A Letter to Traditional Investors: The Rationality of Investing in Digital Assets from a Macroeconomic Perspective

This article was published by Chain News, authored by Eric Peters, and compiled by Perry Wang.

Human imagination is the most powerful force in the universe, and this is precisely what distinguishes humans from other beings; there is no higher power than it. Humans have the ability to envision a tomorrow that is better than today, which is the prerequisite for exploration and invention. These things naturally stack upon each other. It is this combination that has propelled human history from the Stone Age to the Space Age.

The journey has just begun. Aside from the most despairing pessimists, this should be obvious to everyone.

Eric Peters, CEO and Chief Investment Officer of One River Asset Management

From an economic perspective, humanity's uphill path is defined by the increase in productivity, which determines the level of prosperity. In modern society, we have devised various ways to distribute wealth: socialism, communism, free-market capitalism. I can imagine there will be other methods. But even within the existing structures, there are nuances. Today, the profits that capital owners obtain are far too high relative to the earnings of laborers. There is no inherent reason to believe that this level of inequality can be sustained, but it has never truly been sustainable in modern history. The social pressures generated by this inequality are manifestly evident and are intensifying and shifting.

The vast majority of private enterprises believe they are more capable than the government in terms of research and development capital. However, a look back at the state-funded innovations of the past century shows that this is not the case. I think one day we will consider this black-and-white conclusion to be foolish. China's unprecedented economic growth and astonishing technological advancements should prompt self-reflection among Westerners. Yet so far, the West has not engaged in such reflection. I can imagine that in the future, this reflection may be forced upon them, perhaps suddenly and unexpectedly.

In fact, I can imagine many things. I can envision almost everything, of course, except for those things I have never thought of. Those are the unknown unknowns, the black swans.

In my lifetime, no black swan has been able to reverse human progress, let alone the market. The impact of black swans, in any case, does not last long. The bankruptcy of Lehman Brothers during the 2008 financial tsunami was not a black swan. I worked at Lehman for seven years, and for most of that time, I imagined scenarios in which the company suddenly collapsed.

Today's global COVID-19 pandemic is also not a black swan; this is almost certain, even though the end date is unknown. Black swans are usually grand and spectacular, often indistinguishable from magic— the internet, smartphones, cloud computing, quantum entanglement. Major risks tend to skew upward and frequently occur. This is why we humans no longer live in caves. However, our imagination periodically goes mad with cataclysms. I think this will never change.

This is why I invest. Investing is primarily about identifying macro trends. Currently, two major trends of the past few decades are evident: astonishing technological advancements and deepening global trade. The latter cannot come true without the former. The combined impact of both has forever changed the world, connecting nearly 8 billion people in ways previously unimaginable, allowing for the instant exchange of information, ideas, and entirely new forms of collaboration. Moreover, this progress enables every curious person to wake up each day to collective discoveries and knowledge.

Of course, there are other trends. Population growth is slowing down at an unstoppable pace. In developed economies, we are beginning to move toward an aging society. First Japan, then Europe, and now China is entering this trend. These trends interact in complex ways, creating an environment of deflation, which naturally favors capital owners over laborers. Most governments ignore this increasingly severe imbalance and its corrosive social consequences. In fact, the policies they implement exacerbate this issue: each time faced with an economic disruption, governments adopt policies of lowering interest rates, increasing debt, and raising leverage to reverse the downturn, which inflates asset prices and intensifies inequality.

This process is reflexive, as each crisis requires more radical monetary stimulus, and the stimulus itself is a cause of economic fragility. The mechanism of this stimulus pulls demand from the future to the present, so it is easy to foresee without any imagination: the process ultimately is eating the future.

This behavior reached its endpoint during the economic downturn in early 2020. In response, Western governments began to implement new forms of policy stimulus, issuing an unprecedented amount of bonds, which they then purchased with funds created by their central banks.

Students of economic history know that this familiar policy combination is implemented when governments intend to devalue their borrowed money. By this means, governments can alleviate their debt burdens. This is a very rational late-cycle response to a predicament that has been attempted countless times throughout history. I can imagine that this time it will at least go more smoothly for a while. However, as a probability-adjusted decision-making investor, this is certainly not a way to determine a portfolio, especially in the case of discounted traditional asset prices.

Thus, I turn my investment focus to digital assets.

Money is an illusion, perhaps the greatest illusion in the world. Out of desire and necessity, we succumb to this hypnosis. Without money, we are at a loss. Although we cling to its so-called permanence, a quick look back at history reveals that money is actually a pipe dream.

In fact, the Federal Reserve governors have indicated their intention to permanently devalue its currency at an annual inflation rate of 2%. Between the global financial crisis of 2008 and the economic collapse of 2020, in just twelve short years, they failed to achieve the established goal of devaluing the dollar at the intended pace. The reason for this failure is not a lack of effort, but a misunderstanding of the true meaning of money.

