Note: This is not financial advice, and the views expressed in this blog do not represent the views of my firm Sfermion.
Two things are happening:
Governments around the world are printing unlimited amounts of money.
Covid has shown us that the physical world is inefficient for modern work and that the future is digital.
What is one to do in this type of environment? Well, the opposite of unlimited is limited, i.e, scarcity, and the opposite of physical is virtual. In this type of environment, I would suggest exploring scarce digital goods.
Let's first take a look at the trend of printing an unlimited amount of money.
F1 Deltatime is an officially licensed Formula 1 blockchain-based game that utilizes Ethereum blockchain to bring you a full Formula 1 racing experience. Alongside a gaming evolution in a form of true digital ownership and a play-to-earn model, F1 Delta Time consists of two main components;
1. Collecting scarce digital items to fill your garage
2. Leveraging these items to go head-to-head in multiplayer racing.
Visit https://f1deltatime.com/ to participate in various events running throughout December.
Money Printer Go Brrr
Why is seemingly everyone talking about alternative investments? Even really esoteric stuff, like Pokémon cards? It's because the veil of value around fiat currency has been lifted. People are trying to protect their net worth by purchasing scarce goods.
Mass money printing actually started during the 2008 financial crisis, when governments around the world printed money to bail out banks and other industries. That was the 2008 bank bailout, but this year we have experienced the “everything bailout” because almost every business in the US could apply to receive government money. Please note that I am not claiming to be anti-bailout or pro-bailout, I am simply focusing on what is happening because of these events - money printing.
This year, people around the world (many for the first time ever) are questioning their countries’ monetary systems. They are asking simple questions like, “Why did you give this corporation billions of dollars in covid rescue money, but I only got $1,000?” Or even better yet, “Where is this rescue money even coming from?” People are waking up to the fact that governments can print money out of thin air, and some are wondering if they are printing too much.
Here we have a chart of the M2 money supply. M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. We can clearly see that towards the end of 2009 there was a slight bump in total money supply, but in 2020 it has gone into overdrive. After looking at this chart, you must be wondering if this is sustainable. This accelerated money printing has many secondary effects, specifically on collectible goods.
We can examine the world of alternative investments, specifically collectibles, to see the effect mass money printing has had on their performance.
November 2017: The painting Salvator Mundi sold for $450 million
August 2018: A 1962 Ferrari 250 GTO sold for $48.4 million
October 2018: A 73-year-old bottle of French Burgundy sold for $558,000
July 2020: A Pikachu Illustrator Pokémon card sold for $233,000
August 2020: A Mike Trout baseball card sold for $3.9 million
October 2020: Honus Wagner baseball card sells for $3.25 million
These examples are meant to illustrate the immense value that scarce assets have accrued.
We are now in an environment where scarce goods are performing extremely well and even outperforming stock market returns in some categories. Why? Because every single government around the world is printing money like they suddenly forgot every lesson from Economics 101. If you produce more of a thing, then that thing will fall in price. If you produce an unlimited amount of something, then it will essentially become worthless.
To explain this further, check out this analogy.
The government starts producing pencils. Everyone has a pencil in their home to use for writing, taking notes, and all types of pencil-related activities. At first, the total market supply of pencils was relatively balanced: when people used pencils up they threw them away, and new pencils were produced to replace them. Gradually, the government produced more and more pencils, so instead of just having one pencil in my home, I had ten. No matter, I still use pencils, and sometimes my friends run out so I give them my extras. Then, the government states that the amount of pencils they produce does not matter, and they start to create an unlimited amount. I still use them to write, but now I have so many I can’t even give them away because everyone already has one. In the end, there are trillions of pencils everywhere. People use them, but it doesn’t even matter if they break or get lost. Pencils are all over the house, in the streets, and ultimately have lost all value. People are thinking, “What the heck? How did the government not realize that creating an unlimited number of pencils does not make any sense? Don't they remember that time when Zimbabwe and Venezuela created a ton of pencils, and then people started using pencils to make art and other goods because the pencils were so worthless?!”
Okay sorry, I think lockdown is finally getting to me. Actually, wait, the lockdown relates to my next major point.
Note: I will caveat everything above by saying that it is important to view what is currently happening in the alternative asset space within the wider context of our monetary environment. The reason these assets are performing so incredibly well has a lot to do with central bank and government policies around the world. Without mass money printing, I do believe scarce collectible-type assets would still be valuable and performing well, but probably not nearly to the level we have experienced since 2008.
The Digital Acceleration
It is obvious to many people that the future is digital - digital money, digital entertainment, digital social life, remote work, etc. The pandemic took the digital evolution that would have happened over 5-10 years and accelerated it to just one. It was already apparent that tech was taking over, but this year has completely halted any uncertainty. So, if this is the future, then where should you invest your time and money?
Do I want to invest in railroads and steel mills, or do I want to invest in the world's dominant social network that connects 2.7 billion people? Do I want to invest in a company that organizes the world's information - a website that 52% of the world uses? The answer is obvious. Digital applications, or software, are currently the best investments. Software is dominant for a multitude of reasons:
Software products need fewer people to operate massive businesses. For example, Walmart has 2.2 million employees and is worth $416 billion dollars. Google has ~118,000 employees and is worth over $1 trillion dollars
Software products tend to create winner-takes-all markets. Walmart is not the only retail store: there are thousands of competitors all around the world. But there is really only one search engine and just a handful of dominant social media companies.
It is easier to iterate on software products compared to physical products. Fast iteration means you can quickly fix problems and more easily test new products. For example, if I order steel beams for a new building and they are broken, it could take weeks or months to get new ones. If there is a problem with my software product, I could have it fixed within a few hours.
In case it's not clear yet that software products are superior to physical products, take a look at this list of the largest companies by market cap.
In the 1980s there were several oil companies that powered the global economy through oil and natural resources. Today, we see the top spots are taken mainly by tech giants who power the global economy with digital products. The digital trend is not only taking over the products we use but also our money.
Over the past 30-40 years, we have even seen fiat currency turn from physical paper bills to numbers in a database, but again we run into the same issue of scarcity. As long as governments have control over the money supply, there is no incentive for them to be fiscally responsible. Luckily, we have alternative sources of value independent from governments, like Bitcoin and Ethereum. Nonetheless, it would still be great if all “things” could be software-based.
This is where NFTs come into play. NFTs can represent a plethora of goods and assets. It makes sense that in a digital world even our “stuff” is digitally native.
There seems to have been a rapid rise of nationalism and xenophobia over the past few years. I am definitely getting some 1910s, pre-world war I vibes. In case anything were to happen, it would be great to have assets that are mobile, highly secure, and able to fit inside a pocket on a USB device. Obviously, Bitcoin and Ethereum are great candidates for this type of thing, but if you want to also safeguard digital “stuff,” then NFTs fit the bill. You can carry an entire NFT card collection, virtual land, and rare crypto art wherever you go.
NFTs are scarce digital goods that can be taken with you anywhere in the world. If you ever need liquidity, you can access NFT global markets as long as there is an internet connection. In an era where central bankers and governments have thrown out basic economics and people are locked in their homes due to a pandemic, it seems like the world is ripe for scarce digital assets.