Disclaimer: None of the following is financial advice.
Exxon Mobil and other gas companies are notorious for gas flaring — intentionally burning excess natural gas during the oil extraction process. Flaring significantly contributes to air pollution.
In 2019, Exxon had a meeting with other gas companies and promised to decrease their air pollution. Instead, their flaring has worsened.
In economics, flaring would be considered a negative externality — a cost that everyone has to pay but only one entity benefits from.
Governments cause a different negative externality. Instead of flaring, they use deficit spending. Instead of causing air pollution, they cause monetary inflation. For the sake of the analogy, we’ll call it money pollution.
The government can’t stop money pollution. They have too much debt and taxes won’t cover it.
The Fed chairman, Jerome Powell, recently promised that they would reduce their bond purchases (“money printing”). This is like when Exxon said they would reduce their gas flaring in 2019 — it’s a lie. The Fed may reduce printing acutely, to reduce public fear, but it will remain high over the long term.
How can we escape money pollution?
- Buy assets. Like bitcoin and stocks.
- Hold as few dollars as possible. Only enough to pay for essentials like rent and food for 3–6 months.
Isn’t investing risky?
There’s a guaranteed risk of losing your money to inflation if you don’t invest.
Think of cash itself as an investment. Would you invest in an asset that is guaranteed to lose 7–15% a year?
This is why Ray Dalio, CIO of Bridgewater — the largest hedge fund in the world — says, “Cash is trash.”
How trash is cash?
James Mullarney, financial analyst, estimates inflation between 10–15% annually after the government “printed” trillions of dollars in response to Covid-19. Michael Saylor, CEO of Microstrategy, estimates inflation between 14–23% annually. In other words, inflation will be high for years.
If we take the low estimate of 10%, you would lose half of your money in about 9 years. If we take the moderate estimate of 15%, you would lose half of your money in about 6 years.
Can’t I invest in the S&P 500, bonds, real estate, or gold instead?
In short, no. These assets seem safe but they’re actually risky. Bitcoin seems risky but it’s actually safe.
S&P 500 Index
Historically, the S&P 500 returned about 10% a year in nominal terms. ‘Nominal’ means not taking inflation into consideration. If you take inflation into consideration at about 7% (from 2010 to 2020), the S&P 500 returned 3% in real terms. ‘Real’ means taking inflation into consideration. By investing in the S&P 500, you will likely beat inflation, but there are unseen risks.
Technological disruption is the unseen risk of the S&P 500. For example, the S&P 500 includes legacy stocks like Ford motor company and traditional banks that will be disrupted by companies like Tesla Motors and Block. Even great companies can go bankrupt from disruption — look at Blackberry, Nokia, and Motorola after the iPhone.
You do not want to hold a basket of stocks that will go bankrupt. You will get below-inflation returns. This concept also applies to various mutual funds, index funds, and ETFs.
Bonds have had poor returns since 2009. For an investment to be good, we need to get higher returns than inflation. Bonds give you a 1–3% return annually but inflation is at a minimum of 10% — you’d be losing money. Bonds will have poor real returns for the foreseeable future.
Real estate can be a good investment if you buy it in a good location at a low price.
But there are many hassles that come with it: property tax, repair costs, loud neighbors, problem tenants, management, etc. Bitcoin and stocks don’t have these hassles.
The real problem with real estate comes from opportunity cost. If you invest in real estate, you forgo the investment opportunities of bitcoin and stocks.
Historically, gold and silver were the best ways to store wealth and make small transactions, respectively.
Over time, people stopped using silver and focused on gold.
Because gold has the highest stock-to-flow ratio of any precious metal. The stock-to-flow ratio represents the hardness of a money — how much value it retains over time.
The stock is the total amount of the currency. The flow is the amount of the currency being printed, produced, or mined every year.
People naturally adopt the money with the highest stock-to-flow because it allows them to maintain purchasing power over time (rather than lose money to inflation).
Stock-to-flow is not the only metric to analyze when determining the quality of a currency. We also need to analyze how costly it is to physically transport.
Gold is quite costly to move. Dollars are less costly to move than gold, but still costly. Bitcoin is the least costly and takes the least amount of time to transport. Bitcoin wins this category by a large margin because it is digital.
- The quality of a store-of-value is measured by a high stock-to-flow ratio. Bitcoin has a higher stock-to-flow than dollars and will have a higher stock-to-flow than gold in 2024.
- The quality of a medium-of-exchange is measured by how transportable it is. Bitcoin is faster and cheaper to transport than both gold and dollars.
- Over time, people naturally switch to money that retains value and is easier to transport. People will naturally adopt bitcoin.
How much could Bitcoin be worth?
Bitcoin vs Gold
At the time of writing, gold has about a $10 trillion market cap. Bitcoin has a $1 trillion market cap. If you think bitcoin is worth more than gold, it is at least 10x from here.
If this model is correct and you invest $10,000 into bitcoin today, you’d have $100,000 when bitcoin surpasses gold. Much better returns than the S&P 500, bonds, real estate, or gold.
Bitcoin vs Bonds
Government bonds currently total almost $100 trillion. Bonds, like bitcoin, are used as a store-of-value. As bitcoin adoption increases, it will become less risky, making it a more attractive investment than bonds. If this scenario plays out, bitcoin could be worth almost $100 trillion, 100x from today.
Where can I get more info on Bitcoin?
Some of the ideas in this post came from The Bitcoin Standard by Saifedean Ammous. I highly recommend this book to anyone interested in crypto.