“Satorica” — Bitcoin’s Role in Financial Inclusion of the Global Poor and Unbanked

London, Feb 22nd 2021

Having now spent nearly a decade exploring and ~8 years investing into Frontier Markets, it is becoming increasingly clear to us that the single biggest driver of change & opportunity for the poorest people in the world, the overwhelming majority of whom live in Frontier Markets and we can collectively term the ‘Global Poor’, is technology.

We remember the days when cell-phone reception in Bangladesh, Pakistan and Africa was patchy at best, mobile data non-existent (hotel Wi-Fi was essential on our Frontier trips back in 2013–15) and there were virtually ZERO smartphones in these countries. In 2017, Pakistan and Bangladesh entered the top 50 for the first time in a ranking of countries with the highest number of smartphone users (at #49 and #50 respectively). By 2019, they had already entered the top 20[i]. Fast forward to today, and there are over 340m mobile subscriptions across Pakistan and Bangladesh alone and >190m cellular internet subscriptions[ii].

These are not just numbers, but represent nothing less than the most profound improvement in quality of life the Global Poor have ever experienced. It is remarkable that the Global Poor are being offered access to the world’s wealth of information on the internet, mobile communication services basically on a par with the developed world, countless education opportunities, e-commerce, mobile gaming, ride-hailing, e-healthcare, and — perhaps most importantly — financial services.

For someone living in the developed world with several bank accounts (possibly in multiple currencies), multiple credit and debit cards, access to loans, mortgages, Apple Pay, PayPal, stocks, bonds, let alone investment funds, it is nearly impossible to imagine what it must be liked to be unbanked. Even without constraining the amounts involved, try using only cash for an entire month (no e-commerce or really any paid online services like ride-hailing, no credit cards, no wire transfers, no online bill payments, etc). The sheer lack of economic opportunity let alone the inconvenience & waste of time is astounding.

Fortunately, financial inclusion is improving at a rapid pace. In our last two letters we’ve highlighted Egypt’s digital payments winner Fawry. The company went public ~18 months ago at EGP 6.46 per share and hit EGP 50 per share a few days ago on February 14th. While Fawry is truly special, we believe this will be one of possibly dozens of such phenomenas we will be witnessing in the coming years.

As we’ve spent the better part of the last ~24 months getting up to speed on financial inclusion — which in and of itself should make a wonderful contribution to poverty reduction, we couldn’t help but notice the astounding take-up of another technology, which itself has the potential to change the global financial industry more dramatically, than anything we have seen before. And the fastest adoption rates are NOT in the US/Europe, but in our very own Frontier & Emerging Markets!

This technology is Bitcoin, which has heralded the advent of digital scarcity, digital assets and decentralised finance, cryptographically encrypted and accessible 24/7 via the global mobile internet. “Crypto Currencies” is an unhelpful misnomer in our view, as we’re not talking about currencies (aka legal tender), but rather something entirely new, different and nuanced. The only reason we have something (hopefully, original) to contribute to this subject, is that we happen to be experts on Frontier Markets and by extension the Global Poor, so we will focus on the real-life impact & ideas behind these technologies, rather than arcane technical aspects (where we’re also getting up to speed). The subject of crypto currencies is controversial in the Developed World, as it’s new and ‘alien’, naturally makes us uncomfortable, and is sadly ridden with confusion, scams, and noise — so here’s our best attempt to distil the ‘signal’ we’re seeing on the ground in the countries we care about. This is not an exhortation nor even a recommendation to invest in Bitcoin or any other digital assets, but is simply a collation of our thoughts on the topic and its likely implications. We don’t pretend to see further than others, but we believe that our perspective — seeing the world of the Global Poor — and standing on the “Shoulders of Giants” who’ve pioneered rigorous intellectual thinking on this subject over years and decades, has helped us to grasp the significance of the change that is about to occur.

1. Money is Technology

To start from first principles, here’s a quote from the seminal 2020 Shareholder Letter by Ross Stevens[iii], CEO & Founder of NY-based Stone Ridge, who’s a leading thinker on this subject and pioneer in the institutional adoption of Bitcoin (and Bitcoin, only!):

Dear Fellow Shareholder, Shortly before the genius David Foster Wallace died, he delivered a college commencement speech that opens with a beautiful critique of our “default setting.”

