I'm somewhat using it as a stand-in, but I do have this gut feeling that bitcoin has a few characteristics that will make it the standard (more on this later).
I also think there will be digital dollars issued by central banks. In that respect, I don't see Bitcoin being used for day to day financial transactions. I see it being used as a backing value store for these digital dollars though.
I think economists and central banks throughout the world are reluctantly coming to grips with the effects of going off Bretton Woods:
- There is more influence over financial cycles so they can be smoothed over to help with the functioning of day to day life. This is desirable.
- The above influence has gone too far and has created an epic asset bubble and economic disparity that is even concerning to many of the world's most powerful and wealthy (i.e., it's creating an existential risk to them). Obviously this is undesirable and even worse, the central banks have no potential solutions to deal with this in their existing toolchain.
Why do I think bitcoin will win out? Somewhat for the same reasons I'm skeptical of that backdoor scenario. The major national governments have little trust amongst themselves, this trust is getting worse, and we're seeing an adversarial situation play out.
- China and some other economies outside the G7 want off of the USD as a reserve currency
- The G7 are reluctant to accept a world in which China exerts the financial influence they give up
All will realize something in the world's financial system has to change and for the sake of world peace a new arrangement is worth a shot. But none of these adversaries trust each other in such a way that a nationally derived crypto would be acceptable as the basis for a value backing store. Furthermore, existing assets will inherently be untrustworthy too because they're in a bubble. Nobody knows the true value of a house any more. Step in crypto...
- I don't think it will be Ethereum because as I said, reputation has been tarnished (there may be Russian influence). But it also tries to do too much and that may be undesirable for a value backing store.
- I think it will end up being Bitcoin simply because it's a lot more simple. It does less. And furthermore, nobody really knows who invented it so it is inherently not tied to any given nation. Or at least there's plausible deniability about it having been invented by a particular state.
- Other cryptos are distant runners up to these two main players so I don't see any other viable alternatives
I know it sounds farfetched but hear me out. Stranger things have happened.
Bitcoin is a speculative asset like housing and used cars currently are in 2022. But the similarities end there. All the other speculative asset classes have been triggered precisely due to quantitative easing policies. Their current prices have been derived from this fiscal policy. As ridiculous as it sounds, bitcoin’s price is quite literally a bet against the future performance of these world currencies. As the speculative asset classes have their foundation in current fiscal policy, Bitcoin is a bet against their performance too.
Bitcoin has minimal carrying costs as an asset. The same can’t be true of other speculative assets like homes which have become financial instruments due to investors pouring their wealth into anything besides currencies in a desperate attempt to hold value over time. In many countries now, and increasingly so, the only way to profit off housing is through appreciation. Rent will not cover the carrying costs of the mortgages taken out against these homes. These assets have entered bubble territory, decoupling from any rational metric like average incomes.
Holding Bitcoin costs essentially nothing. Sure, there are idiots who invested through leverage. But there are many more who haven’t who can afford to hold on through all sorts of adversity. That makes it quite unlike these other speculative assets.
As a backing store for central banks, it holds value because it’s auditable. Bretton Woods fell apart in no small part due to countries becoming sceptical that other countries actually held the gold they said they did. The amount of Bitcoin each central bank holds would easily be auditable by others and that makes it valuable.
It only sounds foolish because we are used to thinking of measuring Bitcoin against the dollar. Rather, view the amount of Bitcoin each central bank would hold as an auditable hash of all its assets. Then view the digital currencies these central banks would issue as denominated in fractional units of this.
In the world where we value Bitcoin against USD, it sounds foolish because we don’t have enough Bitcoin to act as a foundation for all of it. But what if we have too much money in the world? Bitcoin’s fixed 21 million limit provides a means of truly measuring the rate at which currencies are inflated. Some inflation is of course desirable and Bitcoin could be an inherent regulator ensuring a healthy amount of inflation.