Money is not real and has never been real. It is our collective belief in the meaning of money that gives it real value. Even gold is not a true form of money. Yet for thousands of years, people have held a collective belief in this useless yellow metal as a store of value, sometimes even viewing it as a medium of exchange. Naturally, other equally useless things can serve the purpose. But gold is scarce, and for reasons we may never fully understand, we have invested our collective belief in gold. Even so, we continue to mine more gold each year. Over time, the rate of extraction increases, and the supply grows, leading to a permanent devaluation of its value by 1%-2% each year. With advancements in mining technology, this pace will accelerate. The world produced 2,470 tons of gold in 2005 and 3,300 tons in 2019. In just a few decades, we will surely mine gold from asteroids.

Bitcoin mysteriously appeared in 2009. A black swan. The various technologies that come together to form the Bitcoin blockchain are not particularly novel or striking. However, like all black swans, they collectively constitute a revolutionary future.

Some people recognized Bitcoin early on and dedicated themselves to it. Others entered the market to bet and profit. Some bought and held, becoming millionaires and billionaires. I once thought that governments were unlikely to allow Bitcoin to exist long-term, as they would never relinquish the power of minting; instead, governments would adopt some form of digital currency to dominate, then destroy the private systems that initially developed digital currency forms.

However, nothing in this world is absolute, so there is always a possibility: Bitcoin and subsequent digital assets may be allowed to coexist in a world of digital dollars. Initially, this path seemed extremely narrow. Over time, it will gradually widen. The widespread adoption of Bitcoin and Ethereum, along with innovative companies rapidly developing the blockchain ecosystem, makes it increasingly difficult for governments to dismantle these private systems. People are increasingly able to imagine a world where Bitcoin and other digital currencies can thrive alongside digital dollars, fundamentally transforming finance in ways currently unimaginable.

Allowing this situation to arise aligns with our national interests. The United States should embrace and encourage this vision and lead the world by example.

But everything comes with risks. The risks faced by these assets are not just that the government will destroy them. Unknown flaws in their structure could also lead to failure, shaking people's belief in their value. Or large-scale thefts could trigger enough alarm for investors to abandon the asset class. It is also possible that new digital assets could be easily created, meaning we would be unable to concentrate our collective belief in any one digital asset, leaving many assets with little value.

I can imagine that all these risks will manifest, although due to one of the most interesting characteristics of digital assets—reflexivity—the risks in each case will tend to diminish.

**Currently, most people still believe digital assets are worthless. They are not wrong. Overall, the creation of digital assets is as easy as the Federal Reserve extending credit to banks with digital dollars, meaning digital assets can be created *costlessly* and in unlimited quantities. But imagine if we were to choose one or two digital assets as the objects of our collective belief, just as we once selected gold and silver from the periodic table.**

Now imagine this: unlike gold and silver, these digital assets have a capped supply and are unique objects in an infinite fiat currency world. It is not hard to envision that these assets could become extremely valuable.

Bitcoin has no reference for value. This characteristic alone makes Bitcoin unique. Regardless of how its price fluctuates, its production follows a predetermined path, halving every four years until the last of the 21 million bitcoins is mined in 2140.

In the real world, when the price of gold suddenly rises, its output increases. The same is true for oil, copper, housing, stocks, bonds, and everything else in the infinite universe. However, when the price of Bitcoin rises tenfold or a hundredfold, its output does not increase. In today's inverted world, a more captivating inversion has been created: an asset with capped supply but no intrinsic value, which could become priceless simply through our imagination.

**I can imagine how people initially formed their belief in the value of gold. The unique color, density, and malleability of gold allowed people to grasp it in their hands and believe in its *authenticity*. Real belief must repeatedly, relentlessly, and ruthlessly withstand tests and emerge unscathed each time. In the cultures of various countries, the great ancient stories explore belief for a reason; the core value exploration is about who we truly are. This is a foundational element; without it, humanity falls into confusion. Blockchain technology provides humanity with a way to establish **confidence in new systems, which until recently was unimaginable. This new system is extraordinary, residing in the cloud, and becomes stronger and more resilient as we interact with the cloud more. As these visions come true, it becomes increasingly valuable. This, in turn, attracts more people to participate.

**As people interact with such a novel system, its weaknesses will naturally be exposed. People's beliefs begin to waver, and some leave. However, others contribute their intelligence and investments, dedicated to **improving the system; storage methods become more secure, the code more robust, untrustworthy participants are removed, good money drives out bad, and use cases continue to expand. When these forces interact in infinitely complex ways, our confidence in the system rises, driving the prices of its digital assets upward.

