Deflationary Forces, Bitcoin Indexed

Deflationary Forces

Diamonds

Despite being identical, there is still a significant price difference between natural and lab-grown diamonds. Lab-grown diamond supplies are so high that the average 1-carat round diamond is just $679 vs. $3728 for an identical natural diamond. How cheap can a 1-carat round diamond get? Probably cheaper than $679. Eventually, the price will trend to the cost of the energy used in the process. Where does that put the future cost of diamonds? Maybe $100? Maybe $10? Technological advancements drive this trend entirely, as the natural diamond industry is a monopoly.

Driverless cars

Waymo’s next city is Miami. Waymo is Google’s driverless car division. It operates in SF, LA, Phoenix, and Austin, completing 150,000 paid rides per week, covering 1 million miles. It’s important to note that it will not go on the highway (yet). There are about 1,000 Waymo vehicles currently in operation. By comparison, there are about 5 million Teslas currently on the road. If a Waymo car can navigate San Francisco, so can a Tesla. Conceptually, Uber takes a 25% fee while drivers earn around 75% of the cost of the ride. Conceptually, the price of a driverless ride should fall by at least 50% without the driver present. It will take time for Waymo and driverless technology to scale, but not that long.

Food costs – choice!

On a recent drive from NY to Boston, I stopped at a rest stop and purchased a bacon, egg and cheese on a bagel from Dunkin and McDonalds to compare price and quality since it’s been a long time since I’ve had either. This is not a robust data-driven comment, but my instincts have told me that the media’s representation of food inflation has not been fully representative. The key is that we have an incredible range of choices regarding basic nutritional needs. McDonald’s is extremely expensive at $10 for a simple breakfast sandwich. By comparison, you can buy five pounds of chicken at Shaws for $10.

I think it’s important to note here that this is not a comment on austerity. Egg prices go up and down. Coffee prices are skyrocketing now, and I’m sure they will also come down. Ultimately, the major cost increases related to food have been more based on convenience, entertainment, and addiction and less on core nutritional needs. I think that’s an important distinction in the inflation narrative for the average consumer. If they opt for McDonalds as a primary food source, then yes, that is extremely expensive and highly inflationary.

Bitcoin in the Indexes

We were asked this week about Bitcoin representation in the S&P 500. The answer is roughly 0%. Tesla owns about $1B in Bitcoin, but with a $1.3T market cap, that’s too close to zero to matter.

However, the Nasdaq 100 plans to add MicroStrategy to their index on Dec 23rd at a roughly 0.55% weight. The Nasdaq has always been more tech and innovation preferent, but even this move is a little surprising. MicroStrategy is effectively a shell company that holds Bitcoin, or its product has evolved into providing derivative Bitcoin exposure. Its market cap is nearly 100% based on its Bitcoin holdings and related capital markets operations. Adding MicroStrategy effectively adds Bitcoin to the QQQ index.

This will almost certainly never happen to the S&P 500 as that index has strict earnings requirements that MicroStrategy will never achieve in its current form as a Bitcoin proxy.