In today’s ever-changing economy – with endless expansions of the money supply – family offices have an option to hold a form of money that can’t be inflated: bitcoin. After 11 years of its existence, bitcoin has gone from a fringe to a mainstream concept. With the likes of the CEO of Twitter, Jack Dorsey, and billionaire hedge fund manager Paul Tudor Jones leading the way, bitcoin is increasingly being bought by billionaires, large corporations, and family offices. From a private wealth perspective, there are many synergies between family offices and bitcoin. As family offices aim for long-term wealth preservation, bitcoin aims to retain value over time.
But, in order to fully understand why it makes sense to buy bitcoin, it is important to acknowledge the current challenges and limitations of our existing model: fiat currency, typically defined as government-mandated money that has nothing of value backing its worth.
A history of monopoly
Throughout history, there has quite literally been a monopoly on money that central banks and governments have had. Bitcoin changes this paradigm, and it is humanity’s first real-world competitor to this monopoly. Like any other product or service, if one single entity has total control over the market, as a result of the lack of competition, the consumer/user will have a low-quality product that will not last through time.
This concept is directly applicable to the state of fiat currency today, and history is full of different instances of its limitations. Here are a few examples out of many:
Although the denarius wasn’t technically a fiat currency since it wasn’t a paper note, it still provides a historic example of a dominant money supply that was eventually inflated and debased. Under the reign of Augustus (27 BC – 14 AD) the denarius was about 95% silver, but by 265 AD this was down to 0.5%, making the currency practically worthless.
The oldest recorded example of fiat money was jiaozi, a paper currency issued by the Song dynasty in China in the tenth century. Initially, jiaozi was a receipt for gold or silver, but the government later controlled its redeemability. As the Song dynasty grew, so did its fiat currency supply. The state began to offer programs such as guaranteed loans to farmers – a familiar ambition that many governments have today – which required increases in the money supply. The jiaozi became worthless after 300 hundred years.
Yuan Dynasty’s Chao
The Yuan dynasty also issued another fiat currency in 1260 named the chao, which was initially backed by silver. When the government needed to pay for goods and services that it couldn’t otherwise tax its citizens for, the chao was inflated far beyond its metal-backed supply and later became another failed currency.
In the late 18th century, France issued paper currency called assignats. These notes were initially backed by land, but with financial issues arising from the French Revolution, it suffered from 13,000% inflation and failed to continue.
Challenges and limitations in modern day fiat currencies
Likewise, with these historical limitations, our money today is not magically immune to the same consequences. To analyse just how prevalent this problem of inflation still is, the Hanke-Krus Hyperinflation Table provides an extensive amount of countries – 56 to be exact – that have suffered from this issue approximately since the 1920s. Bear in mind, the word ‘hyperinflation’ is generally defined as when a country experiences at least a 50% increase in prices over one month. There are also plenty more countries not shown on the Hanke-Krus Hyperinflation Table that have also experienced ‘high inflation’, but not necessarily ‘hyperinflation’.
As of our immediate time period, the world is in constant change, facing unprecedented levels of debt and increases in money supplies. Since March 2020, central banks have printed historic amounts of money, unlike anything the world has ever seen. The Institute of International Finance (IIF), which is comprised of members from over 400 banks and financial institutions across the globe, reported that the world’s current recession began with $87 trillion more debt than the 2008 global financial crisis did.
On top of that, the United States, home of the world’s reserve currency, printed more money in the month of June 2020 than in the last two centuries of the country’s history. Additionally, the IIF stated that total global debt already rose by $15 trillion this year, reaching $272 trillion through September. Governments, mostly from developed markets, accounted for nearly half of the increase.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”Satoshi Nakamoto, Creator of Bitcoin
What’s different about bitcoin?
One of the most important differences is that bitcoin has a verifiably limited supply of 21 million coins that can ever exist – it cannot be inflated. It is decentralized and is actually the largest computer network on the planet. It cannot be controlled, hacked or stopped by any person, organization, or government. Contrary to fiat currencies, bitcoin also has a history of gaining value over time, with an approximate 220,500,000% return since its inception in 2009 – and that’s still with only a small percentage of the world’s population owning it.
