Sapiens | Antifragile: A Brief History Of Money & Bitcoin’s Antifragility
Bitcoin has been set on a path to become the most Antifragile monetary system ever created
When Hernán Cortés and his men arrived in present-day Mexico 500 years ago two attributes made gold a prized possession:
- Its scarcity
- Its non-sovereign store of value status
When asked by the Aztecs why they were so interested in the yellow metal, Cortés responded:
“…I and my companions suffer from a disease of the heart that can only be cured by gold” ~ Yuval Harari, Sapiens (Gómara, Historia de la Conquista de México, p. 55)
The Conquistadores have not been the only ones afflicted with such disease.
Throughout modern history, central banks have held a significant amount of the world’s gold supply. The value of gold tends to appreciate when geopolitical, economic, and stock market uncertainties increase. It has served as an inflation hedge in the event of monetary instability.
Historically, gold has been Antifragile.
But times are changing. The purchasing power of the fiat currencies that central banks continue to print is slowly being debased.
Today, the attributes that made gold desirable to the Spanish Empire — and to money printing central bankers throughout modern history — are the same attributes that make Bitcoin increasingly valuable:
- Its scarcity
- Its non-sovereign store of value status
- Its inflationary hedge characteristics
The basic understanding of supply and demand that Cortés knew applied to gold 500 years ago, now applies to Bitcoin.
These attributes have set Bitcoin on a path to become the most Antifragile monetary system ever created.
From Cowry Shells to Digital Gold
“Cowry shells and dollars have value only in our common imagination. Their worth is not inherent in the chemical structure of the shells and paper, or their colour, or their shape. In other words, money isn’t a material reality — it is a psychological construct. ” ~ Yuval Harari, Sapiens
Money is a system of mutual trust. Throughout history, this system has allowed humanity to establish a mutually agreed-upon value for cowry shells, gold, and the U.S. dollar.
This system develops in four stages.
- Collectible: hunter-gathers collected what they anticipated would be desired by others. Cowry shells and gold were initially collectibles.
- Store of value: as the supply and demand of a collectible reach an equilibrium, its value becomes less volatile. Gold became a trusted store of value once its price stabilized.
- Medium of exchange: once the value of gold stabilized it became a trusted method of payment. For a long time, the U.S. dollar was pegged to the price of gold.
- Unit of account: no longer pegged to the price of gold, the U.S. dollar nonetheless serves as a trusted unit of account. International commodity markets, such as the oil market, price commodities in U.S. dollars.
In 2020 Bitcoin is still transitioning into the store of value stage of this system.
The price discovery process that a collectible undergoes when transitioning into the second stage drives its price volatility. Figure 1 and Figure 2 illustrate Gold and Bitcoin price graphs covering different timeframes; the point of the comparison is to highlight their price volatility.
In spite of gold’s centuries-long utility as a store of value, its price volatility persists. Just 20 years ago the price of gold ($261/ounce) was at 14% of its recent price ($1,882/ounce), with significant price swings in between. Bitcoin, on the other hand, has existed for only 12 years; the December 16, 2018 Bitcoin price trough (the $3,236 Dec 16th price could not be picked up in the graph) reached a level that was 14% of its recent price ($22,867). [Gold’s 2018 price trough of $1,191/ounce was about 60% of gold’s 2020 peak price of $2001/ounce.]
Volatility — even pronounced volatility — does not equate to a speculative underlying asset per se. During the last 20 years, few investors would have referred to gold as a speculative asset.
What may appear to be the making of a second Bitcoin bubble could, instead, represent normal price volatility that occurs during the transition into the store of value stage of money.
A Transition Of Antifragility
1944 to 2020
FRAGILE: inflation, via central banks’ money printing, erodes the purchasing power of fiat currencies.
ROBUST: unlike other fiat currencies, the U.S. dollar has held a privileged position as the world’s main reserve currency.
ANTIFRAGILE: during times of uncertainty, the price of gold has increased. Its price doubled following the 2008 Global Financial Crisis.
2020 to Future
FRAGILE: Nassim Taleb believes the biggest tail risk in global finance is the possibility that the U.S. dollar ceases to be the main reserve currency.
ROBUST: its long history and extensive reserves in central banks’ vaults will help gold retain its store of value status.
ANTIFRAGILE: events that stress the blockchain ultimately strengthen Bitcoin. Confidence in Bitcoin as a store of value increases as a result.
