The New Epoch of Self-Sovereign Money
Friday, 8 May 2020
By James Woodburn
‘Cryptocurrencies are not about taking your money out of the country; it’s about taking the country out of your money.’
Some guy on Twitter (I forget who)
‘This is literally the first time in centuries of banking that money meets the free market.
‘But…it’ll be up to the people to adopt it.
‘And they will, I’m sure.
‘Because the alternative is dark.’
So began a text conversation with Exponential Stock Investor editor, Ryan Dinse one evening last week.
We were carrying on a chat from earlier that day about a key event taking place next week in the world of bitcoin.
It’s called ‘the Halvening’ — a pre-coded event that occurs roughly every four years. It essentially halves the amount of coins a miner is rewarded with for unlocking a new block in bitcoin’s blockchain.
Now, if that sounds confusing, don’t worry…today’s issue aims to clear it up for you.
The mistake many people make when it comes to this event is that they think the supply of total bitcoin is cut in half.
That’s not quite the case.
Instead, it means that the supply of new bitcoins drop in half. From 12.5 bitcoins per new block to just 6.25.
As this chart shows, the red line (the inflation rate) steps down every 210,000 blocks. While the blue line keeps rising, but tapers off over time:
Over the last few weeks, the price of bitcoin has been steadily climbing in anticipation of this event.
The idea is that if supply is about to fall by half, then all things being equal, the price should rise.
But if the previous two ‘halvenings’ are anything to go by, you won’t see a sudden spike in the fiat price of bitcoin. Don’t discount the possibility of a renewed boom over the coming 12 months, though.
This chart from Forbes shows what happened after the last two halvening events…
We don’t know what will happen in the wake of this event.
We do know it’s hugely symbolic. We also know the economic context in which it’s happening is interesting, too.
The globally coordinated central bank response to the coronavirus shutdown is, whether right or wrong, now clearly unhinged.
Consider the announcement from the US Fed early this week.
They will borrow another $3 trillion this quarter alone to fund more stimulus measures. I know it’s hard to quantify that number. But perhaps this fact will help. It’s six times last record quarter, which was $530 billion in the quarter ending September 2008 during the GFC.
As a result, now the big gun hedge funds are positioning for the dollar hegemony endgame: massive inflation.
Bloomberg reported last night that Paul Tudor Jones, founder and CEO of Tudor Investment Corp, is buying.
‘The best profit-maximising strategy is to own the fastest horse,’ he said… ‘…my bet is it will be bitcoin.’
Anyway, clearly something is developing.
Bitcoin, it seems, is acting how gold acted during the great inflationary crisis of the late 1970s.
Governments abandoned gold back then for paper money. Investors flocked to gold.
Today, governments are again destroying paper money…and investors are running to a new tech-based money for the same reasons.
It can’t be manipulated. It can’t be debased. And it’s anonymous too.
Which brings me back to my conversation with Ryan…
Ryan says we face a stark choice.
But you need to understand the context.
People need to understand how our current system of money works, in order to understand why we need a better one.
So, I shot Ryan a message for a bit more clarity.
Here’s what followed…
‘OK, think of it like this…
‘Cash bans are coming. Already you can’t spend more than $10K in cash. In Europe it’s €3K. The limits are getting tighter.
‘The aim is to force people to keep their money in the bank.
‘Then they (the elite) will be able to bring in and use negative interest rates.
‘Banks will then be able to control access to your money.’
Me: ‘Yep, I follow. Keep going…’
‘Next step is central banks will want to issue their own digital currency and give everyone their own account.
‘That way, in future QE events they can bypass the banks and deposit money straight into your account.
‘Great, you might think. End the banks!
‘Out of the fire and into the fire pan.
‘Now the government controls your bank account.
‘And with this new tech at their disposal they can put conditions on your money.
‘What you can spend it on…how long you got to use it…perhaps freezing it if you don’t meet certain social norms.
‘THIS IS THE FUTURE THAT IS COMING.
Me: ‘I’m listening…’
‘On the other side of the equation is the cyberpunks…
‘A ragtag bunch of coders, cryptographers and freedom loving people who have been working for decades (bitcoin itself was the end result of work started in the 1970s) on defending against such an outcome.
‘They’ve created ‘self-sovereign’ money. A form of money only you can control. Not the banks, not the government.’
‘It’s the escape hatch we need to avoid the draconian banking system the elites want to foist upon us.
‘We can win this battle.
‘But only if enough people stand up and back it.
‘And they will, because eventually you’ll see…you have no choice.
‘Well, you will have a choice.
‘Like I said, the alternative is dark.
‘It’s either slavery…or freedom.
But it’s far from the end.
In fact, it’s only the beginning. To explain from the top, I got Ryan, Sam Volkering and research analyst Lachlann Tierney around the virtual table to talk about what’s going in the midst of this historical event taking place next Tuesday.
By the way, Mark from Far North Queensland, you’ll like this.
So everyone knows, Mark wrote in last week to ask that we please explain the how the halvening event actually affects bitcoin.
Your wish is granted. Have a watch of the zoom call below.
As you’ll see, it’s not just a bitcoin/crypto story. The implications are far reaching.
