Editor’s Foreword: VanEck previously launched a Bitcoin futures ETF, but was rejected for a Bitcoin spot ETF. This article is very exaggerated in the imagination of Bitcoin after becoming a reserve currency. “Using the same M0 value as gold, the implied price of Bitcoin is about $1.3 million per coin. The implied price of Bitcoin using global M2 is 4.8 million per coin. Dollar”. Its basic logic can be read here. Similar arguments can be found in: Arthur Hayes Long Article: Sanctions, Gold and Bitcoin
Sanctions on Russia may have changed the system of reserve currencies. Through this monetary lens, we attempt to quantify the impact on gold and Bitcoin as potential reserve assets.
Currency has changed. Sanctions on Russia’s central bank wiped out its dollar, euro and yen reserves. This should reduce demand for hard money as a reserve asset, while increasing demand for currencies that can perform the original functions of these former reserve currencies. We believe central banks will act, as will private individuals. To put current events into context, our emerging market bond investing team sought to quantify the emergence of new gold or bitcoin-backed monetary regimes. The end result is that the upside for both gold and Bitcoin could be huge. Specifically, the framework estimates gold at around $31,000 an ounce and a potential bitcoin price at around $1.3 million. If adjustments are made for greater stress on the financial and monetary system, higher prices will result.
The Valuation Framework for Gold and Bitcoin from a Monetary Perspective
We have built a simple framework to assess the value of gold and bitcoin. For gold, we divide the global money supply (M0 and M2) by the global gold reserves. Currency liabilities divided by reserve assets. We use troy ounces to represent current reserves, and we use current exchange rates to convert monetary base liabilities into dollars. We use base money because econometrics is good (on a global scale), which is understandable, it’s just money in circulation and demand deposits in your pocket.
In addition to the “global” gold price, we also know the gold holdings of central banks and are able to calculate the gold price in individual countries. This could be useful for gauging potential stress on countries’ monetary and financial systems. For example, under the strict gold standard, a country’s central bank’s balance sheet should generate about $1,900 per ounce of gold. This would suggest that the underlying pressure from their monetary system is not apparent (although there are obviously many other important factors. Also, we do not recommend a gold standard, and we continue to be unfavorable on the price of all Russian assets). We run the same for M2, just to enhance the framework (more on M2 and M3 later).
For Bitcoin, we have adopted the same framework. We calculate the “global” price of BTC, which is M0 and M2 divided by volume. We only calculate the price of BTC, not all cryptocurrencies, because the number of bitcoins is limited (21 million) and the potential number of “cryptocurrency” is unlimited. This is the denominator of the Bitcoin calculation, just like gold was the denominator in the previous calculation.
Gold and Bitcoin extremes and actual price targets
In the extreme case of gold or bitcoin becoming a reserve asset, there is obviously a need to lower expectations for the resulting “price”, they are just a starting point. Investors should at least determine the subjective likelihood of an outcome. Or, should they choose a degree for the outcome: Will gold or Bitcoin be the only reserve asset, or will this status be shared with other assets?
We believe that most investors will and should use the expected value framework to achieve these numbers. For example, an investor who sees a 10% chance of gold being a reserve asset might say that our “extreme scenario” price of $31,000/oz represents a realistic price target of $3,100/oz. They may think this is an attractive upside relative to current prices, or they may not.
Our point is that we start with extreme situations that may not happen, or may not happen at all. However, they are a way to start the quantitative process, and investors should adjust to their own assumptions.
Understanding the New Monetary Paradigm
Some prominent commentators say the currency has changed due to sanctions imposed on Russia’s central bank. But so far, the output has been prose, and our goal is a framework and some concrete numbers.
Russia’s central bank may change their reserve mix to some extent to hurt the dollar as well as the euro and yen, and strengthen other currencies. U.S., Eurozone and Japan sanctions on Russia’s central bank have essentially “disappeared” Russia’s dollar, euro and yen reserves. As a result, some central banks and the private sector will diversify their foreign exchange reserves.
Many of the new reserves will simply be in existing “emerging market” national currencies, such as the renminbi. Relative to the central bank, the private individual role is now the more important price setter in this market. Therefore, gold and cryptocurrencies are our primary focus.
Central banks and individuals may be looking at “money” in a new paradigm, and we’re trying to figure out exactly what it means. In other words, we believe it is necessary for market participants to answer the question: What would happen if China bought $3 trillion in gold? What happens if people lose trust in fiat currencies and buy other currencies instead?
Insights on the price of gold in a valuation framework
For gold, our main conclusions are:
The implied “global” price of gold, calculated by dividing global currency (M0) by global gold reserves, is $31,000 (average) and $21,000 (median) per ounce for the countries with the most gold holdings .
Dividing global currency (M2) by global gold reserves yields a much higher “global” gold price, around $105,000 per ounce (in part because many central banks have little or no gold reserves).
