The Future of Spending and Investing Sardines

With Bitcoin(BTC) and its associated cadre of cryptocurrencies on the rise, I have no doubt that a panoply cryptocurrencies will become the dominant currency in the U.S. in time.  Long term, I see Bitcoin effectively becoming digital gold, and the other cryptocurrencies forming the panoply of trading currencies.  With this post, I will explain my logic on why I think Bitcoin will become a highly valued saving currency, and why I think Litecoin(LTC) and others will become spending currencies.

One of the more thoughtful points made by an economist/investor, Howard Marks, that I read was the idea of trading and investing sardines:

Two friends meet in the street, and Jim tells Sue he has some great sardines for sale.  The fish are pedigreed and pure-bred, with full papers and high IQs.  They were individually de-boned by hand and packed in the purest virgin olive oil.  And the label was painted by a world-renowned artist.

Sue says, “That sounds great.  I could use a tin.  How much are they?” and Jim tells her they’re $10,000.  Sue responds, “That’s crazy, who would eat $10,000 sardines?”  “Oh,” says Jim, “these aren’t eating sardines; these are trading sardines.”

I had been thinking about digital currencies like Bitcoin as investing sardines, and that may have been a mistake.  Their fans tell me they’re spending sardines, and while that may be the case, I think at the moment they’re being treated largely as trading sardines.  The question remains open as to whether Bitcoin is (a) a currency, (b) a payment mechanism, (c) an asset class, or (d) a medium for speculation.

I agree with Howard Mark's initial assessment.  Bitcoin is not an eating sardine.  It is an investing sardine.  Bitcoin, as an investing sardine, will be treated as a store of value, and will only be traded when the need arises to purchase physical assets.  At that time, Bitcoin will be traded for a more liquid cryptocurrency, which will then be spent purchasing the physical asset.

I base this on the fact that Bitcoin has a limited number of total Bitcoin that will ever be produced, 21 million; and on the fact that SegWit2x was abandoned.   The economics of supply and demand thus directly apply to it, and the US dollar price of Bitcoin will climb indefinitely, albeit at a much slower rate once mass adoption is complete, assuming stable dollar value.

Litecoin, however, is an eating sardine, for now, because of its relative availability.  In the future, LTC will likely run into an identity crisis, due to the earlier adoption of Bitcoin and the limited supply of Litecoin.   I will conjecture that because Litecoin is one of the more secure cryptocurrencies and because it is being adopted later than Bitcoin, the miners will vote to change the fundamental algorithm to increase the total supply at some point in the future.

This is exactly the opposite of what the consensus was on the recent Bitcoin SegWit2x, which was abandoned, implying that the consensus on Bitcoin seems to be settling around Bitcoin being a saving currency, not a spending currency.  Bitcoin is well on its way to being an investing sardine, while abandoning any ambitions of being an eating sardine.

You clearly see the beginning of this divergence of perception of the in the BTC price of a LTC.

Litecoin Charts - https://coinmarketcap.com/currencies/litecoin/

The BTC price of LTC is declining as the perception of Litecoin being an eating sardine and Bitcoin being an investing sardine begins to take hold.  As an investing sardine, I would expect the trade volume of BTC to gradually drop off as the currency matures fully until people just hold Bitcoin, only trading it in large quantities into more liquid currencies -- like LTC and others.

As Litecoin matures though -- only ~64% of LTC are mined compared to close to ~78% of BTC -- the Litecoin will likely begin to look more like a Bitcoin junior or undergo a hard fork to become more liquid.  The chief difference between them will remain the initial perception gap, which will assign BTC a much higher value, simply by virtue of being adopted first and attaining the perception of an investing sardine before LTC.

So, if you are investing in cryptocurrencies to save, you should be investing in Bitcoin, because BTC will not have a maximum price in US dollars that it will stop at.  If the current workings of Bitcoin remain, it will become the digital gold of the future, only far more valuable than gold.

In the future, I can see entire companies being bought and sold for handfuls of Bitcoin.