“There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says ‘Morning, boys. How’s the water?’ And the two young fish swim on for a bit, and then eventually one of them looks over at the other and says, ‘What’s water?’”

Wallace goes on to teach us that sometimes “the most obvious, most important realities are the ones that are hardest to see.” For Americans alive today, one of our ‘What’s water?’ questions is ‘What’s money?’. While Wallace asked the graduating seniors that day to think about fish and their relationship with water, I’ll ask you to think with me about our own relationships with money and, as Wallace also asked, “bracket for just a few minutes your scepticism of the totally obvious” and reconsider “what is real and essential, hidden in plain sight all around us all the time.”

This leads us to ask a number of follow-up questions about the nature of money, its functions and what makes it successful.

  1. What is Money? The reality is, money is and always has been, technology. Most people casually assume that money has always been produced by governments. The reality is more complicated, technically the other way around. Money precedes governments by millennia and the nation state was arguably formed around communities using the same money.

2) What functions does money perform? Money’s job can be broadly defined as being a i) store of value, ii) medium of exchange, and iii) unit of account. The sequence of those three functions is no coincidence, as a store of value is a pre-requisite for a useful medium of exchange, and ultimately unit of account (e.g. we think of value/prices in USD, EUR or GBP).

3) What makes “good” money? Good money should be judged by its saleability across time and space. Saleability across time is easiest understood as the “store of value” function, while saleability of across space as the “medium of exchange” function. Good performance on both dimensions requires the following attributes (again, in loose order of importance):

a. Scarcity — it can’t be sand.

b. Durability — it can’t be grains.

c. Verifiability — needs to resistant or at least difficult to counterfeit

d. Portability — needs to be able to move across space

e. Divisibility — into small, practical units to become viable medium of exchange

2. A Brief History of Money

Money is actually at least as old as written language — we don’t know more as even records of ‘money’ were found among the first written record of human language. And through a long-term process of continuous iteration and trial & error experiments around the world — civilisations which never interacted with one another — countless assets have been tried as money, at least since Homo Sapiens became an agrarian culture. Indeed, allegedly grains were the first money, yet they rot so weren’t particularly useful (same for tulips). We tried salt (‘salary’ and ‘soldier’, which were originally paid in salt, are relics from this time), pepper, sea shells, glass beads, copper, silver and gold.

In hindsight, it is no surprise that we ended up with elements on the periodic table which

i) are impossible to create out of other elements (alchemy has been tried)

ii) cannot be chemically destructed (durability)

iii) are solid at room temperature (removing all the liquids & gases, so we’re left with the metals)

iv) can be melted into bars and coins (divisibility)

v) are non-radioactive (bad idea)

vi) are easy to recognize (shiny)

vii) are sufficiently scarce in the earth’s crust (gold is the scarcest of the monetary metals, although other elements/metals are scarcer) and relatively evenly distributed globally

viii) have few industrial use cases compared to less scarce alternatives (pure monetary signal)

The last point might be the most counter-intuitive, yet there is a good reason for it. Money, by definition, is always a means to an end (saleability across space and time). No one actually wants money for money’s sake alone, whether that’s USD, EUR, Gold, bonds, the S&P 500 or Bitcoin. You can’t eat, clothe yourself with, or live in any of those! Rather, everyone wants to use or preserve purchasing power of that money in order to obtain items of actual human need (food, clothing, housing/shelter, healthcare) — immediately (consumption) in the present, or in the future (saving for future consumption). Since Kingsway is among the world’s largest investors in growing consumption by the Global Poor, we also take an interest in their ability to intelligently save money (the opposite of consumption, allowing for higher future consumption).

As a result, it should be obvious that money which has plenty of industrial use cases (oil comes to mind) isn’t good money, as there is too much noise and not enough signal. For a long time, gold turned out to be the best money, and has fulfilled that role for an astonishing ~5,000 years of human history.

