[Music] today we're talking about the future of bitcoin and its price or what it might be to understand how bitcoin might rise to power here's how the us dollar and fiat currency rose to dominance in one two three acts act one bretton woods no currency has had a greater dominance in modern history than the us dollar the reason why goes back to 1944. while world war ii was still raging delegates from 44 allied nations signed the bretton woods agreement under bretton woods gold became the basis for the us dollar and other global currencies were pegged to the u. s dollar's value making the u.
s dollar the world's reserve currency at the time the u. s accounted for almost 40 of global gdp and almost a fifth of global foreign exchange reserves today the imf estimates the us accounts for roughly 16 of global gdp but over 60 percent of foreign exchange reserves if this sounds like the us greenback's role as the world's reserve currency is under threat trust your instincts act 2 the nixon shock and the rise of fiat currency the dollars fall from grace may have started as far back as 1971 when the nixon shock severed the direct convertibility of us dollars into gold nixon's move decoupled the u. s dollar from gold ushering in the era of fiat money fiat money has two important traits one it isn't backed by an underlying commodity and two it is centralized money meaning control of how much of it is printed is determined by a government being a fiat currency and the world's reserve currency bestowed america with one of the greatest privileges an economy can have control over its economic destiny to a point the u.
s could easily finance its trade budget deficits and pay its debts because they controlled the supply of the currency and through its own monetary policies such as quantitative easing the us could influence the value of the dollar to gain a competitive advantage relative to other economies case in point trump's enforcement of economic sanctions against iran effectively shut iran out of the international banking system richard nixon's treasury secretary john connolly jr said it best the dollar is our currency but your problem act three cronyism and the rise of bitcoin for decades we've embraced rugged individualism and capitalism on the way up privatizing the gains and then cronyism on the way down as we socialize economic losses with stimulus better known as bailouts for corporations and who facilitates the bailouts central banks in response to the pandemic the federal reserve started buying up assets to prop up the stock market growing its balance sheet to a record high of 7. 5 trillion dollars in other words our national character our complexion as a nation is the following hundreds of thousands of americans dying is bad but what would be tragic is if the nasdaq actually declined the fed funds this by printing more dollars expanding the money supply aggregate money supply jumped from 15. 3 trillion in january 2020 to almost 19.
5 trillion by december up roughly 26 percent in just one year the last time money supply grew this fast wasn't you guessed it world war ii when annual growth peaked at 27 what this may eventually lead to is inflation inflation is the decline of the purchasing power of a currency and happens when more dollars chase the same assets driving prices higher now to be fair i don't know nor do i think anybody else really knows if inflation for consumer goods will occur and a case for a deflationary cycle may carry water as well but borrowing off your own money supply machine is like getting high on your own supply it's a hard addiction to shake it's temptation and it generally doesn't end well so how do investors protect their assets and hedge themselves against cronyism and the great monetary inflation they seek refuge in safe haven assets historically that was gold but in the future that might be you guessed it bitcoin [Music] similar to gold bitcoin cannot be created from thin air and must be mined bitcoin miners receive bitcoin as a reward for using tremendous computing power to solve complex mathematical problems that verify transactions however distinct from gold bitcoin isn't a commodity it's a protocol a series of defined procedures and one of those procedures stipulates there will only be 21 million bitcoin that can ever be mined so gold is a scarce asset as well why not just load up on the heavy metal because because bitcoin may have some advantages over gold first there is no way to independently verify the total gold supply with bitcoin anyone can verify the entire bitcoin supply and that supply is fixed by mathematics and code second it's hard to verify if gold is real king gold jewelry is listed on the nasdaq and is one of china's largest jewelry companies it used 83 metric tons of fake gold a fifth of china's annual gold output to secure a 3 billion loan crushing the stock and forcing it to d-list fake gold has even made its way into the vaults of jp morgan on the other hand bitcoin allows for immediate verification and full auditability of its transaction ledger another big problem with gold it's difficult to store transport and divide while physical gold needs to be melted to be divided bitcoin is easily divisible the smallest unit is a sat short for the name of bitcoin's founder satoshi and is equal to 100 millionth of a bitcoin but of course bitcoin isn't without its flaws and its criticisms the first volatility as a relatively small asset class bitcoin's price is highly sensitive to news trading activity and market manipulation bitcoin is also touted as an uncorrelated asset but that hasn't been the case in fact the price of bitcoin and s p has become increasingly correlated in 2020. however while it's still the wild wild west for other cryptocurrency bitcoin appears to have crossed the rubicon in the 90 days prior to filming this episode there were 112 s p companies or 22 percent of the s p 500 with greater volatility than bitcoin why might bitcoin volatility be dropping because speculative money is being replaced by institutional money the market capitalization of bitcoin has reached nearly half a trillion dollars as companies including microstrategy acquire over 1 billion in bitcoin to hold indefinitely or in bitcoin parlance total and other companies are following suit these new buyers are not only bringing down volatility but adding legitimacy to the narrative of bitcoin being a store of value the second challenge to bitcoin bitcoin has no intrinsic value and isn't a means of payment at least not yet economists provide or ask three functions of money one as a unit of account two as a store of value and three as a means of payment the reality is that no currency or asset can do all three things well and there are trade-offs between security and functioning as a means of payment another criticism of bitcoin that the us government could ban its use however the irs already includes it as a question on your tax return and the sec classifies it as property perhaps most importantly the future of bitcoin is not about what happens in the us but about what happens in europe india brazil and other major economies it's also about people specifically what people with means do with their wealth one of our greatest geopolitical rivals china is also the second biggest foreign holder of u. s government debt if china wanted to flex some geopolitical muscle it could dump a stockpile of over a trillion dollars in u.
s treasuries driving the u. s government's borrowing costs way up and crushing the u.
