Extended Thinking of Currency Hardness: Scarcity and Value

Original title: "Deep | Extended Thinking on Currency Hardness: Scarcity and Value"

Original source: Chain Hill Capital 千峰资本

This article comes from WeChat public account: Chain Hill Capital Qianfeng Capital has been authorized to reprint by Chain Hill Capital.

Introduction

"Any item, once used as a carrier of value storage, will bring about an increase in supply; any item whose supply can be easily increased in large quantities, once Being chosen as a carrier of value storage will destroy the wealth of the storer. From this trap, it can be inferred that any item that successfully assumes the role of currency must have some natural or artificial restrictions to limit its incremental flow into the market to ensure Its ability to preserve value.”

01. The hardness of currency determines the ability to preserve value

People are willing to choose a certain item as currency, which is essentially the scarcity of this item that is difficult to be copied, which ensures Its important currency function - value storage capacity. The difficulty with which a currency can be replicated and produced is usually referred to as the "hardness" of the currency. Currencies with lower hardness are called "soft currency" and currencies with higher hardness are called "hard currency".

Throughout the history of human currency, the hardness and value-preserving ability of currency are almost Inseparable. In West Africa, glass beads have been used as currency for hundreds of years. These glass beads can be made into chains, necklaces or bracelets and circulated locally. West African glass beads were intricately manufactured locally, expensive to manufacture, limited in supply and, in today's parlance, a low-inflation currency. In the eyes of the locals, glass beads have extremely high currency hardness and are sufficiently scarce. They are the hard currency circulating in West Africa, thus protecting the wealth and purchasing power of the people in West Africa.

Phoenician Glass Trade Beads Source: Internet

European explorers and traders visited West Africa in the 16th century , they noticed the high value of glass beads in the local area. Since the production process of glass beads in Europe is far superior to that in West Africa, and Europeans seldom use glass beads for trade, they began to import a large number of low-cost glass beads from Europe in exchange for precious resources in Africa. . The European invasion of Africa weakened the currency hardness of glass beads, slowly changing it from hard currency to soft currency, gradually eroding the purchasing power of glass beads in the hands of Africans, and gradually transferring the wealth of Africans to glass beads that can be easily obtained hands of Europeans. The proliferation of glass beads has wiped out its ability to store value, and its fall has impoverished West Africa. Later, these glass beads became better known as "slave beads" due to their role in the slave trade from Africa to Europe and North America.

In addition to the West, my country also has a currency history of more than 4,000 years , hundreds of currencies have been used in thousands of years of history, but none of them has survived. From the original shellfish currency to the cloth coins, knife coins and other currencies in the Spring and Autumn and Warring States Periods, to the square hole coins used by Qin Shihuang after the unified weights and measures, to the pioneering paper money (Jiaozi) experiment in the Song Dynasty, the Ming and Qing Dynasties "Silver Entanglement". Among them, the most representative and innovative one is Jiaozi in the Northern Song Dynasty.

Jiaozi was first born in Sichuan folk, and later in Song Renzong period (1024) It was officially issued as the official currency, commonly known as "Guanjiaozi", and the initial circulation of Guanjiaozi was 1,880,000 guan. The flow period of jiaozi is divided by "boundary", generally three years as a boundary, and a new jiaozi will be replaced after the period expires. Jiaozi originally had a stable currency issuance reserve. Generally, the issuance amount of the first circle is 12,563.4 million guan, and iron coins are used as reserves. The iron coin reserve for one issuance of Jiaozi is 300,000 guan, which is used as the redemption reserve of the court.

Northern Song Dynasty Guanjiaozi Source: Internet

The scarcity of metal is more rare than banknotes, and the production cost is higher. The craftsmanship is more complicated. Compared with coins such as copper and iron, Jiaozi, which is used as banknotes, is worthless without the support of coins. Initially, the regime of the Northern Song Dynasty was very cautious in the use of banknotes and issued them strictly in accordance with the reserve ratio. During the decades from Song Renzong to Song Shenzong, the value of banknotes remained stable, maintaining the market credit of banknotes.

During Song Shenzong Xining’s reign, Jiaozi’s 22nd World It was about to expire, and because many financial expenditures had been arranged, using the new Jiaozi to recycle the old Jiaozi would cause financial difficulties, so the imperial court issued additional Jiaozi from the next realm, but did not use minted coins as reserves. From then on, there was Jiaozi's "two worlds running side by side", which also planted the seeds for the decline of Jiaozi in the Northern Song Dynasty. With Wang Anshi's New Deal and the rapid decline of frontier wars, the number of Jiaozi in circulation began to expand. From 1073 to 1084, the number of newly added Jiaozi was almost several times that of the mint reserve. A large amount of banknotes brought severe inflation, and Jiaozi depreciated sharply. People refused to accept banknotes, and those who had banknotes exchanged them for copper coins, iron coins or real objects as soon as possible. In the end, the Northern Song regime died in the collapse of the currency system accompanied by the military struggles of Liao, Jin and the Fangla uprising in the south.

