There is an old story about a magic doubling penny in which someone is asked to make a choice.
Would you rather:
- Be given $1,000,000
- Be given a penny ($0.01) that doubles in value every day for a month, and then never doubles again
Which choice is going to make you richer?
The $1,000,000 choice is clear. You have a $1,000,000 and are an overnight millionaire. Nothing else to worry about.
So, what about the penny? How much is it worth? Well on day 1, you have $0.01. That doubles and on day 2, you have $0.02, Day 3: $0.04, Day 4: $0.08, Day 5: $0.16, Day 6: $0.32, Day 7: $0.64.
So now if you chose the penny you’ve made it to the end of a week and still have less than $1.00, while those who chose the $1,000,000 have gotten to be millionaires this whole time. This would not have been a very fun week for you.
Let’s step forward to day 10, and you have $5.12, and then jump forward again to day 21, a whole three weeks out of your month. Your penny is now worth $10,485.76. That’s not too bad, but you’re still way worse off than the millionaire.
These stopping points are critical to think about. Most people never let compounding continue long enough to see it’s full effect. In the first ten days you made $5.12, while in the next 11 days you made over $10,000. That is not linear growth by any means. However, it is the last ten days of growth in this example which make all the difference.
Let’s take a look at a full table of a month’s value of your penny:
As you can see, it was in the fourth week of the month, where your gains start to skyrocket in value. However, it isn’t until the 28th day of the month that you finally pass the million dollar mark. This is the first point where the penny becomes the right decision. The penny then proceeds to gain in value to over $10 million by the end of the month on the 31st day.
So what can we learn from this example?
Compound interest can be very powerful. Compound interest is basically interest on interest. Instead of just earning interest on the principal amount you invested, you earn interest on the principal and on interest you've already accumulated on it. Just normal “interest” on the penny even at the 100% interest rate used in the example is just $0.01. If your interest didn’t compound, then every day you’d still receive a 100% return on the original investment of $0.01. However, you would only have $0.31 by the end of the month. But your interest was able to compound on itself. That 100% return (doubling) was in effect on not just the original penny, but also all of the gains made by doubling the penny. This is the heart of compound interest.
But, while compound interest can help your savings grow more quickly than it would with simple interest, it can also work against you when you're borrowing money and, what about the the national debts? Although the growth of the debt-to-GDP ratio has not been growing exponentially, it is growing unsustainably. Our entire global economic system is built on assumptions of growth that are entirely untethered from any sense of reality, and all of the growth that has been made has required a massive expansion of debt and credit while also causing staggering inflation. For every $1.00 of growth, the global economy requires $4.00 of debt. Could you imagine running a business like that? Even a 100% fee (or 100% tax) would be nowhere near the level needed to recoup the investment. It would be one thing if it were just a business, but its the economic system for the entire planet. It dictates how people get access to healthcare, food, shelter, education, pensions, retirement, and basically everything else in life. And sadly, it’s a ponzi scheme.
The level of debt required to achieve growth is an exponential function — meaning that in order to get the same level of growth the world economy has previously experienced, it will require at least double that amount of debt to achieve the another $46 trillion in growth. Yet the solution is staring us in the face. Technology — driving the majority of economic and societal gains in the last few decades — is the greatest deflationary force the world has ever seen.
In fact, despite the destruction in purchasing power of currencies by Central Banks, case in point with the U.S. Dollar losing over 95% of its value since the creation of the Federal Reserve in 1913, technology has still managed to bring us greater value/efficiency at a lower cost year after year. While many Keynesian economists will shiver from just reading the word, the truth is that our system is broken and can no longer work.
A Global Technological Phase Shift
Just as credit, debt, and inflation have been growing exponentially, with largely negative consequences, technology has been improving at an exponential rate, with largely positive consequences. Moore’s Law — the most famous example of technological progress — has found that around every 18 months the number of transistors on a circuit board doubles while the cost stays the same, meaning more bang for a buck every year and half. Although Moore’s Law has begun to approach its upper limit, artificial intelligence is now set to effectively continue the trend.
In the amazing “The Price of Tomorrow”, Jeff Booth explores the pervasive nature of technology and its deflationary pressure. The premise of the book is that technological advancement creates an environment such that the cost of production and goods naturally falls over time; not only that, but this natural deflationary pressure is increasing due to the pace of technological innovation, and so if governments wish to continue printing money in an attempt to stimulate economies and create jobs, they’ll have to do so at an increasing rate, receiving increasingly little in return per currency unit printed. Sticking to the current economic game plan will require printing a destabilizing amount of money and taking on untenable levels of debt. Why not, asks Booth, simply embrace deflation?
