Why NOT owning Bitcoin is risky
This is my attempt to be as concise as possible in explaining why Bitcoin is important to own.
First, one must have an understanding of the real function of money. On the surface, money allows us to earn and spend. But when you dig a bit deeper, you’ll realize that money itself has no intrinsic value.
Money communicates value derived from human labor.
But this communication of value is being significantly distorted through our current monetary system. Let’s quickly revisit the past to understand how this is happening and why this is significant:
Sound money
From livestock to wheat, to seashells to copper, money took many forms over time. Humanity converged on gold and used it as money for thousands of years. This was because gold possessed the best properties over any other physical commodity. Gold is:
Scarce (unlike seashells)
Durable (unlike wheat)
Portable (unlike cows)
Interchangeable and divisible (unlike homes)
Recognizable and accessible throughout the world.
These characteristics made gold the best savings technology for generations.
Did you know that every US dollar once represented a fixed amount of real gold? That’s right- you could cash in your dollars at a bank and receive physical gold. $20.67 would redeem an ounce of gold from 1879 to 1932.
Thus, the issuance of the US dollar represented a paper promise for real payment (an IOU, or credit). Gold was the real payment (an asset, or money).
Since the US dollar was tied to its gold reserves and the United States owned the most gold, many countries formed an agreement to fix the value of their own currencies to the US dollar; crowning it as the world’s reserve currency in 1944.
However, Richard Nixon ended this Bretton Woods Agreement in 1971 by taking the US dollar off the gold standard. The Nixon Shock was meant to be a temporary measure, but to this day, the US dollar has not been backed by anything scarce and can be created out of thin air. Countries around the world followed suit. These currencies are called fiat currencies.
The only value of a nation’s fiat currency is what its government decrees it to be, and the people’s trust in that issuing government.
Fake money
“Back in my day, a dozen eggs were only 53 cents!”
Did eggs become significantly more valuable or scarce? Nope. This price increase is from devaluing our currency over time, known as inflation. How does this happen? By printing more currency. The central bank aims for a dilution of about 2% per year. So if you held $10,000 in a bank for 10 years with no interest, you’d lose 20% or $2000 in purchasing power. If you look at interest rates today and understand that the real rate of inflation is much greater than 2%, your savings account should be considered a losings account.
Although wage earners have increased their productivity through technology, the current system forces them to work more and more to maintain the same standard of living. Those who save depreciating dollars lose and investors with appreciating assets win.
Inflation is the hidden tax on the working class.
Fake banks
Credit is created not only by central banks but by commercial banks. Through fractional reserve banking, they create mortgages through creating credit-not from actual cash that they hold. And as of March 26, 2020, banks are allowed to hold zero percent of customer deposits. Therefore, if all customers demanded their money at once, their banks wouldn’t provide it.
A “house of cards” economy
“It took $185 trillion of debt to produce about $46 trillion of GDP growth over the last twenty years. The growth rate would likely have been negative without all of that stimulus.” (Jeff Booth, 2020)
Economic growth does not necessarily mean an increase in human prosperity.
The wealth of most North American families have not made a real recovery since the great recession of 2008. The economic rebound was mostly due to credit creation.
With low interest rates and cheap labor, companies have not since been incentivized to invest in productivity. Instead, they perform stock buybacks to artificially inflate their share price. And of course, they’ll get bailed out by citizens when times are tough and those bubbles burst.
Endless credit creation, cheap borrowing, corporate & bank bailouts only serve to waste our tax dollars, devalue our hard-earned savings, exacerbate wealth inequality, encourage mindless overconsumption and malinvestment, while propping up zombie companies that should have gone bankrupt long ago. An artificial economy held up by this much credit is unsustainable and has only made the next crisis much worse than it could have been.
Countries in crisis
Throughout history, a country experiences an economic crisis through poor fiscal policy (from its government) and poor monetary policy (from its central bank):
Hyperinflation
The Lebanese pound had lost nearly 80% of its purchasing power in a year. This means that someone in Lebanon who had saved $500,000 for retirement now has the purchasing power of $100,000.
In Venezuela, citizens struggle to buy basic groceries with their currency. With prices doubling every day, 1 liter of milk costs a quarter of one’s monthly wage.
