What it is and why it's essential in today's economy.
In the 14 years since the creator of Bitcoin, Satoshi Nakamoto mined the genesis block of the Bitcoin blockchain on January 3rd, 2009, Bitcoin has come to mean many different things to many different people. Its permissionless nature has seen it being adopted in all corners of the world by individuals, firms, and nations alike who see tremendous value in this globally accessible monetary network. With the advent of this novel technology, Satoshi unleashed a wave of financial sovereignty and economic empowerment unlike anything the world has seen before.
First and foremost, what is Bitcoin and why is it important today? Bitcoin is the world’s first cryptocurrency. It is a peer-to-peer monetary network that anyone with an internet connection can access. As such, it allows anyone to be able to send and receive value from anywhere in the world without the need for a central intermediary such as a bank to facilitate the transaction. Bitcoin has no central authority and is instead maintained by a decentralized network of nodes around the world who run the Bitcoin software and participate in its governance. Anyone can join and participate in the governance of the Bitcoin network which contrasts sharply with the monopoly power states possess over current monetary systems.
The decentralization of Bitcoin lies at the crux of its value proposition. Since the network is sufficiently decentralized, composed only of users and no admins, Bitcoin achieves the ability to resist financial censorship and seizure while maintaining its core design features in place.
One of the most important characteristics of Bitcoin is its absolute scarcity. Bitcoin has a finite supply of 21 million coins and no one entity can ever change that. To make the value proposition even more attractive, every four years the daily issuance of Bitcoin is cut in half in a process known as the halving. This will continue until the last Bitcoin is mined in the year 2140. These halving events create a supply shock in the market. When paired with Bitcoin's perfectly inelastic supply, the price of Bitcoin can only respond by increasing since the supply itself is restricted to 21 million coins. This makes a very compelling investment case since Bitcoin introduces absolute scarcity in a time of monetary abundance and its issuance rate becomes increasingly scarce over time.
While Satoshi’s identity remains unknown, Bitcoin has become increasingly relevant in the global economy for a variety of reasons. Let’s start with the heart of the problem; fiat currency debasement is a real thing.
“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.”
Money is created in economies predominantly through the creation of credit when banks lend money into existence and through government spending monetized by their central bank. It is also created through monetary policies like quantitative easing or less often the actual printing of bills. The second-order effects of this manipulation of money are often felt in less than obvious ways. Most visibly, inflation has become entrenched in the global economy. More pernicious effects such as alteration of our time preference, malinvestment, capital misallocation, wealth concentration, and the boom-and-bust cycles of credit expansion also persist.
“Inflation is always and everywhere a monetary phenomenon.”
While inflation can be exacerbated by supply and demand shocks; at its core it is primarily driven by one force, increasing the supply of money in a given economy. When a government chooses to increase the supply of money in the economy, it devalues the existing stock of money equating to a loss in purchasing power that is exported onto the entire population who use their currency. We see this through inflation which is more accurately a loss in purchasing power rather than the prices of goods and services increasing.
A closer examination of the world’s reserve currency, the U.S. Dollar, shows that since the creation of the Federal Reserve, the Dollar has lost 96% of its purchasing power. In other words, $1 USD in 1913 would be worth a mere 4 cents today. This makes saving over the long term virtually impossible and pushes everyday citizens to take on unnecessary risks with their savings. Rather than being able to provide for themselves and future generations through their savings, they are left with no choice but to invest it to maintain their purchasing power over the long term. This subjects their hard-earned money to the volatility of markets and the risks that come with it. While this instance may come across as shocking, the currency devaluations that take place outside of the USA are far more detrimental.
When we step outside of the financial privilege granted to us by the advanced economies we live in, we see a world in disarray. Over half the global population is living under some form of an authoritarian regime. Capital controls and irresponsible monetary policy erode the ability of people to have adequate property rights or to save in their currency. To make matters even worse, over a billion people live under very high levels of inflation.
The continent of Africa offers a stunning illustration of this: More than 60% of their population has no access to a bank account, let alone financial services. However, most of this population does have access to the internet giving them the ability to transact and save in the world’s first internet native currency, Bitcoin. Furthermore, 14 African nations are subject to the use of the CFA franc, a colonial currency imposed upon them by France. This exposes these African nations to the whims of France’s politics and monetary policy. In 1994 alone, France, in accordance with the central banks of these nations, devalued the CFA by 50% resulting in tremendous losses to the savings and purchasing power of the populace in these African nations. These types of destructive acts exist all around the world; one simply needs to be paying attention. As such, Bitcoin’s ability to evade the effects of currency debasement cannot be overstated. Economist Saifedean Ammous emphasizes this trade-off perfectly when he says:
“You can stay on the fiat standard, in which some people get to produce unlimited new units of money for free, most likely not you, or you can opt into the Bitcoin standard in which no one gets to do that, including you.”
It has become increasingly clear to a great number of people that our current monetary system is broken as it continues to benefit the few at the expense of the many. Throughout history, as monetary systems have transformed, the hardest monies have typically emerged as a dominant medium of exchange. Hard money refers to a medium of exchange that is both scarce and hard to produce. As we enter the late stages of fiat currency, one would be wise to heed advice from history which is littered with tales of monetary collapse from currency debasement. Over the past 60 years alone, on average the supply of fiat currencies has expanded by 14% per annum. This may serve as a better benchmark for inflation than the government's self-reported consumer price index (CPI).
With the inception of Bitcoin, 8 billion people have been given an escape hatch from their current monetary systems; whose constant manipulation of money has been the root cause of countless economic and social problems present in the world today. Bitcoin represents both the hardest and most advanced form of money the human civilization has ever seen. Moving forward, Bitcoin has a strong potential to play an outsized role as a lifeboat from fiat currency debasement as well as serving as neutral and accessible money for the whole world. With history serving as an example of what happens when others hold harder money than yours…
“It might make sense just to get some in case it catches on.”
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Nice! Well written article! BTC FTW!!
Well done Zac