The Perfect Storm for Bitcoin (PART 4)

In our last edition of The Perfect Storm for Bitcoin, we noticed that amid the current market (price) correction the dormant bitcoin supply hits 65.77%, meaning that 65.77% of the bitcoin supply has not moved in 12 months indicating strong holder conviction and behaviour. This indicates that long-term holders hold onto their bitcoin even through a 72% price correction and leave their bitcoin in their wallets without touching or moving it. Anyone holding onto an asset with that kind of corrections must really believe in the asset.

Today, we will examine why bitcoin holders see value in bitcoin that most people do not seem to comprehend. Why would a bitcoin hold any value at all as a form of money? Isn’t a bitcoin basically just backed by nothing and therefore nothing else than magic internet money? The fact that bitcoin seems vague, a scam or hard to understand is because in order to understand the value of bitcoin, one first has to understand the history and properties of money. So let’s dive in. Please notice that I try to keep the story as simple and concise as possible while simultaneously providing the reader with the total story.

THE HISTORY OF MONEY

Money has evolved in our human civilisations over many thousands of years. Throughout history, money has taken many forms: shells, salt, sticks, stones, coins, paper, and now, digital money like digital USD and bitcoin. The specific types of money have evolved over thousands of years as better forms of money emerged. In the very past, we used the barter system to trade (e.g. if I wanted your cow I brought with me 2 goats in order to trade with you. Trading by a barter system is inefficient because of the double coincidence of wants, meaning for a trade to happen each person must want what the other has to offer. As people experienced issues with trading by barter system, eventually over time coins and currencies began to emerge as money. For example, some primitive societies used shells or pearls as currency.

After the barter system, trading by commodity money was the norm (money that derives value from its material such as gold and silver coins. Commodity money like gold and silver coins have intrinsic value because gold and silver are valuable. However, carrying around and hoarding large amounts of gold and silver coins brought several problems and eventually the world introduced representative money. Representative money is money that is backed by something and of which paper currency that is backed by gold is the most widely known example in our recent history. Instead of carrying around gold coins, people could carry around paper notes improving various properties of money. Paper notes convertible to gold was the case under the gold standard that was the monetary system used by the US and Western nations until August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. From that day onwards, most modern paper currencies are fiat currencies (i.e. money is a government-issued currency that is not backed by a commodity such as gold). Fiat money gives central banks greater control over the economy because they can control how much money is printed therefore inflating the money supply. A $20 bill (USD) is an example of fiat money. It has no intrinsic value because it’s only a piece of paper. But a $20 bill is valuable because the government says it has value, and it is legally recognized as currency in the United States, providing it with constant demand. In earlier editions of The Perfect Storm for Bitcoin, we noticed how goverments around the world have heavily inflated their currency supply in the Covid-19 pandemic and what havoc that currently brings towards the global economy. We will discuss inflation and the loss of purchasing power in our next (fifth) edition of The Perfect Storm for Bitcoin, as we will focus our endeavours in this fourth edition on the history and properties of money.

Untill now, we have learned that the specific types of money have evolved over thousands of years, as better forms of money emerged and the older (and less superior) form of money eventually became obsolete. This is because the new form of money has superior properties of money. Commodity money was inherently lacking in portability, verifiability, and fungibility. It’s inefficient to carry around a pouch of precious metals (not portable), they can be counterfeited (difficult to verify) and come in varying shapes and sizes (not fungible). Since paper notes, representing convertibility to gold coins, were superior to commodity money on most properties of money, they eventually replaced commodity money. Now, while fiat money such as the U.S. dollar ranks well on many of the properties of money, it falls short in scarcity and censorship-resistant (meaning that Fiat currencies do not have limited supply and centrally-controlled money can be censored cutting out users from the financial system). Next, we will discuss the various properties of money as shown in the Table below and discuss why bitcoin is a new superior form of money.

THE PROPERTIES OF MONEY

In this paragraph, we will first explain all relevant properties of money before contributing to our comparison of the various forms of money in our current economy. The Table shown below is extracted from an excellent article by Coindesk, in which the author compares the evolution of money to the natural evolution of species and animals.

First, money must be a store of value (i.e. I can save and hold my money before I consume because I know it will hold its value into the future). Our entire economy is based upon the fact that we all exchange our time and energy for money and money is therefore effectively our life/labor energy. In order to store your energy, money must be a store of value. Furthermore, money should also be a unit of account (i.e. you would find it most helpful if the price were set in terms of money because it is a common measure of value and measurement across the economy). Third, money is a medium of exchange (i.e. money is widely accepted as a method of payment). When I go to the grocery store, I am confident that the cashier will accept my payment of money.

Fungibility refers to the property of a commodity whose individual units should be interchangeable with each other, and the units should be distinguishable from each other. For example, if I have $1 and you have $1, we can exchange the notes equally.

Non-consumable refers to the property that one can hardly imagine a demand for money only from one agent;
anyone claiming a demand for money assumes that it can be used later for a trade with others, who will also demand it. For example, using my dollars by buying something in the store does not consume my money.

Portability refers to the property that money must be portable so that it can be moved around easily. Today, money is more portable than ever because it is mostly digital. For example, I can send fiat money to my family on the other side of the world.

