A Masterclass in Economic Calculation (Bitcoin Podcast)

Three scenarios for CEOs:

1. In a deflationary currency environment, the prices of goods and services will decline, and the currency will appreciate. If I keep the money and wait, the value of my money will accrete. 
2. If monetary expansion equals economic growth, e.g., banks print 2% more currency, and the economy grows 2%, then treasury will remain stable.
3. In a stagnant economy, the currency can rise to 5% a year. But if the economy grows less, the prices appreciate for anything scarce like an original Picasso, but will not appreciate for mass-produced goods/services, such as copies of a Picasso.

Technology companies take products and services and turn them into information networks. As a result, whatever they touch becomes deflationary while they become billion-dollar companies in the process.

For example, Google dematerialised every library and every piece for every book, information, video, and music. Everything that Google, Apple, Facebook or Amazon touched became deflationary. The variable cost of sending a Netflix movie to a million people is the cost of electricity.

When you compare Bitcoin to other assets, Bitcoin is a scarce piece of property. 

Bitcoin is liquid, global, fungible, there’s no property tax on it, no state taxing. It’s hard to produce Bitcoins. 

Monetary expansion was 24% in 2020, with a forecast of 10% to 15% for the next five years. Under 15% annual money supply expansion, if a company makes a 5% margin on its business, it will lose 10% of its value every year. That means in four years, half of its wealth will be destroyed.

If you want to preserve your wealth, you have to beat the hurdle rate (the minimum rate of return on investment) and risk premium.

The main store of value buckets are fiat instruments, such as bonds, stocks and commercial real estate.

For bonds: Investors will have to beat the hurdle rate or drop interest rates.

For commercial real estate: Rent has to keep up with the hurdle rate.

When we raise the hurdle rate, individuals have to work harder or take more risks. They have to compete against big tech companies that have money and power, resulting in many small businesses getting crushed.

To preserve value, companies will either have to leverage up to buy back stock or perform acquisitions. But integrating two companies has a 90% failure rate. Worse is that companies borrow money to buy another company. That is a road to ruin.

Cash is a liability, not an asset. Therefore, every fiat instrument based on cash should be discounted at 15% per year, such as stocks, bonds, and real estate.

While Bitcoin is volatile short-term, it is always worth more over five years.

If you generate cash flows in fiat currency that are growing slower than the hurdle rate, you can fix the problem by putting your cash into Bitcoin. Conservative bitcoin growth is estimated at 20% per year; consequently, the yearly income will surpass the company value.

Bitcoin is a growing asset. It’s also the world’s first engineered monetary network that is growing faster than 100%. Corporations can add their balance sheets or PnL into this monetary network.

Square and PayPal compete against both big tech companies and banks. They offer their customers a savings account in Bitcoin that accretes 100% per year tax-free. (Compare that with a bond that offers a 10% taxable return.)

To keep up with competition, Apple or Goole will have to offer Bitcoin as that is what people want.

To stay competitive, the mutual fund business needs to build bitcoin into their product offering. Similarly, traditional banks have to build bitcoin into their business, such as trading, banking, lending, yield, custody, etc.

People will know that public companies can buy bitcoin and then realise they can use debt to buy it. While retirement and investment funds can’t buy bitcoin directly, they can buy publicly traded stocks and look for companies with bitcoin exposure.