Bitcoin et al: The importance of inflation

I wonder if there is anyone who has been immersed in cryptocurrencies for any length of time who IS NOT UTTERLY SURPRISED that one Bitcoin is now selling for around $7900, at current prices around 6.16 times one ounce of gold. You show me someone who genuinely predicted Bitcoin's meteoric rise, and I'll show you a boaster or a liar. Sure lots of people, Roger Ver, et cetera, predicted a rise. But not the magnitude, and I'm not talking about all those out declaring to-the-moon quotes to get a soundbyte and their name in the newspaper.

Personally, I have been very surprised. But maybe if I was smarter, I would not have been. When Bitcoin first overtook gold in price, I was floored - whatttt? went my brain. But maybe again that was just me being dumb.

Some people think there are about 150,000 tons of total gold in the world, which would mean there are about 4 billion, 374 million, 990 thousand ounces of gold in existence. But others think there are 2.5 million tons of gold in the world, which would mean there are about 72 billion, 915 million ounces of gold.

And so when I think of the supply of gold, which is universally considered a very rare and valuable item, should I have been surprised when Bitcoin, of which there will ever only be 21 million, surpassed gold in price? And that's without thinking of fiat currencies, like the US dollars which I understand are so plentiful or infinite in number that the Treasury and Federal Reserve tend to give them out for free to any and all polite bankers that come asking.

What has dawned on me over time is that there is clearly demand for cryptographic currencies, and that the cryptocurrencies that have, and will continue to, rise fastest in price are those with the most limited supply. It has struck me that the free-money responses of all the central banks since the GFC of 2008 have fundamentally changed the way people view fiat money, and fundamentally broken their confidence in it. And not just this, but that the solution offered by one Satoshi Nakamoto of a distributedly verified digital currency with a limited and fixed total number of units is viewed by many as a better alternative, and one that given even modest demand from early adopters and technology enthusiasts has over time rise exponentially in price.

It led me to thinking, what is the real funny-money here? Is it Bitcoin and other cryptocurrencies, derided by the Jamie Dimon's, the Warren Buffet's, the heroes of the old financial order? Or is it in fact the case that it is the fiat currencies, the US Dollars, the Pounds Sterling, the Yen that are the real funny-money? My personal view is that all major floating fiat currencies are now fundamentally suspect, especially those issued by countries with small central bank gold reserves, but frankly given their sheer excess of supply all of them.

That is not to say all cryptocurrencies will succeed. But I fundamentally believe some certainly will, and in my view exponentially relative to fiat currency. And to do date, and I believe continuing into at least the medium term, the cryptocurrencies that will succeed in terms of rising most in price are the ones with the most limited supply. Bitcoin is the obvious example.

The problem with Bitcoin is, it HAS ALREADY risen exponentially through multiple iterations. In my view, while anyone trading in the crypto space now would be wise to consider holding a portion of their float in Bitcoin, Bitcoin's capacity to continue to rise exponentially is limited by its relatively larger market capitalization. I'm quite confident it could double, or triple, I'd even grant a fourfold rise.

But what about the real rises, the rises of 20 fold, 50 fold, 100 fold and more that have turned many a 30-something year old man with a day job, an interest in technology, and too much time in front of the computer screen into millionaires? I don't believe Bitcoin is capable of the exponential rise that smaller market cap coins are capable of, or put another way, I think there are certain small cap coins with limited supply that have a real chance to rise at a faster rate than Bitcoin. They can outperform.

The key of this for me in the short to medium term is that such a cryptocurrency must have a good development team, and must have a low supply. At present, 'low supply' basically means coins that copied Bitcoin's maximum 21 million total supply, of which a number have. This also means that I'm rather neutral on coins with very big total supplies like XRP, and why I'm not surprised that lately Ethereum has tracked sideways while many other coins with lower total supplies have risen. It is why Litecoin with its already over 53 million coins have has never excited me. Sure Litecoin today is fifth largest by market cap on coinmarket cap, but this is misleading. It's only worth $67 per coin, whereas Dash which sits just below it in total market cap is worth $418 per coin. Remember, they were once worth about the same per coin, and they're now worth roughly equal in market cap, but PER COIN price is what we have to consider. In this regard Dash has blown Litecoin out of the water.

Now of the coins I've considered with limited supply, one stands out to me as offering the best potential for exponential rise and outperformance. That is Zencash, a zkSNARKs coin that protects transactional privacy. There are three reasons why this coin has made such a mark on my radar. One, it's worth about $22 today, and it has really only risen about threefold from its lows. What if we could have all bought Dash at $22, we'd be pretty happy today, wouldn't we, with our 20 fold profit? The second reason I like Zencash is, like Dash and Bitcoin, its total supply is limited to 21 million. The third and final reason I like Zencash is that like Dash it has a funded governance model where a portion of coins earned from mining are allocated to fund the coin's development, in other words to pay staff and contractors to develop the coin and ecosystem. It worked for Dash, and I believe it will work for Zencash.

If there's anything that has struck me about the whole cryptocurrency revolution, it has been the impact of scarcity and limited supply in catalyzing the exponential rise in value of an asset even in the face of only moderate and not yet mainstream demand. Perhaps it shouldn't have, but I must raise my hand and admit this has surprised me.