All’s explained here, and a whole lot more…
|James:||Hi, Woody here for The Insider. Today, we continue our discussion with each of our analysts and editors. But today we have a special treat. Not one, but three guests to join the conversation. Guys, that means the onus is on you to make today’s issue three times as valuable. So, the pressures on, do not let me down. Today I’m joined by Ryan Dinse, who’s the editor of the excellent Exponential Stock Investor service, along with his research analyst Lachlann Tierney, I believe Lachlann is in the middle of doing a PhD I believe on blockchain tech. Is that right?|
|Lachlann:||Yeah, absolutely. The economics of blockchain.|
|James:||Right, there you go. And Ryan also runs the VIP Premium Services, the Billion Dollar Breakout Trader and Extreme Crypto Trader. And we also have Sam Volkering zooming in from his home in England. Alongside Ryan, Sam writes our daily e-letter, Money Morning Australia and he’s also the editor of the excellent Secret Crypto Network advisory as well as the stock focus research services, Australian Small-Cap Investigator and Revolutionary Tech Investor. So, welcome everyone. [crosstalk 00:01:04]. OK, right. There’s a good reason why I called this round zoom table today with you guys specifically. There has been a few, shall we say developments in the world these last few weeks. Let me just give you the latest one which Ryan kindly enough tagged me on Twitter and drew my attention to it. ‘Breaking News, just today the US Treasury will borrow an unprecedented $2.999 trillion dollars this quarter to fund stimulus measures and offset lost tax revenue. Now this alone, which I thought was a fascinating fact, is nearly six times the last record quarter which was around 530 billion in the quarter ending in September 2008 during the last financial crisis.’|
|James:||And then another article I read on Monday said that the Federal Reserve supported both implicitly and explicitly by the treasury is on track to backstop virtually every single private sector, state and city credit in the US economy. Now, that gives us some idea of the magnitude of the distortion taking place in the very heart of the global monetary system. And it by that context in which I want to frame our conversation. We are seeing an insane level of debt growth and money printing essentially. So, the big theme or umbrella question for this conversation is what is the real virus? Is it COVID-19? Or is it a debt created by this government enforced lock down? What does it all mean for the markets, for the US dollar and for money, really? Where does it mean we are headed next? So, they’re all massive questions, you don’t have to answer them all in one go, but I think it’s a noble aim for this discussion. So, I figured Ryan, I’m going to start with you. How would you like to begin?|
|Ryan:||Yeah, no problem Woody. Yeah. So, like you said, we’re seeing huge ructions in the whole system of money and I think the important thing to think of it, it’s a money system that we exist in. Money is not one thing. It’s an entire system of things that are interconnected in a complicated manner. There’s the debt, there’s the infrastructure behind how we see things of value. And there’s the way we use money even in our lifetimes, we’ve seen how the concept of money changes. When I first started a business a couple of decades ago and the first thing I got was a cheque book. Now, we don’t use cheque books anymore. We hardly take cash out the ATM anymore. It’s all electronic and digital. So, the system of money is always evolving. And that’s something that we understand implicitly. However, these massive ructions that you talked about, the money printing, the negative interest rates, these are changes at the very base level of money, the primary layer of why does money have value. And that is it huge change that doesn’t happen as often.|
|Ryan:||The thing is though, is that [the] base layer of money does change over time. It happens very slowly, in most people’s lifetime it might not even change, but it does happen. And just to give you a very brief rundown on the history of money. We invented money to make trade easier as humans. Back a few thousand years ago we used to barter, we used to say, ‘Hey, I’ll give you a cow if you give me 20 chickens,’ but obviously, that’s not a very efficient way of trading. So, then we realised that precious metals were better, you could make coins, take them in your pocket and go and buy stuff and trade with other people and that was a lot easier. And precious metals, especially gold turned out to be a really good form of money for thousands of years. And it was so good when the British Empire rules over the 17th, 18th and 19th century, the Bank of England based their monetary system on gold. So, it was called the gold standard and as the British Empire grew around the globe and each pound was backed by a certain amount of gold.|
|Ryan:||I remember growing up in Scotland and even on the banknotes it used to state that you could redeem this for a certain amount of gold. I never really understood what it meant, but now I understand that originally that was the idea, a pound was banked backed to a certain amount of gold. And because of the British Empire success, every other country adopted that method. So, the whole European nations and everyone else adopted the gold standard and that was the foundation of international trade. Everyone’s currency was backed by gold. That worked for a few hundred years, then in the early 20th century after World War One, there was some tensions with that system of money. Europe was a bit broke after World War One and being tied to go gold was bad economically, the same thing in the Great Depression in America in the 1930s and they couldn’t get their economy out of the rut they were in because you couldn’t increase the money supply because it was tied to gold.|
|Ryan:||And so there was already tension there in this idea of gold is money. Then fast forward, World War Two hit a massive ruction in the world. And at the end of World War Two, every country was pretty much broke except for the USA who suddenly found themselves with three quarters of the world’s gold supply. So, in 1944, the allied nations met to try and work out how the world was going to look after World War Two in Bretton Woods, in New Hampshire and America. And they were trying to work out how would money work going forward. And the US obviously had all the power. Everyone else was broke, they had the money and they decided despite some protests from the UK at the time, they decided that, ‘We’re going to insert the US dollar in between gold and other currencies.’ So, for say, a Britain or a France to get gold, they could only redeem it for US dollars. So, this made the US dollar almost the reserve asset. There still was a tether to gold but the US dollar was in front of that.|
|Ryan:||That system worked pretty well for a couple of decades because most countries needed US dollars in order to rebuild their own countries and buy US goods because they had all the factories and the war economy machines ready to go. So, that system worked pretty well for a few decades. However, in the early ’70s, America was in economic trouble, the other countries had grown richer and we’re starting to do well. And they didn’t really want US dollars in the early ’70s. They decided they would like some of their gold back and they started to say to America, ‘Hey, we wouldn’t mind some of our gold back now.’ President Richard Nixon at the time in 1971 just unilaterally said, ‘Hang on; we’re not going to redeem US dollars for gold anymore. There is no gold standard.’ The tether to gold was completely broken; they said it’s going to be a fiat-based system. So, this was a change of that base layer of money to a fiat based system. And the US dollar was at the centre of that.|
