Chain Hill Research | Extended Thinking on the Hardness of Currency: Why Bitcoin Will Increase 10 Times
Original title: "Extended Thinking on Currency Hardness: Why Bitcoin Will Increase 10 Times"
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People are willing to choose a certain item as currency, which is essentially the scarcity of this item that is difficult to be copied, which guarantees its important currency function-value storage capacity. The difficulty with which a currency can be replicated and produced is often referred to as the "hardness" of the currency. Currencies with lower hardness are called "soft currency" and currencies with higher hardness are called "hard currency".
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Phoenician Glass Trade Beads Source: Internet
European explorers and businessmen visited West Africa in the 16th century. They noticed the high value of glass beads in the local area. Since the production process of glass beads in Europe was far superior to that in West Africa, and Europeans rarely used glass beads for trade, they began to import a large number of glass beads from Europe. Import low-cost glass beads in exchange for Africa's precious resources. The European invasion of Africa weakened the currency hardness of glass beads, slowly changing it from hard currency to soft currency, gradually eroding the purchasing power of glass beads in the hands of Africans, and gradually transferring the wealth of Africans to glass beads that can be easily obtained hands of Europeans. The proliferation of glass beads has wiped out its ability to store value, and its fall has impoverished West Africa. Later, these glass beads became better known as "slave beads" due to their role in the slave trade from Africa to Europe and North America.
In addition to the West, my country also has a currency history of more than 4,000 years. Hundreds of currencies have been used in thousands of years of history, but no currency has survived so far. From the original shellfish currency to the cloth coins, knife coins and other currencies in the Spring and Autumn and Warring States Periods, to the square hole coins used by Qin Shihuang after the unified weights and measures, to the pioneering paper money (Jiaozi) experiment in the Song Dynasty, the Ming and Qing Dynasties "Silver Entanglement". Among them, the most representative and innovative one is Jiaozi in the Northern Song Dynasty.
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Northern Song Dynasty Guanjiaozi Source: Internet
The scarcity of metal is rarer than that of banknotes, and the production cost is higher and the process is more complicated. Compared with coins such as copper and iron, Jiaozi as banknotes is worthless without the support of coins. Initially, the regime of the Northern Song Dynasty was very cautious in the use of banknotes and issued them strictly in accordance with the reserve ratio. During the decades from Song Renzong to Song Shenzong, the value of banknotes remained stable, maintaining the market credit of banknotes.
During the Xining period of Emperor Shenzong of Song Dynasty, the 22nd Jiaozi circle was about to expire. Since many financial expenditures had been arranged, it would cause financial difficulties to recycle the old Jiaozi with the new Jiaozi. To mint as a reserve. From then on, there was Jiaozi's "two worlds running side by side", which also planted the seeds for the decline of Jiaozi in the Northern Song Dynasty. With Wang Anshi's New Deal and the rapid decline of frontier wars, the number of Jiaozi in circulation began to expand. From 1073 to 1084, the number of newly added Jiaozi was almost several times that of the mint reserve. A large amount of banknotes brought severe inflation, and Jiaozi depreciated sharply. People refused to accept banknotes, and those who had banknotes exchanged them for copper coins, iron coins or real objects as soon as possible. In the end, the Northern Song regime died in the collapse of the currency system accompanied by the military struggles of Liao, Jin and the Fangla uprising in the south.
The issuance of Jiaozi in the Northern Song Dynasty has no rigid restraint mechanism in essence. Although the mint was used as the reserve fund to issue Jiaozi, it was ultimately defeated by human intervention. The cost of this kind of currency issuance is too low, which can easily lead to the excessive issuance of currency and thus lose the value of the currency. ability. To maintain the currency’s ability to preserve value, it is necessary to work hard on the difficulty of currency supply, that is, the hardness of currency.
So, how to measure the supply difficulty of money? This has to mention a model——first level title
stock-to-production ratio model
The stock-to-production ratio model needs to be disassembled for interpretation. The so-called stock refers to the existing quantity of a certain item, and the output refers to the new quantity of the item in each fixed period. The stock-to-production ratio is to divide the stock by the output. , which means the time it takes to produce the current stock quantity at the rate of new production of a certain item in each fixed period (usually in units of years). The higher the stock-to-production ratio, the longer the time it takes to produce the current stock of the item, and vice versa, the shorter the time.
