Sound Money: Part III
Now that we've gone over our nation's on/off relationship with sound money in the last piece, let's dig deeper into this idea of sound money itself and look at the options we've got to work with…
You may be wondering, why is an oil and gas landman talking about economic policy history? What's the connection here? Well, it has to do with why I like mineral royalties so much in the first place. Minerals are a tangible thing, real oil, real gas, sitting under a real piece of land, we own the molecule in the ground as we’ve said in the past. It's there, it's not going away, and it is inherently valuable. As we've talked about till blue in the face in the past years, hydrocarbons are essential for our world to run, grow, and thrive. Despite all the talk about renewable energy, nothing is close to beating the hydrocarbon (oil & natural gas) markets in terms of value, utility and infrastructure that’s already in place. So, in the case of Maevlo as an aggregator of minerals, once we’ve bought it,we're holding onto something of real value and utility long term. And, nobody else is going to print more of it. Not only that, but we've got optionality on the mineral value, we can sell it, lease it, or hold it and take the income as it is extracted and sold.
But, and this is the rub for us, you can't take a balloon full of natural gas or buckets of oil to the store to buy your groceries, which is why we need currency to translate that value in the ground into other things we value and need.
So let's just go back to our definition of sound money from the last piece for a moment. Good currency needs three things:
Scarcity - it must be genuinely difficult to obtain
Transferability - it must move easily between parties
Consensus value - society must broadly agree on its worth
Sovereignty - trustworthy control of the supply & implementation of it
We love oil and gas reserves because they do a great job at the 1, 3 and 4, but transferability is a tough one. That's where gold has really shined. It ticks all three boxes really well It is, it's a scarce hard asset. There's a limited supply of it. It's hard to find. And when you find it, you find these little bitty flakes of it. These are all features of how it has stored value over time.
If you come to me and I pull a gold nugget out of my pocket, you know that I either bought it, exchanging something of significant objective value for it, or I was out mining and digging and digging, and maybe it took me three months, three years, who knows how long, to find it. You can't just print it. It takes time, energy and resources to uncover it. That gold nugget is sitting there as proof of real value, proof of the work that went into obtaining it. We'll come back to this phrase "proof of work" in a minute. But first a bit more about gold.
Gold has worked really well and to this day, it's a place people fly when the paper note printers (ie: the Federal Reserve) get running on overtime. Consider this: when the dollar finally severed its anchoring with gold in 1971, gold traded at $35 per ounce—equivalent to approximately $270 in today's devalued currency. Now it commands roughly $3,500 per ounce. No government can print more gold or declare it to be no longer of value. The preservation of value is undeniable. It is the original "sound money."
Yet practical challenges remain with physical gold: if you're going to go all in on it, you'll need a pretty serious safe in the closet, and giving your kids shavings off the gold bar to buy milkshakes at chick-fil-a probably isn't going to work too well. It may remain a reliable store of value, but it's a truly analog solution and our world just isn't an analog world anymore. The fact of the matter is that the economy is already a digital one. But is a digital dollar a sound store of value?
Sound money for a digital age
We've long gotten used to our dollars being digital. Our balance sits on a spreadsheet in some bank. But with the connection to a solid resource severed long ago, how secure, how stable, how sound is our money? The more you think about digital information, the more shaky it seems. A simple way of understanding that is if I take a picture here in Denver on my phone and I send it to you, in a text message. Now, you have a copy of and I have a copy. We don't really know which one is the original and we can make as many copies as we like. That's exactly what governments can now do, make as many copies of dollars as they like. As we saw in 2020 it took one global pandemic to knock 30% off the value of our savings. So the digital dollar really fails sound money tests above. Its scarcity and difficulty to obtain is arbitrarily decided by governments, and therefore the consensus of its value is always going to be shaky.
This is where the genius of blockchain technology and specifically Bitcoin comes in. The catalyst of this technology, alongside global networking and connectivity we’ve all been a part of for the better part of two decades now, is something that brilliantly ticks all three boxes of sound money. So let's dive in.
The Blockchain Ledger
The foundational innovation behind Bitcoin is its reliance on blockchain technology. Imagine a digital ledger, not stored in one central location, but distributed across countless computers worldwide. Not all that different from understanding the internet as a whole. Blockchain a continuously growing list of records, called 'blocks,' which are linked and secured using cryptography. Each block contains a record of multiple Bitcoin transactions.
Here's how it works: every time Bitcoin is transferred from one person to another, that transaction is added to a block. This block, along with others, is then verified by a network of computers who solve complex mathematical problems to ensure the transaction is legitimate and hasn't been tampered with. Once verified, the block is added to the chain, making the transaction permanent and unchangeable. This process creates a public record, accessible to anyone, showing who owns how many Bitcoins and the history of every transaction.
Now allow me to pause here. This is where the technology resonated with me as a landman. Landmen run title on property, in order to establish ownership of minerals rights. We scour the public records (county courthouse documents), reviewing countless documents all in different types, times and forms and we form a ‘chain of title’ that’s effectively a historical line of ownership that can be verified by the public and is permanently in place.
