May 15, 2024 | Read Online

Byron Gilliam

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"Money was established for exchange, but interest causes it to be reproduced by itself. Therefore this way of earning money is greatly in conflict with the natural law."

- Aristotle

Productive vs. Non-Productive Assets: The 2,000-Year View

Bitcoin shot higher today following CPI data showing slower-than-expected inflation.

That's evidently because slower-than-expected inflation will allow the Fed to lower interest rates, which will in turn lead to higher-than-expected inflation, which in turn is good for bitcoin.

Got that?

Such is the logic of markets on a day-to-day basis.

Gold is up today, too — not by as much (just 1% vs. bitcoin's 7%) but presumably for the same counterintuitive reason.

Given the longer trading history in gold, however, we should know better by now.

A recent study found that "historically, the realized 10-year rate of inflation has had close to no impact" on the price of gold.

Why, then, do we bother?

I guess because we hope to be around longer than 10 years. And we know that holding fiat currency for that amount of time puts us, as Michael Saylor phrases it, "on the wrong side of an economic war."

Holding gold allows us to at least fight to a draw, although it might require some patience.

The aforementioned study also notes that in the time of the emperor Augustus, Roman centurions were paid an annual salary of 38.58 ounces of gold, worth $86,342 in today's dollars.

Amazingly, the modern equivalent of a Roman centurion (a US Army captain ) now makes an annual salary of — wait for it — $85,594.

That is an impressive, if slightly eerie level of precision for a store-of-value asset intended to maintain its purchasing power.

But is that the best we can do?

What if we had taken Aristotle's advice and let our money work for us by buying equities instead?

The sample size for equities isn't measured in millenia as it is for gold, but here's how we'd have done over the past century:

The dark bars in this chart from John Auther's newsletter represent the real (i.e., inflation adjusted) returns of US equities over different time periods.

The one at the top is entirely to the right of the center line, which demonstrates that equites have never returned less than inflation over any 20-year period since 1925.

Never is pretty good!

Especially considering that the sample includes the epic stock market crashes of 1929, 1987 and 2008/9.

Despite those terrifying drawdowns, holding equities for the long run has always increased your purchasing power.

That's not to say they are risk-free: You might sell at the wrong time, for one thing, and past returns are no guarantee of future returns.

For a guaranteed return, the only thing to buy is US Treasurys, considered "risk-free" because it's the only asset where you're guaranteed to get your dollars back (barring a voluntary default).

But in the meantime, those dollars will have lost some of their purchasing power.

Hence the attraction of gold, which, simply because it's scarce, has maintained its purchasing power with such eerie precision over millennia.

Scarcity is not, however, the only way for an asset to hold its value.

Assets can be productive, too — and productive assets, as demonstrated by the 100-year track record for equities, can do better than inflation, presumably forever.

The compounding really adds up on the forever timeline.

Imagine that instead of investing in gold in the year 24 BCE, you bought Roman equities (had they existed) and those equities outperformed inflation by a modest 1% per year for the next 2,000 years.

Your ounce of gold purchased in 24 AD (or any other year, for that matter) would now be worth a respectable $2,389, but your equities portfolio would be worth $1,049,454,743,864.70.

$1.049 trillion!

This is a thought experiment, of course — in reality, you probably would have been wiped out when the Visigoths invaded or panic-sold everything during the bubonic plague (an obvious buying opportunity, in hindsight).

But it's a thought experiment that illustrates the power of compounding interest, and therefore the power of investing in assets that are likely to outperform inflation.

History shows that productive assets are likely to outperform inflation.

One easy trick to be a trillionaire

Bitcoin might outperform inflation, too, of course — but perhaps only until it catches up with gold.

Gold is a non-productive asset, and as such, there's no reason to think its purchasing power should rise over time — keeping pace with inflation is the best you can expect it to do.

We can expect more from bitcoin because it's still in the process of taking market share from gold and that represents a lot of upside still.

Taking half of gold's share of the store-of-value market would mean bitcoin trades at at least $400,000.

Once that process is complete, however, is there any reason to think bitcoin, also a non-productive asset, can do better than inflation over the long run?

This, I think, is why Michael Saylor says "digital gold" is not a good narrative — the upside is too limited.

In the ongoing "economic war" with government-issued money, Saylor wants to do better than just fight to a draw, so he wants bitcoin to be more than just digital gold.

Gold, he notes, "hasn't made any billionaires," and that's why the narrative of digital gold isn't ambitious enough for him.

As noted in Monday's newsletter, I think he still has some work to do on introducing a better narrative.

In the meantime, he might want to consider productive assets — because those can make trillionaires.

(If we live long enough.)

― Byron Gilliam

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Is this enough to bring about the end of crypto mixers?

Mixers such as Tornado Cash have clearly hit a nerve with governments worldwide. The US government is looking to seriously inhibit or scare people away from using these services.

The chart shows there are still cash deposit transactions happening on Tornado Cash, but there is a clear drop-off around August 2022, when the US government sanctioned the mixing service.

So while their scare tactics haven't spooked everyone off yet, it's clear that they've done some damage to the number of folks using these services.

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The Dark Side of Token Launches

In today's episode Jason is joined by Arthur of DeFianceCapital and Sean of Fintech Collective. They kick off the episode by discussing the current state of token launches, highlighting the unsustainable model of low float and high fully diluted valuations that often leave retail investors at a disadvantage. They explore the challenges in accurately valuing crypto assets and the need for better alignment of incentives between teams, investors, and the broader market.

Watch or listen to Empire on YouTube, Spotify or Apple.

Jurrien Timmer @TimmerFidelity

The market remains on-course in terms of tracking past soft landing analogs, including the 1994-1995 and 1966-68 cycles.🧵

May 15, 2024

10 Likes 0 Retweets 1 Reply

Nick Tomaino @NTmoney

Thoughts on current state of onchain games:

Many say crypto needs great game devs to enter and build great onchain games. That is clearly not enough tho. Many big trad game devs have tried onchain. Nothing has broken through.

What is really needed is a good game + a team that… x.com/i/web/status/1…

May 15, 2024

14 Likes 2 Retweets 3 Replies