The greater the likelihood of a financial crisis, the more important M2 prices are.
M3 is now implicitly guaranteed by the Fed (one of the most significant effects of the global financial crisis, in our view), suggesting more upside. If the Fed is forced to more openly guarantee the global M3 in future crises, then gold prices will be more bullish by then. But the Fed and others have been known to stop calculating this number around the onset of the global financial crisis, and the price is clearly much higher.
On a country-by-country basis, Japan’s figures exceed records. It has a lot of money and very little gold.
The UK is another developed market with very low gold reserves relative to monetary liabilities.
China’s gold reserves also appear to be low relative to monetary liabilities.
Gold price results across countries may suggest that countries where gold prices are too high may face currency depreciation pressure.
In some developed market countries, devaluation pressure is high, even more so than in emerging market countries. Developed market countries “print” their own reserve currencies, so “reserves” are a different concept for developed markets, and emerging markets must work to create external account surpluses in order to increase reserves.
Russia is really interesting. Relative to currency (at current exchange rates and gold prices), it holds almost enough gold to create a currency board. In 1999, after the crisis of 1998, a buying opportunity arose when Russia’s foreign exchange reserves (in the past, Russia’s foreign exchange reserves were in dollars) were equal to the base currency.
Of course, we need to remind investors to downgrade the price of this “extreme” scenario based on their assumptions about the likelihood of such an “extreme” scenario, or the proportion of gold realized in any new reserve state expected.
For those who follow the calculation of gold prices across countries, there is a big difference in prices. The evidence below should speak for itself.
Insights on the price of Bitcoin in a valuation framework
Cryptocurrencies all benefit from this situation and compete with gold. Maybe cryptocurrencies are the new gold and will benefit from this demand for a new hard currency. Maybe not, maybe both. Our current view is that gold is the easiest thing to consider and buy for central banks, and central banks are a key player in our hearts at this particular time. But private actors are more agile and respond to the same underlying motivations.
We did the same calculation for cryptocurrencies. Since the potential number of cryptocurrencies is infinite, we focus on Bitcoin, which has a supply limit of 21 million BTC. In this regard, it is closer to gold than other cryptocurrencies. So, what is the global M0 and M2 divided by the number of bitcoins?
– Using the same M0 value as gold, the implied price of Bitcoin is around $1.3 million per coin.
– The implied price of Bitcoin using global M2 is $4.8 million per coin.
– The upside for cryptocurrencies appears to be much higher than for gold (~33x), even though gold is the more immediate first choice for central banks. However, individual players may act faster.
– As with gold, we need to remind investors to downgrade the price of “extreme” scenarios based on their assumptions about the probability of an “extreme” scenario occurring, or the portion of Bitcoin that will materialize under any new reserve state expected.
A starting point framework for valuing gold and bitcoin
We can’t stress it enough, it’s a framework to help us get started. There are a lot of problems bringing these implied prices j down. The most obvious is to incorporate a probabilistic scheme.
There are other assets that may fulfill the function of gold or Bitcoin as reserve assets. Physical assets such as real estate are another obvious alternative to gold or bitcoin, which many define as having a limited supply. Perhaps even an infinite supply of assets, such as stocks, could function like money. Perhaps the same is true for emerging market currencies (more on that below).
We just provide a starting point for any quantitative process. The ethos of our framework is to initiate a quantitative process that allows you to refine your own answers, rather than producing “answers”.
EM currencies/bonds may benefit
Emerging market currencies (EMFX) are also a potential beneficiary. However, the above frameworks are not suitable for EMFX, so we do not include them in this discussion.
First, unlike gold or bitcoin, emerging market currencies are subject to a potentially unlimited supply. In addition, we have a formal investment process for emerging market local currency bonds. Also, the process does not differentiate between currencies and interest rates. Logically, separating money from interest rates is double counting inflation (unless you’re looking at non-economic factors such as technical factors). We are attracted by high real interest rates relative to fundamentals. period. This is the heart of our formal analysis process. We have a second step of the analysis to incorporate unsystematic risk. For example, we don’t hold Russia at all because while real interest rates are attractive relative to its fundamentals, we believe the sanctions risk is too high to have too much impact. In any case, we see EMFX as a potential major beneficiary, but we do not discuss it here because the framework is not suitable for assets with unlimited supply.
Quantifying the impact on gold and bitcoin prices
So far, the world has not imposed sanctions on major economic and financial players like Russia. The “story” about the future of money is interesting, but if one thinks this might be a new paradigm, it’s worth trying to quantify. That’s what we do with this work, to be as specific as possible on a hazy and complex issue. The key impact of this major change on asset prices has been a surge in gold and bitcoin.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/vaneck-research-bitcoins-imagination-as-a-reserve-asset/
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