In this context, the fielding of a new system — using Bitcoin as the deflationary currency and applying technology’s deflationary power to every industry — is going to happen whether or not we want it to. Bitcoin is the best option for the next global reserve currency, largely due to its fixed supply and therefore deflationary nature. Bitcoin, really is the only candidate and it is the central part of the equation that brings us to the new deflationary economic system.
In order to truly succeed in the long run, Bitcoin needs to experience some level of hyper growth. But don’t be fooled by what seems like linear growth right now — it’s not. A concept called ‘the deception of linear and exponential growth’ was penned by Evolution Partners and Singularity University — in short it means that when you are standing on a exponential growth curve and look backward, the growth always feels linear. And given we only have historical data points to consider, this is what it will seem like. So if we’re experiencing exponential growth, linear growth is exactly what it must look like in the beginning — it’s behaving just as it should. And we’ve seen this with many other technology explosions like smartphone and television adoption. It’s the same reason why technology is almost always adopted a lot faster than what most people think — they project the future on the linear past, when it’s in fact exponential.
So how do we know that we’re on an exponential growth curve? Because Bitcoin has massive network effects.
In very basic terms this just means the more people use it, the more useful it becomes to others, and the more likely they are to use it too. Remember when you didn’t use email because no-one else had email? And then at some point enough people had email to make it useful, so you also got an email address. Or Facebook — with no friends on Facebook it makes no sense to join, until there are a few of your friends on it and you feel compelled to do so as well. Once you hit that critical mass, growth explodes and becomes exponential.
Everyone is familiar with PlanB Stock To Flow model. Critics recoil because it seems to scale too rapidly. What they're forgetting is an intangible amplifying force that I wanted to ballpark quantify: the normal distribution of technology adopters.
The number of investors holdings of 0.1 coins or more has broken into new all-time highs, Cointelegraph reported.
Data published by crypto data aggregator Glassnode on June 13 shows the number of wallets holding 0.1 BTC or more reaching a new record of 3,054,282 – beating out May 21’s previous record by 212 addresses.
The number of wallets holding 0.1 BTC or greater has steadily increased since spiking and falling as the 2017 bull run reached its peak, with new records above 2.75 million consistently being set since April 2019.
How long this adoption curve might take is the impossible question, of course. Technology adoption in the information age is faster than ever. The most compelling demonstration of the widespread adoption pattern of bitcoin is the "S-curve of technological adoption" from the "diffusion innovation model" by Everett Rogers. The image of bitcoin, or cryptocurrency in general, becoming mainstream becomes clear when compared to the adoption curves of other technologies such as electricity, car, radio, telephone, TV, video games, credit cards, internet, cell phone, etc. This curve is shaped like an “s” on a spectrum of innovators, early adopters, early majority, late majority, and laggards.
Stock-to-flow ratios are used to evaluate the current stock of a commodity (total amount currently available) against the flow of new production (amount mined that specific year). This model treats Bitcoin as being comparable to commodities such as gold, silver or platinum. These are known as 'store of value' commodities because they retain value over long time frames due to their relative scarcity. It is difficult to significantly increase their supply i.e. the process of searching for gold and then mining it is expensive and takes time. Bitcoin is similar because it is also scarce. In fact, it is the first-ever scarce digital object to exist. There are a limited number of coins in existence and it will take a lot of electricity and computing effort to mine the 3 million outstanding coins still to be mined, therefore the supply rate is consistently low.
The S2F model, predicts the price of a single BTC will be at least $55,000 or even $150,000 in the future. Certain types of crypto proponents love the research and stock-to-flow (S2F) models, but skeptics believe it’s because it may pad their bullish confirmation bias that someday BTC will be worth tens of thousands and even hundreds of thousands at some point in time.
Basically, the S2F ratio divides abundance with demand by treating bitcoin like commodities such as gold or platinum. This means any analyst can use the model to evaluate the current number of bitcoins in circulation against the number of coins mined during a specific year. The last BTC halving plays a crucial role in the S2F model and if Plan B’s predictions are correct, BTC could be around $55K within the next two years.
In conclusion, the exponential growth of demand and value of crypto, can quietly continue, above all in a world where central banks printing more money in 30 days... than the entire Bitcoin market cap.
