Decentralization: Threat or Trend?

In 2020 and beyond, we are definitely witnessing the beginning of a tectonic shift among not just let's say crypto enthusiasts who were already sold on the concept of decentralization but also CEOs who are responsible for quite a bit of capital. Needless to say as was obvious to anyone who watched his DomainSherpa interview, Michael Saylor believes decentralization is most definitely a trend worth jumping on rather than a threat and he put MicroStrategy's money where his mouth is... 9 figures worth, to be more precise.

Words cannot begin to describe how meaningful of a narrative this is because we are no longer talking about college kids trying to convince their parents to invest in bitcoin back in 2013, things have been taken to a completely different level and nowadays, the proverbial big boys are ready to grab a piece of the pie, even if Michael Saylor's story is still an outlier at this point.

Why Would CEOs Embrace Decentralization?

In a "normal" world where CEOs had adequate confidence in the economic and especially monetary status quo, they... well, wouldn't. But few things about the manner in which the world works nowadays are normal and whether we are referring to individual savers who have built up a nice nest egg or "savers" among businesses that are sitting on impressive cash reserves, concerns abound. In a nutshell, it would be fairly safe to state that if you are a saver in any way, shape or form, you will be punished.

Why?

Simply because broadly speaking, the economy has been in trouble since even before the Great Recession and it is relatively easy to measure it by simply taking a look at metrics such as additional GDP growth per unit of debt added. Do not take my word for it, feel free to crunch numbers yourself and you will see that for an extended period of time, a mega-trend has been and is in the making: more and more debt is being piled on but this additional debt is severely in "diminishing returns" mode in terms of generating additional GDP growth. Think of it as more and more debt being required to generate less and less GDP growth.

Such a paradigm inevitably leads to an absolute nightmare for savers, both at the individual and corporate level, for the simple reason that it would be impossible to service the vast quantity of debt that currently exists across the board at anything but absurdly low interest rates. Furthermore, keeping interest rates low has proven to no longer be enough and as such, central banks have stepped in all over the world through monetary easing measures which are also here to stay.

Currency Debasement and Decentralization

It is impossible to have an intellectually honest discussion about decentralization without tackling the elephant in the room: currency debasement fears because make no mistake, we are most definitely in a worldwide currency debasement framework at this point in time, with the likelihood of the status quo changing being slim.

Critics of the currency debasement argument are quick to point out that there is no problematic consumer price inflation to speak of and they are one hundred percent correct... but misguided. Correct because indeed, when taking a look at metrics such as CPI, inflation is nowhere to be found. Misguided because they assume currency debasement is a process with a linear progression, with the proverbial powers that be debasing the currency gradually and inflation rising in a directly proportionate manner. That is most definitely not how things work in the oftentimes manic-depressive world of economics because... well, there are humans involved and things therefore frequently happen (to borrow an Ernest Hemingway quote) gradually, then suddenly. Therefore, those who expect inflation to kick in linearly and predictably are deluding themselves.

A few observations are in order:

  1. Have we had consumer price inflation yet? No... but what about for example asset price inflation, with let's say poorly run companies at ridiculous sky-high valuations because market participants ended up having no choice but to gain more exposure to various assets?
  2. A lot of central banks such as the Federal Reserve do not have the legal right to simply "print" money and hand it over to individuals. They cannot spend, only lend, in other words. As such, only roughly 7% of what constitutes money over in the US is created by central banks, with commercial banks being FAR more important. While central banks have been ultra-aggressive, commercial banks did not follow suit (so far, at least) and this at least partially explains why consumer price inflation hasn't become problematic. Should commercial banks step in or should perhaps something like the US Federal Reserve Act be altered so as to give central banks more "superpowers" like the ability to SPEND... watch out.
  3. It's not just the Federal Reserve over in the States that is aggressive, it's a game everyone is playing at this point and as such, the dynamic is quite different compared to instances where just one economic actor is being disproportionately aggressive.
  4. Inflation isn't something that is governed by reason or ultra-complex equations/models/algorithms but rather simple human behavior. Since we are talking about humans, "confidence" is the operative word and for the time being, confidence in currencies has not collapsed to such a degree that they are treated as a hot potato that everyone wants to get rid of. Should confidence collapse for whichever reason(s) the market deems appropriate... yet again, watch out.

Visionaries vs. General Public

The observations above should make one aspect crystal clear: the general public hasn't yet lost confidence in the worldwide monetary framework and therefore, there isn't that much in the way of incentives for the desire to acquire decentralized assets to represent a mega-trend. Not enough wind in its sails... for now.

But CEOs such as Michael Saylor are not a part of the proverbial general public, they are visionaries who understand that beating the crowd is the name of the game rather than panicking when everyone else is panicking. Therefore, when it comes to embracing what will most likely shape up to be mega-trends, you can expect them to be early and not care one little bit. For example, it isn't the least bit difficult to imagine that a lot of individuals raised an eyebrow when exposed to Michael Saylor's decision of saying no to cash and cash equivalents (such as US Treasuries) and embracing bitcoin reserves instead.

But do you think he cared or cares? Of course not. He has a clear vision with respect to the future and the role decentralized assets have in this equation, so he is simply doing his thing, just like he has when it came to paying $25,000 for domains such as Strategy.com back when (again) the Average Joe would have raised an eyebrow. Visionaries lead, the general public follows... this is how it has always been and it is difficult to believe things will be different with respect to decentralized assets.

But What About Threats?

It is vital to point out that some individuals as well as corporate entities haven't yet taken the plunge with respect to embracing let's say bitcoin not only because they haven't lost confidence in the monetary status quo to enough of a degree but also because there are threats or if you will potential drawbacks associated with decentralized assets. Decentralized assets which, by definition, aren't run by a centralized decision-maker who can be there to help you if a mistake is made.

Therefore, if you lose access to your private keys, your crypto is essentially gone barring a quasi-miracle. And do not assume this is a minor issue. Estimates are all over the place but many seem to point out that roughly 4-5 million of the maximum bitcoin supply of 21 million are in one way or another lost: from Satoshi's coins to a lot of bitcoin that has simply been lost forever due to improper custody strategies.

Fortunately, more than enough players are stepping into the custody space to fill this void but still, we need to understand that decentralized assets come with negatives that make the average person uneasy, to put it mildly. It is even more so important to play the custody game properly if you are a person such as Michael Saylor who is responsible for reserves worth 9 figures. While Michael had the foresight and determination it takes to do it and do it right, others... well, haven't.

The Bottom Line

For reasons which range from macroeconomics to utility, decentralization as a trend is not only here to stay but even more so, it's poised to have an impressive run. However, it is most likely not quite ready to bloom just yet. On the one hand because there is still not enough in the way of fear among the general public for the average market participant to be incurably sold on decentralized assets and on the other hand because there are still threats that constitute a deal breaker to many until properly tackled (with the custodial issue being the most obvious example).

Therefore, regardless of what the reasons behind your decision to gain exposure to decentralized assets may be, deploying patience is the name of the game. No matter which angle you choose to view the situation from, "deploying patience" has been proven to be a profitable modus operandi time and time again, as long as whatever it is you are gaining exposure to is genuinely investment grade. As frustrating as it may be to come to terms with the fact that you are early and have to wait for everyone else to catch up, it is difficult to envision a better approach, so why fight something that has been proven to work?