Note, this perspective equally pisses off Bitcoin skeptics and libertarian die hard hodlers. I have a very good chance of being wrong of course. But it’s not as farfetched as we’d initially suspect either. The biggest reason against this scenario isn’t the financial aspect, but the incredible shift in power that would result.
Current Bitcoin investors would find themselves suddenly incredibly wealthy and powerful. We don’t typically see shifts in power like this. But it happened to Saudi Arabia and other people who struck it suddenly rich (and powerful) with oil. So it isn’t unprecedented.
These are complexed nuanced ideas, and not really able to be confirmed objectively one way or another.. so for that reason I appreciate your detailed thoughts but I won't be replying in detail.
One thing I did want to reply to is the idea that house rents will not cover carrying costs of mortgages.
I think this is a telling point and focus on it because I think it's very telling regarding the mindset of crypto investors vs housing or traditional value investors.
The key difference is housing is a get rich SLOWLY system, not a get rich QUICKLY system. But crypto has been a flame for the moths of get rich quickly schemes. Previously this was the domain of ponzis, MLM schemes, various fake investments, tulips etc. While some people in Crypto may not all be of this ilk, the majority mindsets of it seem to be. I don't see many talking about HODLing for a lifetime, but only until they strike it rich somehow, generally with a minimum of work and minimum of value provided back to society in exchange for somehow getting rich, quickly.
With this in mind you say house rent does not cover holding costs such as mortgage payments (and repairs, government costs, management fees, insurances etc etc). That statement is only true when looking with a short term perspective. Which is the perspective of most people attracted to get rick quick schemes. However the statement on housing income vs costs is actually incorrect, is wrong, when looked at in with a long term mindset. This is because over time inflation increases rent while shrinking the mortgage which gets eventually paid down (in the average mode of housing investment outcomes). So when you see the fullness of time, housing investments can more than pay for their costs, while also providing capital gain. This is actually by design, it's structured, to share value between the investors for good management over the long term, and between society which gets the provision of housing provided, and managed, for the long term. This is an outcome of government policy, by design.
With that in mind, it may be that the fact that you've considered the short term perspective, may be an important insight into your thinking, may be an opportunity for you to expand the range of your thinking, should that provide you value in the fullness of your life! Anyway, just some thoughts to share!
I also think there will be digital dollars issued by central banks. In that respect, I don't see Bitcoin being used for day to day financial transactions. I see it being used as a backing value store for these digital dollars though.
I think economists and central banks throughout the world are reluctantly coming to grips with the effects of going off Bretton Woods:
- There is more influence over financial cycles so they can be smoothed over to help with the functioning of day to day life. This is desirable.
- The above influence has gone too far and has created an epic asset bubble and economic disparity that is even concerning to many of the world's most powerful and wealthy (i.e., it's creating an existential risk to them). Obviously this is undesirable and even worse, the central banks have no potential solutions to deal with this in their existing toolchain.
Why do I think bitcoin will win out? Somewhat for the same reasons I'm skeptical of that backdoor scenario. The major national governments have little trust amongst themselves, this trust is getting worse, and we're seeing an adversarial situation play out.
- China and some other economies outside the G7 want off of the USD as a reserve currency
- The G7 are reluctant to accept a world in which China exerts the financial influence they give up
All will realize something in the world's financial system has to change and for the sake of world peace a new arrangement is worth a shot. But none of these adversaries trust each other in such a way that a nationally derived crypto would be acceptable as the basis for a value backing store. Furthermore, existing assets will inherently be untrustworthy too because they're in a bubble. Nobody knows the true value of a house any more. Step in crypto...
- I don't think it will be Ethereum because as I said, reputation has been tarnished (there may be Russian influence). But it also tries to do too much and that may be undesirable for a value backing store.
- I think it will end up being Bitcoin simply because it's a lot more simple. It does less. And furthermore, nobody really knows who invented it so it is inherently not tied to any given nation. Or at least there's plausible deniability about it having been invented by a particular state.
- Other cryptos are distant runners up to these two main players so I don't see any other viable alternatives