The citizens of Zimbabwe all became millionaires. But a million Zimbabwe dollars might have only bought you a chicken for dinner if you were lucky.
Many more examples of hyperinflation have occurred with other currencies.
Deflation
When low interest rates fueled speculation in real estate and the stock market, Japan’s asset bubble burst in the fall of 1989. Equity values plunged 60% within 3 years, while land values dropped an incredible 70% within 11 years. Prices have yet to recover after 32 years.
Government in crisis
In Greece, interest rates rose due to fear of the government’s inability to repay its debts, while asset prices spiraled downward.
Citizens were only allowed to withdraw 60 euros per day for 3 straight weeks
Afterward, the government stole salaries, pensions, and paid benefits straight from the bank accounts of its citizens to cover their newly imposed tax hikes in hopes of recovering from its fiscal crisis. These citizens even had depositor insurance but that STILL did not protect them from being robbed. This is called a “bail-in” and is legal in every G20 country.
By choosing to store your wealth in a fiat currency, your wealth is vulnerable to poor monetary and fiscal policies.
What will we experience- inflation or deflation?
COVID-19 caused the Federal Reserve and other central banks to issue debt and buy assets at an unprecedented level to keep their economies afloat. The long-term consequences of this are highly debated.
There are intelligent arguments on both sides, including how the Debt/GDP ratio of many countries are at risk of entering a doom loop, how the deflationary nature of technology will no longer allow our inflationary system to work, how our current Consumer Price Index (CPI) hides real inflation, or this alarming fact- The US printed more money in 1 month than in 2 centuries.
During the most global economic uncertainty we’ve ever faced, people are still trusting 100% of their wealth in fragile financial instruments that are legally allowed to be withheld or devalued in a crisis.
A rock and a hard place
Will central banks keep the money printer going, and increase the debt burden while running asset and consumer prices through the roof? Or do they allow natural deflation and risk a Great Depression?
Protect your wealth
If there’s one lesson that 2020 should have taught us, it’s that a government cannot completely protect its people from a public health crisis. This then begs the question- can our government completely protect us from an economic crisis? With humility, the answer should be no.
At the very least, one must diversify their wealth outside of fiat. It is now irresponsible not to.
Traditionally, stores for wealth included *fairly valued* real estate, classic cars, art, jewelry, and of course, gold.
However, the best asset to hold is Bitcoin.
Bitcoin: A revolution in money and trust
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.” Satoshi Nakamoto, 2009
After nearly 30 years of cryptography, computer science, and internet currency experiments, Bitcoin emerged in 2009 from its creator codenamed Satoshi Nakamoto. Bitcoin allows the transfer of an asset over the internet without a middleman. Digital scarcity is a simple concept yet had never been achieved. When you email a file, send a text message, or a photo, you are sending a copy (not transferring the original). And you are using applications or social networks that are owned by central third parties who store your personal information and files on their servers. Bitcoin is fundamentally different.
No central entities own or control the Bitcoin network. Its database is immutable and unhackable through the security of nodes and computer miners distributed throughout the world. Anyone with internet access and a smartphone can send and receive satoshis (money of the network).
Bitcoin is digital gold (and much more)
The invention of Bitcoin is much more profound when you understand sound money. It encompasses all of the monetary properties of gold while also improving upon them:
Not only scarce but verifiably finite- There will only ever be 21 Million Bitcoin. Each Bitcoin is comprised of 100 Million satoshis (when you own 0.01 BTC, you own 1,000,000 satoshis).
We have a rough estimate for how much gold there is on earth, but cannot be certain. Also, Bitcoin’s supply does not react to an influx in demand. This is a very important distinction from gold or any other asset.
Durable- If the internet exists, Bitcoin exists.
Portable- As long as you remember your 12 or 24-word password, you can go anywhere in the world and still access your wealth from the internet. It’s obviously much more difficult to transport, store and transact physical gold.
Fun fact: Central banks still perform settlements with each other using physical gold (how inefficient!)
Interchangeable and divisible- Every satoshi is the same.
Recognizable and accessible throughout the world- Global acceptance is emerging. The higher Bitcoin’s price becomes, the more recognition and belief it gains, the more users it retains over time.
