E03 - Bitcoin As Digital Capital & Volatility

This week’s newsletter is arriving a little later after attending conferences and client meets last week. It has been interesting to see how much more mature the conversations around Bitcoin and money have become, and I went back through some older sources to refine my thoughts before hitting "Publish".

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Exploring Bitcoin as Capital

Over the last while a simple theme keeps coming up in conversations. Money and markets feel less stable than they used to, and people are quietly asking what actually counts as real capital now. We see it in daily life before we see it in the data.

Cash does not stretch as far as it did a few years ago. Salaries move, portfolios move, yet school fees, medical costs and groceries have a habit of running ahead.

That is the backdrop against which I keep coming back to Bitcoin. Not as a get rich quick scheme and not as a replacement for everything else - but as what we now call digital capital.

When I say digital capital I mean an asset with three simple traits. Its supply is capped in a way that cannot be quietly changed. It exists natively in the digital world. It is designed to hold purchasing power over long stretches of time rather than over a few months or years.

Bitcoin is by far the outlying winner in this race. There will only ever be 21 million coins. That number is not a marketing slogan. It is part of the shared rulebook that every honest computer on the network enforces. New coins come into circulation on a known schedule. Roughly every four years the rate of new supply is cut in half - resulting in an exponentially decreasing new issuance.

That design has a few important consequences for anyone thinking about long term reserves.

• Supply does not respond to elections, policy pressure or market panic. When demand changes the price adjusts instead of the quantity.

• Over time the amount of new bitcoin entering the system becomes very small compared to the existing stock. Scarcity increases rather than erodes. On simple measures of scarcity Bitcoin now compares well with gold.

• Most importantly you do not have to take anyone’s word for it. You can download the software, run your own node and verify the rules for yourself. No committee meeting, press conference or budget speech can override that without the world noticing.

Long before Bitcoin existed F. A. Hayek argued that we would probably not see truly sound money again until it was taken out of direct government control and introduced in a way that could not easily be stopped.

Bitcoin is the first successful attempt at that kind of system.

What I Mean By Capital

When most people hear the word capital they picture investments, property or a share portfolio. Underneath all of that sits something simpler.

Capital is the part of your wealth that you hope will hold its strength over time. It is what you would like to pass on to children or rely on in later years after inflation, tax and surprise events have done their work.

The challenge today is that the money system under everything has changed in character. Modern economies run on government issued currencies that can be created, redirected and managed to deal with crises and policy goals. Some of that is necessary to maintain the status quo - and has certainly helped avoid very hard landings. The trade off is that the value of each unit tends to slip over time.

You feel this in the quiet way those recurring costs - especially food prices - rise faster than your sense of progress.

This does not make traditional assets useless. It does raise a fair question. If the measuring stick is constantly stretched and shrunk how do you know whether something is really preserving capital or just keeping up with the stretching.

That question is where digital capital enters the picture.

What I Mean By Digital Capital

Digital capital as I use the phrase points to three characteristics:

• The supply is capped in a way that cannot be changed by a policy decision.

• The asset exists natively in the digital world rather than in a vault or filing cabinet.

• The design goal is to preserve purchasing power over long stretches of time not just through the next quarter.

Bitcoin fits that description better than anything else we've ever seen.

There will only ever be 21 million bitcoin. New coins arrive according to rules that everyone can see. Roughly every four years the new supply is cut in half. Anyone in the world can check this for themselves by running the software. The protocol itself has been consistent since it was launched.

For people trying to think about long term capital a few things follow:

• Supply does not bend to political pressure. When interest rises nobody can quietly create a new batch of bitcoin.

• Over time the stream of new coins becomes tiny when compared to what already exists. The scarcity deepens rather than weakens.

• You do not need to trust a person, only open source code and a public ledger.

This is very different to the assets and money most of us grew up with.

Bitcoin Next To The System You Already Know

The point here is not to declare war on shares, bonds or property. Those assets represent claims on real businesses and real buildings. They will continue to exist and have an important role.

Bitcoin is simply different in nature.

It does not pay a dividend. It does not send a coupon. It does not have a management team that reports quarterly results. It behaves more like digital land or digital gold with an important twist. It is perfectly divisible, can move across borders in minutes and can be verified with simple software.