There is essentially no rigid restriction mechanism for the release of Jiaozi in the Northern Song Dynasty. Although the mint was used as the reserve fund to issue Jiaozi, it was ultimately defeated by human intervention. The cost of this kind of currency issuance was too low, which could easily lead to the excessive issuance of currency and thus lose the currency's ability to preserve value. To maintain the currency’s ability to preserve value, it is necessary to work hard on the difficulty of currency supply, that is, the hardness of currency.

So, how to measure the difficulty of money supply? This has to mention a model - the stock-to-production ratio model.

 02. Stock-to-output ratio model

The stock-to-output ratio model needs to be disassembled for interpretation. The so-called stock refers to a certain The existing quantity of the item, the output refers to the new quantity of the item in each fixed period, the stock-output ratio is to divide the stock and the output, which means that a certain item in each fixed period ( Usually measured annually) The rate at which new production is added, and the time it takes to produce the current stock. The higher the stock-to-production ratio, the longer the time it takes to produce the current stock of the item, and vice versa, the shorter the time.

Stock-to-output ratio model is called in English:Stock-to-Flow Model (S2F Model), and its ratio is called the SF value. The idea of the S2F model first came from Nick Szabo's definition of the "unforgeable cost" of items, and was later used by an analyst named "Plan B" to measure the scarcity of commodities and investment products.

SF=existing inventory/annual new flow

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Precious metals, antiques, jewelry and collectibles due to their mining costs or formation costs Too high, usually with unforgeable scarcity (higher SF value). Taking gold as an example, the total stock of gold is about 185,000 tons, and its annual output can be increased by about 3,000 tons. It will take about 62 years to mine the current stock at an annual mining speed of 3,000 tons (that is, the SF value is 62 ), which is the most difficult to supply among precious metals, so it has a high scarcity.

SF value of commodity

However, for metals such as palladium and platinum, the SF value is only slightly higher than 1 Even lower than 1 means that it is not difficult to supply and does not have high scarcity. Once people hoard this commodity, the price will rise, which will attract more miners and investors, prompting an increase in production, and the price will fall accordingly.

03. Bitcoin: the most scarce asset in the world

Items with lower SF value are less difficult to produce and supply, and their wealth storage and value preservation capabilities are relatively low. If similar items are used as currency, the hardness of the currency is low, which will easily lead to a substantial increase in supply and weaken the currency's ability to preserve value, so it is not an ideal currency carrier.

Bitcoin currently has about 18.5 million pieces in stock and 328,500 per year The new supply of coins, with an SF value of 56, makes Bitcoin a scarce asset close to gold. After the fourth halving in 2024, the new supply generated by each Bitcoin block will drop to 3.125 pieces (that is, 164,250 pieces per year), while the stock of Bitcoin will rise to 19,687,500 pieces , the SF value will rise to 119.86, and the scarcity of Bitcoin will surpass gold in one fell swoop, becoming the most scarce asset in the world.

Bitcoin issuance curve and inflation rate

Bitcoin total There is an upper limit (21 million pieces), and its charm lies in the fact that the existence of the halving mechanism reduces the supply by half every four years or so. The difficulty of production is getting more and more difficult, but the supply is getting less and less. In addition, with the continuous expansion of the consensus group, the continuous growth of the number of users is also increasing its demand. An item whose demand is increasing but supply is decreasing means that its ability to preserve value will be excellent, and it is the most ideal container carrier for value storage. In fact, the relationship between Bitcoin's market value and scarcity does prove that it is an ideal store of value.

By collecting the SF value and total Market capitalization, as well as the SF value and total market capitalization of gold and silver, and perform regression analysis on them. As shown in the figure below, the abscissa represents the total market value of the asset, and the ordinate represents the SF value of the asset. Both the abscissa and the ordinate use logarithmic coordinates. The total value spans 10 orders of magnitude from $100,000 to $10 trillion.

Bitcoin S2F cross-asset model (S2FX) Source: https://100trillionusd.github. io

SF uses logarithmic values for better It clearly shows a good linear relationship between ln (SF) and ln (total value), and the R square of the two factors has reached an astonishing 0.9967, indicating that the S2F model has a significant strong positive correlation in measuring asset value and asset scarcity The relationship, the relationship between the two will also be a mathematical relationship is not purely coincidental or accidental, the dominant driver of market value is scarcity (SF). According to this model, the market value of Bitcoin will approach in the next four years:

Market Value = exp(12.7598)*56^4.1167 = $5.5T

This means that the market price of each bitcoin will exceed $100,000 and is expected to reach a historic high of $288,000.

S2F Model Channel and Bitcoin Historical Price Source: Plan B

Bitcoin is the world's first An absolutely scarce digital asset, it is very similar to the digital version of gold, with high currency hardness (scarcity). At the same time, it has the characteristics of divisibility, portability, durability, and verifiability, and is a better value storage container than gold.

Like Saifedean Ammous In his work "The Bitcoin Standard", he described the difficulty of currency supply as the following phenomenon:

"Any item, once used as a carrier of value storage, will bring about an increase in supply; any supply can be easily increased by a large amount Once selected as a carrier of value storage, it will destroy the wealth of the storer. From this trap, it can be inferred that any item that successfully assumes the role of currency must have some natural or artificial restrictions to limit its growth in the market. amount to ensure its ability to preserve value.”

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