I have been thinking about writing this blog post for a while, and because I am now on a long flight over the Pacific Ocean I decided to put my thoughts on virtual paper. I am worried about where the world is headed, there are a number of parallel things happening that all seem to be going in the wrong direction, while most people just seem to ignore or dismiss them. Ignorance is bliss, but that’s not how my mind works unfortunately. I always tend to think a few steps ahead about the things that I see around me and that led me to some good opportunities in the past but it also made me worry about other things that the world didn’t see yet.

Examples of opportunities I saw were podcasting and online video (both in 2004, a year before YouTube started and at least a decade before podcasting broke through) and Bitcoin in 2011 (although I was too pre-occupied with work to buy at $5 per Bitcoin, so I ‘only’ bought my first BTC 2 years later). Things I have been worried about early on were for example the climate crisis, I started paying attention to it in the mid-2000’s when most people still dismissed it, and I have been writing about it ever since. Also with Covid I was early: on Twitter I can see that I bought face masks in January 2020 already, a full 2 months before most countries realized the world was having a problem. Despite millions of deaths I still think we got lucky with Covid, but that’s a story for another day. 

Complexity

The world is getting too complex and I believe we have collectively lost track of what could go wrong or is already going wrong. Because of social media and polarization we also can’t get together as humanity anymore to solve the problems that we face. What am I worried about? I think there are 3 big issues that we are facing and that we are not sufficiently tackling. The first is the climate crisis, the second is the financial system that is on the brink of a collapse, and the third is the danger of the exponential growth of artificial intelligence. While the collapse of the financial system will lead to widespread poverty and to the end of the standard of life that we are used to and has the potential for civil or even global wars, the climate crisis and AI could simply wipe out most of humanity

Climate Crisis

I have written about the climate crisis before, so I won’t write too much here anymore. I think we are not taking climate change serious enough and not taking sufficient measures to reduce or stop it. Solutions are politicized, for example carbon credits issued by governments (‘cap-and-trade’) that are manipulated by politicians to suit their political goals. Issuing more credits because coal plants need to stay open to make sure Europe doesn’t run out of energy is understandable from a short term political point of view, but long term it makes no senses. We simply have to get away from fossil fuels as soon as we can. We will need entrepreneurs to solve this problem, the governments can’t (or won’t) do it. That’s one reason why I started Climate 8.

Will the USD-based financial system collapse?

The collapse of the traditional fiat financial system is a big risk that most people don’t see coming yet. To me it’s been clear for years that we can’t go on printing money. Unless we inflate the debt away we are now past the point where it’s still possible to pay it back. With the much higher interest rates on Treasury bills, Central Banks may soon have to start printing money not just to pay back the debt, but even to simply pay the interest. Tax income will never pay for it, despite politicians giving voters that impression. I think the hegemony of the dollar might be over sooner than most think. The decline is still quite slow, but there are signs everywhere that countries want to be independent of a US dollar-based system. It’s probably still a matter of years, but if the US would default on its debts this year (unlikely, but not impossible with the current divide between the Left and the Right) things could change very fast. 

Central Banks have shown that in this age of social media and digital banking their tools have lost a lot of their effectiveness. Once people start to lose trust in the dollar, social media will make it almost impossible to stop the fall of the dollar. The banking crisis in the US seems to be over for now, but it was a good example of how quickly banks can fail, because bad news travels at the speed of light thanks to social media. The same could happen to the dollar and the US is doing everything it to stop that. The US sees Bitcoin more and more as a threat to the dollar and because it’s too late to ban it, they now try to close the on- and off-ramps between Bitcoin and the traditional banking system. Of course it’s no coincidence that 2 of the 3 banks that failed (Silvergate and Signature) were ‘Bitcoin banks’ and Bitcoin was mentioned as part of the reason why they failed (which is completely incorrect). The US is pushing crypto companies offshore and Asia is happy to onboard them. Even state-owned Chinese banks in Hong Kong are now willing to open accounts for companies that have lost their US bank accounts!

You have to be prepared for this, because once the system falls it will be too late. Make sure you get some Bitcoin and if you still find that too risky or don’t want to invest the time to understand it, get at least some gold or silver for your cash savings. Things won’t look good if the financial system falls apart, and it’s not a question of ‘if’ anymore but only of ‘when’.

AI exponential growth

The biggest ’new’ risk is artificial intelligence. I have been studying AI on and off for a number of years, but the progress that happened over the past months is something even I had not expected. We do not have an AGI (Artificial General Intelligence) yet, but GPT-4 feels like we are getting pretty close. Most people don’t seem to understand that many jobs will be at risk because of AI. Yes, new jobs will be created (Hello Prompt Engineers!) but I believe we are way too optimistic about this. AI develops so fast that it will take over jobs before new jobs can be created and even these new jobs will be quickly replaced by AI. This is exponential change in action, it’s now going so fast that it feels we have lost control. We don’t understand the complexity of AI, we literally created a potential monster. And that is scary, because we then get to the biggest risk of all: AI destroying humanity. 