|Ryan:||Cleverly, the Americans also said, ‘Hey, it’s our dollar and we can print as much of it as we want.’ However, if you want to buy oil or other commodities, guess what? It’s all priced in US dollars. So, we had the birth of this petrodollar system, which placed the US dollar as the reserve asset with no tether to gold at all. And since that time, almost five decades ago, the US dollar has sat in the middle of the entire financial system; the base layer of the money system has been the US dollar. And that has worked pretty well, but having that petrodollar system, obviously is responsible for a lot of the adventures in the Middle East we’ve had over the last two decades, the Gulf wars. And the funny thing about being the reserve currency and this is something Britain eventually found out as well, is that people want your currency. So, people want the US dollar to a high degree because they need it to buy oil and other commodities and to trade internationally because it’s trusted.|
|James:||Ryan and I were actually talking about this last Friday. In times of crisis, that’s where people go, they need to get to the dollar because that’s the reserve currency. So, as to your point.|
|Ryan:||Correct, yeah. And that’s right. So, the US dollar, the benefit to the US is that they can print dollars at will and buy stuff whenever they want. However, what that does, is that hold out the American economy, because they’re buying stuff from overseas with their powerful dollars. So, say they’re buying goods made in China for example and they’re giving them US dollars, which China needs so they can buy oil and other things. But they’re growing this trade deficit over time. Now, to finance that trade deficit, they’ve got a budget deficit, so they’re borrowing more and more money. And who do they borrow off? They borrow off people like the Chinese and the Japanese. So, they pay for goods in US dollars and then [those] US dollars goes back to America to finance this debt that the Americans have grown. Now, that debt bubble was always growing, there was always going to be a day of reckoning because of that because no one seems to want to deal with that.|
|Ryan:||However, in the last few months, this has just accelerated beyond belief because of the coronavirus crisis. Now, I think this extra 2.99 trillion you mentioned before, that’s on top of $2.3 trillion, new money the Fed Reserve just printed out over the last few months. To put that in context, that’s more than they created over five years post the GFC in 2008. So, they’re expanding this supply of US dollars at a frightening rate. If you go back to first principles of why gold was chosen as a reserve asset, it was because it had scarcity value. Now, if the US dollar replaces gold, but it has no scarcity value, how can that be the reserve asset going forward? And I think that’s what’s leading to this position we’re now at. Everyday people are questioning, if you print money, well, how does it have value? And that’s why I think most of us Sam and Lachlan as well, chip in if you want, but we think there is going to be a new epoch of money, which isn’t going to be the US dollar as the reserve asset.|
|James:||Hey Sam, Ryan and I were talking earlier and Ryan made a good point that gold was, in his view, great money for the industrial age. But now we find ourselves in a digital age, where as we’ve seen, the most powerful central bank in the world is literally…I know we always say printing money out of thin air, but it’s just gotten crazy. What are your thoughts on the whole situation?|
|Sam:||Yeah, it’s on another level. We’ve never seen this kind of stimulus, economic manipulation from central banks and governments ever just flat out. What right now we’re seeing the sorts of things that were not supposed to happen. We were not supposed to see this kind of acceleration in money printing, we were not supposed to see this kind of influence into the money supply, we were not supposed to see negative oil prices. Everything that we were not supposed to see, we’re saying and it’s just levelling on top of all the hangover from the last few decades. And you’re right. We’ve come out of the industrial age in the 20th century into the 21st century and we’ve got the tools and technology at hand to do some other things. And when Ryan was talking just now about the history of money, how many different cycles of money did he talk about? We’re talking about bartering, we’re talking about precious metals and we’re talking about gold standards, and we’re talking about the US dollar.|
|Sam:||I think [for] a lot of people…that understanding of history is important because it starts to really help people understand that money has never been just one thing, it’s evolved, it’s developed, it’s become something that’s important at a particular time to whoever it might be. And so, what we’re seeing now is that while the US go on this crazy rampant money printing spree, there’s all these other countries in the world that have been dependent on US dollars that are going to battle and struggle off the back of that. So, emerging markets in particular are really up that creek without a paddle and particularly at the end of this year, there’s going to be a lot of maturity on debt that has to be refinanced or basically given up. So, that pane is coming for emerging markets as well towards the end of this year, but something Ryan mentioned earlier about, I think it was after the First World War and Europe was basically broke and they were tethered to gold and the tensions with that it didn’t really work for them.|
|Sam:||That same thing’s happening now, a lot of these emerging markets and countries that are tethered to the US dollar, it’s not really working for them anymore. And so they’re going look for alternatives. And what we didn’t have in 2008 and what we do have now, is obviously cryptocurrencies and the Bitcoin phenomenon that it is. That came about because of the 2008 crisis because of intervention and centralised control around money, how it’s delivered and how it circulates through economies. And over the last decade since that Genesis in 2009, which was really, I guess what you’d consider to be the first when bitcoin first launched. We’ve had a decade to develop that and the speed at which we can now develop new networks, new financial networks, a new monetary system, an alternative monetary system. The ability to develop that to a point that it can actually be used on mass in the last decade is phenomenal. We were just talking about thousands of years of money and in the last decade we’ve been able to build something that could rival the standards that we use and supposed to have trusted today like the US dollar.|
|Sam:||So, what’s happening in the world in the legacy financial system, when you look at global debt, I think it’s in excess of $255 trillion. You look at global debt to GDP ratios and it’s over 320%. That sort of debt, those kinds of ratios, they don’t get unwound. That doesn’t slowly come back to manageable levels. That either gets worse or it gets cataclysmically worse, they’re the only options. And if that happens in the legacy system, it’s going to cause absolute havoc, which is why having an alternative system, having bitcoin and cryptocurrency markets. Right now I think is one of the most…the timing is just ridiculous, it’s really been put through its paces and it’s really had its first major test in a crisis. And what we’ve seen is it has passed with flying colours. Everyone was talking about bitcoin and cryptocurrencies being worth nothing, magical internet money, fake, fraud, scams, whatever. And we hadn’t really seen it put to the test, we hadn’t really seen the flaming sword put to its throat.|
|Sam:||And it has just absolutely done everything that we expected. It’s been the best performing asset since the start of the year. It’s been the perfect hedge against the crisis. Yes, gold as well has been great in this situation, but bitcoin has done even better. And that’s exactly what we expected of this. While it’s still in its infancy and we’re still talking about early stage development, I have no doubt that as we progress through the 21st century, we will be talking about crypto currencies and bitcoin as a legitimate, viable alternative system and quite possibly even a standard form of money going forward.|