Prices sometimes become insane. Since Bitcoin's inception, there have been six instances of wild price fluctuations. Bitcoin has recovered from each surge and crash, becoming stronger and more resilient. In each cycle, Bitcoin has attracted more smart and ambitious entrepreneurs who view Bitcoin and Ethereum as the technological platforms that will constitute the future of currency and finance, believing they will create wonderful things we cannot yet imagine.

As people invest their energy into this new system, the promise of Bitcoin far exceeds the simple realm of digital currency. This attracts new investors and innovators, and with each addition, it becomes increasingly difficult for the government to dismantle the system. Conversely, the motivation to encourage this new technology to coexist with digital dollars grows. As investors observe these trends emerging, they become more willing to invest, and the more they invest, the harder it becomes for the government to dismantle it. This process is also reflexive. In today's inverted world, this creates another massive inversion: an asset with no intrinsic value becomes increasingly secure, and its price rises ever higher.

This brings me back to the investment question, considering the risks and returns, assessing the probabilities of many possible outcomes, and the countless paths to achieving goals. But good investing also involves constructing a thoughtful portfolio. The dominant portfolio structure today combines high-value risk assets with risk-free assets that yield negative returns, while long-term trends and policy choices make this mainstream configuration highly susceptible to a single risk—inflation. Moreover, the positions in investors' portfolios are most easily affected by the precise outcomes actively created by governments.

**Current mainstream portfolios include stocks and bonds. Bond yields are currently lower than at any time in human history. Stock price-to-earnings ratios are near historical highs. Therefore, in today's world, investors must achieve a 7% annual return to avoid bankruptcy, and they have leveraged their investments, amplifying both gains and losses. Unfortunately, calculated at this yield, bond returns are unlikely to offset stock losses during a recession. In an inflationary period, bonds will suffer losses, and historical experience tells us that *bond losses* will subsequently lead to stock losses. In a recession accompanied by inflation, losses in securities investments will be catastrophic. Most people cannot imagine all this. But it is not as difficult to envision as one might think. When people lose confidence in fiat currency, inflationary recession (stagflation) occurs.**

After more than a decade of not implementing inflationary policies, governments have recently undergone a dramatic shift, conducting monetary and fiscal stimulus on an unprecedented scale. The global pandemic has provided a catalyst for politicians to temporarily support this new policy paradigm. However, such large-scale monetary and fiscal stimulus is difficult to reverse. As mentioned earlier, this stimulus is accompanied by currency devaluation each time. Betting on the failure of this policy is unwise. Even if the deeply divided U.S. government adopts new tightening policies, leading to another economic collapse, the calls for more radical monetary devaluation will immediately resurface. And with greater force.

**Belief is not a static thing. It is slowly, painstakingly, and suddenly lost. Therefore, it is likely that for a time, current policies will seem appropriate, even prudent. I can easily imagine this scenario, just as easily as I can imagine the opposite. However, longer-term trends are difficult to envision, as governments are not constrained by coordinated monetary and fiscal policies. What if more radical policy stimulus fails to achieve inflation targets for an extended period? The appeal of adding digital assets to a portfolio lies in their ability to help mitigate this *currency devaluation risk* without encountering negative returns while waiting and watching.**

But digital assets not only help alleviate the downside risk in a portfolio; they also allow people to engage with the vision promise of humanity's latest "black swan," which is the beginning of the journey to reshape currency through this nascent technology. That is the last inversion in today's inverted world, as only in such a strange moment can one make a high-conviction bullish bet on a brighter future for humanity while ensuring that investors face no severe consequences due to our mismanagement.

**With each passing day, among the world's *smartest people*, more and more are contributing to this work, which overall enhances people's confidence in these new digital systems. These individuals collaborate without ever having met, knowing each other's names, locations, or needing a common language. What they share is a **common belief. They cooperate in ways that were simply impossible a few years ago, improving the code that supports these assets, building the architecture and interfaces that integrate these systems with existing financial participants, while creating new products and features. Moreover, they have built second-layer (L2) applications on top of assets like Bitcoin and Ethereum to improve the functionality, speed, efficiency, and usability of public chains. This ensures that future innovations in digital assets will emerge one after another, making tomorrow look better than today.

**We all try to imagine how high an asset can rise and how low it can fall. The latter is easy. Theoretically, every digital asset could go to zero, although it is extremely difficult to imagine that such a scenario would occur collectively. It is not hard to imagine that in a world where fiat currency can be created infinitely, the actual utility of these digital assets continues to increase, their value could rise many, many times. The value of Bitcoin can certainly exceed that of gold. Owning these assets will become a cornerstone for the future, as all our perceptions of financial intermediaries and their relationship with centralized policies will change in ways we cannot foresee. Holding these assets long-term will keep us in sync with the macro trends of *technological advancement* and currency devaluation, both of which seem to be accelerating. Of course, what kind of future this will lead to and what valuations will arise will be determined by our collective imagination.**