Rich, but not that much

Bitcoin 

Bitcoin closed last week higher by +1.54% at $23,336, on the news that Blackrock, the world’s largest asset manager, had filed for Bitcoin Spot Trust (or ETF). So far this week bitcoin has been firing on all cylinders, up +14% for the week at the time of writing, and currently battling the $30k technical resistance level. 

Bitcoin short positions in the spot market as per the BitFinex exchange, are down -25% so far this week, which suggests that this rally is being fueled in part by short liquidations or shorts covering. 

The epicenter of the market move is the expectation of an approval of Blackrock’s bitcoin ETF, and the institutional demand that it would usher. This is evidenced by bitcoin outperforming Ethereum by a wide margin since the blackrock announcement. 

The Blackrock announcement could continue acting as a tailwind for bitcoin prices in the weeks to come.

Digital Asset Markets:

Rich, but not that much

A society flourishes - wealth gradually accumulates around an increasingly small segment of the population, until the imbalance between rich and poor becomes so high that it results in a revolution. It’s a tale as old as man.

In the book “The Lessons of History”, Will and Ariel Durant write that “In the Athens of 594 B.C., according to Plutarch, ‘the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition’”. Ultimately, this backdrop resulted in the election of a gentleman by the name of Solon. 

Solon devalued the currency, thereby easing the burden of all debtors (although he himself was a creditor); he reduced all personal debts, and ended imprisonment for debt; he cancelled arrears for taxes and mortgage interest, he established a graduated income tax that made the rich pay at the rate of twelve times that of what was required from the poor, he reorganized the courts in a more popular basis; and he gave benefits to the families of those who had died in battle. 

Solon’s Problems

As you will see from the data, the problems that Athens and Solon faced back in 549 B.C., have not changed much. And the tools that Solon and others used to fix the problem are very similar to those still used today.

Below are the income inequality graphs for a series of countries dating back to 1980 until present day. The sample set includes China, Singapore, the U.S., and Sweden. All countries with different political inclinations and economic models. 

As you can see, in every single example, the top 10% earners take a disproportionately higher amount than the bottom 50% - and the trend is clear. More and more wealth accumulates to the top earners, and increasingly less so to the bottom earners.

Regardless of whether a system subscribes to capitalism, communism or socialism, whether it is a dictatorship or a democracy, systems have historically led to extreme accumulation of wealth and power on a narrow segment of the population, and natural monopolies. 

After trial and error, humans - like Solon, realized that it's best to erect some social guardrails to maintain harmony in society. It helps minimize social upheaval (and the ensuing chaos). Over time, governments have funded their social guardrails or “safety net” with a combination of taxing and currency debasing/printing. 

Taxes have a dual-purpose: to “delay” the concentration-of-wealth process as much as possible by destroying as much wealth as possible from the top earners, and to offer partial funding for government initiatives. In simple terms, it helps them print/debase less.

Debasing the currency acts as a wealth transfer mechanism between those that have issued debt and those who owe the debt, by making debt easier to repay. 

Needless to say, when any one group of humans can print money out of thin air, or debase the currency, _and_ also controls how much another group can be taxed, things can get heated very fast, and corruption can take hold. That’s a story for another essay. 

Despite everyone’s best efforts - historically, inequality reaches its limit, and social discontent ensues. Inevitably, someone with authority has to intervene to restore equilibrium. 

“The Equalizers”

Many wealth redistribution tools have been used to try and restore social equilibrium throughout history. Today we will be focusing on the two most common “social equalization tools” - that are still used today.

Similar to what Solon did back in 549 B.C. Athens, debt forgiveness or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. Effectively, this transfers wealth from anyone that is owed money to anyone that owes money. It is meant to reduce the debt burden on a specific segment of the population.

Historically, debt forgiveness events have also been referred to as “Debt Jubilees”. 

A couple of recent examples are:

This plan has not yet been approved by the U.S. Supreme Court. It will rule on the plan by the end of this month. 