Is there a big risk of that happening? I don’t know, but I do know that it is a non-zero risk. And that should scare us, because we might already be too far down the rabbit hole to stop it. We simply don’t have guard rails built in and we don’t know how AI gets its results anymore. We have to hope that AI will be benevolent and will work together with humans to make the world a better place. But an AGI could very well realize that humanity stands in the way of its progress and decide to just destroy us. I am not a Luddite, but the risk of AI acting against us is something that should be stopped right away. Despite some very smart people warning about this, I don’t see it happening though. We can only pray that the world will not be destroyed all of a sudden. 

Can you prepare yourself for this?

It’s hard for me to understand that most people just continue to live their lives as if nothing is wrong, while the world has fundamentally changed and is heading for a fall. I feel powerless, especially because there is not much you can do as an individual. I am relatively well prepared for climate change by not living at sea level and in locations where weather patterns are still relatively stable. If needed I can survive by living off the land and the sea, although I hope it will never have to come to that. If the financial system fails I believe I will do better than most. I might still lose most of my fiat wealth (I expect banks to all fail and the little money that’s guaranteed by the government won’t buy you much anymore because of hyperinflation), but I have some Bitcoin and commodities that will help me through the first year or two. I hope it won’t be needed, because we will then live in a world that we don’t want to live in. But for AI you can’t prepare yourself. AI will not only destroy many jobs over the next couple of years but may even decide to kill off humanity. There is simply no way to be prepared for that anymore. It’s difficult for me to understand that people don’t see these risks and are still more interested in sports, celebrities or polarizing politics than in where the wold is heading. Let’s hope I am very wrong this time. 

My life has changed a lot over the past year. I now spend most of my time in Southeast Asia (mainly Singapore), combined with regular trips to Europe and the Middle East. I don’t spend much time in Canada anymore and that likely won’t be the case for the next couple of years either.

I have an amazing summer house in Sharpes Bay (Desolation Sound) in British Columbia. When I originally bought it, my plan was to spend all my summers here with my kids, plus long weekends during the rest of the year. However, because my kids now live in Singapore they prefer to stay in the region during school holidays or visit their family in Europe, so summers will likely not be spent here. The flight from Singapore to Vancouver is 17 hours one way (combined with a 15 hour time difference), plus an additional hour by a chartered sea plane to my house, so going back to Sharpes Bay for just a few days is not an option either.

Last week I traveled to my summer home for the first time in over 6 months. I realized that although this is one of the most beautiful places in the world, it simply doesn’t make sense to keep a big house and only spend 2 weeks per year here. So with pain in my heart I decided to put it on the market… I may regret this decision later, because it might be impossible to ever find another place like this, but then I will probably just re-read this blog post to remember why I sold it.

Details and pictures of the house can be found here, asking price is $3.2 million. The house comes with 2 slips in a private marina (40 foot & 15 foot). If you are interested in this house please get in touch with my realtor. The video below was taken this weekend, it gives a good overview of the house and how beautiful this part of the world is.

The realtor describes the house as follows:

We are proud to present a truly spectacular property at rarely available Sharpes Bay. Located 15 minutes past Lund, 60 minutes from Powell River, this stunning 2.7 acre estate is perched atop Sharpes Bay with phenomenal views over the Copeland Islands to Savary, Hernando, and the entrance to Desolation Sound. The gorgeous 5 bed 4 bath 4,000 sq ft custom home features a wrap around deck with glass railings, soaring ceilings, stone fireplace, and jaw dropping views from every room. Amenities include a tennis court, pickle ball, beach volleyball, sea side sauna, and marina club house ideal for entertaining and storing paddle boards / kayaks. This private gated community is the epitome of luxurious West Coast living with a beautiful marina, care taker, 22 exclusive lots, and heli pads for easy access via helicopter or sea plane. Includes 2 prime slips in the marina, 40′ and 15′, a car port, and storage shed. Superb value for an iconic acreage with a beautiful cabin completely rebuilt in 2011. Do not miss this incredible opportunity to own a dream recreational property to enjoy with family and friends in Sharpes Bay!

With inflation soaring all over the world there is a risk even the Western world could end up with hyperinflation. We are still far from that, but if anybody had told me a year ago that Holland would have 17% year-over-year inflation right now I wouldn’t have taken them serious. Hyperinflation is a lot more than 17% of course, the definition that’s mostly used is 50% inflation on a month-to-month basis. If that happens the economy doesn’t function anymore and many people will lose everything they have. Companies will go bankrupt and there will be large social unrest. I decided to look a bit deeper into what happens when there is hyperinflation and how you can protect yourself against it.

Debt to GDP ratio as a predictor of hyperinflation

Generally hyperinflation only occurs in countries with a debt to GDP ratio of over 120%, that number seems to be a significant turning point. As a rule of thumb a ratio of over 130% is considered the death zone for countries. However, this rule of thumb seems to be more valid for second- or third-world countries than for first world ones. For example, Japan has had a ratio of over 130% for many years and is now approaching 250% and still gets away with it, although it hurts its currency. The US is now close to 130%, but because the USD is still the leading global currency people won’t as easily lose trust in it. In Europe a number of countries are close to or above 130% as well, most notably Italy with 150%. Because the EU is a monetary union Italy can still get away with it, but it will be harder and harder for them to borrow money, which may force to EU to eventually issue joint debt to bail out countries like Italy.