|James:||So, I think it’s probably a good time to bring Lachlann in at this point, because like I said at the start, you’re doing a PhD on this whole thing. What are your thoughts on the move to digital currencies and how imminently do you see it happening?|
|Lachlann:||Well, it’s absolutely fascinating. So, I think there’s going to be a series of events that’s going to start with the halvening and then you’re going to see a cascading series of events, each linked to the other. And I’m not prognostic heading here. When you look at what say Japan and Europe have been doing with their central bank back digital currency initiatives, is they’re just testing their models at the moment and they’re being very clear that they’re not going to roll them out just yet. But then there’s this whole idea that Ryan brought up, which is, it’s always been a competitive system. So, you’ve got gold being edged out by fiat, fiat of being edged out by cryptocurrency. But at the same time, there’s going to be governments trying to insert themselves into this narrative via central bank backed digital currencies. And so not only do I think you’ll see central bank back digital currencies, you’ll see corporate currencies, corporate digital currencies, you’ll see the halvening before all of that. And then you’ve got Libra that’s meant to launch sometime this year.|
|Lachlann:||So, there’s really going to be this massive crush in influx into this space and not only that, I think it’s an investible series of events. And if you’re clued up and you can actually see these subtle shifts happening very quickly, I think there’s a massive opportunity there.|
|James:||Hey Ryan, so Lachlann then mentioned you got certain governments creating digital currencies, doesn’t that negate the whole: You might as well just stick to the dollar if they’re going to do that, right?|
|Ryan:||Yeah. Look, I think first of all, you’ve got to understand why something like bitcoin has value or why a cryptocurrency has value before you can understand why it’s different from say a central bank digital currency. So, the fundamental value preposition of bitcoin, which for some reason I find a lot of people still don’t fully understand is that you can transfer…it’s a system, so [the] Bitcoin blockchain is a system alternative to our current monetary system, which allows you to send a unit of value, whatever that unit of value is, in a peer to peer fashion with no middleman. That is the basic value proposition. I can send Sam who’s [in] England any amount of bitcoin from one-cent to a billion dollars if I had it worth of bitcoin and I could send it from right now on my computer and in less than an hour, he could confidently verify that he has now had that bitcoin. And it’d really probably cost me either a few cents or a few dollars.|
|Ryan:||If I tried to do that in the banking system, I couldn’t do that. That would take days, it would cost me money, there would be a whole bunch of…it would have to go through a bunch of middlemen that you sometimes don’t even see. And these middlemen are prevalent in the entire financial system. I think I read the other day, it’s talking about fingers only, but the trillions of dollars that gets taken off people because of these middlemen in the financial system, it’s enormous. The financial system, it clips the ticket all the time. If you buy or sell a share there’s…let’s say you go to the share market and you go to buy Commonwealth Bank shares today, there’s about six intermediaries in between that transaction, there’s the brokerage, there’s the exchange, there’s custodians, there’s auditors, there’s administrators. And all of them take a cut. So, they’re just the typical parasites that cut the ticket on every transaction value that’s done in the financial system. But they were necessary before.|
|Ryan:||Before bitcoin, that was just the fact of life. You needed middlemen, you needed auditors to check stuff, you needed custodians to make sure ownership was transferred correctly. You needed brokers to get two parties together. With the Bitcoin blockchain system, you don’t need any of those middlemen. So, the Bitcoin blockchain system was the first iteration of an entirely new system which made middlemen obsolete. Of course, that’s the first version of something which…because it’s technology, it gets better and better and better. But that was the first time in history that a system like that was even possible. So, that comes to your question on central bank digital currencies. Yeah, they might have some electronic means of utilising certain aspects of blockchain technology to make their systems more efficient, but there will still be a middleman, either the central bank who’s ultimately in control of it. Now, that’s a dangerous proposition for anyone who believes in free markets. Imagine a central bank could monitor your money. Imagine they could dictate how you could spend that. Imagine…say the JobKeeper program that’s out at the moment.|
|Ryan:||This is an economist wet dream. They could make the JobKeeper program such that you’re not allowed to spend that on alcohol. They’re going to dictate to me and you, what we can spend our money on. They might say, ‘Well, if you don’t spend $500 a week it runs out.’ So, you have to spend it. And they’ll do it under the guise of academia and economics. But really, it’s about total control. Because the failings of economics are…they call it the dismal science, right? And they call it a dismal science because it sounds great in theory, but it never works in practice. And that’s because humans are unpredictable. So, I think that the central bank digital currency, economists are thinking, ‘Hey, if people won’t do what we want them to do, we’ll make them do it.’ And so they’re looking at this technology from that angle. And I think…I’ll speak for Sam and Lachlann and myself and we said that’s a horrible aggregation of a technological advance. But the beauty is that you can ignore central bank digital currencies, no one can stop you using the free market Bitcoin cryptocurrency system.|
|Ryan:||No one can stop your transaction on that. Historically speaking, when government tries to do something, it does it worse than the free market. So, we think not only from our philosophical point of view are cryptocurrencies a free market libertarian form of money, but technologically they’ll probably always be superior as well because best and brightest minds in computer science are more aligned to that way of thinking, whereas we’ve seen a lot of high profile even big corporation attempts to do blockchain stuff that has never really worked out. So, you have to remember there are two separate things, true cryptocurrencies are completely different, they are true peer to peer systems and that’s the kind of thing that we think is not only better, but also necessary.|
|James:||Hey, Lachlann mentioned the halvening. Now, this is a very kind of…I don’t want to say techie concept. If you’re deep in the crypto sphere, you’ll know what that means. And I want to touch on that in a moment. But first, Sam, can I just ask you something? You touched on what you were saying before, you said this is happening imminently, perhaps at the end of the year. Can you just elaborate on what you meant by that? Because that sounds pretty soon.|