Silver (10–15x less scarce than gold and with more industrial use cases) also was, and remains in use as money, as gold — as good as it is — has shortcomings on the dimensions of ‘divisibility’ and ‘portability’. Due to its high value density, gold has proven to be a wonderful store of value (saleability across time), but gold coins are too valuable for small day-to-day transactions (imagine buying a cup of coffee with grain of gold dust). Likewise, having lots of physical gold presents a security risk as it’s a bearer asset which can be taken by force. Indeed, in 1933 Roosevelt’s Executive Order 1602 forbade the “hoarding” of gold and ordered citizens to hand in their gold (or otherwise face serious penalties and/or up to 10 years in jail) in exchange for $20.67 per troy ounce. The government then raised the price of (its own) gold for international transactions by ~70% the following year, thus raising billions of dollars for the Treasury. We find it stunning to think that as recently as in living memory the US government effectively took people’s gold by force.

This leads us to the origins of paper and fiat currencies. Effectively, paper currency was a private sector innovation to solve for the shortcomings of metal currencies’ saleability across space or portability, as well as the inherent security risks of storing gold at home. Secure, safeguarded ‘warehouse’ businesses provided a solution, offering gold owners the opportunity to safely store their gold for a modest fee, issuing paper ‘notes’ in return which were fully backed and thus redeemable into gold. Those businesses became banks (private sector), those notes became bank notes, and those banks became regulated and, ultimately, centralized, by Central Banks. It is no coincidence, that the world’s first ever Central Bank (the Swedish Riksbank, founded in 1668) was founded shortly after the concept of the “Nation State” was established in 1648 through the Peace Treaty of Westphalia, present-day Germany.

Since the goal of this letter is to illustrate what Bitcoin and its broader ‘digital asset ecosystem’ means for the future of Frontier Markets, we are compelled largely to skip the ensuing centuries of ‘history through the monetary lens’ (the Gold Standard, “Gilded Age”, “Belle Époque”, or “Gruenderzeit”, the World Wars, etc) to fast-forward to Bretton Woods and the fateful year of 1971.

Towards the end of WW2, the US-convened 1944 Bretton Woods conference laid the foundations for the post-war world order and monetary system. By virtue of being in possession of ~3/4 of all known global gold reserves at the time[iv] (Britain had effectively been forced to sell most of its gold to the US to fund the war effort), the US was primum inter pares.

Instead of returning to a classic Gold Standard (or adopting Keynes’ Bancor Proposal), the US effectively created a ‘USD-Standard, backed by gold’. The US pegged the USD at $35 per ounce (with other currencies pegged to the USD, in turn), guaranteeing free convertibility of USD into gold, until retracing from that commitment in the 1971 Nixon Shock, making the USD a pure fiat currency (backed by nothing physical, bar the full faith and credit of the US government). Effectively, it has thus been only ~50 years since we’ve been in this system, a mere 1% of the ~5,000 years since humans first discovered “gold as sound money”. Over those 50 years, the very same ounce of gold is now valued at ~$1,800 today[v]. Said differently, the US Dollar (which is one of the best performing fiat currencies over that period) is down 98% against gold.

In fact, the etymology of the word “Dollar” goes back to the German Silver Thaler (~1 ounce of silver), which was the most widely used coin in the Holy Roman Empire. The “British Pound Sterling” has its name for a similar reason: one GBP used to buy a pound of sterling silver. Now if you’re curious how many GBP one needs today to buy a pound of sterling silver, the answer is ~£300 ($26/ounce of silver, 16 ounces in a pound). This is significant as the GBP is the single most successful (i.e. longest surviving) fiat currency we have (all predecessors have gone extinct and been replaced). For a British family who chose to save in silver rather than in GBP cash, that effectively means that they could have been ~300 times richer than had they chosen to save in GBP — which after all, is the difference between having £100k or £30m! Clearly, on one hand this analysis is simplistic as British savers in GBP would have had an opportunity to earn interest (or invest in the equity of a business). On the other hand, it isn’t so simplistic, as the ~3bn unbanked Global Poor of today have no access to bank interest, bonds or equities. And keep in mind, silver wasn’t nearly as good as gold as a store of value — and, at least on the aforementioned principles of sound money, gold arguably isn’t nearly as good as Bitcoin (see below)!

3. Seigniorage Abuse, Bitcoin and Frontier Markets

We believe that most people who are poor, whether that’s in developed, emerging, or frontier markets, are in that situation not because they are lazy or stupid, but rather because they don’t have capital working for them, only labour. Every reader of this letter will make money while they’re sleeping, which is a wonderful state of affairs for us — but sadly is not the reality for the vast majority of the global population, who might be rich in human capital but poor in financial capital.