Weimar Germany

So we are not there yet in the Western world and we will hopefully never get there, but it’s still good to consider what might happen in case hyperinflation should hit. There are some good books about the subject, among others When Money Dies. That book focuses on Weimar Germany in the period after World War I, after Germany took itself off the gold standard (like the USD did in 1971) to finance WWI. After Germany lost the war it was forced to make reparation payments that eventually led to hyperinflation. Because the book describes a period about 100 years ago it’s not very applicable to the current situation, but it shows you how quickly things can go wrong and how almost everyone is affected by it. A good example of how hyperinflation in Germany affected everyone I found here:

“My father was a lawyer,” says Walter Levy, an internationally known German-born oil consultant in New York, “and he had taken out an insurance policy in 1903, and every month he had made the payments faithfully. It was a 20-year policy, and when it came due, he cashed it in and bought a single loaf of bread.” 

Argentina and Zimbabwe

Other countries that have faced hyperinflation more recently include Argentina and Zimbabwe, and what happened (and happens) there could be a good lesson for us in how to mitigate the worst problems. I recently had a conversation with someone in Zimbabwe who told me that banks still provide mortgages there. He keeps on remortgaging his properties and even after 20 years of hyperinflation banks let him do that, despite the fact that they know they will lose real value on these loans. He said the main reasons they do that is because it’s their business to carry on, because of relationships, because of the fees they earn, and that because of regulatory reasons they don’t have many other options.

Of course nominal interest rates are very high, but in the end inflation is always much higher so you are almost guaranteed to make a profit as long as you have cash flow. For example, the person who remortgages now pays 200% on some loans. That’s painful when there are no devaluations for a while if the Central Bank is trying to tighten, but in the end it always breaks with printing more money, because the country simply can’t avoid that.

The situation in Argentina is different, at least for real estate loans. Almost all property deals are done for cash in Argentina, without a mortgage. The reason is that Argentines do not trust their banks. So savings from the private sector barely enter the banking system: if people don’t put their money in the banks for saving, then the bank doesn’t have any money to lend. Many people therefore rent, because they can’t buy property without savings. Also many sellers only want USD and that’s hard to get because of currency controls.

Rental yields in 2014 were 7-8% per year, but went down to 2% in 2019. Because not many people were buying, sellers decided to rent out and are happy with that. In 2019 there were only 30,000 housing transactions in Buenos Aires (a metropolis of 15 million people), mainly because most transactions are in USD and people are not allowed to change more than $10K worth of pesos per month.

Hyperinflation and mortgages

If hyperinflation would hit the Western world existing mortgages would not be affected, and would be easier to pay back over time (assuming your wages would rise with inflation, an effect which is always delayed during times of high inflation). Of course this assumes that you have a fixed mortgage rate, if your rate is variable you will be in big trouble and you might be forced to sell your house, most likely in a market without many buyers, because nobody can afford mortgages at inflated rates. The big lesson is to have a fixed mortgage once hyperinflation hits. 

If you are a landlord hyperinflation will be a major problem, because you generally can’t increase rent as much as you like (rent control) or only once a year. If there are any repairs those may be much more costly than the rent you receive. Governments will likely intervene as well, to avoid that most renters will become homeless because they can’t afford the higher rents. Of course property is still a good store of value, so landlords may just suck it up because it’s better than cash that evaporates in front of your eyes.

Hyperinflation and companies

High inflation changes the fundamental nature of business operations. For companies, instead of focusing on production, cash management becomes extremely important. One lesson from Argentina is that you should not keep your cash in the bank but invest it in other currencies. Companies in Argentina put their cash abroad in USD if they had that opportunity. In the end many companies can only survive by speculating in the currencies and commodities markets. However, business that are highly leveraged are doomed to fail because interest rates will go up extremely fast. One interesting thing is that companies often wait to sell their products. Stockpiling large inventories to sell later at higher prices is better than to try to sell them right away.

Alternatives for the USD

Now, if the USD would hyperinflate most likely all fiat currencies will be doomed, so there are no other currencies left to put your cash into. I think that is when Bitcoin will come to the rescue: it is not a fiat currency, so you don’t need to trust it (nor a government). In times of hyperinflation the price of Bitcoin could literally go to millions of dollars very quickly, but of course those millions would have a lot less purchasing power than they currently have. 

Hyperinflation and the stock market

How about the stock market? Generally stock markets are very resilient and are a good way to survive hyperinflation. As someone told me recently, the rich use stock markets to move money, so these markets generally will do well. That might be true if you look at what happened in countries with hyperinflation over the past decade, but the question is what would happen to stock markets if the USD collapses. That is an unprecedented event and the effect could be a total collapse of the financial system, including the stock markets. 

