Citadels, currencies and collapse

Let’s pick back up where I left off yesterday.

Remember, I’m trying to explain multiple strands of what we’re seeing in the financial world today, including gold and bitcoin soaring, interest rates plunging below zero and Facebook’s plan to issue its own currency, Libra.

I’m not sure any one narrative can explain all of that in its entirety. But I’m going to try and get us a little closer anyway. Here’s my working theory for what’s happening. Bitcoin and gold represent the antithesis of the financial system. If you own either, you’re effectively “short” trust in the system.

Libra is the opposite of this. But not quite in the way you might expect. The opposite of a good idea can also be a good idea. Libra is backed by a basket of multiple fiat currencies. It aggregates all the trust left in the traditional system and uses that as its backing. That may well be a clever move.

But Libra is secretly backed by an even more valuable currency. More powerful perhaps than the mighty US dollar. Or gold. Or even bitcoin! More on this in a second.

But first some context. Yesterday I compared Facebook and other FAANG stocks to the East India Company at the height of its powers. (Read it here.) Comparing one powerful company to another is one way of looking at things. But former publisher Dan Denning reminded me that there’s another way: comparing powerful companies to medieval City states. Citadels of wealth, Dan calls them.

Don’t scoff at the comparison. I’ll remind you here that one of the biggest companies on the planet released plans to issue its own private currency, and those plans were taken seriously.

Seriously enough for the authorities – both financial and political – to immediately attack the concept. You don’t do that unless you’re worried. You don’t worry unless there’s a real threat. The threat is only real if it exposes your own weaknesses.

Which is another way of saying the existing financial system’s days are numbered – and we’re getting a peek at what the authorities fear is coming next.

If you’re still sceptical, just read those last three paragraphs on a loop until you’re willing to hear me out.

Think about the power dynamics involved here. How weak does a government have to be to have private companies challenging its currency monopoly? How strong does the company have to be? How messed up does the financial system need to be for a social media company to elbow its way in – to create a new currency that is based on the existing system yet simultaneously threatens it?

There’s more to the story though. Facebook may be powerful enough to issue a currency. But it’s not like one always leads to the other. That almost never happens. In 2004 the biggest company in the US by market cap was General Electric. Exxon Mobil was second. Pfizer and Walmart were in the top five.

None of those companies issued a currency.

Go back in time and look at the biggest and most powerful companies of their decade. How many issued a currency or built a monetary system?

That’s an easy question.

Here’s a harder one: why is that?

I’ve already compared powerful companies to medieval city states and to private ventures with state-like power, such as the East India Company. These types of “citadels” of wealth and power don’t always exist. They emerge only when the conditions allow.

I’d argue the two most important of those conditions are a) a particular weakness in the power of the state and b) a particular advantage that allows a private company/city to flourish.

A little history to flesh that point out. The great medieval city states emerged (mostly in Italy and Northern Europe) as nodes on an increasingly deep trading network. The state was relatively weak, especially when compared to its Roman height.

A millennium and a half of history in a few sentences: Rome fell. The Church stepped in to administrate large parts of the old empire. These parts were mostly either spiritual (the law) or financial (money and taxes). The Church did not, by and large, engage in trade.

Therefore emerging city states flourished. They did this by capitalising on geographical advantages (lying at the intersection of trade routes by land or sea), an openness to markets and a willingness to invest in new technology (mostly ships).

When this coincided with periods of nation-state weakness – which will happen periodically due mostly to debt, war and financial mismanagement – it led to “state-like” power. There were times when you’d have been better putting your faith in a city over a country.

Much of the same is true for powerful trading companies like the East India Company. A combination of a weaker state and the exploitation of even deeper trading networks – again based on technology (even better ships) – led to extreme wealth and power.

You can see where I’m going with this. We already have many of the conditions required. Weak states, crippled by overspending, overpromising, overindebted governments. (My description of the state as weak might well ruffle a few feathers. Right of reply, as always, to Though it’s hard to look at the world today and conclude this is a system functioning smoothly or without stress. Just my view.)

And we have a new type of business that uses technology to exploit a new kind of trade: digital data. In one way or another, all FAANG stocks trade in digital assets. That’s the basis of their wealth, power and influence.

Which is a good way to share a note I received from a reader after Monday’s note. It’s a point worth making:

Nick you forget that the big difference between gold and bitcoin is that you can never physically see or hold bitcoin or use it as a material in objects which also generally hold their value. Admittedly currencies these days are not backed by gold reserves.

This is why I still consider cryptocurrencies are all just scams waiting to implode.

I’m not sure I agree with that. I don’t see why you need to choose one over the other. In fact, it’s a false choice in my view. Gold and bitcoin do two different things in my portfolio.

I hold gold and silver as insurance against total currency collapse and financial mismanagement.

I hold bitcoin as a speculation on the makeup of the next financial system.

And by the way, I think to attack bitcoin for not being “real” isn’t the right way to think about it, either. If the last two decades have taught us anything, it’s that digital assets can be extremely valuable. Is an online-only media business less valuable than a print-only one? Not really.

That might change in the future. But I think it’s unlikely we’ll regress to the point that digital = valueless. 

The merits of real vs digital would take an entire essay to discuss. Maybe we’ll get to that later in the week. For now, let’s get back to the questions I’m getting at in this week’s letters. We’re dancing around three points:That’s why I find the Libra project so fascinating. It turns this from an abstract concept into reality. It’s a private business challenging the state’s monopoly on money.

I’ve made this point before, but it bears repeating: I don’t think it will be the last. Ultimately I think there’ll be a corresponding value and exchange system connected to each of the FAANG stocks.

That may be a currency, like Libra. I could see Google going down that route, given Google is how so many businesses reach their customers today. Or it might be a network that allows data to be commodified and exchanged in a less overtly “monetary” but still valuable way.

I’m going to put this idea to tech experts Sam Volkering and Eoin Treacy later today. I’ll share their thoughts with you tomorrow.

For now I leave you with a thought to ponder until tomorrow’s piece, when I’ll pick this back up. Do you think Libra – or the broader idea of privately issued money – is a genuine threat to the authorities? Will it be allowed?

If you’ve been reading my pieces this week you’ll know that I do. I’m going to expand the idea tomorrow. But I’m always keen to hear your thoughts. My email address is

Until tomorrow,

Nick O’Connor
Publisher, Exponential Investor

Category: Cryptocurrency

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