They're only numbers on paper. Once you understand them, it's easy to make them behave.
In HBO’s monumental hit series “The Game of Thrones,” there were multiple Characters Bagholder absolutely loved. Perhaps his favorite was the realm’s “Master of Coin” - Littlefinger, who uttered the quote above. He was self-made, a consummate wheedler, a cynic, a schemer with a Machiavellian mindset, and an intellectual with a razor-sharp grasp of human nature. Come to think of it, Bag also has a few of those traits, but I digress. That Littlefinger quote, and some of his others, will be sprinkled in to provoke thought on the subject of today’s article: Growing Wealth. There is no doubt, that is a topic about which the Master of Coin had a remarkable understanding.
Perhaps the most widely known historical example of real-world monetary inflation leading to complete societal collapse is post-World War 1, Weimar Germany. Nearly everyone has seen the black-and-white images of people heading to the local bakery pushing a wheelbarrow loaded with bricks of cash - hoping they could exchange those bricks for a single loaf of bread. That inflationary spiral in the early 1920s thrust the German population into abject poverty. What is not widely known about that period in history is that a handful of people came out on the other side of the inflationary collapse with generational wealth.
I’d risk everything to get what I want.
One of those people was Hugo Stinnes. Post-collapse, he was by far the wealthiest man in Germany. He had the foresight to recognize his government would continue printing currency at an ever-accelerating rate, which would inevitably lead to hyperinflation. Not only did he see the inflation coming long before his fellow citizens, but he also had the conviction to position himself accordingly. He knew that two things would happen as more and more money was printed. Debt becomes easier to pay back, and hard assets rise significantly in terms of nominal price. So, in true Littlefinger fashion, he risked everything by going into debt up to his eyeballs, and used that money to buy hard assets. Once the currency collapsed completely, he could sell a single loaf of bread for enough money to wipe out all his existing debts - while at the same time maintaining control over all the (soaring in price) assets he purchased.
In effect, he leveraged his bet on the inevitable inflation, and as a result, he profited twice: once from the rising price of his assets and again from the collapse in his debt burden. This double dip is a common theme historically in countries undergoing rampant inflation. It happened in the USA as well, in the 1970s. Anyone with assets, or anyone in debt benefitted immensely from that decade of inflation. Those who benefitted the most were those who had assets AND went into debt to get them.
Chaos isn’t a Pit, Chaos is a Ladder.
In the chaos of the modern-day world, it is often difficult to distinguish signal from noise. It has long been a given in our society that debt is considered, if you will forgive my double entendre, a four-letter word. Financial gurus like Dave Ramsey and others preach relentlessly about the virtues of paying down or getting out of debt. In a falling interest rate environment like the USA had from 1980-2020, this is generally sound advice as debt becomes increasingly difficult to pay back in that world. However, if the interest-rate worm has turned and we are now in a world with rising rates, then judicious use of debt starts to become wise. The Uber-wealthy have understood this fact for centuries.
We could look to Elon Musk as an easy-to-understand example of how the uber-wealthy use debt. When Tesla stock goes through the roof, Elon doesn’t just sell a bunch of shares to fund his lifestyle. That would leave him without his shares, and he would incur capital gains taxes. The smarter move is to post the shares as collateral and borrow against them. He gets the money to fund his lifestyle, maintains ownership of the asset (his shares), doesn’t have to pay capital gains, and picks up a tax deduction for interest paid on the loan. This is precisely how the wealthy stay wealthy. They understand the game is about controlling scarce and desirable assets, even if it requires going into debt to get them, or keep them.
The Past Is The Past. The Future Is All That's Worth Discussing.
The single most significant advancement for human civilization in the last 2000 years was a decentralization of power in the early 1500s commonly recognized as a separation of “Church and State.” This ushered humanity out of a thousand years of squalor and misery known as the “Dark Ages” into the Renaissance, and the Age of Enlightenment. The growth and prosperity that followed for all of mankind are undeniable. Bagholder believes humanity is on the cusp of an even greater achievement—the separation of “Money and State” through the creation of a decentralized currency.
The Federal Government’s control of the money supply has punished us all with inflation, resulting in consistently rising prices for life’s necessities. As discussed in detail in Bag’s previous post, “The Money War” …. prices for things like food and housing are up 100x in the last century, while corresponding wages are up less than half of that. Bag would suggest that modern-day society’s increasing number of psychological disorders, rising divorce rates, rampant drug use, falling lifespans, and record-high suicide rates are all a direct result of the State-sponsored policy of inflation that forces us all to work longer and harder, for less and less. These problems will all get much worse until mankind finds a way to separate State from money. The tool to do just that is available right now, and it goes by the name of Bitcoin.
