A letter to traditional investors: The rationality of investing in digital assets from a macro perspective


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Long-term holding of digital assets will keep us in step with the macro trends of technological progress and currency devaluation.

Written by: Eric Peters, CEO and Chief Investment Officer of One River Asset Management. One River is an American asset management company that has recently received investment from billionaire and well-known hedge fund manager Alan Howard, and has purchased more than $600 million in Bitcoin. Compilation: Perry Wang

Human imagination is the most powerful force in the universe, this is the biggest difference between humans and other creatures, there is no higher position than its strength. Humans have the ability to conceive a better tomorrow than today, which is to explore the premise invention. These things add up naturally. It is this combination that pushed human history from the Stone Age to the Space Age.

The journey has just begun. Except for the most desperate pessimists, this should be obvious in everyone’s eyes.

Eric Peters, Chief Executive Officer and Chief Investment Officer of One River Asset Management

From an economic perspective, the human ascent is defined productivity improvement, increased productivity determines the degree of prosperity. In modern society, the way we came up with a variety of distribution of wealth: socialism, communism, free-market capitalism. I can imagine there are other ways. But even in the existing structure, there are subtle differences. Today, the profits earned by capital owners are much higher than those earned by laborers. There is no inherent reason to believe that this level of inequality cannot be sustained, but this situation has never really been sustained in modern history. This inequality generated social pressure is very clearly demonstrated, it is intensifying and metastasis.

The overwhelming majority of private enterprise organizations believe that they are more capable of research and development capital than the government. However, look at state-funded innovation over the past century can be traced back, it will show that it is not. I think one day, we will think this black and white conclusion is stupid. China’s unprecedented economic growth and amazing technological progress should prompt Westerners to reflect on themselves. So far, the West has not had such reflection. I can imagine that the future may be forced to accept this kind of reflection. Maybe it’s sudden and it’s caught off guard.

In fact, I can imagine many things. I can imagine almost everything, of course, except for the things I never thought of. Those are unknown unknowns, black swans.

In my life, which has not a black swan is able to reverse human progress, not to mention the market. The influence of the black swan will not last long anyway. The bankruptcy of Lehman Brothers in the 2008 financial tsunami was not a black swan. I have worked at Lehman for 7 years, and most of the time during that time I imagined the sudden collapse of this company.

Today’s global COVID-19 pandemic is not a black swan either. This is almost certain, although the date of its end is unknown. Black swans are usually magnificent and indistinguishable from magic-the Internet, smart phones, cloud computing, quantum entanglement. Big risks tend to move upwards and often appear. This is why we humans no longer live in caves. However, our imagination periodically with Cataclysm crazy. I think this will never change.

This is why I invest. Investment is to identify the major macro-trends. Currently, two major trends of recent decades is clear: the amazing technological progress and the deepening of the global trade. Without the former, the latter cannot be true. The common influence of the two has changed the world forever, connecting nearly 8 billion people with each other in previously unimaginable ways, allowing instant exchange of information, ideas and new forms of collaboration. Not only that, this progress also allows every curious person to wake up every day to be exposed to collective discovery and knowledge.

Of course there are other trends. Population growth tends to slow down with an unstoppable trend. In developed economies, began to move towards an aging society. First is Japan, then Europe, and China has also entered this trend. These trends interact in complex ways, resulting in a deflationary environment, natural beneficial owners of capital rather than labor. Most governments ignore this growing imbalance and its corrosive social consequences. In fact, the policies they implemented amplify this problem: every time in the face of economic disruption, governments of various countries adopt policies of lowering interest rates, increasing debt, and increasing leverage to reverse the decline, which pushes up asset prices and exacerbates the problem. Equality phenomenon.

This process is reflexive, since each crisis requires a more aggressive monetary stimulus and monetary stimulus itself is itself the cause of economic vulnerability. This mechanism is to stimulate demand pull from the future now, and therefore does not require any imagination can foresee: the process is finally living beyond.

This act came to an end during the economic depression in early 2020. In response, Western governments began to adopt new forms of policy stimulus measures, issuing an unprecedented number of bonds, and then buying these bonds with funds created by their central banks.

Students of economic history is clear, when the government intends to borrow the currency devaluation, it will be familiar with the implementation of this policy mix. The government can reduce its debt burden by this means. This is a very reasonable late-cycle response to the dilemma, and it has been tried countless times throughout history. I can imagine that this time it will be smoother at least for a while. However, as an investor who makes decisions based on probability adjustment, this is definitely not a way to determine the investment portfolio, especially when traditional asset prices are discounted.

I will therefore invest sights on digital assets.

Money is an illusion, perhaps the world’s greatest fantasy. Out of desire and necessity, we succumb to this hypnosis. Without money, we are at a loss. Although we adhere to its so-called permanent, but a quick review of history will know, in fact, money is shake their dream.

