Investors, once content with the comfortable predictability of fiat currency, are starting to look for an alternative. The era of unquestioning faith in government-backed money may be nearing its end.
There are three primary functions of money.
- Medium of Exchange: Money facilitates the exchange of goods and services.
- Unit of Account: Money measures value.
- Store of Value: Money can be saved and used later.
Fiat currency is money that has no intrinsic value. Its worth is derived solely by the government that issues it and the faith of the people who use it. The foundation of our modern economic system, a system that has enjoyed decades of relative stability. However, problems are beginning to surface.
The culprit? A potent cocktail of factors. Decades of easy money policies, fueled by quantitative easing (QE), have eroded the purchasing power of fiat currencies. Inflation is rearing its ugly head, silently eating away at the value of savings and investments. Governments, burdened by ballooning debt, seem trapped in a cycle of printing more money to service the old. Inflation is eroding purchasing power, making it a stealth tax on everyone.
The reckless financial policies of global leaders are a ticking time bomb. The whispers of a potential "fiat currency crisis" are gaining traction, prompting a cautious shift in investment strategies. As of this writing, we are about to cross 36 trillion in debt, with no end in sight.
Many will seek refuge in traditional safe-haven assets such as gold, silver, and a relative newcomer, Bitcoin. A common thread uniting these assets is their inherent scarcity.
To get more gold, you must first find it. Once you have found it, the process of getting it out of the ground and refining it is not a simple task. The same endeavor also applies to silver. Bitcoin is finite. There will only ever be 21 million bitcoins. While gold and silver have long been recognized as valuable assets, Bitcoin is vying for a place in the financial lineup.
Unlike fiat, Bitcoin has a finite supply, capped at 21 million coins. As of this writing, just over 19.77 million bitcoins have been mined or 94.18% of the 21 million bitcoins that will ever exist. By 2030, about 97%+ of bitcoins will have been mined. This built-in scarcity protects against inflation, making it an attractive option for long-term investors.
Furthermore, Bitcoin operates on a decentralized blockchain network, free from the control of any government or central bank. For investors disillusioned with the current monetary system, this level of autonomy holds immense appeal. It represents a change in basic assumptions, a move from trust-based fiat to a verifiable, mathematically sound digital currency. I have retreated to the solitude of my own understanding of Bitcoin, weary of trying to explain it to friends and family. In a single word, I now describe Bitcoin as Freedom. Freedom from a failed monetary system that has failed its people. When I also think of physical gold and silver, it is possible to escape the grasp of government or central bank control also. To ensure that, all you must do is store it somewhere safe. Far removed from any government control or third-party risk.
The primary argument against owning physical gold, silver, or Bitcoin is that they do not generate direct income like stocks and bonds do. It’s a fair argument. Here is how I will entertain that argument. Over the 25-year period from December 31, 1999, to October 25, 2024, gold has annualized at 9.43%, while the S&P has annualized at 8.26%. While past performance is not indicative of future results, you get my point.
Silver is one commodity that is lower than it was when the Hunt brothers tried to corner the market in silver during 1979-1980. Silver wears two hats. It is a must-have industrial commodity, while also serving as a precious metal. If you have read my past bullish arguments for silver (see Silver Lining and Silver Lining 2.0: The Sequel You've Been Waiting For), I make the case for silver to finally break out and hit an all-time high in the coming years. I put forth the case of industrial consumption, with stagnate growth in production that has gone on for years. I believe the devaluation of currency will drive demand for silver as it does for gold. In May of 2022 when Silver was trading at around $22 an ounce, I made the argument that it was one of the cheapest assets on this planet. Since then, silver has climbed over 54% as of this writing.
Bitcoin Bonus Bonds: A Potential Game Changer for the Debt Market
This is where I get excited about the future potential of Bitcoin to solve inflation concerns. The way public companies borrow money might change. Imagine this: a company needs a billion dollars, so they issue bonds, just like they do now. But instead of just offering a fixed interest rate, they sweeten the deal with a bonus tied to Bitcoin. It is an extra 2% of bitcoin on top of the regular coupon. Why would they do this? Because investors are getting nervous about inflation, that sneaky thief that eats away at the buying power of regular money.
Bitcoin might be a way to protect their investment principal. It could pay off big if bitcoin keeps climbing. It wouldn't surprise me to see companies start offering "Bitcoin Bonus Bonds" in the future. Helping Corporate America compete for capital. This could be a way to attract investors in a world where everyone is looking for a hedge against inflation. Let us say you invest $100,000 in a ten-year Corporate Bond with a 5% coupon. You get $5,000 a year for ten years. Do you think that $5,000 you receive in year 3, 5, 8 or the 10th year has the same purchasing power it did in year one? History shows most often that it won’t. So, we add 2% of bitcoin to each $100,000 in face value and hedge the devaluation of our principal. The same principles could be applied with silver or gold. I believe a day will come where this will become a reality.
As the initial concerns about fiat currency morph into a full-blown loss of confidence, the sprint will begin. Look at silver, gold, and bitcoin prices this year. Investors, both institutional and individual, will scramble for assets perceived as sound alternatives. Bitcoin is likely to be at the forefront of this movement. Its first-mover advantage, combined with its growing acceptance by mainstream institutions, could propel it to new heights.
On December 10 of this year, Microsoft shareholders will vote on a proposal to have the company assess whether to invest in Bitcoin. I doubt it will pass, but the fact that it is proposed would have been unthinkable just a few years ago.
Bitcoin is up about 60% so far this year. But Bitcoin will not be alone. Gold is up almost 34% YTD, while silver is up almost 43% YTD.
A New Chapter in Financial History
The slow walk away from fiat currency is a story still unfolding. Whether it culminates in a full-blown sprint, or a measured retreat remains to be seen. But one thing is certain: the seeds of doubt have been sown. Investors are increasingly aware of the vulnerabilities of the current system and are actively seeking alternatives. As this trend develops, we may be witnessing the first chapter of a new era in financial history - an era dominated by digital assets and a fundamental shift in the way we think about money. Imagine you had a choice to take one of the following: $1,000 worth of gold, silver, bitcoin, or US dollars. Which pile would you choose? I won’t tell you my pick, but I can tell you this: I will not be choosing US dollars.
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Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. Investing involves risk, including the loss of principle. Past performance is not indicative of future results. Content is for informational purposes only and does not constitute financial, investment, legal, or other advice. There are risks involved in investing, including the potential for loss of principal. Forward-looking statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Any mention of specific securities or investment strategies is not an endorsement or recommendation.
Copyright © 2024 Bill Puplava
