The Bitcoin Newsletter #3 - Bitcoin, banks, and treasury management
Bitcoin Ski Summit, SXSW, Treasury Management, and Silvergate, SVB, & Signature crisis.
INTRO
Welcome to the 3rd edition of The Bitcoin Newsletter
The supply of money matters. What happens if there are 1,000 units of money in the economy (you have 100 of those units) and the government increases the money supply by 1,000 units? Your 100 units are now worth half as much as before the doubling of supply.
This is what is happening in the fiat economy. Fiat money (government issued money that is not backed by a commodity) is continually inflated and devalued by central banks. As the supply of money increases, it loses value and market participants are forced to look for ways to preserve the purchasing power of their money, driving them to invest and not save. Most think investing is the same as saving. It is not — saving is simply holding onto money.
Investing is putting your money to work. ETFs have become one of the most popular ways to invest. In this edition of the newsletter, I'm going to talk about the problems associated with investing in general, ETFs in particular, and how Bitcoin can help.
Finally, I will explain how the problem of a financial reality where we cannot save because money keeps depreciating has led to the recent debacle of Silvergate, SVB and Signature banks and why bitcoin as a reserve asset is a solution here too.
Best regards,
Leon
DEEP DIVE
Bitcoin is an ETF on global ingenuity
Exchange Traded Funds (ETFs) are a popular way for people to invest their money. They were created from a type of investment strategy called index investing, which means the manager tries to match the fund's holdings to a benchmark index. With the intention of minimising risks. Over the years, the amount of money invested in ETFs has grown significantly, increasing by 3,000% from $204 billion to over $10 trillion from 2003 to 2022 (source: statista.com).
ETFs can be helpful in the "fiat world" because fiat money doesn't hold its value over time. However, there are risks involved in investing in ETFs. When you invest in an ETF, you invest your money in a financial instrument that uses fiat money as its unit of account, which is problematic because fiat money declines in value over time due to monetary inflation (increase of the money supply). Currently, most ETFs can't keep up with the rate of monetary inflation. Furthermore, it has recently been revealed that any asset held by a third party tied to the fiat system is susceptible to rapid loss. Many people have the intention of using ETFs as savings, but they are actually risky investments because of the connection to the fiat system.
Bitcoin, on the other hand, is a great way to save and preserve the value of time and effort. The Bitcoin Network exists outside of the fiat system. Bitcoin the currency has a fixed supply that is predictable, verifiable and cannot be increased at will, so its value does not decrease like fiat money. It can also be custodied by the individual, mitigating the risk of third parties. With near-perfect money like bitcoin, all other tools for maintaining purchasing power become unnecessary. There is no longer a need to invest in ETFs to offset monetary inflation; saving in bitcoin is enough.
Because of its fixed supply cap and other characteristics, bitcoin is the best type of money and it is becoming inevitable that everyone will use it over time. As bitcoin adoption grows, bitcoin’s value will grow along with humanity's productivity. By holding bitcoin, you can benefit from the productivity of everyone else using it, making it an “ETF on global ingenuity”. If you want to learn more about this topic, I recommend reading my new article, "Bitcoin is an ETF on global ingenuity". LINK
Throughout this newsletter, we have been operating under the assumption that bitcoin is a sound, or near-perfect, form of money. Whether or not this is actually the case is beyond the scope of this newsletter. However, if you would like to learn more and come to your own conclusion, we have provided some articles in the resources section of the appendix below.
WORTH TO KNOW
Bitcoin Ski Summit 2.0
I recently attended the Bitcoin Ski Summit 2.0, held in Jackson Hole, Wyoming. This invitation-only gathering is meant for entrepreneurs, investors, miners, policy experts, and local leaders to come together and discuss the Bitcoin Network. I participated in a panel discussion on the Macro Case for Bitcoin, where I shared my views on bitcoin and real estate in the greater macro environment with other experts. I also recorded a podcast for the “What is Money?” show with Robert Breedlove (to be released soon) discussing the ethics of money, exiting the fiat system, and bitcoin as digital real estate.
