Bitcoin — Stone Ridge 2020 Shareholder Letter Highlights

Stone Ridge Asset Management recently released their 2020 shareholder letter. The firm manages $10bn of assets on behalf of their clients and a few years ago seemed to have gone down the Bitcoin rabbit hole, founding NYDIG (New York Digital Investment Group) in 2017. NYDIG is an institutional native Bitcoin financial services company, offering clients trading, lending, research and custodial services. You may have heard of them as being the firm that MassMutual used for their $100mm Bitcoin purchase in late 2020.

Back to Stone Ridge. This letter has been making its waves amongst the Bitcoin community and rightly so. Founder and CEO Ross Stevens has laid out the firm’s fundamental reasoning for “why Bitcoin now” in a beautiful way. Due to the letter’s longer length (12+ full pages) I decided to try and compile a list of some of the notable highlights below. I would highly encourage you to make the time to read the full letter but this should serve as a TLDR in the meantime.

“The owners of Stone Ridge Holdings Group, together, collectively own more than 40,000 Bitcoin.” — Ross Stevens, Founder and CEO

Money

• Money is, and has always been, technology. Specifically, money is technology for making our wealth today available for consumption tomorrow.
• Sound money — along with language — were the first, and have forever been the most important, human networks responsible for human flourishing. Imagine life without them.
• Money is unique among all the goods we seek because we value money not for its own sake, but rather solely for its prospective exchange utility
• Our timeless search for ever-sounder money is an individual, intuition-based optimization — as unstoppable as evolution — because we instinctively know that our survival is at stake.
• Since its founding in 1913, the Federal Reserve (“Fed”) has upended our Darwinian propulsion.
• When the Fed doles out billions, or trillions, of USGPM, it has the immediate effect of helping the favored few who first receive it, directly or indirectly, plus all pre-existing financial asset owners, at the expense of everyone else. (Cantillon Effect)
• The Federal Reserve’s price distorting printing of money (1) impairs the fidelity of economy-wide price signals, (2) inefficiently draws human and capital resources into activities that cannot be lastingly maintained, (3) drives temporary illusions of relative prosperity in certain economic segments, and despair in others and (4) leads inevitably, and repeatedly, to booms and busts.
• By giving in to the clamor for ever more abundant and ever cheaper money, central banks cripple the role of the wisest regulator, the market.
• People sacrifice their time for money, which enables them to trade for commensurate sacrifices from others. When prices are distorted, we are each inhumanely robbed of making fully informed personal choices with our time.
• If you give anyone the power to print money, they will print money. It’s human nature, not finance or politics.
• Over-moneyed zombie firms have neither the will (“when USGPM is free, why bother with financial discipline?”), nor ability (“our business model doesn’t work at higher interest rates”), nor, in some cases, even permission to leave (“you bail us out because we employ so many voters, or because we intermediate and credit-multiply your monetary policy”).
• Any central bank can control the supply of their money. They can’t make their people value it.

Discovery of Bitcoin

• Every new piece of a network, every new platform or protocol, has the potential to fundamentally alter how we connect. Satoshi Nakamoto could not have possibly imagined how popular — and therefore how powerful — his new protocol-powered monetary topology could be.
• In many countries, it is illegal for women to have a bank account, or even work, while the men learn, earn, and create independence for themselves. Bitcoin offers them an exit option, an offramp. Bitcoin demolishes their cage. Today, gradually. Tomorrow, suddenly.
• Leveraging Bitcoin’s growing network, and their smartphones, these women can, and do, find jobs online — secretly for now — and get paid. In Bitcoin.
• Institutions and ideologies that can deliver space-time compression will grow, thrive, and accelerate
• Bitcoin is a journey, not a destination, and everyone is on their own path. The more I learn about Bitcoin, the more I realize how much there is to know, and how much I want to know. There’s beauty in Bitcoin.