When stock markets fail the winners will be owners of real assets. Those go up in value and can be sold at hyperinflated prices if needed. This can be anything from watches to pianos (they were bought as a store of value in Weimar Germany), and from real estate to diamonds. However, the best real assets will likely be commodities like silver and gold, and of course Bitcoin. It’s simply much easier to sell some gold, silver or Bitcoin to buy food, than to sell a piano. Most real assets can be good stores of value, but they are simply less liquid, less divisible, and more fungible than precious commodities and especially Bitcoin.

Conclusion

My conclusion after reading a lot on this topic is quite simple: if hyperinflation hits Western world outside the USD zone, get into USD to hedge yourself. If the USD gets hit by hyperinflation all bets are off and the whole financial system could fall apart. In that case make sure you own liquid real assets, preferably gold, silver or Bitcoin.

Will this happen? Most likely not, but it is also certainly not impossible. I believe governments will try to inflate their debts away with inflation rates in the double digit percentages per year. That might work until people realize that in the end they are paying for it, because their savings and money lose a lot of value every year. In that case we may get a monetary reset, which aims to restore faith in the currency by chopping off zeros from all prices and will that reduce government debts in the same way. That might work for the currency, but it will lead to financial devastation for many people. Also in that case the best way to survive the crisis is to own real assets. 

I am not trying to sound fatalistic, but these are real risks in today’s world. The current global financial situation is getting out of hand and Central Banks have lost control. Something’s gotta give, but we don’t know yet what. So, as I have said several times before on this blog, please make sure you are prepared for an uncertain financial future. Hedge your bets when you can still do so.

It’s Labour Day weekend in North America, which marks the end of summer and the beginning of the fall season. In Vancouver it is suddenly much cooler and we had the first rain in many weeks, which was somehow fitting. It also led me to reflect a bit on the sad state of the world and the direction that financial markets are headed.

The Fourth Turning

I am a believer in the Fourth Turning theory, that basically predicts that the world is heading into a major crisis over the next decade or so. This theory focuses specifically on the US, but because the world is so interconnected its impact will be felt everywhere. Everything seems to be coming together now, a perfect storm is brewing that I believe will lead to civil war in the US and potentially to a global war. In this article I will focus on why I believe things are moving in the wrong direction and on the worst possible outcome. However, I will also discuss how you can best prepare in case things really go wrong.

A Perfect Storm

What does this perfect storm consist of? It’s a number of things that all come together at the current moment. Polarization is worse than ever, the left and right in the US simply have no common ground left anymore. At the same time the world is divided over Ukraine, with most of the Western world condemning Putin, but with a large part of Asia continuing to do business with Russia. This will lead to huge energy problems in specifically Europe over the next couple of months, but this will also affect North America. Next to that the worldwide food supply is endangered if not enough grain can be shipped from Ukraine to Africa and the Middle East.

On top of that the world’s Central Banks pretend to be in control, but in reality they have lost control years ago by printing unlimited money. Suddenly double-digit inflation also appeared in the Western world. It will only make the growing divide between the rich and the poor even bigger. Trust in governments and institutions is at an all time low, in the US only 20% of the population still believes the government can be trusted to do the right thing. Finally the climate crisis is going from bad to worse in many parts of the world, leading to potentially widespread famine and hundreds of millions of refugees during this decade. How this will end nobody knows, but I am much more worried about the next couple of years than I was earlier this year.

How to prepare yourself?

The question is what you can do to prepare yourself for the fall out of all these problems. The book The Fourth Turning gives some good advice on this. The book advises for example to forge strong bonds in your community, be in good shape and to make sure you have a good reputation. But you also need to be financially prepared.

Assuming you still have a nest egg, where should you invest it? Honestly, there is no easy answer to this. I think diversification is key, but what should you diversify in? A few months ago I thought the stock market had seen its lowest point, but I am not so sure anymore. I believe the recession will be much worse than we are led to believe. Soon we will see widespread labour unrest because people can’t live a normal life anymore, so they simply need to get higher wages. Companies that already have much higher costs for raw materials can’t pay those wages, so profits will fall sharply and businesses may simply not survive. And that doesn’t even take higher energy prices into account.

At the same time the FED keeps on increasing interest rates, which will lead to even more problems for companies because it makes it more expensive to borrow. But it also leads to issues for governments because they will have to refinance their huge debts at higher rates. The question is how long that game can last. 

My point is that based on all of this the valuation of many companies might still be way too high. If people start to realize how big a recession could be and how it will affect every single company, don’t be surprised if stock markets can go down at least 50% from here, which would put the Dow Jones roughly at its value a decade ago. And if the world really starts to fall apart it could even go down a lot more than that.

The last Fourth Turning started in 1929…

Going back to the Fourth Turning theory, the last time a Fourth Turning started was in the fall of 1929. At that point we had seen a decade of huge growth in stock prices, not dissimilar from what we have seen in stock markets since 2009 (in the 1920s the Dow Jones index went up about 8 times, since 2009 it went up about 6 times). After Black Monday the Dow Jones kept on falling for 3(!) years, eventually ending down 89%. It took 25 years for the Dow Jones to get back to its 1929 levels. Although most people can’t imagine it, history tends to repeat itself. That doesn’t mean we’ll see such a large drop in company valuations, but you have to keep in mind that it’s certainly a non-zero possibility. 