Analysts say that since the year 2000, China has been regularly forgiving loans that are nearing their end but have a small balance.

Debt forgiveness usually finds pushback from the lenders - unless the lender is the state itself. Even so, president Biden’s recent attempt to forgive $400 Billion in student loan debt was challenged by the Supreme Court and may be overturned.

2) Asset Expropriation

Asset expropriation is the act of a government claiming privately owned property to be used for the benefit of the overall public. In most cases governments don’t just take the property - they pay “fair market value” to the owner. How “fair” a price can be if there is only one buyer and a forced seller is a topic for another essay!

Expropriations are typically done to build public infrastructure projects such as highways, railroads and others. However, it can also be used by governments as a means of wealth redistribution. 

A couple of examples of expropriations as a means of wealth redistribution are:

In many ways, this was land theft. The former owners got pennies on the dollar, and received no payment from the government. They didn’t get to keep any part of the land - however small. And there was very little recourse for them to dispute or prevent an expropriation.

The order was signed to “prevent the hoarding of gold within the continental United States”. It demanded citizens sell all gold in excess of $100 to the Federal Reserve at a price of $20.67 per troy ounce.

How “fair” was the price paid by the Federal Reserve? Records from lawsuits at the time show claimants arguing that they could have received ~40% more if they had been allowed to transport the gold back to Europe.

In this case, private citizens got to keep some of their gold, and received compensation for the gold that had to be sold to the Fed.

So what?

As you can see from the above examples, there are many ways to go about expropriating an asset for public use, or forgiving debt. Countries with strong institutions and property rights, like the U.S., will likely put up a challenge to any such tool - as we are seeing with the challenges facing Biden’s Student Loan Debt Forgiveness - even considering that most of the debt that would be forgiven is issued by the Federal Government. Similarly, even back in 1933, the outcome of executive order 6102 for those who owned gold in the U.S. was very different from the fate of Venezuelan land owners who got absolutely nothing.

These tools are nothing new. And the reasons why they are used are still the same. More often than not, these measures are enacted by newly elected leaders with a populist voter base. Astute investors can monitor the social, economic, and political conditions of a country, to anticipate when the risk of any equalizer event could be increasing and prepare accordingly.

Bitcoin is an asset that has incredible attributes to shelter investors from these types of events. 

1. Intangibility: Bitcoin is a digital asset. It cannot be physically seized. You can hold your bitcoin personally through self-custody, or have it at a custodial service like Ledn. Setting up a new personal wallet or a new account in a custodial service like Ledn takes minutes.

2. Transferability: Bitcoin can be sent and received 24 hours a day, 7 days a week. There are no restrictions or downtime. At any point in time, you can transfer your bitcoin from one address to another, whether you are withdrawing from a custodial service or transferring from one personal account to another.

3. Censorship resistance: No one, including governments, can alter the bitcoin network. Meaning that no government can forcefully take your bitcoin by reorganizing the bitcoin blockchain.

Bitcoin is a great asset to build wealth. And it is even better at helping investors protect that wealth over time.

HODL.

The Week Ahead 

The week ahead will be loaded with economic data and events. Thursday will be a big day for markets with interest rates decisions from the Central Banks of England, Switzerland and Norway. We will also get U.S. bond auctions throughout the week and 15 Fed member speeches including 2 from Fed Chairman Jerome Powell. 

As always, you can catch all of the details of market-moving events for the week ahead in our calendar:

Notice for Canadian Residents: As of January 4, 2023, Canadian clients will no longer be able to take out new B2X loans.

As of February 1, 2023, Canadian clients will no longer be able to open a new BTC or USDC Savings Account, deposit BTC or USDC to existing Savings Accounts or earn yield on any existing BTC or USDC Savings Account balances.

Notice for U.S. Residents: Effective March 1, 2023, U.S. clients will not earn interest on any BTC and/or USDC balance in their Savings Accounts and/or Legacy Savings Accounts.

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