A letter to traditional investors: The rationality of investing in digital assets from a macro perspective

In fact, the governors of the Federal Reserve have stated that they intend to permanently reduce its value at an annual inflation rate of 2% . From the global financial crisis in 2008 to the economic collapse in 2020, that is, in just twelve years, they failed to achieve the set goal of devaluing the U.S. dollar at the set pace. The reason for the failure is not a lack of attempts, but a misunderstanding of the true meaning of money.

Currency is not real, and it is never real. Is our collective belief in the significance of the currency, given the real value of money. Even gold is not a true form of money. But for thousands of years, people have been on such a useless yellow metal have collective beliefs as a store of value, and sometimes also it as a medium of exchange. Naturally, other equally useless things can also achieve the purpose. But gold is scarce, for reasons we may never fully understand, we put the collective belief of gold. Even so, we are still mining more gold every year. With the passage of time, its mining speed continues to increase and its supply increases, so its value is permanently depreciated by 1%-2% every year. With the advancement of mining technology, this pace will accelerate. The world produced 2,470 tons of gold in 2005 and 3,300 tons of gold in 2019. In a few decades, we will definitely mine gold from asteroids.

Bitcoin appeared mysteriously in 2009. A black swan. The technologies that are combined to form the Bitcoin blockchain are not particularly novel or compelling. But, like all the black swan, which together constitute a revolutionary future.

Some people have known Bitcoin early and devoted themselves to it. Others enter the market to place bets and make profits. Some people buy and hold, becoming millionaires and billionaires. I once thought that governments are less likely to make long-term existence of Bitcoin, because the government could never give up the right to mint, instead, the government will adopt some form of a digital currency, making it the dominant currency, and then destroyed initially developed forms of private digital currency system.

But things in the world are not absolute, and therefore there is always a certain possibility: Bitcoin and subsequent digital assets are allowed to coexist in dollar digital world. At first the road seemed extremely narrow. As time goes by, it will gradually become wider. Bitcoin and widespread adoption of Ethernet Square, as well as the rapid development block chain ecosystem of innovative companies, making government more difficult to destroy these private systems. It is increasingly easy for people to imagine a world in which Bitcoin and other digital currencies can prosper together with the digital dollar and completely disrupt finance in ways that are currently unimaginable.

It is in our national interest to allow this to happen. The United States should embrace and encourage this vision, and set an example to lead the world.

But everything is risky. The risk to these assets is not just that the government wants to destroy them. Its structure is unknown defect may also lead to failure, so shake people’s faith in its value. Or large-scale thefts will also trigger enough vigilance to make investors abandon relevant asset classes. It may even be that new digital assets are easy to create, which means that we will not be able to concentrate our collective beliefs on any kind of digital assets, leaving many assets with little value.

I can imagine that all these risks will emerge, although due to one of the most interesting characteristics of digital assets -reflexivity , the risks tend to decrease in each case.

At present, most people still believe that digital assets are worthless. They are not wrong. Overall, the creation of digital assets as the Fed digital dollar credit from banks as easily, that can be no cost to create an unlimited number of digital assets. But imagine that if we want to choose one or two digital assets as the objects of our collective belief, it is like selecting gold and silver from the periodic table.

Now imagine: gold and silver is different is that the supply of these digital assets are capped and unlimited legal tender is unique in the world of such objects. It is not difficult to imagine that these assets will become very valuable.

There is no value reference for Bitcoin. This characteristic in itself makes Bitcoin unique. Regardless of the rise or fall of Bitcoin’s price, its production pace follows a predetermined path, halving every four years until the last of 21 million Bitcoins are mined in 2140 .

In the real world, when the price of gold suddenly rises, its output will increase. The same is true for oil, copper, housing, stocks, bonds, and everything in the infinite universe. When currency prices bit 10 or 100 times, the yield does not increase. In today’s upside-down world, an even more fascinating inversion has been created: an asset with a capped supply but no intrinsic value can become invaluable only by our imagination.

I can imagine how people first formed a belief in the value of gold. Gold unique color, density and malleable, so that people can grasp it by hand, I believe its authenticity. True beliefs must stand the test repeatedly, relentlessly, and mercilessly, and survive every time. In the culture of the countries, the great ancient story for some reason are exploring beliefs, core values is to explore who we really is. This is the basic element, without it, human beings will be lost. Block chain technology to provide mankind with a way to let people build confidence in the new system, but until recently this new system is still unthinkable. This new system is extraordinary, resides in the cloud, and becomes stronger and more resilient as we interact with the cloud more and more. As these visions come true, it becomes more and more valuable. This in turn attracted more people to participate.

As people interact with such a novel system, the weaknesses of the system will naturally be exposed. People’s faith began to waver, and some people left. But others contributed talent and investment, working to improve the system; storage safer, more solid the code, do not trust the participants were deleted, good money drives out bad money, use cases continue to grow. When these forces interact in infinitely complex ways, our confidence in the system rises, pushing the price of its digital assets upward.