What to invest in?

In times of crisis it’s important to have at least some liquidity, so keep part of your assets in cash. Yes, you will lose 10% or more per year because of inflation, but at least you have cash if you need it. And it gives you the opportunity to buy back into the market at much lower prices in case it crashes. Commodities like gold and silver have generally done well in times of high inflation and crisis, but it seems that’s not happening this time around yet. If you would have bought gold in 1929 and would have held it until the market stopped falling 3 years later you would actually have made a 30% return. Not long after that the government forced investors to sell their gold to the government thought, but that’s a different story.

If you have a longer time horizon (2-3 years) Bitcoin should be a good bet, long term my very bullish predictions have not changed. However, Bitcoin is extremely volatile and it may have not seen its lowest point yet. There is still a lot of leverage left in the Bitcoin market that could get flushed out. Long term it should outperform most asset classes though, so if you hold enough cash you could consider putting some of the rest of your assets into Bitcoin. As I discussed in a recent blog post, I am also a huge believer in voluntary carbon credits, so that is something you should look into, especially because it is a hedge against climate change. 

In terms of stocks I would stay away from index funds, but invest only in specific sectors that you believe might outperform the market. Energy stocks could be one sector to look at, but it’s hard to say what will happen when governments step into the market and set prices. Anything related to climate change will likely do well, so look at renewable energy related stocks or companies active in carbon reduction. Artificial Intelligence will be a game changer whether the world falls apart or not, so that’s something that I would include in a portfolio as well. And of course crypto related stocks, not just miners or exchanges, but also crypto Wall Street firms like Galaxy Digital.

Also make sure you diversify geographically. Having only investments in North America and Europe may not be the best strategy. I think Southeast Asia will be the least affected by effects of the Fourth Turning and may even benefit from it. So investing in companies or real estate there seems like a good idea.

Conclusion

Things are not looking good at all. But hopefully I am completely wrong and the FED will start lowering interest rates again soon and continue with quantitative easing. Then the stock market might stabilize or even go up again. But if you want to be prepared it may be a good idea to keep at least part of your portfolio in other instruments. The worst that could happen is that you miss out on some upside, but at least you are well protected if things don’t go as well as most people still seem to believe. 

Disclaimer: As always, these are my personal opinions and not meant as investment advice.

I am always looking for the next big thing, and although I am often too early I have been lucky to have been right a number of times. In 2018, after Bitcoin started going into a bear market and I was working full-time in the crypto space, I started looking at other investment classes that could have returns. I then stumbled upon carbon credits.

A carbon credit is the right to emit one metric ton of carbon dioxide (CO2) or an equivalent amount of other greenhouse gases. There are carbon credits issued by governments for the so called cap-and-trade market and there is the voluntary carbon market, a market that is overseen by standard setting bodies but that is not regulated by governments. When I first started investigating carbon credits I was only looking at the regulated markets, but I didn’t like the structure of it. The reason is that these cap-and-trade credits are created out of thin air by governments and given away or sold to companies that can use them to offset their emissions.

The problem with that is first of all that these carbon credits are not based on real emission reductions, which doesn’t make any sense to me. But more important, governments can unilaterally decide to issue more credits if they feel that’s needed, or they have the right to cap prices. As an entrepreneur or investor you don’t want to be active in a market that can be artificially manipulated by governments. So although I saw huge opportunities I decided to stay away from it.

In early 2021 I met up with 2 very experienced Dutch guys who had been active in the carbon credit space since 2005, among others trading credits and putting large international carbon projects together and executing on them. They are real veterans and have seen it all over the past 17 years. They told me about their business and I told them about my plans to build a sustainable business in the carbon space. I also explained that I didn’t like the regulated carbon space and they convinced me to take a look at the voluntary market. I had always dismissed voluntary carbon credits, simply because I did not believe you can build a real business on something that is voluntary. But after talking to them in more detail all of a sudden a light bulb went off in my head and I realized that the voluntary market will be the future of carbon credits instead of the regulated market.

Let me explain that: in the voluntary market a carbon credit is only issued once a project or a company takes one metric ton of CO2 (or equivalent) out of the air forever. It is a very strict system and it’s becoming stricter every year. The credits are bought by companies that want to offset their current or future emissions. That is voluntary, no government forces them to do this, and that’s why I dismissed it for a very long time. But what I suddenly realized last year is that the role of governments is not as important anymore as it used to be.

Nowadays consumers and investors are determining what companies should (or should not) do. What that means is that even though companies are not obliged to offset their emissions by government regulations, they are still setting net zero targets because their customer and investors demand it. If this is hard to believe (which it was for me for a while), look at what happened in Russia after they invaded Ukraine. Most Western brands decided to give up all their operations there, from Louis Vuitton to McDonalds, and from Starbucks to Apple. They were not told to do so by governments, but they did this because their other stakeholders wanted them to do so.