Space/Time/Inflation

• Bitcoin is the first store of value in history for which its supply is entirely unaffected by increased demand. From this perspective, Bitcoin is better at being gold than gold — it’s even more salable across time.
• Gold’s low spatial salability became an acute flaw even the most ardent “goldbugs” miss.
• Bitcoin’s protocol and network topology renders national borders irrelevant, which is especially empowering to the world’s most vulnerable and unprepared for fiat hyperinflations (think: Venezuela, Turkey, Lebanon today).
• Bitcoin safely settles about every hour and, as a bearer instrument, credit risk is not a concept. From this perspective, Bitcoin is better at being fiat than fiat — it’s even more salable across space and, because it’s not debt like fiat, has no credit risk.
• The Difficulty Adjustment was the “missing piece” of decades of previous attempts at decentralized electronic money. It ensures that every 10 minutes a new Bitcoin block is rewarded and all transactions in the interim are accurately and immutably verified.
• It is what drives Bitcoin’s salability across time discussed above: even amidst periods of surging demand for Bitcoin, Bitcoin miners have no ability to mine Bitcoin faster, making unexpected inflation impossible. Forever.

Energy

• Bitcoin is a better technology for performing central banking than the current government monopolies on central banking.
• In the same way that cars consume far more energy than the bikes and horses they replaced, and electric lights replaced candles, and central heating replaced chimneys, and computers replaced typewriters, Bitcoin’s better monetary system consumes far more energy than the current central For Institutional Use Only. banking system.
• Throughout history, energy use has grown whenever free people making free choices have decided for themselves that the price of the extra energy for the new technology they wanted was worth it.
• Bitcoin mining is the only profitable use of energy in human history that does not need to be located near human settlement to operate. The long-term implications of this are world changing and hiding in plain sight.
• Before Bitcoin, the problem of energy has never been its scarcity, but only our ability to channel it geographically where it is needed most. The world has never had a profitable use of energy that’s location independent.
• As Bitcoin finances the for-profit development of cheap, clean energy infrastructure on a massive scale, it can lead to a future in which more and more of the world’s population lives near abundant energy with an extraordinarily low marginal cost of production. This matters because cheap energy equals human flourishing.

Network Effects

• I strongly believe that the centralized class will continue to significantly under guess the appeal, and therefore likely the price, of a decentralized monetary network to the rapidly emerging decentralized class — us Bitcoiners — just as they significantly under guessed the power Google and Facebook and Netflix and Amazon every year for decades, and even as they loved those services and used them daily.
• From a valuation framework perspective, I believe Bitcoin should be viewed identically to those network business models — the value of the network growing with the number of users — except for two major differences.
• First, money is primordially more important in a way even the most hilarious on-demand cat videos, or same-day delivery of any product we want, will ever be — there is no comparison. Second, Bitcoin lacks the possibility of antitrust enforcement. Ever. No matter how big and no matter how valuable it gets.
• However, just like the internet can be censored in certain countries, but cannot be turned off, Bitcoin can be (attempted to be) confiscated in a country, but cannot be turned off.
• Unlike gold, with Bitcoin there’s no vault. And good luck confiscating my memory.

2021 and Beyond

• The trillions of dollars of central bank-driven low or negatively yielding financial instruments demolish the dreams of savers and retirees, prohibiting an enormously large and growing group of individuals from meeting their retirement wants, wishes, and — tragically — even needs. Free money has consequences. Because it is not free. No matter how well-intentioned, runaway global money printing, and the resulting financial repression, is society’s largest global challenge.
• Millennials voting with their dollars, and with more distrust for traditional institutions than their forebears, have already made Bitcoin “the millennial savings account”?
• Is it any surprise that two highly rated Life & Annuity insurers, and two highly rated Property & Casualty (re)insurers — among the most brilliant, forward-thinking investors I know, and each, by virtue of their business models, with extraordinarily long-dated U.S. dollar-denominated liabilities — have direct or indirect exposure today to more than $350 million of Bitcoin, all purchased and held through our Bitcoin-focused affiliate? One thing I know for sure: they, and insurers in general, are just getting started.
• When the Fed creates $3 trillion in a matter of weeks by pushing a button, it consolidates the power to price and value human time. In our country, humans are not supposed to have that kind of power over other humans.
• When Chairman Powell, no matter how well-intentioned, says in June, “We’re not even thinking about thinking of raising rates,” at Stone Ridge we respond, “We’re not even thinking about thinking of not buying more Bitcoin,” and we did. Bitcoin is our peaceful weapon of choice against central bank driven time theft.
• The owners of Stone Ridge Holdings Group, together, collectively own more than 40,000 Bitcoin.