The Summit, organised by Amanda Cavaleri, brought together some of the brightest minds in Bitcoin and beyond. The United States FED meets annually near where the event was held and the gathering is meant to a beacon for those building outside of the fiat system. Bitcoin is a lifeboat that has the potential to cary humanity out of the “dark ages” of central banking into the next great phase of human flourishing. I'm excited to see how Bitcoin will positively impact the world. LINK
IDEAS OF INTEREST
Silvergate, SVB, & Signature crisis.
What happened at Silvergate, SVB, and Signature has exposed the flaws in the fiat system and larger crypto industry (digital assets sans bitcoin). Silvergate and SVB used government bonds, which have become a virtually worthless asset class, for hedging. The strategy backfired. Assets linked to the fiat system are exposed to high risk because they cannot outpace growing inflation. Central bank decisions can have dire consequences when interest rates change. This especially affects bondholders.
Silvergate and Signature have banked a number of crypto companies in an attempt to capitalise on the growing misallocation of capital — a consequence of low interest rates and excessive "money printing" over the past decade. There was so much money available that investors and institutions poured capital into precarious projects. That too backfired. We can expect the problems in the banking system to get worse from here. Crypto, with its fiat-like business practices, adds additional risk to intermediaries and an already shaky financial system. Crypto is a leading indicator of the larger systemic problems because the fringe nature of crypto is first to expose weaknesses in the fiat-based financial system.
Bitcoin is a solution to this problem because it is “sound” money. It leads to the development of strong business practices, appropriate capital allocation as bitcoin acts as a benchmark, and robust financial services models that extend to loans, IRAs, and equities (as more public companies will be exposed to bitcoin by mining it or holding it on the balance sheet). The events of the past week underscore the importance of a Bitcoin strategy, as the Bitcoin Network operates outside of the fiat system and acts as a true hedge.
When bitcoin is stored in cold storage, those bitcoin are the holders alone and are not at risk of default by third parties, including banks or exchanges, or rising monetary inflation and central bank decisions. Bitcoin price action since Friday (03/10/2023) shows that market participants are beginning to understand how to truly store their value. While banks are crashing, bitcoin grew in strength.
From conversations at SXSW in Austin this week, venture capitalists and tech companies in particular are beginning to understand the advantages of Bitcoin over the traditional banking infrastructure. Founders are starting to use bitcoin to protect part of their treasury from a banking system failure, preserving the value of their capital raises and riding the upside of a deflationary money.
Because bitcoin is highly volatile, it's important to use only a portion of a company's treasury to buy bitcoin (2-5% seems to be typical). This is not money that is needed to make payroll or pay vendors. A bitcoin stash is a long-term treasury management strategy outside of the traditional banking system’s current uncertainty. It is also ideal to have a holding horizon of 5-10 years as bitcoin appreciates in value over time.
Be it an individual or company, holding bitcoin (global ingenuity ETF) can preserve the value of capital. It also allows the individual to save and build wealth. With timing, it can boost a company’s balance sheet and allow for a higher multiple at exit.
Resources
statista.com - ETFs, statistics & facts
Some useful articles to understand why bitcoin is (becoming) money
Vijay Boyapati - The Bullish Case for Bitcoin
Arman The Parman - The Problem With Money and the Solution Explained
Arman The Parman – “Bitcoin is Too Volatile!”
Arman The Parman - Why Money Tends Towards One (With Proof)
Photo Credit: labs.openai.com
Disclaimer: the content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. If you like to build on my thoughts, feel free, but please cite me as the source. 2023 - Leon A. Wankum.
If you want to support me. Feel free. You can send me some satoshi/bitcoin.
My lightning address is: law@getalby.com
My bitcoin address is: bc1qyc9q89wjzmvaw729tj3wsrsfhft53mjycrjxdk