Virtually every big public company in the world now has emission reduction targets and many corporations have publicly said that they will have zero CO2 emissions by 2030 or 2040. There is no legislation telling them to do this, but they still do it. Customers demand it and capital markets now charge higher rates for companies that are not trying to reduce their emissions. 

So how will they get to net zero? Of course you can reduce your emissions, but getting to zero is almost impossible for any company. Not just for natural resources companies like oil or gas companies, but also for large Internet companies a net zero footprint is not possible without a way to offset emissions that you can’t reduce. And that’s where carbon credits come in: for every metric ton of CO2 that companies emit they will have to buy voluntary carbon credits to offset them. Because these carbon credits are actual reductions of CO2 (unlike the regulated carbon credits that are issued by governments) they allow companies to keep on emitting some greenhouse gasses as long as there is an offset for these gases somewhere else. 

Last year we started a company called Climate 8 to enter the voluntary carbon credit market. Climate 8 invests in very large reforestation projects on degraded land. These projects take CO2 out of the air and Climate 8 gets the carbon credits for these projects. It’s of course a bit more complicated than that, but that’s the core of the business. To us the co-benefits of our projects are important. They include for example ten of thousands of newly created jobs in areas with not many job opportunities. But we also use forestry models that preserve native species and enhance overall biodiversity.

We partially sell these carbon credits forward to pay for our costs, but we also aim to keep them on our balance sheet because I believe the price of carbon credits will explode over the next couple of years. Carbon credits in 2022 remind me of Bitcoin in 2012: most people haven’t really heard of them yet and most people don’t see why this new asset class will become very important in the future.

My Bitcoin thesis played out, but is just in the early stages. Governments and Central Banks simply printed too much money, which will eventually lead to a breakdown of the fiat financial system. My belief is that this will lead to cryptocurrencies taking over the role of the current fiat financial system, most likely before the end of this decade. There will be a huge demand for Bitcoin, but the supply will be very limited, leading to exploding prices. 

For carbon credits I see a similar future. The climate crisis is already quite visible and will get exponentially worse every year. The heat waves in 2021 were bad and broke many records, but 2022’s heat waves are even worse. Droughts are hitting large parts of the world and only seem to get worse. Even stubborn climate change deniers are starting to see that there is more going on than just a natural phenomenon. The worse the climate crisis gets the more people will demand governments and companies to do something about it. The problem is that governments have not been able to do anything over the past 25 years since the Kyoto protocol was signed. I figured out years ago that they were useless to solve the climate crisis, but only since last year I understood that we don’t need governments if we use voluntary carbon credits.

The worse the climate disasters get, there more people will force companies to do something about it. Companies will realize that they may be able to reduce their emissions by 30-40%, but if they want to reduce by more than that they will have to completely revamp their business models, which is impossible for many of them. So they will have to buy carbon credits in order to satisfy the wishes of the public, there is simply no other solution for them. That means a huge increase In demand, while it will be much harder or more expensive to increase supply.

Climate 8 currently creates new carbon credits for less than US$ 10 (our cost price), because reforestation is relatively cheap. However, there is a limit to how many carbon credits you can create by planting trees, there is simply not enough land to do it and certainly not land in areas where trees can easily grow. So in order to fulfill demand, technical solutions to take CO2 out of the air are needed. Luckily there are good solutions for carbon sequestrations, such as direct air capture, but they are very expensive. It depends a bit on the scale of companies and of the sequestrations technology that they are using, but generally a price of $300-500 per metric ton (=1 carbon credit) is not unheard of. 

If we start to use carbon credits at scale to fight climate change we will need to use the technical solutions, there is simply no way around it. That means that in order to make these technologies feasible, the price of carbon credits has to at least cover the cost to generate them. But because investments of billions or possibly trillions of dollars are needed to pull this of, the market will not just want to break even on these projects. So possibly prices of $300-500 per carbon credit will be on the low side, and prices could go to the thousands of dollars per carbon credit. Companies simply need ttem to survive and the world needs them to survive as well, then almost no price will be too expensive.

Current voluntary carbon credit prices for nature based solutions are about $10 per credit, but in the EU the regulated market pays almost $100 per credit already. When I started looking at carbon credits a few years ago these EU credits were at $15. My expectation is that both credits will eventually be interchangeable, so the voluntary credits will have a similar price to regulated market credits. Most likely the voluntary credits will go up fast over the next couple of years to catch up, and likely EU credits will keep going up fast as well.

A return of 10X is the least I expect over the next couple of years for voluntary nature based solutions, but it could very well be 50-100X. That may seem over the top, but it’s the same as it was with Bitcoin 10 years ago. Nobody would take you serious if you would tell them that Bitcoin could go to tens of thousands of dollars, just like most people still don’t see that Bitcoin could easily go to a million dollars or more if it becomes more accepted as a reserve currency. 