Bitcoin has no top because fiat has no bottom.
A digital gold rush
Bitcoin’s rate of supply is meant to replicate the emergence and evolution of gold becoming a global reserve settle money. The supply of new Bitcoin is cut in half every 4 years. Given the same level of demand (or more likely- an increase in demand), this supply shock is eventually reflected in the market. This explains Bitcoin’s current all-time high- its last halving was May 11, 2020. This “number go up” policy is credibly permanent and will continue for decades.
From investment banks and hedge funds to insurance companies and university foundations, institutional adoption is becoming harder to ignore. On February 4, 2021, a Bitcoin conference was held to instruct corporations on purchasing and holding Bitcoin on their balance sheets. Soon after, Tesla announced their $1.5B purchase. The list continues to grow.
There is no such thing as “the next Bitcoin”
Out of the thousands of cryptocurrencies that came afterward, none have come close to matching Bitcoin’s level of security, decentralization, and network effect.
“Compared to bitcoin (BTC), these (competing) tokens have fewer nodes, far less hash rate, lack of dedicated hardware/security ecosystem, and lack of institutional interest, so their network effects are not remotely close. Each one has a market capitalization of less than 2% of bitcoin’s market capitalization”. — Lyn Alden Investment Strategy, March 2021
There are many established theories that can support Bitcoin becoming the most dominant form of money over time.
Metcalfe’s Law
Bitcoin’s Lightning Network also debunks the false proposition that a faster, cheaper alternative is necessary.
“As a good rule of thumb, proprietary technology must be at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage. Anything less than an order of magnitude better will probably be perceived as a marginal improvement and will be hard to sell, especially in an already crowded market” — Peter Thiel, 2014
Considering all attributes, Bitcoin is easily 10 times better than any physical asset for storing value. What is 10 times better than Bitcoin?
Bitcoin obsoletes all other money
When you rationalize money from first principles, the idea of Bitcoin becoming the dominant global reserve asset (and eventually, global reserve currency) seems quite possible:
Can property appreciate in value without scarcity? No.
Is Bitcoin digital property? Yes.
Is Bitcoin the only currency that guarantees a finite supply forever? Yes.
Is Bitcoin the most obtainable, securable, & tradeable property? Yes.
Do money networks converge to one medium of exchange? Yes.
“…monetary systems tend to a single medium because their utility is liquidity rather than consumption or production. When evaluating monetary networks, it would be irrational to store value in a smaller, less liquid and less secure network if a larger, more liquid and more secure network existed as an attainable option.” — Parker Lewis, 2019
Bitcoin is apolitical
Until we reach a point where democratic governance can be guaranteed worldwide, money will always be necessary for global cooperation. The separation of money and state is as partisan as the separation of church and state.
Bitcoin is a peaceful protest against a broken system
“There are two ways to express power in this world:
- Voice
- Exit”
— Andreas Antonopoulos
Occupy Wall Street was a movement against the culprits of the 2008 financial crisis. Bitcoin continues that movement.
Bitcoin is volatile!
“And when network participants, individually and as a whole, observe that bitcoin survives, even after extreme downside volatility, that mere fact strengthens confidence in the network. At some price, individuals were willing to step in and catch the falling knife. Through these episodes, bitcoin accumulates more human capital. The weak hands are shaken out and the strongest hands always survive (often in the form of new holders), causing the network to become more resilient and not merely remaining static or simply absorbing the disruption. Bitcoin actually feeds on the chaos. In the end, near-term volatility directly contributes to long-term stability.” — Parker Lewis, 2020
When you understand that Bitcoin is a closed system with a credibly enforced fixed supply of money, short-term exchange price volatility does NOT equal risk.
The global debt crisis is upon us all. Plan accordingly.
Suggested resources (in order of accessibility):
Introduction to Bitcoin — Andreas Antonopoulos
Bitcoin is Protecting Human Rights Around the World — ReasonTV
2020 Shareholder Letter — Stone Ridge
Bitcoin Obituaries — 99 Bitcoins
Debunking Bitcoin Misinformation — End The FUD
Gradually, Then Suddenly — Parker Lewis
The Fraying of the US Global Currency Reserve System — Lyn Alden
