Search
  • Adam Harper

Limited supply of nothing

Digital asset critics and advocates are on a common quest to locate value in scarcity. That could be a bridge that connects traditional and digital finance. But the big challenge for advocates will be showing why "a limited supply of nothing" is actually a limited supply of something – and something transformational.



Photo by Jingming Pan on Unsplash


John Paulson, who famously made billions from the collapse of the US subprime mortgage market, had some choice words this week for the growing digital asset market. Cryptocurrencies, he said on Bloomberg TV, are a worthless bubble. Gold, meanwhile, is about to go “parabolic” as inflation gathers pace.


Curiously, this inflation-beating argument is exactly the same one that crypto bulls use to justify their own parabolic expectations for Bitcoin, Ethereum or other tokens. Cash is a losing bet, and yields in traditional fixed income are far too low. (Bill Gross, incidentally, agrees with that one, too.)


So the worlds of old money and new are not as far apart as they first seem. As superabundant liquidity starts to inflate asset prices, both camps are sceptical about mainstream financial assets. Both are seeking value in scarcity.


So the worlds of old money and new are not as far apart as they first seem. As superabundant liquidity starts to inflate asset prices, both camps are sceptical about mainstream financial assets. Both are seeking value in scarcity.

One worldview looks for that scarcity under the ground, though, and the other in computer code. Both views are based in fact: gold is just hard to find, while the supply of digital assets is intentionally limited. We’ll sidestep the debate about intrinsic value here, and indeed the question over whether value is subjectively or objectively determined (Goldman Sachs appears to take the latter view, by the way, having published a report in June called Digital Assets: Beauty Is Not in the Eye of the Beholder. Paulson was blunter, saying crypto is based on “a limited supply of nothing”).


Instead, we’d argue that this common quest for scarcity as a defence against inflation in a world awash with liquidity is a useful bridge for those looking to present the benefits of digital assets to traditional institutional investors. It’s an easier, more immediate sell to investors worried about inflation than far-reaching arguments about Web 3.0 and how blockchain will change everything.


The big question for digital asset advocates, though, is whether these tokens actually do serve as a hedge against inflation. Right now, their extreme volatility makes that argument seem like wishful thinking. But if enough investors believe that the scarcity of digital assets makes them a good hedge against rising prices, and the performance of the asset class therefore outruns inflation, that wishful thinking could be fulfilled – at least for a time.


For now, digital assets don’t have the same connections to cashflows from the real economy as stocks or bonds. They can’t rely on that grounding in the tangible world to create confidence. But all capital markets involve taking a view of the future: fossil fuel companies enjoy great cashflows today, for example, but questions over their prospects in a carbon-neutral world have depressed their valuations.


The challenge, then, for those who believe in the future of digital assets – and a more decentralized digital economy – is to build confidence by showing why and how they would serve society better. They need to demonstrate why they believe a limited supply of nothing is actually a limited supply of something – and something transformational.


58 views0 comments