Written on April 11, 2021
Why would anyone choose Bitcoin instead of diversifying into other asset classes, especially stocks? Why not hold an index tracking fund like the S&P 500?
The short answer: Because Bitcoin, as the primary money medium, absorbs the cash rewards of all other assets, including stocks.
You may not be happy with this answer, but a complete answer to the question “Why not hedge against Bitcoin with stocks?” requires us to forecast the expected value of Bitcoin and then compare it to the expected return on equity.
Nowadays, people usually measure economic value in fiat currency units. But instead of using fiat as the unit of account, we have to look elsewhere. My thesis is that Bitcoin absorbs the cash rewards of all other assets. Therefore, we cannot first measure by the units that are likely to be absorbed.
In this article, I am going to present an alternative model for valuing Bitcoin. This model views money as a mechanism for saving time. Once we have estimated how much stored time Bitcoin could represent, we can port that back to today’s fiat currency units. Finally, we’ll compare these expected returns to holding a market capitalization weighted stock index fund.
First, let’s talk about the trade that will lead to money and then to speculation.
Trade, money and speculation
Human trafficking. We do and give things in exchange for other things. The expectation of repayment and the gratitude of the people make this possible. When someone does something nice for us, we feel like we owe them something in return. This feeling underpins our ability to work with strangers.
But what about working on a scale? How do we keep track of who owes what to whom? Money is the technology that scales collaboration. As Dawkins said, “money is a formal sign of delayed mutual altruism” (Dawkins, 1989).
We accept money because we speculate that someone else will accept it in the future. This speculation is the main purpose of money. We call this imputed value the “money bonus” of a good.
When we talk about the price increase of an asset in the trading context, we also see it in terms of forecasting its monetary premium. How much will this be worth to someone else in the future? We envision a future buyer to whom we will eventually sell the item.
One can speculate about the future worth of anything. The purpose of money is to be the item one owns because they have the ultimate confidence that others will later accept it. The markets for other assets may dry up, but you expect people to keep accepting your money.
Bitcoin and cash bonus
Bitcoin is the most important medium of money for several reasons. Here are just three:
First, unlike a physical medium of money (gold), Bitcoin is digitally native. The electronic representation of Bitcoin is the thing itself. It is not a credit instrument. Anyone can independently review the ledger in its entirety without relying on a trusted third party.
Second, Bitcoin is decentralized. In contrast to competing digital money media (fiat), the supply of Bitcoin does not depend on the use of a select few.
Third, unlike competing payment networks (banking), the transfer of Bitcoin does not rely on entrusting intermediaries.
For these reasons, I expect Bitcoin to take over the majority of the cash rewards of all other goods worldwide for the foreseeable future. To gauge what this means for Bitcoin’s spot price, it needs to be compared to another set. But what can we compare Bitcoin to?
We cannot use fiat for this comparison as we assume that bitcoin will absorb fiat’s cash reward. So what else can we use? How do we measure the total global monetary premium without resorting to prices based on existing monetary media?
One answer is time. Time is an egalitarian estimate of the total monetary premium that does not resort to pricing based on monetary media. Time is the big balance: everyone only has 24 hours a day.
Every living organism must secure the resources that are necessary for its continued existence. There are no exceptions. So, in a sense, having money gives you time. If you have money you can afford to stop earning income for some time and spend money out of your savings.
Different people have different preferences about the amount of time they want in reserve, and those preferences change over time. Hence, every imaginary average is meant to be wrong. But we can still guess.
According to a 2020 Acorn study, Americans must have saved an average of $ 76,700 to be comfortable. This number is pretty similar to the U.S. Department of Housing and Urban Development’s median family income in 2020 ($ 78,500). Accordingly, it stands to reason that a good initial approximation of the time saved is around 1 year per person.
Store years in bitcoin
The current world population is estimated at ~ 7.9 billion people. If each person wants to store 1 year of value, it will save 7.9 billion person-years. This number changes based on preferences and population changes.
However, there will never be more than 21 million Bitcoin. In order for Bitcoin to be able to encode all the desired 7.9 billion years of person time, each Bitcoin must represent the following:
7.9 billion person-years / 21 million BTC = 376 person-years / BTC.
Then Bitcoin should cost 1 year worth:
1 year / 376 person-years / BTC = 0.00266 BTC (266,000 Satoshis).
After we have made a rough estimate of the value of each bitcoin in terms of human time, let’s fold back the fiat currency price. Then we can compare the results with our expected returns on the stock market.
Calculation of fiat equivalents
What does a year of Bitcoin savings cost? At today’s Fiat spot price (~ 60,000 USD / Bitcoin), 1 year of Bitcoin saved costs:
60,000 USD / BTC ✕ 0.00266 BTC = ~ 160 USD.
For $ 160 at today’s price, you can buy 1 person per year of saved time in the native instrument of that value.
But what would the fiat equivalent be in today’s value if Bitcoin had already hit saturation? To do this, we need an estimate of annual income in fiat terms.
Global median income estimates vary, but $ 10,000 / year seems like a conservative figure. If 0.00266 BTC is to encode 1 person year with a global median income of $ 10,000, it translates into a fiat price of:
$ 10,000 / year / 0.00266 BTC / year = $ 3.76 million per BTC.
If you divide this price by today’s price, you get the expected return between here and saturation:
$ 3.76M / $ 60,000 = $ 62.7M.
As a percentage gain, this means:
(62.7-1) 100 = 6170%.
Based on this model, and given conservative estimates, I expect holding Bitcoin will result in about 6100% profit (in today’s dollars) before we hit an equilibrium price (in terms of time savings). In this case, it can make sense to diversify into other income-generating assets, provided that those are aimed at generating a return in bitcoin terms.
Now that we’ve set a hypothetical target Bitcoin price based on the stored time, we can compare the expected gains between here and there to the expected return on a market capitalization weighted stock index.
Comparison with stocks
How does our predicted bitcoin valuation model compare to investing in stocks? According to Goldman Sachs, the average stock market return over the past 140 years has been ~ 9.2%, but that rate could be falling soon. If we project forward to meet our expected 6100% gains in the US dollar exchange, one should wait:
62✕ = 1.092 t ⇒
Log (62) = t ✕ log (1.092) ⇒
t = log (62) / log (1.092) = 47 years.
Will it take Bitcoin less than 47 years to absorb the cash rewards of all other assets (including stocks)? I think so. Until then, it seems like a gamble to speculate on something else.
But that’s just my opinion.
This is a guest post by Jimbo the Consensualist. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.