Where traditional assets sit fully inside the existing monetary and banking system Bitcoin sits slightly to the side. You still check its price in rand or dollars yet what you own is not a claim on a bank balance or a bond issue. It is a direct entry on a public ledger that nobody can quietly dilute.

For many people around the world this has created a new way of thinking about reserves. Some portion of their long term wealth remains in the tools they know. Another portion sits in an asset that is neutral and scarce regardless of what central banks decide to do.

That mindset is what I am describing with the phrase digital capital.

A Noisy Month And A 30 Percent Pullback

None of this changes the fact that the last month has been noisy. Bitcoin has dropped roughly 30 percent from its recent highs. Moves like that get attention. They trigger doubt. They raise very human questions such as “has the story broken” or “was this all a mistake”.

Short term price volatility is one of the hardest parts of dealing with Bitcoin. ECO101 taught me that the price is affected by two things: Supply and Demand. Bitcoin's supply is fixed. Demand on the other hand moves with headlines, fear, excitement and liquidity. That combination produces sharp rises and painful drops.

From a historical point of view drawdowns of around 30 percent have been a recurring feature of Bitcoin’s price history. Larger pullbacks have happened as well. At the same time anyone who has held through full cycles of four years or longer has, up to now, seen positive outcomes despite very difficult periods in between.

Past behaviour does not promise anything. It does show a pattern. Price volatility has been the price of admission for people who wanted exposure to something absolutely scarce in a world where the money supply can be expanded.

When the noise starts and people start asking "Is Bitcoin finally dead?" I find it helpful to come back to a few simple questions:

• Has the 21 million cap changed?

• Has the network stopped processing transactions?

• Are more people and institutions still learning how to buy and hold it securely?

• Is there more or less energy being spent to maintain Bitcoin's network?

If the answers remain “no, no, yes, more” then the long term idea is intact even when the short term experience is uncomfortable.

Bitcoin Ownership vs. Investment

There is also an important point about language that has historically defined how I look at and teach about Bitcoin.

In one of his early emails Satoshi Nakamoto was very clear that he did not want Bitcoin to be sold to people as an investment. He wrote that he was “uncomfortable with explicitly saying ‘consider it an investment’” and that it was better if people reached that conclusion on their own rather than having it pitched to them.

Today, I still share that caution. Investment is a game of giving away your capital with an expectation that you'll generate a yield or interest income as a reward for risk.

So in my long-term work - you'll find an educational slant into what Bitcoin is and why it's worth looking at. My goal is to explain why some of us think about Bitcoin as digital capital and why its design keeps pulling serious people back to the topic even after rough months.

Where I err from this it's really to speak the language of my audience - but seeing this quote from Satoshi was really helpful once again. In the end, my simple suggestion is not “go and invest in bitcoin” - rather I'll keep calling you to "go and study Bitcoin".

Read widely. Look at how the network works. Look at its rules for supply next to the currencies you use every day. Look at how people are holding it, how they are securing it and how it has behaved over longer stretches of time.

Once you have done that work you will be in a far better position to decide for yourself what role, if any, you want it to play in your own life, family or business.

Bringing It Home

You do not need to become a full time analyst or abandon everything you already know about money to engage with this topic.

The practical invitation from this week's newsletter is simple.

Start thinking about what you regard as your true capital. The part of your wealth you would like to see hold its strength through policy changes, economic cycles and shifts in the money system itself. Then consider whether it is worth your time to understand digital capital like Bitcoin and how it might sit alongside more familiar assets.

Any decisions about allocation, structure or products should be based on your own study and in conversation with professionals who understand your full picture.

If you would like to deepen that learning especially around secure self custody and how you can own Bitcoin with zero counterparty risk - I am always happy to share what I have seen over the last few years. We're also busy with some very exciting clients and projects looking to shape the way every person in South Africa engages with this topic.

For now - keep learning!

James Caw

Founder and Bitcoin Strategist | SimplB www.simplb.co.za

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SimplB (Pty) Ltd is a Juristic Representative and James Caw is a supervised Representative of CAEP Asset Managers (Pty) Ltd FSP No: 33933 - an Authorised Financial Services Provider. Nothing in this newsletter should be construed as financial advice. Before taking any action speak to your financial advisor.