A major concept to grasp is the fact that there is no third-party intermediary involved. Bitcoin restores financial sovereignty to the user in the sense that the user can hold their own funds as well as send them directly to a recipient without the use of a middleman, such as a bank or payment service. The implications of this are enormous and beyond the understanding of most people today.
By eliminating the need for banks and payment services, this means that a bitcoin holder’s funds cannot be altered in any way by an outside party. For example, the capital controls in Greece during 2015 when bank accounts were frozen. Bitcoin gives people the ability to receive aid, it allows people to not have to worry about banks freezing their funds, and most notably grants financial inclusion to the global economy for the approximate 1.7 billion people who do not have access to bank accounts.
With this sentiment, Fidelity’s Director of Research recently stated in their bitcoin investment thesis: “An analogy is that investing in bitcoin today is akin to investing in Facebook when it had 50 million users with the potential to grow to the more than 2 billion users it has today. If bitcoin does eventually replace fiat currencies, the analogy of Facebook’s rapid growth is quite accurate.
Corporations & UHNW Investors Want Bitcoin
With the issue of massive inflation in mind, increased demand for bitcoin has recently come from many UHNW investors, corporations and institutions as a result of it being a scarce asset. Let’s look at the moves of adoption.
Billionaire hedge fund manager Paul Tudor Jones allocates 1-2% of his portfolio in bitcoin, saying: “We are witnessing the Great Monetary Inflation – an unprecedented expansion of every form of money, unlike anything the developed world has ever seen.”
One of the largest business intelligence companies on the planet, MicroStrategy, started the first round of their total $425 million bitcoin purchase (completed). Their CEO stated: “This investment reflects our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash,”
Jack Dorsey’s company, Square, purchased $50 million in bitcoin – this equates to roughly 1% of the company’s total assets. Their CFO claimed: “We believe that bitcoin has the potential to be a more ubiquitous currency in the future. As it grows in adoption, we intend to learn and participate in a disciplined way.”
Stone Ridge Holdings Group (SRHG), the parent company of NYDIG and also of a $10B+ AUM asset manager to leading financial advisors, institutions, and insurance companies, announced that it purchased over $115 million in bitcoin. Their CEO stated: “From an investment perspective, we’ve long viewed bitcoin as superior to cash. And now with unchecked – and unbacked – global paper money printing and real yields increasingly negative, SRHG’s more than 10,000 bitcoin are the principal component of our treasury reserve strategy.”
Mode Global Holdings (listed on the London Stock Exchange) announced that 10% of cash reserves will be in bitcoin. Their Executive Chairman, Jonathan Rowland said: “Faced with the challenges of COVID-19 and with U.K. interest rates at the lowest level in the Bank of England’s 326-year history, our confidence in the long-term value of bitcoin has only increased”
Paypal releases bitcoin and other cryptocurrency services, with the company stating: “We are pleased to announce that all eligible Paypal account holders in the U.S. can now buy, hold and sell cryptocurrency directly with Paypal.”
Senior analyst from CitiBank, Tom Fitzpatrick, claimed that bitcoin can reach as high as $318k by December 2021 and stated: “Bitcoin is the new gold – It is an asset with limited supply. It is digital. This is the 21st century – gold is a 20th-century asset”
“The world ultimately will have a single currency. The Internet will have a single currency. I personally believe that will be bitcoin”Jack Dorsey, CEO of Twitter
Bitcoin and family offices very logically compliment each other: Family offices aim for long-term wealth preservation throughout generations, while bitcoin is a form of money that can’t be inflated, and can therefore retain its value over time.
A combination of the history of fiat currencies, concerns for looming inflation, and recent adoption from UHNW investors, corporations, and institutions lead to a very compelling case for family offices to start getting involved in this new financial revolution.