In finance, as with everything, we love to sort stuff into categories. This is fine until you have to shoe horne a new asset into a category that isn’t an ideal fit. Cryptocurrencies are a new technology that are growing and evolving faster than the governments and regulators can react. Some regulators (UK) have decided not to try and regulate the space, while others (USA) are trying to force crypto into their existing models.
Bitcoin does not care either way. It is outside of the control of governments. It has no board of directors and no employees that can be pressured or blackmailed. It recognises no borders and no laws. Everytime a government mismanages its finances Bitcoin will be there absorbing value and trust. It is the perfect system because politicians cannot control or manipulate it. Yes the price is currently volatile but that volatility will evaporate as adoption increases.
In our view it does not matter what the worlds governments try to do as Bitcoin is inevitable. Ethereum may become the most valuable cryptocurrency but it is an evolving project with key personnel that can be pressured. Bitcoin has none of those vulnerabilities.
With that being said governments are still trying to classify crypto in old frameworks instead of developing new ones. Most assets can be classified as one of the following:
Cash
Fixed Income/Interest
Property
Securities/Equities
Commodities
Cash
Cash is in your wallet, in your bank and in your pay cheque. Cash is the most convenient and most liquid asset class of all. It is so liquid that governments around the world create it out of thin air and spend it on whatever they want. The technical name for the cash we have is Fiat Money. The value of Fiat is based on the trust that it has value. A dollar is worth a dollar because enough people believe it’s worth a dollar. Fiat is therefore a unit of trust.
Cash that is created from nothing only retains its value for one purchase. Once it has been spent it just increases the supply into general circulation. The more cash that is created from nothing the less valuable all cash becomes. As cash loses value it feels like prices are increasing. This is sleight of hand by the cash wizards as the cash in your bank remains the same but you just need more of it when you spend it. This magic trick is called inflation and the general population does not understand it at all which is why governments do it all the time. Who can blame them though? Why would you raise tax rates and risk civil unrest when you can just print what you want and pass the cost down to the general population without any drama?
Everyone needs cash to pay for things in the short term but holding it over the medium to long term is throwing value down the drain.
Cash has traditionally been considered to be the lowest risk asset one can invest in. We would argue that with inflation being as high as it is, cash is no longer a safe asset.
Fixed Income/Interest
If you hear anyone talking about the Bond Market, they are talking about Fixed Income/Interest. Debt is big business. Governments, corporations and individuals borrow money all the time. Investors lend money to these entities for a fixed return called an interest rate/yield/income or whatever.
It’s a huge industry and lending money to governments and corporations is considered to be less risky than owning a share of a company (mere mortals cannot own a government).
For example the US government might want to borrow $1billion for 5 years to ‘educate’ the American children about the gender spectrum🤡. They are offering an interest rate of 5%. For every $100 you lend them you will get $5 every year for 5 years before getting your $100 back, making you $25 profit. As the income is known at the start its considered to be fixed.
This sounds like a reasonable investment until you discover that to repay you the government has fired up the money printers. The government pays you in newly printed dollars and by doing so they have reduced the value of your initial investment, the $25 you got in interest and all the other dollar sitting in your bank account.
Congratulations! You have paid the government for the honour of lending them money.
We wrote a series on fixed income assets that can be read here
Property & Real Estate
To qualify as Property in the US an asset must be (i) definable, (ii) identifiable by third parties, (iii) capable in its nature of assumption by third parties and (iv) have some degree of permanence.
Property as an asset class is typically pretty steady and encompasses buildings, land and other stuff in the US. Everyone needs to live/work somewhere so property values typically increase over time and especially when the government goes on a money printing binge. If you own property you can also rent it out for an income which is nice. With valuations increasing and an income coming from renters property seems like a nice asset class (yay).
On the down side property can be a bitch to sell (illiquid) and you can’t sell a small amount of a house (yet) because who would want that? You also have upkeep costs, void periods where no one is using your property and tenants to deal with. It can be a lot of work
Equities
Equities typically represent ownership of a publicly-traded company. If someone at the next urinal/cubicle is talking about their ‘stock portfolio’ while straining to squeeze out a few drops/nuggets into the bowl, they are talking about equities.
Equities are pretty liquid (easy to sell) as they have stock markets where they can be traded. Some people make a living trading stocks on these markets as prices go up and down. It’s big business.
Commodities
Gold, precious metals, corn, coal, food and water all count as commodities. You buy exposure to a commodity when you think the price is going to rise (the prices always rise when the government is printing money willy-nilly).
Gold has traditionally been the worlds reserve currency (its rare, durable and malleable) while we need metals and minerals for manufacturing and food/water for obvious reasons.
Where Does Crypto Sit?
Crypto is a new asset class and each coin has unique features, many of which are not easily pigeon-holed into one of the above classes. Bitcoin is considered to be Property by many regulators while some Altcoins are considered equities.
This may feel like a pointless exercise in definitions but if 2021 has taught us anything it’s that definitions matter a lot. The category a coin falls into will impact the tax and regulatory treatment of that coin. Regulators and central banks have already made it clear that they are hostile to low volatility stable coins like Tether as stable coins are the currently the greatest threat to their power. Due to its volatility Bitcoin is not considered a threat at this time while the technological uses of Ethereum and the Ethereum Foundations willingness to work with the traditional business world has made it popular with the existing leaders.
In the end governments, central banks and regulators will be unable to monitor and control everything. In the traditional world the banks are the gatekeepers to building wealth. If you didn’t play by the rules your accounts could be frozen and your wealth confiscated. Crypto technology takes that power away from centralised power.
Registering and scrutiny of tokens will not be possible as the sheer number of Alts will outgrow any meaningful oversight. Big Alts (Ethereum et al) will move to register OR be forced off shore which is a significant risk. We will await to see how this all plays out.
Bitcoin is not a security as seen from all the content currently coming out of SEC and general congressional chat around the infrastructure bill. It seems likely that it will continue to be treated as Property/Commodity in the eyes of the US legal and regulatory system.
TWG View : Again we are seeing the power of decentralised Bitcoin able to position and stave off any form of attack and adapt to the point now where the discussion is moving away from the monster in the room (bitcoin) and focusing on lower hanging fruit (Altcoins) yet to be tested. It is early days but the risks are certainly there for the Shitcoins and lower cap tokens. Our macro view is to use BTC as a savings / property technology for the long term and IF you wish to invest in Alts consider realising gains along the way to minimise the risk of a hostile regulatory environments potentially causing a mass exodus out of your “favourite” token.
Like warren buffet says “Only when the tide goes out can you see who was swimming naked”
Till next time
The Wealth Gap Team