|Sam:||Yeah. What’s happening is with the current legacy system; these smaller emerging markets are really, really struggling. We’re going to be looking more than likely at defaults on their debts. And that’s going to send and reverberate through the legacy financial system like you wouldn’t believe. That means that they then have an option, is that they can continue on tagging along with the rest of the world, using predominantly US dollars to try and get their economies, to try and lift the living standards of their people. I don’t see that happening. I think they’re going to be looking for another way. Now, whether that’s their own central bank backed digital currency possibly, but I think that a lot of these emerging markets are going to start switching on to cryptocurrencies predominantly using and looking at bitcoin basically as the gold standard, the digital gold standard for their economies and they’ll base their economies on that moving forward. It’ll get a little bit more technical than that due to things like volatility, but at the same time volatility only comes when you peg something like bitcoin to fiat currency, to a US dollar.|
|Sam:||When you look at the raw facts, bitcoin has always been a bitcoin, whereas you look at the value of the US dollar over time and incrementally is worth less and less and less and less and less and less and less. So, I think we’re going to see a real burst out of emerging markets really towards the end of the year as a lot of these defaults start to come to fruition. They’ll start to switch over to something like bitcoin as the digital gold standard that they can then base their currency on. And so then we’ll be looking at somewhat of like what we had in the past when money was paid to a gold standard but in a digital form because there’s more inherent trust, because we know what bitcoin’s going to do. That’s the elegant beauty of it, is that we’re going to talk about the halving is that these sorts of things like halvings and difficulty adjustments and everything that’s programmed into it, is programmed into it. So, it’s going to happen. And that delivers an element of predictability that is actually quite good to base a monetary system on.|
|Sam:||So, I think the switchover for these small countries, these small emerging markets, we’re not talking about the US dollar dropping fiat money and switching to cryptocurrencies overnight. They’re too big, it’s like a giant oil tanker trying to shift in the ocean whereas these emerging markets are those small speedboats that are just coming in and go, ‘All right, well, let’s pivot we’ve only got a population of a million people. Let’s look at doing our economy basing that around something like bitcoin and pegging ourselves to bitcoin.’ So, that change I think is coming imminently. And because the technology is available now and because we know that there are countries that are already looking at this and working on this, I think it’s inevitable that we’re going to see some shift to an alternative financial system that’s based around cryptocurrencies.|
|James:||Just one…not objection. I guess it’s a question I don’t quite understand. So, you said one bitcoin is one bitcoin, but back in…wasn’t it that famous story where someone bought a pizza with a ton of bitcoins, whereas now, one bitcoin would get you a blooming car. So, how does that work?|
|Sam:||So again, all of that price volatility comes back to when you relate a bitcoin to something like US dollar or an Australian dollar for instance. So, it’s about the purchasing power and that comes down to what the supply chain uses as their money. So, if you go all the way back to the guy that makes the wheat that makes the flour that goes into that pizza bakes, he wants to get paid historically in dollars. And so you inevitably have to peg cryptocurrencies to…we don’t have to but people are doing it in order to try and get a concept of value in their mind. If that guy that grows the grain that makes the wheat that goes into the flour, if he’s willing to accept bitcoin as payment because he can pay his suppliers and he can pay for his agricultural feed and all that stuff and his tractors in bitcoin, you don’t need to peg that value to money anymore, your value proposition becomes the cryptocurrency itself.|
|Sam:||So, when I talk about monetary system based on cryptocurrencies, I’m talking about shedding any relative value to fiat currency completely, but that’s not a change that happens overnight because you’ve got to influence, not influence, you’ve got to integrate that within an entire supply chain, within an entire economy so that everyone along that line is willing to accept something like bitcoin or another cryptocurrency as a medium of exchange and as payment for the goods and services that they receive or supply. That’s easier to do in an economy that is small. And that’s why emerging markets are particularly open to that idea. That’s really hard and takes lifetimes for something like the US or Europe to integrate. And that’s why it’s really the [inaudible 00:29:35] is through speed transition, where you will find I think smaller economies and countries moving to this faster because they can and longer term, much longer than any of us or anyone that’s watching today is alive, that transition is going to happen. So, this is not just a light switch, everything’s over. This is not go all in it’s just going to be crypto. We’re not that naïve.|
|Sam:||These sorts of transitions with big economies take a long time. But there are opportunities and transitions that are going to be happening I think as soon as this year. And we’ll see this play out over the next decade, the next 20, 30, 50, 100 years. And that’s why I keep talking and Ryan mentions and Lachlann mentions as well. We’re talking about a real revolution in what we think about money, how we deal with supply chains in economies, this idea of centralised control being decentralised. It’s a very significant and powerful change that is happening right now and will continue to happen into the future.|
|James:||I guess that’s the really interesting thing. Sorry, Ryan, you were going to say something?|
|Ryan:||I’ll disagree slightly with Sam just at one point.|
|James:||We’re allowed to disagree. This is why we’re having this conversation.|
|Ryan:||I would only disagree with him based on what’s happened in the last few months with the coronavirus crisis. So, when me and Sam were working together, we probably had the same opinion and this was a gradual change that would start off with smaller nations and then expand and expand and expand. However, the coronavirus has highlighted something in the world right now called the US dollar shortage, right? And that is there’s just not enough US dollars to go around. And what that means is there’s about 12 trillion offshore US dollar lending market, right? And that is non-US companies and countries lending in US dollars because it’s a reserve asset that’s uniquely trust. However, what happens in times of economic disruption like we’re getting now is the supply of US dollars falls and there’s suddenly a rush to try and get your hands on US dollars. And we’ve seen that in March, there was a spike in the DXY, which is the dollar index. And that’s because there was a mad scramble for US dollars. Now, what happened there was, the Federal Reserve jumped in and start printing money, colossal amounts of money.|
|Ryan:||And that’s because they were worried that the US dollar shortage was going to have an effect on America. And you might wonder, well, why would they care about what’s happening in offshore markets, because usually the US would give us stuff if emerging markets could bust. But in the world we live in now, foreigners own about $11 trillion more on assets than what Americans own foreign assets. So, the next step of what was going to happen if these foreign borrowers needed US dollars and they couldn’t get it from the usual banking system, they were going to have to sell their US equities, their US properties, they were going to have to sell on mass all their US assets. And that would have caused huge ructions in the stock market, the bond markets everything else.|