* * *
Goldman Sachs has made similar observations to Nassim Taleb’s black swan scenario in which the U.S. dollar loses its status as the world’s main reserve currency. Such a scenario would likely expedite Bitcoin’s adoption.
Consider the following:
- The U.S. has added $6 trillion to the money supply (M1 + M2) in 2020.
- Black swan events are, by definition, unpredictable and unforeseen.
- Growing money supply + black swan hedging = ↑ Bitcoin demand ↑
Bitcoin In Stronger Hands
Billionaire investor Paul Tudor Jones recently allocated 2% of his hedge fund’s portfolio in Bitcoin, amounting to a $180 million position.
“I’ve never had an inflation hedge where you have a kicker that you also have great intellectual capital behind it…I think we are in the first inning of Bitcoin.”~ Paul Tudor Jones, CNBC Squawk Box
Several publicly and privately listed companies, see Figure 3, agree with P.T. Jones and have allocated a portion of their cash reserves in Bitcoin. MicroStrategy announced that it had purchased a total of 38,250 bitcoins worth approximately $700 million (at early December 2020 prices).
“…our treasury reserve assets will consist of (i) cash and cash equivalents and short-term investments (“Cash Assets”) held by us that exceed working capital requirements and (ii) bitcoin held by us, with bitcoin serving as the primary treasury reserve asset on an ongoing basis” ~ MicroStrategy, Form 10-Q, September 30, 2020
These financial entities have effectively notified the investment community that they have bought into the system of mutual trust which deems Bitcoin as being a viable store of value.
Additional fund managers and companies are likely to follow suit, anticipating that Bitcoin will continue to be valued as an inflation hedge. This is a similar process through which earlier civilizations anticipated the desirability of gold, and which ultimately turned it into a trusted store of value.
Importantly, this new cohort of Bitcoin investors will include “stronger hands”, better positioned to advantageously buy price dips. The price of Bitcoin will likely still be volatile, yet these new entrants could add a more stable price floor.
Disease Of The Heart: A New Cure
BlackRock is a global investment company. Through a subsidiary, it provides advice to financial institutions, governments, and central banks. BlackRock’s Rick Rieder, CIO of Global Fixed Income, recently stated:
“I think cryptocurrency is here to stay. I think it is durable, and you’ve seen the central banks that have talked about digital currencies.” ~ Rick Rieder, on CNBC
If the U.S. dollar undergoes inflationary pressure, central banks will seek to reduce their exposure to it. Bitcoin will be one of the obvious alternative assets to diversify into. Evidently, central banks are already considering preemptive hedging strategies that involve cryptocurrency.
Some nations, in fact, have a geopolitical incentive to adopt a new reserve currency. They are in a position to benefit if the U.S. dollar loses its hegemonic influence.
Bitcoin's non-sovereign store of value status and inflationary hedge attributes are now too obvious for individual investors, companies, and even nations to ignore. Its convex return potential, in-and-of-itself, makes it attractive; and perhaps even an optimal (if not prudent) allocation in any portfolio.
Given its scarcity, incremental increases in Bitcoin’s adoption rate — even by just a small percentage of investors — will increase its price. The extent to which this virtuous cycle can grow is still unfathomable to most investors.
When U.S. delegates of the future ask heads of nations why they are so interested in “digital gold”, these leaders may well respond:
“…I and my companions suffer from a disease of the heart that can only be cured by Bitcoin”.
No longer cured by only gold.
Or the U.S. dollar.
If so, the logical evolution of Bitcoin will perpetuate accordingly, setting it on a path to become the most Antifragile monetary system ever created.
Author also wrote: N. Taleb’s Minority Rule | Your Inner Voice | Bitcoin’s Volatility | Blockchain Stocks | 50 Investment Lessons | Flywheel Effect | Bitcoin: Mental Framework | Crypto Moonshots | 4 Crypto Stocks | Bitcoin: Insurance | Spontaneous Order | Ackman’s $2.6B Moonshot | Fragility Inducing Events | Antifragile: Definition | 1% Bitcoin: 99% Cash | COVID-19: Market
Disclaimer: Topics covered herein are for informational purposes. Before acting on investment information consult with a financial professional. This article is intended for people who understand the pro/con impacts of “tail-risk,” “convexity” and asymmetric risk-reward in the context of an investment portfolio. The price of Bitcoin will likely remain volatile.