There Is No Justice In This World. Not Unless We Make It.
Bag understands the skepticism towards Bitcoin, and the possibility of it becoming a new currency. Let’s set that aside for today and consider Bitcoin only as an investment asset. When you buy Bitcoin, you are purchasing a share of the biggest and most powerful computing network on the planet. Not only is it the biggest and most powerful network by far, but it is also the ONLY fully decentralized network, which means it is unique, secure, and outside the control of anyone, including the State. Consequently, it is the only network on Earth governed by rules, instead of rulers. That distinction is critical to recognizing Bitcoin’s value.
As Bag pointed out above, prices for most things, thanks to inflation, are up 100-fold in the last century. So, to accrue purchasing power (wealth) of any kind, you must park your money in an asset that outruns inflation. Some of you reading this might point to gold, the stock market, or real estate as good ways to outrun inflation. But the fact is, the Dow Jones was 380 in 1929 - and it is 38,000 today, a 100-fold return. Gold was $20 in 1929; it is $2000 today - again, a 100-fold return. The average home in 1930 was $3900, today it is $380,000. Once again, a 100-fold return. These numbers make clear that stocks, gold, and most real estate have allowed investors to maintain purchasing power in the face of inflation; they just haven’t allowed investors to grow their purchasing power.
All Of The Power Is Yours. You Only Need Reach Out And Take It.
Bag is not interested in breaking even. He prefers being as rich as a Lannister. So he has searched far and wide, striving to find asset classes that have grown wealth despite the inflation of the last hundred years. As far as he can tell, there are only three. The first is high-end rare art, like Picassos and Van Goghs, etc… This asset class has increased 1000x in the last hundred years, returning ten times the purchasing power inflation has taken away. The second asset with phenomenal returns is ultra-prime real estate. We are talking city-center in the world’s biggest metros (New York, London, Tokyo, etc..) or perhaps some beachfront property in the most desirable locations, think Hamptons, etc… The properties in these locations, and others similar, have also been up 1000x on average in the last 100 years.
High-end art and prime real estate are rarely made available to us plebes. The people who own these things (the wealthy) never sell them. Like Elon, they only borrow against them. The Windsors have owned most of downtown London for generations. Van Goghs are only for sale once someone dies with heirs too foolish to borrow against them. And even when these things are for sale, the price is so staggeringly high that we plebes have no chance of acquiring them.
There is a third asset class with 1000x or better returns, and this one is available to all of us. That asset is networks, or more specifically, network monopolies. As evidenced by Bag’s last article linked here: “Monopoly” … networks are the most asymmetric bet on the planet. The rewards are 100-1000x the risk. Those 1000x returns are limited to those who enter the network in its infancy. With a current adoption rate of just under 1%, the Bitcoin network qualifies.
Knowledge is Power.
Consider these Bitcoin facts:
1. Since its inception 15 years ago, Bitcoin has returned, on average, 124% per year, compounded. In six of the last nine years, it has been the best-performing asset class on the planet. How anybody could look at those returns and say, “No, I don’t want any of that,” is beyond my comprehension. It is grossly irresponsible to have zero allocation to an asset with that track record.
2. Despite the current 1% Bitcoin adoption rate, the daily transactional dollar volume is already greater than that of Visa and Mastercard combined. BTC has 700,000 daily active wallets, 5 million weekly active wallets, and 17 million monthly active wallets - and those numbers are all growing at a ridiculous rate.
3. Since the US government approved the Bitcoin ETFs in January, an average of 400 million dollars a day has flowed into them. That is a total of 20 billion dollars of inflow in the last 50 days, and it has driven the BTC price up over 50% in that time. Oddly, that 20 billion is almost exclusively retail money. The institutions that manage trillions (not billions), like Morgan Stanley, UBS, or Vanguard, haven’t even dipped a toe in yet. Neither have MOST sovereign wealth funds, mutual funds, US corporations, endowment funds, or pension funds - all of whom are hungry for yield and control trillions. If a 20 billion dollar inflow drove the price up 50%, what is an inflow 50x larger (trillion) by any of these entities going to do?