The history of today’s Emerging and Frontier Markets is rife with examples of the wealth of their populations being plundered by external forces, but perhaps an interesting episode in the context of this note is one which can be viewed through a monetary lens. For many years, much of West Africa operated under a “Glass Bead Standard”, which made sense in a geographic vacuum as glass beads in that part of the world fulfilled the properties of “Good Money”. When the British colonists made their way to West Africa, realising that the entire national wealth was stored in glass beads, they were quick to bring with them by ship large amounts of industrially produced glass beads, effectively enabling them to extract immense wealth from the local population, and literally enslaving millions of Africans for generations (more background on “Trade” or “Slave” Beads can be found here). We’re not here to judge the course of history, and clearly there are countless other reasons why countries are rich or poor. But the fact that this was ~500 years ago and these countries effectively still haven’t recovered from that (yet), should give us pause.

The post-colonial era opened up a new front in the war that the poor in Emerging and Frontier Markets have been having to wage to preserve (let alone build) their financial wealth. As modern nation states emerged as independent entities that were no longer part of the various empires and unions that preceded them, they each of course wanted to have their own currency which they controlled as part of their sovereignty. While this may have been well-intentioned initially, the sad fact is that the siren song of ‘Seigniorage Abuse’ or running the printing presses to finance the whims of the countries’ rulers has been the norm rather than the exception. This in turn has led to arguably predictable and constant debasement of those countries’ currencies. In 1973 one GBP was worth two Nigerian Naira (NGN, today’s Nigerian fiat currency), yet today one GBP is worth ~650 NGN, i.e. another factor of 325x vs the GBP, itself down ~300x vs silver and more against gold, since inception.

Bringing it a little closer to home for Kingsway, our wonderful Partner Tamir Saeed is from Sudan, a country with a rather troubled history, as you may know. Until 1978 (not so long ago after all), the Sudanese Pound was pegged to the US Dollar at a fixed rate of $2.87156 per Sudanese Pound i.e. the Sudanese Pound was stronger than the USD at that time. Today, the prevailing rate is 385 Sudanese Pounds per USD which would be bad enough in itself. Yet the twist is that in the meantime the government has redenominated the currency three times, knocking off three zeroes in the process such that in equivalent terms the actual rate is 385,000 Sudanese Pounds per USD, for a total factor of over 1.1 million x loss in value compared to the USD since 1978. Similar stories can be told by our friends in Zimbabwe, Venezuela and Argentina.

Frontier and Emerging country citizens are therefore well-used to seeing their currency, which is often mandated by law to be the only one they can hold their savings in, doing an extremely bad job as a store of value. “Saleability across time” as a role of money is simply not fulfilled. Even when not mandated by law, historically technology and access has been another limiting factor to those citizens’ ability to save in anything other than their domestic currency; before the advent of the smartphone, what chance would you possibly have had, as a poor and unbanked villager in Kenya, to hold savings in anything other than cash Shillings, maybe some livestock or even land if you could afford it, or possibly if you were lucky a few USD bills that were perhaps the circulating remnants of some tips from a tourist or two?

Frontier and Emerging country citizens have also struggled historically with their currencies when it comes to “saleability across space”. Even for the lucky minority who have had access to the formal banking system, Frontier and EM banks tend to be quite poor at payments (i.e. transfer of value), whether that is domestic or international. Domestic transfers are typically hampered by low physical branch penetration levels and ultimately limited breadth of payment networks in light of small customer bases which mean that you can’t necessarily assume that your intended recipient of value will be able to access it after it has been remitted. As for international transfers, high compliance burdens for international banks involved in the processing of international remittances, a general mistrust (all too often for good reason) of Frontier and Emerging Banks and their customers, and the relatively small “size of the prize” for running open payment channels to what are often smaller economies, have made those international transfers both expensive and unreliable.

Now, just imagine that Nigerians, Kenyans and Sudanese could have an opportunity to routinely, easily & safely store their savings in silver, gold — or Bitcoin, would you be surprised if they embraced the opportunity, without asking questions about ‘volatility’ or ‘quantum computing’ risk? We aren’t surprised either: in a survey carried out by Statista last year, 32% of surveyed Nigerians said that they owned or used cryptocurrency, a proportion higher than any other country in the world and >5x higher than the US.

