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“Science really does advance one funeral at a time,” proclaimed a 2019 headline in the trade magazine Chemistry World.1 It explained the phenomenon by which superstar academics often hoover up outsized funding, thereby crowding out potential disruptive ideas, which often flourish after the demise of the superstar. The idea is not so different from that of German theoretical physicist Max Planck, who famously observed in 1950 that “a new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.” There are lessons for Bitcoin in these insights.
Many have observed that COVID helped accelerate digitalization trends and spurred innovation, amidst a massive intergenerational wealth transfer expected to total $68T over the next 25 years.2 New business formation in the U.S. is running 50%+ above 2019 levels, and more Americans quit their jobs in August than during any month in history.3 And yet despite that rapid turnover, the broad unemployment rate remains elevated at 8.5%.4 How is it possible to have both a worker shortage and high unemployment?
Perhaps, rapidly changing consumer preferences in the face of sticky government support for failing institutions might explain some of this phenomenon, which the below chart of Bitcoin + Ethereum market cap ($1.66T) vs. that of the top six U.S. banks ($1.41T) helps illustrate. The banks’ $1.4T market value derives from the gap between their $12.4T in assets and $11.2T in liabilities, and the market’s expectations of the return to be earned on that spread.5 Bitcoin’s $1.2T market value, on the other hand, is derived from no such liability, and requires no such spread to sustain it. Thermodynamic energy, code and silicon suffice.
Still, total Bitcoin futures open interest, of which the CME has an 8% market share6, has exploded in the last week, reaching $105B, up from $42B on the day before any Bitcoin futures ETFs began trading.7 For comparison, gold futures total $98B and copper futures at $90B.8 Seen from this vantage point, perhaps the $1B in assets accumulated by the world’s first Bitcoin (futures) ETF in two trading days may be less surprising.9 Yes, the futures-based structure is hardly ideal due to the costs of rolling futures contracts (see VanEck Bitcoin Futures primer here). But these ETFs nevertheless provide differentiated access points for institutions and individuals looking for a hard-money alternative to a classic balanced portfolio.10 Indeed, in the wake of recent acceleration in global inflation, Merrill Lynch recently declared “the end of the 60/40 portfolio,” noting that since 2009, both a 60/40 mix and a 100% equity portfolio had Sortino ratios11 of about 1.6, meaning annual returns were 1.6 times the downside portfolio volatility. In other words, the lower volatility gained by owning some bonds didn’t make up for significantly lower total return in bull markets.12 We should also note that Merrill Lynch followed up that “end of 60/40” report with 150 pages on digital assets titled “Only the First Inning.”