|Ryan:||So, the Federal Reserve is sort of handicapped, they have to just keep on printing now. Because if they don’t, interest rates on every junk bonds, treasuries, will just spike higher and cause the economy to collapse [inaudible 00:32:53]. So, what you’ve got now is the Federal Reserve just said they have an infinite amount of money to print, they pretty much said that. They even said that they’ll be willing to underwrite the 1.5 trillion junk bond market. That is debt that’s triple-B rated. It’s not like-|
|James:||That’s the worst of the subprime back in 2000.|
|Ryan:||It’s getting there. But the whole point is, and I’ve read some discussion that say, this is just the start pretty much because there’s this US dollar shortage, they pretty much have to underwrite the whole 104 trillion-dollar bond market for the world. And they’ll just keep on printing, printing and printing. And so that comes back to why the adoption of bitcoin and cryptocurrencies might be accelerated by this crisis, because how can you have a scarce asset that holds value if you’ve got a Federal Reserve that just can’t stop printing because if they do, interest rate spikes and the economy falls in a hip. And that’s the story playing out and I don’t know for certain which way it’ll go, but every time you see a spike in the ripple market interest rate or the DXY, the dollar index spikes or some sort of interest rate spike, is usually because there’s a shortage of dollars under this mad scramble to get it. And the US Fed Reserve, the only thing they can do to solve that is to print more US dollars.|
|Ryan:||And then that goes, well, how can that be a scarce asset if you’re just printing out willy nilly? It can’t. I read this interesting thing that said the US dollar, it might be in their interest now for the first time in a while not to necessarily be the reserve asset. Not to have oil priced in US dollars. It might make sense say for Russia to buy or China to buy oil off Russia and do it in their own currencies, right? So, they would spend rubles or yuan when they’re doing international trade. But there would be a difference between how much they import and how much they export. And that difference would maybe be where bitcoin comes in, that would settle the net difference between the imports and exports between the trade. So, it’s an interesting idea anyway, I don’t know if it’ll happen, but if US dollars aren’t trusted, it could be that countries go back to buying and selling in their own currencies by making that difference between what the import and export, netting that out with bitcoin.|
|Ryan:||They can do it with gold as well and I’ve seen scenes where they say they will net out the difference with gold. So, if you import more than you export, then you have to pay some in gold to the other country. But in a digital age, it makes more sense for that to be bitcoin, because you can pretty much do it instantly as the trade occurs. With gold, what do you do? Are you going to ship it from a vault in the Bank of England or are you going to leave it in the trust of someone else? There’s a few issues there. So, I hope that makes sense. But that was just something I was reading recently, which I thought could fast track the adoption of bitcoin as a settlement layer reserve asset, which is one thing it does that not a lot of other assets can do.|
|James:||I guess it’s also an interesting point that the COVID-19 crisis speeds things up and highlights these weaknesses in the current system. So, if you go back to the gold standard back in the 1920s, that changed predominantly because of the First World War. Is an event that happens next an external event that forces a kind of reset, wouldn’t you say?|
|Ryan:||Yeah, that’s 100%. And that’s why, like we said at the very start, money always evolves and systems always evolve. And this day of reckoning for the US dollar was probably going to happen at some point because of the imbalance in trade and the grown debt position that this COVID-19 has just brought forward. I’d say five or 10 years worth of mucking around with the system to a point where this could happen a lot sooner than what most people think.|
|Sam:||Another thing to think about is how they’re talking about all these reliefs from lockdown plans and these exit plans from lockdown and everything like that. Almost every single time they talk about the number one thing that they’re going to do, is they’re going to stop cash transactions because they don’t want people handling cash and passing the virus on to each other. So, almost-|
|James:||That’s convenient, isn’t it?|
|Sam:||Yeah, almost overnight, cash will be completely irrelevant. And when we look back just through the last decade, I’m just talking about a legacy system with the explosion of no contactless payments and then smartphone payments, things like Apple and Android Pay. The evolution and development of that is only going to get faster with fintechs and opportunities in the fintech space as well. All of that that was another five or 10 years away is going to be about 12 months away, because it’s forced upon us because of this dramatic event that’s unravelled in front of us.|
|James:||Now, Lachlann, you brought into the discussion pretty early on the bitcoin halvening. Is it a halving or is it a halvening or doesn’t it matter?|
|Lachlann:||Depends how nerdy you are really.|
|James:||And you’re very nerdy about it.|
|Sam:||It’s halvening to everyone on this call Woody.|
|James:||OK. So, what’s the significance of that then?|
|James:||Because it’s imminent, right? This next week, it’s on Wednesday I believe.|
|Lachlann:||Yes. Very soon. The 12th, right Sam?|
|Sam:||Yeah. So, that’s Tuesday morning UK time. I don’t know what that time is for you guys.|
|James:||And if you’ve been following the Secret Crypto Network, if you’re subscribed to that, Sam every week has been [crosstalk 00:38:35]. Log in the process; you said it’s a symbolic event just as much as it’s an economic event. So, maybe you guys want to elaborate, maybe I’ll start with Lachlann.|
|Sam:||I’ll let Lachlann kick it off and then I’ll add my thoughts.|
|Lachlann:||Well, not everyone agrees here but I’m generally bullish on this. I think it leads to a groundswell of retail sentiment towards it. It’s usually as Sam said, a symbolic event, but last few times this has happened, there’s been a little lag but reliably it went up. And I think it really has to do…and I think this is a pivotal moment for us, is that the world is just starting to wake up to the fact that money is now this transition thing. And one of the words that keeps coming up is the word trust. And I think when you really break it down, blockchain and cryptocurrency is, say a trust machine. It’s not necessarily trustless but it naturally generates trust. And one of the key takeaway points from my studies is the trust cost in the US makes up about 35% of its economy. When you break it down, these are lawyers, these are accountants, these are all the people checking and verifying that everything’s above board. And when you think about the potential for blockchain to revolutionise an economy, absolutely massive.|
|Lachlann:||If you could swap those 35% of people out for something better, a more productive job, a more fulfilling job, that’s a dream come true. So I think, yes, there’s the bitcoin halvening event, but there’s also this very broad based appeal of blockchain technology generally, which has the potential to transform economies. And I think governments will eventually come on board to this and they’ll want to legitimise the blockchain sphere because of all the efficiency gains that can be derived from it.|
|James:||Mm-hmm (affirmative). Sam, do you agree? Do you agree governments are going to get on board with it?|
