Compared with Bitcoin and gold, productive assets are a better long-term storage of value.
Original Title: “Fixed Supply Doesn’t Mean Good Value Storage Means”
Written by: Dankrad Feist
I think the narrative of “value storage” and the misunderstanding of what is the real “fiat currency” is a huge problem that undermines the entire cryptocurrency world. Only when we have an honest understanding of this can we truly be able to build something better.
The following are the core arguments that I believe in, and I will explain them in full:
The argument of “value storage” is untenable. There is no guarantee of delivering value to the future, and only a fixed supply of assets does not solve this problem.
If you want to create as much value as possible in the future, what you really need are productive assets (long-term) and stable coins (if you need money in the near future).
Why doesn’t the “means of storing value” exist
This is a common saying in cryptocurrency narratives: “Look at fiat currencies. In 1950, the purchasing power of 1 US dollar was 10 times higher than the current US dollar. This is a scam. If you use US dollars to store value, you will suffer from inflation. And continue to suffer losses. This is because the central bank/government can directly print more U.S. dollars. Instead, you should store the value in assets with a predictable supply, such as gold and bitcoin, which doesn’t have this problem.
The real part of this statement is that if you store value in dollars, you will lose a large part of your purchasing power for decades. This is no problem. The question is, is there another method that means “store of value” but does not have this characteristic? Proponents of store of value claim that if you use an asset with a predictable supply, you have it.
Of course, historical data supports this statement to some extent: If you use gold instead of dollars to store value, your situation will be better. That is, if you bought 1 ounce of gold for $35 in 1950, it is now worth about $1,765 (as of June 20, 2021, this is the source of the price). Taking into account that due to inflation, the current value of the U.S. dollar has decreased by 10 times, the value of the U.S. dollar in 1950 is now $176.5, or its value has increased by 5 times.
But we can actually do better than this: if we put the $35 in 1950 on the S&P 500 index tracking system, we can now get a staggering $74,418.65, which is a 10 times loss in purchasing power of the U.S. dollar. 212 times increase (so equivalent to 7,441.87 USD in 1950). Therefore, it is obvious that this kind of investment is a better “value store” than investing in gold.
Bitcoin has performed much better than the S&P 500 index and gold in the past 10 years. However, this is a very short period of time, during which Bitcoin has developed from a very small minority to an asset that most people in the world have heard of, and some influential few people have invested in it. This situation is unlikely to happen again (I don’t think it can). The historical data of gold shows that, for a long period of time, value storage methods based solely on “limited supply” have performed much worse than productive assets.[1]
So why do people think that gold or Bitcoin is a better store of value than productive assets like companies, real estate, etc.? There are two reasons for what I see:
The stock market is obviously very volatile. Therefore, they may think that productive assets are a good long-term store of value, but not short-term.
Those who believe that “limited supply” brings stored value have a doomsday mentality. They believe that in the event of a major social collapse, their stored value will to some extent be better than more productive assets.
The first argument does not convince me at all. This is based on the fact that the volatility of their chosen value storage method is lower than that of productive assets, which has not been proven in reality. Gold and Bitcoin are much more volatile than holding a S&P 500 index tracking fund. If you want stability, you should actually choose productive assets.
The second argument means that you can simply “send” value to the future, even if you encounter a major social collapse. I think this is a pretty crazy idea-because when the society collapses, whatever the value you can buy Still, the value of demand for “limited supply assets” will collapse.
Of course, people think that companies (including the S&P 500 Index) will go bankrupt, but other assets will not be better:
Is real estate a good “value store” in disasters? Real estate is valuable mainly because its location is related to valuable economic and social activities. The reason why properties in central Manhattan are so valuable is because so many people want to live in the city. A random piece of land in the wilderness is usually of little value. In a major disaster, properties in central Manhattan may not be able to maintain their value (or even properties that do not have a garden where they can grow their own vegetables are valuable).
Similarly, the value of gold is derived from social tradition, even though it has lasted for a long time. Society can determine a new and very valuable asset, which is indeed what Bitcoin enthusiasts advocate. But more importantly, if there is nothing valuable to buy, your gold is actually worthless.
If we agree that value depends on a society that provides valuable goods, then we must accept that there is no guarantee that money will be sent to the future. You might as well make a real investment in productive assets.
What we need are productive assets and stable coins
In the above, I argued why I believe that “limited supply of value storage methods” (non-productive assets such as gold or Bitcoin, whose value comes from scarcity but no practical value) is no better than production such as stocks Sexual assets have more advantages. They have the same or even higher volatility, but at least gold (which we have a long history to prove) does not perform as well as productive assets in the long run. When Bitcoin completes the absorption of initial demand and reaches a stable position like gold, the same situation may also happen to Bitcoin (as for other results, such as a sharp drop in value, of course it is also possible). They may not perform better in disasters; if this is something you worry about, you may be better off buying goods that are useful in disasters.
This means that productive assets should be a better long-term store of value, because they are better in every way.
But obviously, for many applications that are purchased with fiat currencies, the volatility of productive assets is unacceptable. I don’t think many people would like their monthly salary to fluctuate by 50%. In fact, if their wages suddenly drop by 50%, most people will find it difficult to pay all their expenses. What most people need or want is more stability than this.
Similarly, if you save money to buy a house or run a company in the near future, and maintain cash reserves to ensure that they can pay wages and supplier payments, what you need is stability.
Even if we assume that everyone suddenly starts using Bitcoin, it will not solve this problem at all. Because its supply cannot be adjusted dynamically, its value will continue to be very unstable due to economic fluctuations.
Fortunately, there are now mechanisms that only use unstable assets to build stablecoins to deal with these situations. My favorite system is the design behind MakerDAO and DAI, and I talked about my views in this article.
If our current system is so good, why do we still need cryptocurrency?
I think in the field of cryptocurrency, we need to think more carefully, and if we want to succeed, we need to start seeing the true characteristics of the system we are trying to rebuild. As far as we know about the legal currency, as long as we see their essence, we know that it has achieved great success. Their essence is to prevent short-term fluctuations, not to maximize long-term value.
I believe that cryptocurrency can greatly improve the current financial system, but I hope not only by providing a limited supply of assets (which cannot solve most of the most important problems). Instead, we should ensure that our assets are productive, maximize long-term value, and build stablecoins for applications that must avoid instability. This system can improve our current financial system because:
It is more transparent-anyone can verify the balance sheet and risk exposure, not just a professional audit company. This is very important, because at present, the detailed risk exposure of banks is not public, which means that depositors do not know the situation of the bank at all, and it is difficult for them to make wise choices about which bank is trustworthy.
We can make it fairer-let everyone enter the financial system on the same conditions. For example, why can banks access central bank accounts, but ordinary people and companies can’t?
Governance can be improved by involving everyone when major decisions must be made (e.g. quantitative easing after the global financial crisis).
Get rid of baggage (such as physical currency), thereby making the system more flexible; for example, when all balances are electronic, there is no technical need for inflation (although in practice, it may be due to psychological reasons or “price stickiness” Need to do this).
The most important thing is to create a system where anyone can participate at all levels without permission and censorship resistance.
Special thanks to David Andolfatto, Vitalik Buterin, Chih-Cheng Liang, Barnabé Monnot, and Danny Ryan for their comments on this article.
[1] Vitalik pointed out that this may somewhat exaggerate the opposition to Bitcoin, because since 1950, the supply of gold has increased much more than Bitcoin in a similar period of time. Nevertheless, I don’t think this can make up for the huge return difference between gold and the S&P 500 index.
Source link: dankradfeist.de
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