The digitalization of the world economy and its monetary system
Where does digital money fit into your portfolio? It is the question all asset allocators are asking but afraid to answer. It is oddly polarizing. Our goal is to provide a framework that supports portfolio solutions. We evaluate digital currencies in a macroeconomic context, provide a framework for their valuation, and quantify their role in portfolios. Digital money is an incredible innovation with great potential – currencies are just the start.
INTRODUCTION: IN MATH WE TRUST
We are living through a quiet revolution led by the digitalization of the world economy.
Growth in innovation in the past decade has been the fastest of our lifetimes with the biggest leap in China. Market forces are pushing in the same direction placing a huge premium on intangible scalable assets.1 There is a wall of money chasing scalable intellectual property; old-economy bricks & mortar companies are hitting a brick wall, struggling to find affordable capital for fixed investment. You know the stories. Tesla versus Ford. Uber versus Hertz. AirBnB versus Hilton. Bitcoin versus Gold.
The revolution is pounding on the gates of an antiquated monetary system. It starts with Bitcoin. Where it ends will depend on the collective ingenuity and energy of its community by virtue of its decentralized, inclusive nature. Have a great idea in banking? It is most likely to be lost in translation of a web of incumbent bureaucracy. Great idea in decentralized banking? Put it in the digital startup ecosystem and prove it.
The analog money system builds on centralized trust. No more evident is faith-based money than in the words on the back of physical US dollar notes: “In God We Trust.” Digital money is built on math. It is there for everyone to see. For everyone to criticize. For anyone to improve upon.
Digital money and its vast future derivatives are the missing assets that will help solve today’s portfolio problems. This paper builds the case in four sections:
- Section 1 explores the Bitcoin protocol in a macro context of monetary and fiscal policies.
- Section 2 walks through a valuation approach for digital assets.
- Section 3 explores the role that digital assets can play in institutional portfolios.
- Section 4 looks at the future growth of the digital age.
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1 In 2018 the top five US companies’ intangible assets were valued at $21 trillion, five-times tangible assets. In 1975 the situation was the reverse with tangible assets of $600 billion or 5-times the value of intangible assets. The companies? Today: Apple. Alphabet. Microsoft. Amazon. Facebook. 1975: IBM. Exxon Mobil. Procter & Gamble. GE. 3M.