4. The “Discovery” of Bitcoin and Ultimate Scarcity

“There are decades where nothing happens; and there are weeks where decades happen(Lenin)

“Nothing is more powerful than an idea whose time has come” (Victor Hugo)

If you don’t believe it or don’t get it, I don’t have the time to try to convince you, sorry.” (Satoshi)

Efforts to create ‘stateless’ money go back centuries, had been popular among Austrian Economists (Hayek effectively predicted Bitcoin in 1984) and Libertarians alike. Since the 1980s, those efforts were continued by modern-day “Cypherpunks”, the name of an ominous email distribution list of an informal group of likeminded members aiming to achieve privacy and security through proactive use of cryptography.

On Halloween 2009, the pseudonymous participant Satoshi Nakamoto (unknown to this day) circulated The Bitcoin Whitepaper, laying out the vision for the project he conceived. The novelty of Bitcoin wasn’t so much a singular breakthrough, but rather an ingenious way of combining existing pieces of the puzzle (proof of work, open-source software, computer science, game theory, Merkel trees, state-of-the-art cryptography in the two-way SHA256 hash function, originally invented by the NSA) in a novel way, and adding a single, but critical component — the so-called difficulty-adjustment. Readers without any prior knowledge who’re interested in learning more, we recommend Inventing Bitcoin, by Yan Pritzker, which doesn’t require any technical knowledge.

Whoever Satoshi was/is, he/she/they left breadcrumbs making clear that Bitcoin was conceived as a solution to loss of trust in institutions and the banking system. For reference, the first ever “Genesis Block” on the Bitcoin blockchain contained a copy of the English Sunday Times Newspaper of January 3rd 2009 with the headline “Chancellor on brink of second bailout for banks” (as proof that the block was created that day or shortly after and suggesting being based in the UK) and Satoshi picked his/her/their birthday to be April 5th 1975, presumably since April 5th (1933) was the day of Franklin D. Roosevelt’s Executive Order 6102 forbidding private gold ownership, and 1975 was the year that this Executive Order was finally reversed and gold ownership re-legalized for US residents.

The combination of those pieces as conceived by Satoshi, allowed for the solution of the so-called Byzantine Generals Problem (Nakamoto Consensus). The result — for the first time in human history — was the creation of absolute scarcity. The significance of this invention (or rather, ’discovery’) will only be fully understood in decades to come. Historical parallels are already being drawn to e.g. humanity’s discovery of the number zero (which was brought to Europe only in ~1200 AD by Italian Mathematician Fibonacci) which not only fulfils a central role in mathematics (integers, real numbers, algebra and calculus would be unthinkable without ‘zero’) and thus formed not only the basis for modern-day banking (‘warehouse businesses’) & double-entry bookkeeping (Medici in Florence, 1397), but arguably the Renaissance and ultimate the Industrial Revolution in Britain & Europe. Now if this sounds crazy, even Fidelity (with >200 staff a pioneer in Digital Assets) quoted in their 2020 Bitcoin Investment Thesis that “Bitcoin is the most significant innovation in finance since the Medicis invented double-entry accounting”.

The reality is, anything physical, however scarce (e.g. Manhattan real estate or gold), humans will create more of, if there is an incentive to do so. So by definition, ultimate scarcity can only exist in the non-physical realm.

The way ultimate scarcity is achieved and maintained by the Bitcoin Blockchain is through open-source software, which follow certain rules defined in the Bitcoin consensus algorithm. The most important rule is that there will only ever be 21 million Bitcoin (note that an estimated 15–20% have already been lost and there are an estimated ~50m USD millionaires in this world, including many readers of this letter, so by definition ‘millions of millionaires’ will never own a full Bitcoin). Currently there are ~18.6m Bitcoins in circulation. This number can be tracked by everyone in real time and equally known is the future issuance of newly minted Bitcoins (900/day, +1.6% inflation p.a.), which is ‘halving’ every ~4 years and trending asymptotically towards zero terminal inflation.