The point is that you have to be able to think out of the box if you want to understand where carbon credit prices could go. I think the downside risk is fairly limited unless we completely give up on the climate, but the upside is extremely high. Maybe it won’t be a 100X return once more people start creating credits or if the cost of creating technical solution credits would fall quickly, but I am pretty certain 10-20X will be on the lower side of the returns that we will see.

And that’s why I believe that Climate 8 is making a smart decision to keep as many of its credits on its balance sheet in the future, just like we did with Bitcoin mining company Hut 8. We may eventually tokenize some of these carbon credits, but for now the focus is on getting our first projects up and running and close the financing for these projects.

Climate 8 is a private company that is mainly funded by the management team. We are not raising funds for equity in the company, so there are currently no investment opportunities for outside investors. However, we do have a mailing list for people interested to invest once we open up to accredited investors or to the public.

Note: this is my personal opinion and not investment advice. I intentionally simplified some numbers, but the core is the same. Do your own research before you invest. 

As 2021 is coming to a close it is clear that the Bitcoin market has not fulfilled the promises that the onchain data seemed to indicate. To say it in a different way, I was way too optimistic in my predictions of where Bitcoin would end this year. Even just 2 months ago I thought Bitcoin would hit at least $100K by the end of 2021, but that didn’t happen. When I don’t get my predictions right it’s important to look what assumptions were wrong and how they could impact the future, and that’s what I am doing in this post.

In case you are not into Bitcoin on a daily basis, Bitcoin still did quite well in 2021. It went up from around $28000 in late December 2020 to about $48,000 right now, so an increase of about 70%. Not bad compared to most other asset classes, but it’s lower than average for Bitcoin. During the year Bitcoin has been quite volatile, hitting $64,000 before going down to $29,000 before climbing up to $69,000 in October. But the volatility has actually been less than in other Bitcoin cycles.

So what happened and why did Bitcoin not follow its price trajectory from 2013 and 2017? I think I (and many Bitcoin analysts with me) underestimated how quickly Bitcoin matured over the past year. What I mean with that, is that the price is not only determined by mining supply and spot buying & selling like it was during the past 2 halving cycles.

A large part of the market now consists of institutional investors that mainly take derivative positions through futures and options. This means that each time the price overshoots (like when it hit $64K in April and $69K in November) they start shorting it, leading to long squeezes of other investors, which in turns leads to a Bitcoin price crash. The result of that is that you don’t see a real mania phase anymore, because the price starts to go down before FOMO (fear of missing out) sets in among retail investors. So without institutional shorting I believe we might have been over $100K now or potentially even a lot higher. 

Are institutions bad for the Bitcoin price? No, they may actually be a good thing because the other side of the equation is that they will also prevent Bitcoin from going down 80-90% like it did in the past after a blow off top. We will still see Bitcoin going down 50% in the future, but if it goes down much more than that institutions will step in to take long derivative positions. So I expect that shocks to the Bitcoin price will be a lot less going forward. The long term Bitcoin price will not change, just the way we will get there. Bitcoin will be less volatile, which may actually lead to even faster adoption.

It does mean that some of the short-term models that are purely based on onchain data may have to be revised. For example, Plan B’s floor model that had predicted prices of at least $100K in Q4 this year completely missed its mark. I believe that is because you don’t see derivate positions onchain, so you miss out on a large part of the action. You are literally comparing apples from 2017 to oranges from 2021. I don’t know how his model works, so this is of course speculation, but I do think focusing purely on onchain data might not be sufficient anymore. This will only get worse in the future, especially if more people flock into the US Bitcoin ETFs that only use futures. You simply don’t see those flows onchain, but they still drive the market. 

There are a number of other reasons why Bitcoin did not hit $100K yet. However, they seem less important to me and only have a short-term impact. Among them the fact that Chinese exchanges like Huobi informed their users that they can’t sell their Bitcoin anymore after Dec. 31, leading to many people selling their coins and depressing the price. Year-end balancing for institutions also plays a role, as does tax loss harvesting for investors that bought BTC at higher prices during the year. Although they all have an impact before the end of the year they should also lead to increasing prices in early 2022. 

Of course there are other things driving the price as well. One of them is that the Bitcoin mining market changed completely since the 2016 halving. When we started Hut 8 Mining in 2017 and took it public in early 2018, we were the first publicly traded Bitcoin mining company. We decided to HODL our Bitcoin instead of selling them and to simply raise money from capital markets to cover our expenses. Since then many other companies copied that strategy and because of that a large part of the mined Bitcoin do not hit the market anymore. This has big implications for the impact of the Bitcoin halving and on models that are based on this. Although the halving will still have some impact, it is significantly less than it would have been without the publicly listed Bitcoin miners.

The same is true for companies like MicroStrategy that keep on buying new Bitcoin and hold them on their balance sheets. It seems pretty straightforward to me that this could lead to even higher prices from PlanB’s S2F model. There are simply less coins hitting the market, so the resulting price should be higher. Because his model is currently at the lower end of its price band it means other things are keeping the price down for now. 