The stock-to-production ratio model is called in English: Stock-to-Flow Model (S2F model), and its ratio is called the SF value. The idea of the S2F model first came from Nick Szabo's definition of the "cost of counterfeiting" of items, and was later used by an analyst named "Plan B" to measure the scarcity of commodities and investment products.
SF=existing inventory/annual new flow
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Commodity SF value
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Bitcoin: The world's scarcest asset
Items with a low SF value are less difficult to produce and supply, and have relatively low wealth storage and value preservation capabilities. If such items are used as currency, the hardness of the currency will be low, which will easily lead to a substantial increase in supply and weaken the currency’s value preservation. capabilities and are therefore not ideal currency carriers.
Bitcoin currently has a stock of about 18.5 million pieces and a new supply of 328,500 pieces per year. Its SF value is 56, which makes Bitcoin a scarce asset close to gold.image description
Bitcoin Issuance Curve and Inflation Rate
The total amount of Bitcoin has an upper limit (21 million). Its charm lies in the existence of the halving mechanism, which reduces the supply by half every four years or so. The difficulty of production is getting more and more difficult, but the supply is getting less and less. In addition, with the continuous expansion of the consensus group, the continuous growth of the number of users is also increasing its demand. An item whose demand is increasing but supply is decreasing means that its ability to preserve value will be excellent, and it is the most ideal container carrier for value storage. In fact, the relationship between Bitcoin's market value and scarcity does prove that it is an ideal store of value.
By collecting the SF value and total market value of each development stage of Bitcoin, as well as the SF value and total market value of gold and silver, and performing regression analysis on them.image description
Bitcoin S2F cross-asset model (S2FX) Source: https://100trillionusd.github.io
The logarithmic value of SF is to better show the good linear relationship between ln (SF) and ln (total value). The R square of the two factors has reached an astonishing 0.9967, indicating that the S2F model is measuring asset value and asset scarcity There is a significant strong positive correlation between the two levels, and the relationship between the two will also be a mathematical relationship that is not purely coincidental or accidental, and the dominant driver of market value is scarcity (SF). According to this model, the market capitalization value of Bitcoin will approach in the next four years:
Market value = exp(12.7598) * 56^4.1167 = $5.5T
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S2F Model Channel and Bitcoin Historical Price Source: Plan B
Bitcoin is the world's first absolutely scarce digital asset, much like the digital version of gold, with high currency hardness (scarcity). At the same time, it has the characteristics of divisibility, portability, durability, and verifiability, and is a better value storage container than gold.
Just like Saifedean Ammous described the difficulty of currency supply as the following phenomenon in his work "The Bitcoin Standard":
"Any item, once used as a carrier of value storage, will bring about an increase in supply; any item whose supply can be easily increased in large quantities, once selected as a carrier of value storage, will destroy the wealth of the storer. From this trap we can It is inferred that any item that successfully assumes the role of currency must have some natural or artificial restrictions to limit its incremental flow into the market to ensure its ability to preserve value.”
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About Chain Hill Capital
Supported by a professional team with multicultural backgrounds, members of the core departments - Investment Research Department, Trading Department, and Risk Control Department are all from well-known universities and institutions at home and abroad. They have a solid financial background, excellent investment research capabilities, and a keen sense of the market Sensitive ability, highly awe of the market and risks. The Investment Research Department combines rigorous basic research with mathematical and statistical models to obtain investment strategies such as "Pure Alpha" and "Smart Beta", and will soon export institutional-level research reports and project due diligence reports.
Supported by a professional team with multicultural backgrounds, members of the core departments - Investment Research Department, Trading Department, and Risk Control Department are all from well-known universities and institutions at home and abroad. They have a solid financial background, excellent investment research capabilities, and a keen sense of the market Sensitive ability, highly awe of the market and risks. The Investment Research Department combines rigorous basic research with mathematical and statistical models to obtain investment strategies such as "Pure Alpha" and "Smart Beta", and will soon export institutional-level research reports and project due diligence reports.