Comparing Bitcoin with Gold on the aforementioned criteria of sound money illustrates that — at least on those dimensions — Bitcoin is order of magnitudes better at being Gold — than Gold itself:

i) Scarcity: ~2% annual debasement of gold doesn’t sound like a lot, but over 100 years that means an ~87% loss of purchasing power, while Bitcoin has zero terminal inflation. Also note that Bitcoin has no price elasticity of supply, which again no physical asset has. If Gold prices doubled over the coming year, rest assured miners will dig up more gold. If Bitcoin’s price skyrockets, not a single extra new Bitcoin can and will be mined.

ii) Verifiability: Gold has to be verified by a cumbersome chemical or mechanical process while Bitcoin is simply verified by code and is effectively impossible to forge or counterfeit, being protected as it is by the single largest source of dedicated computing power the world has ever seen, the network of computers “mining” Bitcoin. The computing power of this network is now more than 180,000 times greater than that of the world’s most powerful supercomputer (currently Supercomputer Fugaku in Japan)[vi].

iii) Durability: Bitcoin is information (access to a private key) which can be stored in third-party custody (including institutional-grade such as Fidelity, BONY Mellon, NYDIG, etc), mobile wallets, cold-storage (i.e. not-connected to the internet), pieces of paper or indeed — your memory — which also makes confiscation impractical.

iv) Divisibility: one Bitcoin can be divided into 100m Satoshis or ‘Sats’ (so it takes 10 Bitcoins or ~$520k to be a Satoshi billionaire). Divisibility of Gold breaks down beyond small coins.

v) Portability: Bitcoin travels with the speed of light through the internet, without the need to asking any government or bank for permission to transact.

5. Bitcoin — a New Frontier in Cyber Space?

Zooming in a bit further on the transformative implications of Bitcoin, the portability point is worth double-clicking on as there is a common misconception that Bitcoin isn’t suitable for day-to-day payments, given it takes on average ~10 minutes to commit a Bitcoin transaction to the Bitcoin blockchain.

However, the devil is in the detail, as i) one shouldn’t confuse paying with Visa / Amex / Mastercard at say Starbucks with final settlement (there typically remains a few days of credit risk until then) and ii) one needs to differentiate between “Bitcoin the Asset” and “Bitcoin the Network”. On top of the Layer1 Bitcoin Blockchain engineers have built the so-called Bitcoin Lightning Network, which allows for batching small transactions together and settling them ‘en bloc’ over the Bitcoin Layer1 blockchain. A powerful illustration of this technology is Chicago-based start-up Strike and we’d recommend watching the ~2min video clips here and here). This technology allows for instant, final settlement on a global scale and will be open (i.e. other payments companies building on Lightning can use it with interoperable QR codes) and scalable.

Any sufficiently advanced technology is indistinguishable from magic” (Arthur C. Clarke)

We expect this technology to be potentially very disruptive with massive winners and losers even in the advanced FinTech/Payments space, so we’re excited to be actively working with Strike to help forge local partnerships in Frontier & Emerging Markets and to secure front-row seats to any potential disruptions. Remittances are an obvious use-case we see in our countries, where e.g. Bangladesh, Pakistan, Egypt, the Philippines, but also India and Mexico EACH receive tens of billions of USD worth of remittances from migrant workers sending money back home to their loved ones. Traditional ‘fiat’ remittance providers can charge 10% or more for the privilege — which isn’t just a number but can easily be an entire month’s worth of wages — imagine working an entire month just for the privilege of remitting the money home!

Keep in mind that the entire fiat financial system runs on legacy tech & systems with both ACH and SWIFT being ~50 years old and so it still often takes longer to send a wire transfer from London to New York than taking an envelope of cash on an airplane! If indeed the Bitcoin Lightning network lives up to its promise, Bitcoin might not only be “better at being Gold than Gold” (saleability across time), but also “better at being Fiat than Fiat” (saleability across space).

Bitcoin mining also offers new economic opportunity for countries blessed with cheap electricity production but hitherto without a way to monetise that. Frontier Markets like Kazakhstan has nearly an equal global market share in Bitcoin Mining to the US and Ethiopia just finished Africa’s single largest hydroelectric dam. We wouldn’t be shocked to see the oil/gas-rich MENA countries waking up to this idea soon, which might require a new version of OPEC to keep climate change at bay.

