Asset Allocation in a Bitcoin Standard Economy
The Future of Money, Debt, and Equity in a Bitcoin Economy
Wealth In A Bitcoin Economy
In a Bitcoin economy, there would be three types of assets: money (currency), equity, and debt.
1: Currency (i.e., Bitcoin) would be used to price all other assets. With a fixed supply, it would grow proportionally with the economy, since it will be required to purchase all other assets. Therefore, holders will see the value of their Bitcoin increase proportionally with economic growth. This is because the demand for Bitcoin will increase as the economy grows, while the supply remains constant.
2: Equity: The return on equity (business ownership such as stocks) will also be proportional to the net economic growth plus some additional entrepreneurial return.
3: Debt (bonds) will reflect the economic growth plus the additional return from the time value of money and a smaller degree of entrepreneurial risk. Bonds offer a fixed return, which includes a premium for the time value of money and a smaller premium for the risk of default.
I don't think personal homes will be a meaningful store of value because (1) they are a depreciating asset, (2) without the mortgage subsidy, financing will be determined by the market, and (3) Bitcoin will replace property as the primary store of value, as it offers a higher return.
So far, I'm just describing what asset allocation looked like during the gold standard.
I would predict that stock ownership would be limited to a small number of entrepreneurs and market speculators compared to today. In a fiat, zero-interest policy (ZIRP) system, people must own stocks and become market speculators to preserve their purchasing power. In a Bitcoin economy, the premium on stocks over holding currency will be much smaller. However, stocks expose investors to both business and market cycle risk. Given that holding just Bitcoin will be equivalent to holding an all-market ETF fund today, most people will simply hold Bitcoin, while stock picking will be limited to professionals and speculators. Professional asset managers will primarily serve the wealthy in personal relationships, while mutual funds, ETFs, and other impersonal managed investment products for the public will largely disappear.
I expect that the asset mix of individuals will depend on net worth and investment horizon, just as it does today. The lower class will own primarily currency (Bitcoin). The middle class will also own some debt (bonds). The upper class will own primarily equities (such as stocks) as their investment horizon is measured in decades, so market cycles will not be a primary concern.
Bitcoin SV as a Case Study on the Block Size Debate
If you wanted to conduct a controlled experiment comparing Big Blocks vs Small Blocks, the Bitcoin/Bitcoin SV case provides the perfect case study.
Here are some key lessons learned from this experiment:
1. Data expands to fill available space, leading to bloat. Big blocks tend to be filled mostly with low-value data and spam transactions.
2. Big blocks are susceptible to frequent chain splits due to the increased time required for propagation across the network.
3. Although big blocks are supposed to enable faster transactions, they actually result in slower confirmation times because of the higher risk of chain splits and lost transactions. Safe Bitcoin SV transactions may require up to 1008 confirmations (about 1 WEEK), while Bitcoin typically requires 0 or 1 confirmation, depending on the transaction amount.
4. Large blockchains are extremely difficult for average users to fully validate due to the high storage, computational, and networking requirements. Major indexers have dropped support for Bitcoin SV because of the challenges in running such a large blockchain. If professional indexers struggle with this, it is impossible for individual users.
5. The only practical way to run a large blockchain is to rely on trusted third parties and only store the UTXO (Unspent Transaction Output) set, effectively delegating trust and compromising decentralization.
6. Markets tend to prefer secure and decentralized blockchains over those optimized solely for cheap transactions. This is evident from Bitcoin's dominant market share compared to its forks.
7. While the theoretical throughput of big blocks may be high, in practice, are slower due to the higher number of confirmations needed to consider transactions secure. Small blocks are secure, secure blocks are fast.
8. The total transactions per second (TPS) of existing payment networks exceed 100,000. At this scale, block sizes of 1MB, 8MB, or even 128MB are essentially equivalent, as sustaining 100K TPS would require gigabytes of data every few minutes, which is infeasible for any current blockchain. In the real world, all financial systems rely on layered architectures to achieve high throughput.
9. The security and immutability of a blockchain can be compromised if the majority of the network's hash power is controlled by a single entity or a coordinated group, a risk that is more pronounced in networks with larger block sizes and lower overall hash power. Bitcoin SV and Bitcoin Cash can both be reverted to their fork-date chain state by having Bitcoin miners spend about 8 days creating a new longest chain.
10. There are now dozens of Bitcoin L2 networks (https://l2.watch/) made possible by Segwit innovations. It's clear from these projects that Bitcoin is properly scaled by enabling layered chains, not brute force block increases.