We have experienced increased financial, trade and political instability during recent months, contributing to growing concerns about a potential global economic downturn. The trade dispute between the United States, China, Brexit and other European politic instability, more sovereign defaults and return to Argentina of capital controls and threats to the position and independence of central banks have all weighed on markets.
When you walk through these events and provide almost infinite explanations and opinions on different metrics, such as an inverted yield curve and negative mortgage rates, you will have to hear advice to turn your portfolio of investment into “hard assets.”
And mostly because hard assets like gold have a track record of success during periods of economic and financial instability (Figure 1).
Figure 1: Gold prices have increased regularly during economic recessions
But what is a hard asset, exactly? And why is Bitcoin (BTC) the ‘ hardest ‘ asset in the world, despite being completely virtual so transacted on the Internet?
Hard vs soft assets
Traditionally, hard assets are classified as tangible property or physical resources such as gold that are coveted for reliable supplies. We reject soft assets such as fiat currencies, stocks, and bonds, which can increase their supply as easily as the click of a computer button. Soft “financial” assets may also be restructured or defaulted, dividend and benefit cuts, or other (sometimes arbitrary) adjustments that reduce long-term value.
Over history, experienced investors have relied on hard assets to mitigate risks and maintain long-term wealth in the face of uncertainty and economic downturns, when the availability of many soft assets historically rises and lowers their value.
What makes Bitcoin more valuable than land or gold?
Hard assets are back in vogue as central banks buy large amounts of gold in countries such as China, Russia, India, and Turkey. In the first quarter of this year alone, central banks were expected to buy 145.5 metric tons of gold, up 68 percent over the same timeframe in 2018.
We have also seen famous investors such as Ray Dalio, the founder of the world’s largest hedge fund, recently propose growing the exposure of people to gold. Not unexpectedly, in the last five months, the price of gold has risen by 16 percent.
We have hundreds of data on the value of gold and its traditional role as a haven. The physical nature and the myriad proven use of gold as well as being a value store (e.g., jewelry, industry) make it more complementary to bitcoin in our opinion than competitive. In other words, we see that both gold and bitcoin are not bullish as mutually exclusive.
We do not see gold and bitcoin bullish as mutually exclusive.
However, a crucial difference between bitcoin and gold must be emphasized, which is that the dynamic of the gold supply is not fixed.
As its price increases, gold previously inefficient for mine can be placed on the market. The resulting rise in gold supplies will regulate further rises in gold prices.
Traditional hard assets are vulnerable to price shocks.
The same dynamics of gold supply (higher prices= > increasing supply= > falling price pressure) function for silver and all other conventional properties. Even the number of occupiable properties available can be expanded, with examples ranging from the transformation of single-family homes to multi-family homes that occur regularly today into more exotic and future projects.
Historically, physical goods have also experienced sudden supply increases (sometimes called “shocks”) that have deflated rates. The discovery in the late 19th century of large numbers of gold in South Africa and the conquest and colonization of South America in the 1500s are examples, both of which placed downward pressure on gold prices.
Looking a lot farther forward, there could be an intense supply shock of developments such as mining asteroids laden with precious minerals such as gold.
Unlimited gold, but a limited bitcoin availability.
The ever-increasing supply of bitcoin to contrast gold with a hard cap of 21 million units (“coins”). The first publicly released software protocol for Bitcoin 11 years ago, governs a fixed and algorithmically deterministic total supply that does not influence price changes, in stark contrast to gold.
What the final bitcoin supply means is that once someone has a certain percentage of the total bitcoin supply, he will always own at least that percentage. Bitcoin is the only important asset with this property in history, and its reliably limited supply is why bitcoin is the toughest asset in the world.
The limited supply of Bitcoin is an incredibly powerful function. When an individual has a certain percentage of the total bitcoin supply, they have at least that percentage at all times.
The “halving”: why new Bitcoins get scarcer over the years.
While the number of bitcoins remains, about 86 percent of all current bitcoins have already been produced (18 million of the 21 million coins exist today). The current supply of Bitcoins currently increases at less than 4 percent per year and will continue to decline and fall below 1 percent over the coming decade.
This delay in creating new Bitcoins is due to the fundamental rule embedded in the software of Bitcoin, known as “halving” (or “halving,” which reduces the number of new Bitcoins “mined” into existence every ~10 minutes in half every four years.
The next halving is expected next year in mid-May to further limit the mining price from the present 12.5 new bitcoins generated every ~10 minutes to only 6.25 new bitcoins (Figure 2).
Figure 2: New Bitcoins are being supplied slowly over time and are limited to 21 million coins
Then there will be another halving in approximately May 2024 (or approximately four years from the previous halving event). Also, the mining bonus will be halved, this time up to 3,125 new bitcoins every 10 minutes. And again in May 2028, down to 1,5625 new bitcoins.
Until about the year 2140, when the hard limit of 21 million is reached and new bitcoins will no longer be used.
The next “halving,” where new bitcoins are every 4 years, is scheduled in May of next year.
Although new bitcoins will continue to be generated in ~100 + years, by 2030, more than 98% of all existing bitcoins will be created in the following decade. In other words, new bitcoins will be scarcer and scarcer over time until the 21 million coin cap for the software protocol is eventually met and new bitcoins are completely stopped.
When are central banks going to recognize Bitcoin as Sounder than Gold money?
According to a Bloomberg article, Australia & New Zealand Banking Group Ltd. economists believe that both the central bank of China and Russia will continue to hoard gold in the years to come.
One community representative said that China’s trade war restrictions against the USA and economic sanctions against Russia would enable the main world powers to begin diversifying their reserves. He added:
Gold is also ideal protection with rising political and economic instability and is therefore searched for by central banks worldwide.
Most supporters of Bitcoin argued that the blockchain is superior to the bright precious metal that makes gold an enticing store of value on every front. The overall supply is known and can not be inflated. Compare this to gold. Compare. Nobody knows how much gold the world has. Even on earth, huge gold deposits are not open to today’s mining technology. With some future technological advancement, this could change quickly.
Bitcoin is also much easier to transport, store, transact and conceal than gold. Therefore, for many supporters, it trumps gold on all levels, apart from its historical precedence. Bitcoin has simply not been around for sufficient time to earn the level of confidence that people have in gold as a value shop. Moreover, the longer it sticks around, the more it trusts.
The idea that a central bank could one day add Bitcoin to its reserves, especially given Russia and China’s obvious hunger for hard assets, is also common in bitcoin circles.
With central banks hungry for a hard monetary asset like Russia and China, which is entirely unrelated to the fiat currency market, it would seem reasonable to know at some time in the future that a bank hoarded Bitcoin. The popular theory suggests that other central banks are forced to follow once this happens. This could cause a buying frenzy on an unprecedented scale.
It is more than digital gold.
For over a decade, the algorithmic supply of Bitcoin has generated both the ability and the need for investors to store value for long periods. Link those dynamics with Bitcoin’s portability, stability, and usefulness as a payment mechanism, with investors who want to handle different forms of economic, financial, and another risk as a compelling value proposition. Nevertheless, Bitcoin has already attracted tens of millions of owners and users over the last decade, and its growth is more rapidly than Web and PC (Slide 94).
Although this post focused on the role of Bitcoin as a scarce and hard asset, its increasing position as a broad technology network for digital identity and other cases of non-monetary use is important to note. As we explore in our latest investment report, Bitcoin’s view that it is’ digital gold’ just highlights its full potential and its total market capability.