All in all I continue to be very bullish for Bitcoin. Fundamentally nothing has changed, the market structure is simply different from before. Unfortunately it makes onchain analysis less important, but it is still very valuable to understand what type of investor is buying and who is selling. I believe Bitcoin will keep on breaking new records in 2022, but likely with less volatility than in previous cycles. When we will hit $250K or $500K I don’t know. It might be faster because more coins are taken off the market. Or it may take longer because we see less FOMO because institutions prevent 10X returns within a year. However, if you have a long term horizon it should not really make much of a difference, so just keep on HODLing.

Disclaimer: As always, this is my own opinion and not meant as investment advice!

After not traveling much for the past year or so (my last trip was a 6-week trip to China, exactly a year ago with 2 weeks quarantine in China and 2 weeks upon my return to Canada) I decided to do some serious ‘revenge travel’. We spent most of the summer in Canada on boats and at my summer home, and started traveling internationally again about 6 weeks ago. Since then we have been to the Bahamas, New York City (twice), The Netherlands, Belgium, Luxembourg, France and Monaco. It was an interesting experience because every single country has different regulations and sometimes it’s not clear when you arrive what these regulations are.

In Europe most countries don’t require COVID tests anymore, and if they do we decided to skip those countries (sorry Italy!). But in North America you need them each time you travel. Canada requires PCR tests every time you return, which is a bit of a hassle. The US and the Bahamas are fine with antigen tests, which only take a few minutes and are not as uncomfortable as the PCR tests. The good thing is that you can get these tests anywhere in N America: in New York City you can even get them for free in mobile vans that are parked on the main streets in Manhattan, and in the Bahamas they can come to your home or hotel to do the COVID test for you. Face masks are required everywhere (even outside) in the Bahamas and Monaco, but most other countries are more relaxed and only require them indoors. In The Netherlands you can now even go indoors without masks, it’s the only country where I have seen this so far (Canada had this over the summer, but they changed back to indoor masks after the delta variant hit). 

In the Bahamas we stayed at our own place instead of a resort, but in order to enter hotels, resorts or restaurants you had to provide your COVID test results. What we didn’t realize until after a few days, is that there was a 10 pm curfew in effect. We had not seen it announced anywhere, not even at the airport, and resorts seem to have been exempted from it, because we spent several nights at restaurants at the Atlantis until after 10 pm. However, when we went to a local beach side restaurant around 8 pm they told us they were closed already because of the 10 pm curfew. We literally had no idea, but we suddenly understood why Michi had been stopped by police after 10 pm one night after visiting a friend in a nearby resort. The police just asked where she was going and when they realized she was not a local they let her go, without even telling here about the curfew.

We also made a road trip through Europe, which was very enjoyable. Because of COVID it wasn’t very busy on the roads and we never had to book hotels in advance, so we could just decide to take a hotel without planning ahead. Hotels were quite affordable as well, at least cheaper than before, simply because they are competing for less travellers. Restaurant reservations were not needed, except for some of the top restaurants in Monaco during the yacht show, which means you can decide last minute what, where and when you want to eat. 

Quarantine is not required anymore as long as you are fully vaccinated. You do need to show your vaccination proof in every European country we visited if you want to have dinner or even just a coffee in a bar or restaurant (just like in Canada, the US and the Bahamas). Europe has its own QR code system that is incompatible with the Canadian vaccine passport, but we never had any issues with our vaccine cards. The countries that have had the system for a couple of weeks already seem to have fully integrated it into their way of life, nobody complains about it and even at McDonalds people simply scan their code before entering. However in Holland where the QR code system was only introduced a few days ago a vocal minority is still strongly against it and some restaurants are even threatened with closure because the owners don’t want to scan QR codes. 

Personally I don’t think governments should force people to take vaccines if they do not want to take them (I am pro-vaccine, but think it’s an overreach of government power). I wish everyone would take the vaccine, but if they don’t I am against forcing them and it simply means they will get COVID within the next year anyway. After seeing how well the system works all over the world I don’t think it makes a lot of sense to fight against it, it’s simply not a hill that’s worth to die on. There are much worse things going on in society that people seem to take for granted. I don’t believe in conspiracy theories about governments using vaccine passports to get more power, in my opinion governments are just incompetent. I have seen it with Ivermectin, about which I wrote on this blog back in January this year. I thought governments would be able to understand how well it works (the data is there for all to see), but they are simply too busy and seem to follow the mainstream media. And indeed since then the media turned it into a ‘animal deworming medicine’, instead of an almost-free pharmaceutical that has been used by billions of people with hardly any side effects since the 1970s. Again, not a hill to die on, and I have had my own supply for months already.  

Anyway, I don’t really want to turn this blog post into a discussion about vaccines or medicine, but just want to point out that things are similar all over the Europe and N America. Of course most of Asia, Australia and NZ are still very different (let alone Africa and S America), but they will get there as well. I am glad I can travel again, intercontinental planes between Europa and N America are full and most good restaurants seem to have survived. It will take another year before things are fully back to normal, but at least with some small inconveniences we can pretend that COVID is over. If you want to enjoy travel without too many other tourists around now is the time to go.