|Sam:||Yeah, I think it’s going to be like I mentioned earlier, it’s going to be a need-based thing when it comes to governments looking to get on board. And when it comes to the halving. So, what we know about the halving is that, in the very first instance of the creation of bitcoin’s code that every 210,000 blocks, the block reward would be cut in half. So, a lot of people might hear about the halving, but they don’t practically know what that means. So, in a blockchain, every time a block is added to the bitcoin blockchain, the miner that helps to verify and add that block to the blockchain is rewarded with bitcoin, it’s the incentive to contribute to the network to help secure it and to help maintain it and keep it going forward. At the very start, that reward was 50 bitcoin and every 210,000 blocks that reward would half, so by very nature, bitcoin is deflationary.|
|Sam:||We’re at the point where…so that’s happened now twice before, so the initial reward was 50 and 210,000 blocks later it cut to 25, 210,000 blocks after that it cut to 12.5. We’re now about to hit block 630,000 and that reward is about to cut again down to 6.25. So, the miner will receive 6.25 bitcoin for adding a block at block 630,001. So, that’s the practicalities of it. What that actually then means for people that are thinking about getting bitcoin or looking at cryptocurrency space or looking at the bitcoin network. What that means is that from block 630,000 to 630,001, nothing really. It’s a mining and technical code base thing. But what we’ve seen in the two previous halvings, in between those halvenings, is that we go through this cycle, we go through this value finding, price discovery cycle when you relate the value of a bitcoin to fiat money.|
|Sam:||And we all are very clear and aware that what happens in the past is certainly no guarantee about what’s going to happen during the next period of time between this halving that’s coming on Tuesday and then the one that comes roughly four years after that. We don’t know for certain what’s going to happen, but when we look at the patterns, that’s what come before…God, that was a mouthful. We’ve seen that there’s been this great value appreciation because we know that when you cut the reward in half, when there’s a reward halving, the new supply of bitcoin into the system is reduced by half. So, we know that for the next 210,000 blocks, half the amount of new bitcoins that have come through the last period is going to be drastically reduced. So, you’re talking about these supply constraints immediately with what comes. Now, at the same time, we’re also seeing a great increase in the awareness, understanding and adoption of bitcoin.|
|Sam:||So, we’re starting to see a drive up in the demand for it. And that’s coming from retail and tech nerds like us through institutions that are going, ‘OK, well, maybe this is actually a pretty good hedge against crisis in the legacy system.’ And also now governments and central banks. They’re aware of this stuff, there’s a great video of Vladimir Putin talking about it a couple of years back and he’s got a great understanding of the concepts behind it. So, the awareness of this is spiking and skyrocketing. And we know that as well. If you look at Google Trends over the last five years, and you look at the last halving, which was back in 2016, there was a spike in interest over time in the term bitcoin halving. And then when you expand that to the current date, it’s I think a multitude of four times higher greater interest in bitcoin halving today than it was at the last one.|
|Sam:||So, instantly that tells us that more people are aware of it, they’re wanting to know more about it and they’re really starting to get that idea in their head because of what’s going on in the last few months with the legacy system. They’re starting to think, ‘Maybe this is something I really should be involved in and interested in.’ And so I think we’re going to see this surge in demand and this surge in adoption and usage of bitcoin and other cryptocurrencies off the back of that into the market. So, constricting new supply, expanding new demand. It doesn’t take a genius to figure out the economics of that and I think we’re going to see this mega cycle repeat over the next 210,000 bitcoin blocks. And I think the other key takeaway from that, is that every cycle within that, it’s not just bitcoin that goes through that mega cycle, there’s a whole host of other cryptocurrencies that benefit from that because it’s not just about bitcoin as a store of value and as money.|
|Sam:||The cryptocurrency ecosystem is expanding far greater than that. And when you start to really understand it’s more than just money, we’re talking about the development and rebuilding of whole new networks, then you can really start to see the opportunity that I think presents in this next mega cycle.|
|James:||So, you mentioned how it’s not just money, but it spans out to other things. Ryan, a lot of the thing that you’ve been writing about in the last six months, it has an effect on other sectors, right? So, not just cryptos, but other sectors in the market, like the banking system for example. And a big thesis of yours last year was the…you called it ‘The Great Bank Unbundling’. I guess it’s like a decentralisation. So, you have the Big Four banks and they’re being uprooted from the very core. Right? Do you want to expand on that and how this halvening event is a symbol for all of that as well, isn’t it?|
|Ryan:||Yeah, it’s such a huge topic and sometimes like we’ve started off talking about the financial system and the monetary history of money. And we’re going to segue into the fact that you can use blockchain technology to change a whole bunch of industries, cloud computing, government, it can be used for data, decentralised data, it can be-|
|James:||Related to the coronavirus, even the biotech sector as well.|
|Ryan:||Exactly. I’ll probably segue into this quickly, but one of Sam’s picks actually is creating a tracking app using blockchain technology, which doesn’t tell anyone who you are or where you are. However, if you meet someone or in contact with someone who has coronavirus, it will alert you. So, it’s a completely decentralised private way of doing the exact same thing that the Australian Government’s app is doing. And that is using blockchain technology and that is using cryptocurrency technology. So, the range, the span of what this is going to change, it’s a very easy analogy but it’s how the internet just sucked value out of every single industry out of retail out…and blockchain technology is going to do the same, it’s going to suck value into it from every other single industry. And what that means for companies is they either get on board with it and try and find a way to survive in this new reality or they don’t. And part of The Great Bank Unbundling thesis that Lachlann and I were talking about most of 2019, was pretty much saying that this is part of this journey to a new financial system.|
|Ryan:||The big banks have got out dated technology, they’ve got legacy debt positions that are over leveraged property, they’ve got a brand banking model which is obsolete but they can’t get rid of it for political reasons. They’ve got thousands of employees. And at the same time, these new technologies were coming, which were based on the latest technology; we’re concentrating just on one aspect of banking. So, say wealth management or insurance or personal loans or whatever. And they were going to come in, do it better, do it more efficient, do it cheaper even than our big banks. And since we wrote about that, I think most of the big banks have fallen between 30 and 35%, they stopped paying dividends as we all know and I was looking at the five picks that Lachlann had as part of this Great Unbundling thesis, apart from one which didn’t do so well, I think one finished up about 226%, one just had results out today and has jumped up about 50%. And all the other ones are in profit.|