4. Speaking of ETFs, there are several scheduled to open this month in Hong Kong. This will, for the first time, open the Asian markets, and their billion plus citizens to Bitcoin. That is a flood of potential investment. Hong Kong is arguably the wealthiest country on Earth, with more Billionaires per capita than any country on the planet. Those upcoming ETFs, unlike the US equivalents, allow for self-custody and direct withdrawal of Bitcoin by shareholders. For that reason, they are a far superior product to anything being offered here.
5. As an added kicker, the daily mined supply of Bitcoin will be cut in half in about two weeks. So we have a tsunami of new demand (Asia & institutional money) meeting shrinking supply, meaning Bitcoin is a veritable powder keg. There are only 20 million Bitcoin in existence today, and more than 70% of those haven’t moved in over 3 years. That means there are less than 6 million shares readily available for a piece of the most powerful computing network on the planet. Once those new investment dollars arrive - and make no mistake, they are coming - the Bitcoin fuse will be lit, and the price will explode.
Only By Admitting What We Are, Can We Get What We Want.
In the investment world, knowing what the smart money is doing, always pays. There is a reason investment Titans like Larry Fink, Stanley Druckenmiller, and Michael Saylor are piling into Bitcoin. They get it. Not only do they get it, but their conviction is the stuff of legends, particularly Saylor. For those who don’t know, Michael Saylor is the founder and CEO of a publicly traded multi-billion dollar software company called MicroStrategy. It trades under the symbol MSTR, and its returns of late dwarf those of Wall Street darling Nvidia. Saylor has turned MSTR into a Bitcoin accumulation company. You might wonder how that is any different than the ETFs. Please allow Bag to explain:
Saylor is following Hugo Stinnes's playbook. He is borrowing dollars like crazy (at almost zero interest) with payback seven years or more in the future and purchasing Bitcoin with the proceeds. There are two possible outcomes. The worst case is Bitcoin goes down in price, and Saylor will have to service that debt, which he can easily do with the cash flow from MSTR’s underlying software business. Even in this worst case, there is good news. The dollars he will be servicing that debt with will be severely depreciated thanks to the persistent inflation we have here in the US.
The best case is if Bitcoin goes up in price, Saylor will not have to repay the debt at all. Yeah, free money and free Bitcoin. The debt holders will opt instead to convert their holdings into equity (shares of MSTR). On the surface, this might sound dilutive to existing shareholders - but it is not; it is accretive. The amount of Bitcoin per share will increase for all shareholders in this scenario. In other words, Saylor has found a cheat code in the capital markets, giving his investors a yield on their Bitcoin. This is what differentiates MSTR from the ETFs. The ETFs take a percentage of customers’ Bitcoin holdings every year as a fee, while Saylor is busy increasing his shareholders’ Bitcoin holdings.
It is a thing of beauty. He has created an economic flywheel. He borrows money, buys bitcoin with it, which drives up the price of bitcoin, which drives up the assets side of his balance sheet, which allows him to erase the debt with new shares, getting all shareholders more Bitcoin per share, which allows him to borrow more money to buy more Bitcoin, and start the cycle anew. It’s Genius.
In Bag’s estimation, this makes him Littlefinger’s true modern-day monetary equivalent ….
MSTR of Coin.
Always good to read one of your blogs and how you relate it to one of my favorite series. I agree with pretty much everything here and I'm seriously considering getting a coin or two myself.
I can't really agree with what you say about bitcoin being the perfect separation from state and currency. The government controls the banking regulations. Just like it was possible to play poker on-line and win money in an overseas account, it was near impossible to get that money transferred into a US bank. Reporting bitcoin profits is already a part of our tax returns. In the end, governments may simply say everyone has to turn in their bitcoin for USCoin by a certain date or they lose access to them, just like confiscation of gold in the 1930's.
I don't see government being disconnected from how money is moved around in any form. It's going to be controlled, monitored, and taxed. Even though they can't "print more bitcoin", they could perhaps manipulate fractional banking of bitcoin to just "create" more as needed. Or, just say you can own bitcoin, but you must transact business in USCoin.
The debt level is getting ridiculous. Gold and silver are sharply up just these past weeks. Inflation is also going up and it's looking like there won't be any lowering of the interest rates this year to curb inflation. Trump, if elected is going to raise tariff's 100% on China. That's going to blow up inflation even more.
Buy land, gold, silver, art, collector coins, and houses - take on debt like you said. Then just bring in a wheelbarrow of fiat currency to your local bank in 10 years and pay off all your debt.