Apart from comparing Bitcoin to gold or fiat money, we find the following analogies useful:

1) New Version of the Internet: If the internet of today is the internet of i) information, ii) communication, and iii) commerce/payments, the internet of tomorrow could be the internet of i) trustless transactions, ii) value transfers, large & small, and iii) Digital Assets. The far-reaching implications can already be seen in decentralised finance or “DeFi” (Bitcoin but also other Digital Assets are used as collateral, lent/borrowed, paying yield etc) and Non-Fungible-Tokens or “NFTs” (which we believe could disrupt parts of the traditional entertainment and mobile gaming industries). The adoption is ~1% of the global population (e.g. the internet in the mid 1990s) and the growth rates are significantly higher than back then, plus one can much more easily own a piece of it. By that logic (and we have no idea whether Bitcoin will end up succeeding) not putting a little bit of money into Bitcoin, is akin to refusing to get an email accounts after you heard about it dozens of times and almost 100m people in the world are already using it.

2) The World’s Largest Internet Start-up: being open source and freely accessible, everyone with on-ramp access and some fiat money can invest a portion into Bitcoin, thus aligning themselves with the project’s success. Some participant’s work on product (e.g. building Coinbase, Kraken, Binance, local equivalents of such exchanges, as well as savings or payments apps, which are mushrooming everywhere in Frontier/Emerging Markets). Others work on marketing, creating content and sharing that to as wide an audience as possible. To analyse an internet start-up’s prospects at what now can be characterised as a “late-stage” investment opportunity, we’d analyse the following:

a. Total Addressable Market (TAM): IF successful, Bitcoin might have the largest TAM ever. After all, money is half of every transaction (whether you buy a good, service or asset) and basically much of the savings economy (cash, gold, parts of the real estate, equity and debt/bond markets). Looking around London or Manhattan and routinely interacting with Frontier & Emerging Market tycoons, we can’t help but notice that many of them are parking their wealth in prime real estate, not necessarily to live there or for the yield, but to store value in asset class which has been good at that job. But when you can now sit on your estate on the banks of the Nile River near Cairo and liquidate $1bn of your Bitcoin on a Sunday morning 2am (when banks, stock- and currency-markets are closed) with a few keystrokes, that’s arguably more difficult with your London property portfolio. Add tax into the equation (real estate is heavily taxed and we suspect that will go only one way, Bitcoin is ‘property’ and thus taxable on crystallised capital gains only at the time/residency of disposal) and try leaving the country with your real estate!

b. Network Effect: by definition, the best money becomes the money people want to hold and use. Governments and Central Banks can issue legal tender, but cannot force their people to value it. While Whatsapp/Facebook enjoys a very powerful network effect, one can be (and I am) on 2–3 different messaging apps (e.g. Telegram and Signal) — at the same time. Try to hold the same $1m in two different assets — at the same time — it’s “winner takes most/all” by definition. Readers in the US might be less familiar with Gresham’s Law, but it’s real right here in the UK. In my personal judgement, GBP is less good money than USD since the UK has an overvalued real estate market, lots of mortgage leverage (mostly variable-rate), so the BoE will always keep sacrificing the GBP over the homeowner by cutting rates in the face of economic shocks such as Brexit or COVID. Frugal teutons like myself thus prefer keeping cash in USD rather than GPB, and trickle in GBP when needed for consumption/expenses (but never saving) — “the good money drives out the bad money”. Now there is the option to keep personal cash in Bitcoin, no more need for USD or GBP. When Gresham’s law comes to the US, the implications could be big. Finally, the network effect here is really a four-dimensional flywheel, benefiting the users, investors, third-party developers/apps and miners (the last two itself will present Bitcoin-related equity investment opportunities). Satoshi himself put it succinctly in his Whitepaper: ‘As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.

3) A Branded Savings Technology: as experienced investors in both offline and online consumer franchises, it is Bitcoin having a “brand”. While still far too ‘edgy’ in the developed world, Bitcoin’s brand in the Frontier & Emerging Markets is stellar — Bitcoin is “Hope”, “Freedom”, “Wealth Insurance”. If effectively promises wealthier people to “stay rich” and poor people to “get rich”, which is arguably more seductive than even nicotine or sugar. Bitcoin also has marketing in what might be the most successful Multi-Level-Marketing (MLM) scheme ever. But before judging MLMs as “bad” one has to recognise that it’s just a tool, a powerful one indeed. Not only does every Bitcoiner have an incentive to bring in others, but it’s also credible as everyone has skin in the game — they win together and lose together. We’re seeing this happening in villages in Nigeria but also in devastated Lebanon where Bitcoin has seen widespread adoption.