|Ryan:||So, while the big banks are falling these fintech upstarts, which are leveraging the latest technologies and things like open banking and things like blockchain technology, they’ve gone the other direction. The key for that will be who can carve out a business model in this new reality given the fundamental change to the underlying infrastructure. And that is financial services, but it’s also a whole bunch of other industries. And like I think Lachlan said, 35% of the economy is based on trust or something like that. The trust economy. All these middlemen. Again, it comes back to this concept of middlemen that won’t be needed. So, even for someone in a job you need to start thinking about how relevant are you in a world where you don’t need that person in the middle of a transaction it can be done in a peer to peer way. And it will be blockchain technology that takes that value.|
|Ryan:||And as Sam knows and Lachlann knows and I know, part of that value will accrue to certain crypto currencies who contribute resources to secure these networks. And that’s an amazing opportunity if you think about it. The total market cap of crypto right now is about 250 billion, it’s a drop in the ocean. We’re just talking about 2.3 trillion created out of nothing.|
|James:||Yeah, in a single quarter.|
|Ryan:||In a single quarter. It’s unbelievable, the discrepancy in value. And although I know Sam especially doesn’t like to equate it into fiat, but for crypto currencies to take over it will have to grow in fiat level, in fiat value to suck in that value and then eventually, one day we’ll get to the point where we talk about not whole bitcoins because they will be rare, we’ll talk about Satoshis. That’s the smallest unit of bitcoin which is 0.00000001 of a bitcoin. And that’ll be what people will talk about. Satoshis-|
|James:||It’s like the reverse of fiat, isn’t it? Where, I don’t know. My dad always used to say back in the ’70s a pint of beer would cost him 12p or something.|
|James:||It’s now six pounds for a pint, whereas bitcoin’s the reverse, isn’t it? 2000 and…what was it whenever those pizzas were bought, I think it was 300 bitcoin or whatever. Oh, yeah. For a single pizza, whereas soon it will be a few Satoshis which is [inaudible 00:51:51]. Interesting.|
|Ryan:||There is a Twitter account you can follow Woody called Bitcoin Pizza and it will tell you how much the bitcoin pizza is worth on any given day.|
|James:||Oh, yeah. All right.|
|Sam:||50 million at some point recently, wasn’t it?|
|James:||Anyway, it’s coming close to an hour now. So, I think just from this conversation, I wanted to keep it relatively open-ended because there was so much, it’s such a fascinating topic. So, I’m going to reach out to readers now, I want The Insider to be a two-way conversation. If you’ve heard anything in this conversation you want us to elaborate on, please do write in to us, firstname.lastname@example.org. I’m going to maybe end with a question for everyone or one question and you can all chip in. I’m going wake up on the 13th of May, or the 14th of May after the halvening. Is the sky still going to be blue? What’s going to be different?|
|Sam:||I’ll kick that off. So yes, the sky will be blue. And if you do nothing, then that’s another day that you’ve wasted, I think to look at cryptocurrency and bitcoin as a real opportunity for your wealth strategy. We’re never saying go all in, but I think if investors haven’t at least seriously considered bitcoin, if they don’t already have it, if they haven’t seriously considered adding it, looking at it and getting involved in it, then it’s another day wasted.|
|Ryan:||I’m just going to chip in with a quote I heard the other day and I hope it will stuff this up, but it says that, ‘Bitcoin or cryptocurrencies isn’t about taking your money out of the country, it’s about taking the country out of your money.’ And that idea encapsulates it. You’ll wake up nothing will have changed, but guess what? We all knew that this halvening event was going to happen, there was no politician who decided, there was no surprise from the Fed manipulating markets, it was a predictable event we all knew was going to happen, we’re all in the same boat, it’s a free market, it’s fair game for all of us. And that then gets rid of all this crap in the economy which is sucking out value and brings it back to people on a level playing field. I think that’s what I hope crypto can be.|
|James:||Your turn Lachlann.|
|Ryan:||OK, I’ve just got one final thought. I think when you look at cryptocurrency, bitcoin, it’s an inversion of everything from a very fundamental level. You start with power with fiat and then you get trust. With cryptocurrency you get trust first and then the power unfolds from there. So, that’s my final thought.|
|James:||Decentralising power to the individual, which is only a good thing in my book. OK, I think we will end there guys, thanks so much. If you want to learn more about this stuff, I said the newsletters that Ryan works on and Sam works on, the Secret Crypto Network is just a really good guide to how you invest and go about investing into a basket of cryptocurrencies. And Ryan’s service, Exponential Stock Investor does the same thing but more in exponential trends developing in the stock market, which is all to do with the types of things that we’ve been talking about. Anyway, thank you for your time, guys. It’s been a fascinating conversation and hopefully we’ll have more of them as we go forward. Cheers.|
As always, do write in and tell me what you think.
By the way, at the 52:26 minute mark I mention our email address here at The Insider. But I say it wrong. So, let me correct that right here.
Write to us at email@example.com.
I would love to hear your thoughts on the conversation and the ideas we discuss.
Now, there’s something else before I sign off…
Released this week: The Mid-Cycle Almanac
On Wednesday, Catherine Cashmore and Callum Newman, co-editors of Cycles, Trends & Forecasts released their long-anticipated eBook on the property and stock market…and where they are at in relation to the 18.6-year land cycle.
It’s called The Mid-Cycle Almanac: Your Investing Playbook for 2020-2026.
If you’re a Cycles, Trends & Forecasts subscriber or an Alliance member, you’ll already be privy to this fascinating report. You’ll find it in the special report section of the Cycles, Trends & Forecasts area of the Fat Tail Media website.
And if you’re not yet a Cycles, Trends & Forecasts subscriber, I’d suggest taking up our new offer for a trial subscription so you can read this eBook yourself.
Here’s a quick bit of background…
Catherine took the helm of Cycles, Trends & Forecasts to carry on the great work that Phil Anderson and Callum had started in the first few years of the service.
Phil and Catherine are long-time associates via the Prosper organisation, a think tank for economic and tax reform, of which Catherine is the president.
Like Phil, she’s a long-time student of the 18.6-year land cycle, and how it relates to the real estate cycle. As a buyers’ advocate in one of the world’s biggest property markets — Melbourne — she sees the cycle play out on the ground and in real time.
She and Callum have long been forecasting that the year 2020 would see the start of the ‘mid-cycle slowdown’, the point at which there’s a brief respite in the real estate and stock market…before an almighty boom in the second half of the cycle.
It’s not easy to see, because history never repeats exactly. There always tends to be an unconnected event that blinkers almost everyone to what’s really playing out. That’s why most people mistake the mid-cycle slowdown for a real crash.
That’s why I recommend that everyone read their latest report on where we are in the cycle right now.
Because it’s at these points in history where some extremely lucrative investing decisions were made.
Many people are calling the coronavirus the trigger for a great depression (including some our prominent editors). Catherine and Callum call it a red herring for what could be the greatest property boom you’ll likely see in your lifetime.
If you haven’t seen the invitation to trial Cycles, Trends & Forecasts, so that you can download the report, you can check it out here.
Of course, it’s totally up to you.
Have a great weekend!