Prices sometimes become crazy. Since the advent of Bitcoin, the price has risen and fallen wildly six times. Bitcoin has recovered from each surge/pump, becoming stronger and more resilient . In each cycle, Bitcoin attracts more smart and ambitious entrepreneurs. They regard Bitcoin and Ethereum as the technology platforms that constitute the future of currency and finance, and they also believe that they will create what we cannot yet imagine. good thing.

As people put their energy into this new system, Bitcoin’s promise goes far beyond the simple scope of digital currency. This has attracted new investors, innovators, and each additional government destroy the system will increase the difficulty. On the contrary, the incentive to encourage the coexistence of this new technology with the digital dollar is growing. As investors observe these trends would be more willing to invest, and the more investment, the government will also become more difficult to remove it bigger. This process is also reflexive. This is in today’s world upside down and caused a huge upside: this is not the intrinsic value of the assets has become more and more security, more and more its price rises.

This brings me back to thinking about investment issues, that is, considering risks and rewards, evaluating the possibility of many possible outcomes, and countless ways to achieve goals. But good investment also involves constructing a thoughtful investment portfolio. Today, the dominant structure is a high-value portfolio of risky assets with negative returns of risk-free assets combined with long-term trends and policy options to make this mainstream configuration vulnerable to a single risk – inflation. In addition, investor position portfolios are most susceptible to precise results actively produced by the government.

The current mainstream investment portfolio including stocks and bonds. The current yield on bonds is lower than at any time in human history. The stock price-earnings ratio is close to the highest point in history. Therefore, in today’s world, investors must obtain an annual rate of return of 7% to avoid bankruptcy, and they use investment leverage to expand their gains and losses. Unfortunately, at this rate of return, bond gains are unlikely to offset stock losses during recessions. During the inflation period, bonds will suffer losses, and historical experience tells us that bond losses will then bring stock losses. In a recession accompanied by inflation, securities investment losses will be catastrophic. Most people cannot imagine all this. But this is not as difficult as imagined. When people lose confidence in fiat currencies, an inflation recession (stagflation) occurs.

In the absence of inflationary policies in the past decade or so, governments have recently undergone dramatic changes in monetary/fiscal stimulus on an unprecedented scale. The global epidemic provides a catalyst for politicians to temporarily support this new policy paradigm. However, monetary/fiscal stimulus of this scale is difficult to reverse. As mentioned earlier, this stimulation each time accompanied by currency devaluation. It is unwise to bet that this policy fails. Even if the deeply divided US government adopts a new austerity policy, leading to another economic collapse, the call for more radical currency devaluation actions will immediately recur. And more powerful.

Beliefs are not static. It is slow, arduous and suddenly lost. Therefore, it is likely that for a period of time, the current policy appears to be appropriate, even prudent. I can easily imagine this situation, and it is as easy to imagine the opposite situation. But longer-term trends are hard to imagine, because the government is not bound by monetary/fiscal policy coordination. What if more radical policy stimulus measures fail to reach the inflation target for a long time? Adding to the attractiveness of digital assets in the portfolio is that they help mitigate this devaluation risk, without having experienced negative returns in the wait and see.

But digital assets not only helps to mitigate downside risk in the portfolio, but also allows people access the latest vision of humanity “black swan” of commitment to this emerging technology has just begun to reshape the currency journey. That was the last inversion of today’s upside-down world, because only at such a strange moment can we make highly convex bullish bets on a brighter future for mankind, and at the same time guarantee that investors will not face serious problems because of our mismanagement. as a result of.

As each day goes by, the world’s most intelligent people, more and more people into the work contribution, and enhance the people’s confidence in these new digital system on the work as a whole. These people have never met, never knew each other’s names, where they were prescribed, or did not need a common language. They share a common belief. They collaborated in ways that were impossible a few years ago, improving the code that supports these assets, building architectures and interfaces that integrate these systems with existing financial participants, and creating new products and new features. Further on Ethernet and token bit Fong assets constructed second layer L2 applied to improve the functionality, speed, efficiency and availability of public chains. This ensures that future digital asset innovations will emerge one after another, and tomorrow will look better than today.

We all try to imagine how high an asset can rise and how deep it can fall. The latter is easy. In theory, each digital assets are likely to zero, although extremely difficult to imagine the collective will appear this situation. It is not difficult to imagine that in a world where legal currency can be created infinitely, the value of these digital assets can rise many, many times when the actual use of these digital assets continues to increase. Bitcoin value certainly more than gold. Owning these assets will become the foundation of the future, because all our perceptions of financial intermediation and its relationship with centralized policies will change in ways we cannot foresee. Long-term holders of these assets and make technological progress and devaluation of the macro trend to keep ourselves in unison, both of which seem to have accelerated the trend. Of course, all this will lead to what the future and have what valuation will be determined by our collective imagination.


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