4) A Publicly-Traded Religion: while that might sound strange at first, Bitcoin (like Gold) is entirely based on the belief in the soundness of its features, architecture and thus the appeal to others. Unlike an equity or fixed income investment, if Bitcoin’s price doubles, it’s not necessarily twice as ‘expensive’ as the stock or bond, but more secure (more mining & hashpower, more app development, stronger network effects, more lobbying power and thus more likely to succeed). A historical parallel might be the origins & success of Christianity, which started as a Jewish sect, suffered ridicule and even prosecution, until it managed to spread and culminating in Constantine the Great to be the first Roman Empire converting to Christianity ~300 AD.

5) A New continent in cyberspace “Satorica”: when Christopher Columbus ‘discovered’ the continent of America, there suddenly was a new place to explore, settle and stake claim to an abundance of real estate. There was also a lot of new gold discovered (both in South and North America) and the resulting expansion in the money supply led to plethora of commercial activity. The people who settled over from Europe were looking for a brighter future, wanted to leave feudal Europe and prosecution behind, in hope for a better future based on principles of liberty, equality and protection of private property. That included sound money and thus the American Dream. Indeed, one could make an argument that Bitcoin is more American than the US Dollar — of the people, by the people, for the people. Quotes from the Founding Fathers on Fiat Money:

Thomas Jefferson (portrait on the $2 bill, allegedly said): “If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered…. I believe that banking institutions are more dangerous to our liberties than standing armies…. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Ben Franklin (portrait on the $100 bill): “When the people find that they can vote themselves money, that will herald the end of the republic.”
I am for doing good to the poor, but I differ in opinion about the means. I think the best way of doing good to the poor is not making them easy in poverty, but leading or driving them out of it”

The last quote might not be directly relevant to Bitcoin or sound money, but there clearly is a powerful argument that excessive fiat money creation gives endemic rise to economic inequality (helpful charts can be found here, illustrating US data before and after the 1971 Nixon shock). Scenes from Capitol Hill last month reminded us more of a Frontier Market than the greatest democracy the world has ever seen. From our work in poor countries it is obvious to see that poor people either don’t save at all, or they save in cash, thus cash represents a much greater proportion of their net worth than rich people. When cash is being debased by ~5% in a “good year” and ~25% in a “bad year” like 2020 and 2021, it is hard to get ahead in life. Modest wage increases barely suffice to maintain purchasing power and bank interest or yield is nowhere to be found.

By no means do I pretend that sound money (or Bitcoin, for that matter) fixes everything. Before judging Bitcoin being “good” or “bad”, for the time being “it just is”. It could be either depending on what we make of it, but clearly it’s captured the imagination of global millennials and thus epitomises the Zeitgeist of my generation. A thoughtful (investment) critique by Baby Boomer Investor Bill Miller can be found here, whose son clearly had an influence on him.

The man who gave America its name was Martin Waldseemüller. You will have never heard of him and are unlikely to find any mention of him in any history book. He was born c. 1470 AD in a tiny village in Southern Germany called Schallstadt-Wolfenweiler, which happens to my hometown and my parents still live there. He named the continent in honour of the Italian explorer Amerigo Vespucci. So if indeed, there is a new continent emerging in cyberspace, I would call it “Satorica” in Satoshi’s honour, but also in honour of the principles upon which America was built!

Warm regards from locked-down London,

MS Co-Founder Noah

[i] Newzoo Global Mobile Market Report

[ii] Source: Pakistan Telecommunication Authority (December 2020) and Bangladesh Telecommunication Regulatory Commission (BTRC) (2020)

[iii] Stone Ride 2020 Shareholder Letter: https://www.microstrategy.com/en/bitcoin/documents/stone-ridge-2020-shareholder-letter

[iv] “When Bretton Woods began, the US held ~¾ of the global supply” — “U.S. Policy in the Bretton Wood System”, Allan H. Meltzer: https://core.ac.uk/download/pdf/6958481.pdf

[v] Approx. average gold spot price per ounce of ~$1,800 in 2021 YTD from 1st January to 17th February

[vi] Source: The TOP500 List (https://www.top500.org), Bitcoin Charts (https://www.bitcoincharts.com), Kingsway calculations



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