Gold. Bitcoin. Bomb. Innovations In Scarcity——Three generations of scarce assets
7 Aug, 2019 11:21
Author: Vishal Karir
“We wants it, we needs it. Must have the precious.” – Gollum in The Lord Of The Rings by J. R. R. Tolkien
People have an inherent desire to own what others can’t. This desire makes a resource with limited supply more valuable. The value of a scarce asset is driven by society’s collective desire for it. This can be observed with a variety of objects people covet — limited edition cars, exclusive sneakers, rare wine. Scarcity sparks desire; desire creates value.
The concept of “utility” is well-understood, and the economic theory around it quite mature. Plenty has been written about utility, and the value of any object (or person or organization) that provides utility to the society is accepted. The value of scarcity, on the other hand, remains mysterious, and on the fringes of investing and research.
I focus a narrow lens on the value of scarcity here, with three assets that have scarcity as an essential building block. Following reasons make them interesting for the purposes of this study:
Each asset has a unique position as the “standard” or “pioneer” asset in its space.
The limited utility of these assets may be debatable, but their supply is verifiably scarce.
They exhibit (most if not all) characteristics of money — durability, portability, divisibility, uniformity, limited supply, and acceptability.
The goal is not to present one of these assets as superior to another — they all have their merits. I aim to compare and contrast them to explore the idea of scarcity. I hope this post invokes curiosity about scarcity, and encourages further, deeper research.
Gold — the quintessential scarce asset
Gold is the quintessential scarce asset, and the most popular form of “commodity” money. There is a limited supply on the planet. An estimated 190,000 tonnes of Gold has been mined since the beginning of time, and around 3,000 new tonnes are mined every year.
Over 90% of the demand for Gold is in jewellery and investments.
Gold’s usage is predominantly for ornamental and investing purposes, and over 90% of the demand for Gold is in jewellery and investments. Industrial uses like electronics, dental and medical account for less that 10% of Gold demand. In spite of the limited utility, the yellow metal has maintained its charm and value over millennia.
Source: World Gold Council
Since the gold standard was abandoned in the 1970s, the nominal price (not adjusted for inflation) of Gold soared from around $40 to near $1700 in 2012. More recently, Gold trades around $1300.
Bitcoin — Digital Gold
Unlike Gold, which the human race stumbled upon and discovered its scarcity, Bitcoin was the first popular implementation of digital scarcity. Bitcoin supply has been predefined in the codebase. There are nearly 18 million in circulation currently. The supply will increase to a maximum of 21 million in 2140.
Compared to Gold’s history that covers millennia, Bitcoin is a relatively new asset. The Bitcoin Genesis block was mined on January 3, 2009 with this comment — a response to the instability caused by fractional-reserve banking:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
10,000 bitcoin bought one pizza in 2010, and today each coin is worth several thousand dollars — over $13,000 at the time of writing.
Bitcoin’s original objective of becoming a peer-to-peer payment network has not been fully realized due to scalability issues and high price volatility, but Bitcoin has clearly established itself as a store of value along the way. Limited supply, with a transparent supply schedule, plays a key role in driving the price.
Bomb — Deflationary Gold
In the digital age, we don’t need to wait another few millennia for a new innovation in scarce assets to come along. Bomb caught attention as the “world’s first self-destructing currency”. The project states its objective simply as a social experiment and financial case study to measure the feasibility of a deflationary currency.
Bomb is world’s first self-destructing currency
The revolutionary idea here is that Bomb’s supply decreases over time. Bomb’s total supply started with 1 million tokens. Each time a Bomb is transferred, 1% of the transaction is destroyed. No new Bomb tokens will ever be minted.
Bomb came into existence in January 2019 as a smart contract on the Ethereum blockchain. Majority of the supply was airdropped to early participants for free. It is fascinating that something that was given away for free earlier in the year, has traded for over $10 on crypto exchanges.
Bomb makes no claim at any utility other than as a decentralized hedge against traditional inflationary instruments. The project is admittedly in its infancy, but it is fascinating as a pure implementation of scarcity.
Price Appreciation and Volatility
Since the gold standard was abandoned in the 1970s, the nominal price (not adjusted for inflation) of Gold soared from around $40 to over $1700 in 2012. More recently, Gold trades around $1300. Bitcoin price soared from zero to over $19,000 within a few years of existence, and Bomb covered the distance from zero to $10 in just a few months since its invention.
Given the lack of intrinsic utility though, Gold price remains volatile and incredibly hard to predict. The long-term trend is encouraging but it’s worth noting that Gold’s return has been negative (or close to zero if you were luckier) for the last 8 years. Bitcoin price fell to under $4,000 post the all-time high above $19,000.
Assets that derive the majority of their value from people’s desire of scarcity can go through long bear markets.
Hedging Cycle Risk
Scarce assets can be useful hedges for cycle risks. Gold is well-accepted as a hedge to economic cycle risk, and geopolitical risk. Bitcoin is increasingly cited as a potential hedge to geopolitical risk as it gains popularity.
