bitcoin adoption is going to stall. I’m just arguing that the adoption waves will likely persist beyond 2021 and that another bear-market in 2022 is probable. There is a language that needs to be spoken before people build enough conviction to allocate large portions of long-term capital to this new monetary network. It’s reservation long-term capital that will negate volatile halving-induced 4-year cycles. The degree to which gold is still engrained in culture, yet the lack of appreciation of the primary principles for its status, suggests we’ve got a lot of ground to cover over the next 10 to 15 years before the world adopts a bitcoin standard.