The Mansfield Letter
Bi-Monthly Newsletter from MansfieldLetter.com
April 25, 2021
Could Bitcoin survive an event like World War II?
When going through formal finance courses one will encounter a pyramid of asset classes which shows the safest assets at the bottom and the most risky at the top. I have not been able to find one which includes Bitcoin. This example is from Annuity.com:
There is something intriguing that jumps out when looking at one of these diagrams. Contrary to today’s popular belief, on this diagram, real estate is actually classified as one of the most risky assets. Why the discrepancy?
Well, because historically, over millennia, real estate was really, really, risky. Because you could not take it with you when you had to flee. You also couldn’t hide it. If you couldn’t defend it, you could lose it. Borders would change all the time and sometimes entire nations would lose everything.
It’s only in the post WWII era in western countries the systems have become so stable that slowly over the last few decades people have come to believe that real estate is the safest of all assets. Nowadays, because of nuclear weapons, there is a strong incentive to talk things out. This has led to an unusually long period of relatively stable geopolitics. Unfortunately, this stability has also led to increasing divergence in the expectations of market participants from historical norms.
And it is in this distorted environment of recent years that the market is trying to figure out a fair value for Bitcoin. I’m sorry but I do not think that it will be an accurate valuation. Not even close. Nobody really knows what Bitcoin is actually worth. If western real estate is so distorted, then Bitcoin is probably distorted too. And the stock market as well, for that matter. So, what would happen if a major event snapped market psychology back to the mean? Something huge, like World War Two? What would happen to cash, real estate, and the stock market? Could Bitcoin survive such an event? Was World War Two an actual world war? What were the assets that did survive? Lots of questions. Let’s take a crack at some of these.
During WWII the performance of a certain country’s assets was strictly tied to its performance on the battle field. The currencies of the defeated nations went to zero. The citizens of a defeated nation would also lose title to their real estate, and all transactions would cease. If you didn’t sell in time before things got too crazy, then you couldn’t sell at all. So, from the point of view of a citizen of a defeated nation, real estate went to zero. Also, the stock markets would cease operations.
The only assets that held value were movable hard assets like precious metals or art. Most of which were stolen by the conquerors anyway, but at least they held their value and retained their utility to be used as money. Specifically gold and silver have proven themselves as a store of value not only during wars, but even transcending civilizations. From the Pharaohs, to the Romans, to today… they are still precious.
Now let’s get to the main question of this article: Would Bitcoin survive an event like WWII? My short answer would be… Yes. If everything was the same, but we just added the existence of the internet and Bitcoin into the mix, then yes, I think Bitcoin would survive. One of the reasons is that during WWII, much of the world did not see any actual fighting. Most importantly the continental United States did not see any fighting on its soil. If there had been the internet at that time, it would have been able to operate normally in much of the world because electricity was uninterrupted for the most part. So in a much simplified scenario the availability of the two ingredients necessary for the survival of Bitcoin, being electricity and the internet, would lead me to believe that Bitcoin would do fine.
But… more realistically, if we take into consideration that if the internet did exist at that time, then no doubt the entire war would look much different. Cyberwarfare would almost certainly be a huge part of the war effort from all sides. Attacking the internet and the electricity grids would be as important as bombing the oil fields and refineries. Also, even though nobody has been able to do it as of yet, and the Bitcoin community doesn’t like to talk about it, there is at least one way that I know of, that Bitcoin could be hacked. It is called a 51% attack. This means that if an entity could amass 51% of all the available computing power in the world, then they could carry out an attack where they take over control of the blockchain.
Therefore the fate of Bitcoin during an actual modern world wide conflict is quite uncertain. Hopefully it doesn’t come to that and Bitcoin will not have to prove me right or wrong. It will grow old in peace, and like every technology, will eventually be replaced by a better version of itself.
In the age when jurisdiction is becoming more important, is the so called home bias becoming less of a bias?
Thirteen months ago many international investors got a rude awakening when the borders were closed and travel was shut down. Like deer staring into headlights they were paralyzed while their brains were trying to process what the heck just happened…
You could see some of these people on social media stuttering in disbelief: you, you mean… I won’t be able to go visit the vault in Singapore where I keep my gold? Nope. And what was worse, nobody could tell them if and when they would be able to travel again.
It’s in moments like these when all the text book mumbo jumbo goes out the window and some common sense returns. Of course it’s better to be closer than further away from your investments. Many investors today are too young to remember times when travel was ever restricted. As a result they have stopped assigning any premium to investments that are in their own, safer, jurisdiction. Several decades of ultra stable geopolitics and years of ultra low interest rates have resulted in many pathological investment assumptions.
Home bias is nothing but human nature. The closer you are to your investments then obviously you can keep an eye on them better. It’s better to be able to physically visit the operations of a company you invested in, than not be able to do that. So there should be a value assigned to that. Just think of the BRE-X scandal… would they be able to pull it off if it wasn’t in middle of nowhere?
Kodiak Copper TSX-V: KDK – Close to home, and worth looking into.
Headquartered in Vancouver, B.C., Kodiak Copper has all of its properties in Canada and the United States. As the name suggests, the company focuses mostly on copper.
The company’s most interesting project is located near the Copper Mountain mine in south-central British Columbia, Canada. It is called the MPD copper-gold porphyry project and it is conveniently located near a highway. The 147 squared kilometer property has been drilled extensively since the 1960s, but with old technology and rarely deeper than 200m.
In 2020 Kodiak Copper obtained some very promising results from its drilling program and the share price has responded very positively. It has since then pulled back which might present a buying opportunity before the 2021 drilling season. The company is well capitalized and is planning to drill up to 30,000m in 2021.