Crypto cycles are uncorrelated to economic cycles, and anyone who has experienced their intensity will find value in hedging crypto exposure. Bomb, by pioneering a deflationary token among a plethora of inflationary crypto currencies, intends to provide a hedge to crypto cycle risk.
Bomb intends to hedge crypto cycle risk.
Scarce assets might become even more relevant in a period when central banks — the controllers of fiat money — are coming under immense pressure from populist agendas and polarizing politics. Excessive printing of fiat money will only increase economic cycle risks.
And there is plenty of evidence that people-controlled money printing is not slowing down. Global debt has risen to well over 200% of GDP since the financial crisis in the early 2000s. Interestingly, the richest economies are the most in debt. The top three borrowers in the world — the United States, China, and Japan — account for more than half of global debt, exceeding their share of global output.
Source: International Monetary Fund
There’s plenty of competition in the world of scarcity. Gold competes with Silver, Platinum, and other precious metals for its position. Silver and Platinum have industrial uses which drive their price, and expose them to economic cycle risk. Gold is thus unique for its pure “safe haven” quality, that people flock to in times of uncertainty.
Bitcoin has a unique position as the pioneering asset of the crypto revolution that unleashed an immense amount of innovation. Bitcoin continues to solidify its position as the “standard” amid several other crypto currencies. In a previous article I discussed how the top 10 crypto assets by market cap change every year, but Bitcoin maintains its #1 position.
Competition for Bomb is heating up already — some projects are interesting innovations on the deflationary idea, and others outright copycats. While it took a few years for Bitcoin competition to catch up, Bomb competition is close at its heels. The project will need to rapidly build on the idea it has pioneered in order to avoid being swamped by competition.
Competition unintentionally brings more attention to the scarce asset.
There is a bright side to competition. Although it can be argued that competition reduces scarcity, it also helps increase popularity and bring more attention to the scarce asset. Hundreds of crypto currencies launched in the last few years have brought more attention to Bitcoin, helped it become more popular, and established crypto as an asset class that even institutions have started taking seriously.
Characteristics of Money
These assets exhibit characteristics of money — durability, portability, divisibility, uniformity, limited supply, and acceptability — to varying degrees, and with interesting deviations. They are all durable and uniform, but the other characteristics warrant some discussion.
The supply of these assets is limited because it is not controlled by people — Gold occurs naturally, whereas Bitcoin and Bomb supply is defined in code.
Bitcoin and Bomb are significantly more portable than Gold because of their digital nature.
Bitcoin is divisible to the eighth decimal, a Satoshi. Put differently, each bitcoin is equal to 100 million Satoshis. Bomb, on the other hand, chose to be not divisible. The smallest unit is 1 Bomb. The 1% Bomb destroyed is rounded up and an entire Bomb token is destroyed on every transaction. So, 1 Bomb is destroyed when 100 are transacted, or when a single Bomb is transacted. This indivisibility speeds up the deflationary process pioneered by Bomb.
Where Gold has been widely accepted for millennia — way before fiat money came along — Bitcoin has made rapid progress towards mainstream acceptance. Bitcoin started as a movement among technologists, innovators, and activists, and it continues to gain popularity. The number of Bitcoin blockchain wallet users has risen to 40 million at an astounding rate; 8 million users were added only in 2019.
Bomb has just started its journey, and the project is receiving heightened attention from the crypto community.
The value of a scarce asset ultimately lies in its popularity, The value of a scarce asset lies in its popularity, so it will be interesting to watch how the acceptance for Bomb evolves.
In a generally abundant world, scarcity has and will maintain its appeal. The advent of digital scarcity has opened up the space for innovation.
Gold is the quintessential scarce asset; Bitcoin and Bomb fascinating innovations in scarcity. The value of a scarce asset is in its limited supply, and unique narrative that helps it stand out from the competition. Limited industrial use reduces its exposure to economic cycles, and makes Gold unique among precious metals. Bitcoin pioneered the idea of a decentralized, trustless, digital asset which launched an entire crypto revolution. Bomb is unique as the world’s first self-destructing currency, and a potential hedge to crypto cycle risk.
Scarce assets with unique positions in their space are useful hedges against economic cycles and geopolitical risks. These assets demonstrate the potential to hold up their value in the long run, but the price volatility can be hard to stomach — with strong rallies, and prolonged bear markets.
Vishal Karir, CFA is Co-Founder and Chief Investment Officer at Huddl — world’s first social financial marketplace. Huddl founders — former BlackRock and Mastercard executives — saw first hand how the current financial environment favors the wealthy. They have committed to expanding opportunities and lowering costs for everyday investors by bringing the best of Wall Street to Main Street.
This post is for educational purposes only and should not be considered as investment advice or a recommendation of any particular asset, strategy or investment product. The author may or may not own or have owned the assets referenced and if such assets are owned, no representation is being made that such assets will continue to be held.
Original Source: https://medium.com/huddlofficial/gold-bitcoin-bomb-innovations-in-scarcity-8c2e685b9297