What a parallel, huh?!
Back to Blockchain – What's crucial is that this ledger is decentralized. It's not held or controlled by any single bank, government, or institution. Instead, many identical copies of the blockchain exist simultaneously on computers across the globe. To alter the blockchain, you'd have to change every single copy at the exact same time, which is virtually impossible due to the robust cryptographic security measures in place. This makes Bitcoin incredibly secure and resistant to fraud or censorship.
Therefore, owning Bitcoin is like possessing a digital asset directly. It's as secure as having a physical gold nugget in your pocket. No government, CEO, or board of directors can control or manipulate your Bitcoin. This decentralized nature, where no single entity controls the money supply or its storage, is a key feature of Bitcoin and can be a challenging concept to grasp initially. However, it's precisely this independence that makes it such a powerful and unique form of digital money.
Proof of Work & Scarcity
The next innovation tackled the problem of how easy it is to make digital copies of things. You cannot copy a bitcoin. The creator(s) designed the system so that "miners" are rewarded in bitcoin for doing the intensive processing work required to encrypt and secure all of the transactions that happen. Therefore every Bitcoin is an actual representation of energy, effort, creativity expended, just like the gold flakes at the bottom of a river pan.
On top of this, the algorithm is set up so that only 21 million bitcoins will ever exist, with 95% of them mined already and the balance to be mined over the next 140 years. It is a truly limited – scarce – resource. The next thought an enterprising individual may have is to go out and raise a billion dollars to build the biggest mining facility on the planet and gobble up all the remaining coins. To get in the way of this, the creators built in a regulating structure that slows the release of the bitcoins as time goes on and requires a certain amount of time per batch of transactions (blocks) to be processed. Just like any natural resource, the more you dig out, the slower and more expensive it gets to dig out more. It's digital genius.
Consensus of value - From "Bitcoin Bros" to strategic reserves.
In its early years bitcoin was a niche geeky, computer science thing that only a few were into, and then on May 22, 2010 the first transaction occurred where two large pizzas were bought for 10,000 BTC (yes, that’s over $1B in today's prices) establishing and setting off the utility of BTC as a medium of exchange. Since this first financial transaction, BTC has launched into a $2.2T Asset class of its own with an average CAGR of over 60%! This allocation over the years has had a lot of wild volatility and for some years, "investing in bitcoin" was synonymous with playing roulette with your investments. But, hear this: that stage is thoroughly over.
If we look at gold, at current prices, there's between $15-$20 trillion there, (enough to fill up about 4-5 olympic swimming pools, by the way). Looking closer to our industry here, there is an estimated $6-9 trillion in extractable oil and gas sitting underground.
So where does Bitcoin sit? Well with 97% of the available 21 million coins mined, sitting around $100,000 per coin, that's $2.2 trillion. If that doesn't seem like a solidifying consensus of value, I don't know what would. And as this continues, what will happen to the value? It only goes up.
Follow the Treasuries
The last piece of the puzzle is to look at who's paying attention. Bitcoin owners are no longer your young bearded nephew who corners you at the family reunion to tell you about this new tech he's into. It's every industry, major corporations, and even governments - state, federal, international. And these institutions are not roulette players as a rule, they are strategic, they are calculated, they are interested in protecting value. That's why we have Fort Knox. As we stand today the State of Arizona, State of New Hampshire and the State of Missouri all passed through their own legislation to establish a Bitcoin Treasury inside their own states. Texas SB21 has already passed the House & Senate respectively and will be on Gov. Abbott’s desk in the coming weeks making the 8th largest economy in the world - Texas, a BTC treasury operator! And then, of course, now you have nations adopting it. Trump recently signed an executive order to establish a national reserve.
We have a petroleum reserve, we have a gold reserve. It's going to take legislation to effectuate that, but we will soon have a strategic U.S. bitcoin reserve. So you have the adoption curve growing. This thing is here to stay, and will only become more mainstream and mainstreet.
Maevlo IV - The first Mineral Royalty/Bitcoin Treasury
So what does this have to do with Maevlo? It may feel a bit like we're back in '96 trying to explain the iPhone, but If you've come with me this far and you're even a fraction as convicted by this thing as I am, I'll just leave you with this.
In our next fund we've created the first mineral royalty/bitcoin treasury fund in existence. The way we see it is that people are interested in owning mineral royalties because of their secure value, their optionality, their enduring necessity to our would, and their increasing scarcity. So we've decided to be a bridge to the next generation of secure assets of enduring value that are only going to increase in value as we go down the road.
So the short pitch is this. Maevlo IV investors will now be able to elect to have their royalty earnings go directly into bitcoin that will be held in a professionally managed treasury for them, immediately locking the value extracted from the ground into digital gold. When they want to pull them out, we'll transact directly in bitcoin or sell them and distribute the cash-at our investor’s discretion!
For now, that's probably enough. Thanks for coming on the journey and welcome to Maevlo Fund IV, learn more in our deck here.