Durable refers to the property that money should be durable enough to withstand repeated usage and retain its usefulness for use in future transactions. Money that is durable (difficult to destroy) is safer to possess than fragile money. Durability exists in a physical and digital sense. For example, paper money can be burned or damaged while digital money cannot.

Divisibility refers to the property that money that is highly divisible allows for accurate payments of any value. With low divisibility, value is lost through inaccurate exchanges and/or small exchanges do not happen at all. For example, gold is not highly divisible because it would be difficult to shave off a layer of your gold bullion bar in order to pay for your banana in the grocery store.

Security / Verifiability refers to the property that money must be verifiable to become counterfeit-resistant and to provide a high level of trust between both sides of the trade. If the authenticity of money cannot be verified, the potential for counterfeit increases. For example, one should check whether the gold bullion bar is not a counterfeit one before accepting it in a trade.

Scarcity refers to the property that in order to maintain its value, money must have a limited supply. Scarcity is a critical property of money because it is essential to value of money as a store of value over long periods of time. For example, in fiat currencies, inflation leads to a loss of purchasing power over time.

Censorship resistant refers to the property that money should be resistant to confiscation (theft) and censorship (control of how money is used). If a money is easy to confiscate, people are not safe storing their wealth in it. Decentralisation of money removes a single point of failure or the ability to censor users and transactions. For example, in the fiat system Kanye West was recently censored from his bank account at JP Morgan.

Now that we have discussed the properties of money, we can easily see why fiat currencies replaced commodity money since the latter was inherently lacking in portability, verifiability, and fungibility. In the paragraph below, I will demonstrate why bitcoin is the superior future form of money and why bitcoin has the ability to replace all fiat currencies and make them obsolete as the superior form of money has always done in the history of mankind.

BITCOIN: A NEW SUPERIOR FORM OF MONEY

Bitcoin and fiat currencies are both fungible forms of money (i.e. you would not care if you hold $20 bill A or $20 bill B nor would you care which one of the 21.000.000 bitcoin you hold). In fact, there is furthermore no tool for you to discover the difference between them. Both forms of money are non-consumable forms of money as both dollars and bitcoins can be used in transactions repeatedly. It is now, however, that our comparision becomes quite interesting.

Bitcoin significantly outperforms fiat currencies in the portability property of money since in order to transact and send value to other recipients in the fiat system, you would need banks or other third party intermediaries to complete your transactions. These banks and third parties then charge you heavy fees for their services, are only open monday-friday and make human errors. Bitcoins, however, can be easily send through (digital) borders to anyone anywhere in the world without the need for a third party approval. It does not matter whether you send 1 bitcoin, 0.00054 bitcoins or 86.000 bitcoins, you are free to do so if you like. Moreover as 1.7 billion adults worldwide have no access to banking services you can only transact with other parties in the fiat system if they have access to banking services. For bitcoin, they only need a smart phone.

• As a sidenote: Providing banking services could lift people out of poverty. World Bank Group President Robert B. Zoellick said that “Providing financial services to the 2.5 billion people who are ‘unbanked’ could boost economic growth and opportunity for the world’s [impoverished].” He stated further that “harnessing the power of financial services can really help people to pay for schooling, save for a home or start a small business that can provide jobs for others.” [Eurykleia]: One can only imagine what a borderless open decentralised network can achieve in the not too distant future when they connect an entire population of people who formerly had no banking services to the worldwide financial services and markets.

Bitcoin also outperforms traditional fiat currencies in divisibility as one bitcoin can be divided into units as small as 0.00000001 BTC (or 1 sat) with each bitcoin being equal to 100.000.000 sats. Just like a 1 euro bill can be broken down into 100 euro cents, bitcoin can be divided into 100 million smaller units creating endless opportunities for small transactions and eliminating rounding costs.

Bitcoin also outperforms fiat currencies in verifiability as transactions are verifiable on a public blockchain that is accessible to anyone. Everyone can run a bitcoin node and therefore check the blockchain, as nodes validate each block and transaction before adding them to the blockchain. In the fiat system, you place your trust in central (human) authorities that are prone to human error and emotions such as greed. Furthermore, there is no way for you as an individual to check your money or transactions for errors or countfeits as you rely on centralised institutions (banks).

One of the most important properties of bitcoin is that it is a scarce asset, meaning that there can never be more than 21.000.000 bitcoins in the world, whereas fiat currencies are constantly inflating their supply and therefore lowering the purchasing power of each fiat unit and user. Bitcoin is therefore a far more superior long-term store of value as your energy/wealth in bitcoin can be maintained over time. If a money does not hold its purchasing power over time, its users are encouraged to spend their money sooner than later because they will be able to buy less in the future compared to now. Rapid loss of purchasing power prevents people from saving money for future consumption and destroys their wealth building opportunities.

Lastly, bitcoin is highly censorship-resistant because it is a global decentralised form of money. This also means that bitcoin can maintain its other properties of money in the future as there is no single point of failure to attack the network and change the properties of the system. Furthermore, bitcoin stored in a personal wallet is resistant to confiscation whereas your fiat money can be easily confiscated by third parties (again banks).

In conclusion, bitcoin significantly and clearly outperforms fiat currencies in nearly all of the properties of money. In addition to the examples used above, the table below furthermore shows the unique value proposition for bitcoin versus other forms of money. If we have learned one thing by our study of the history of money, it is that sooner or later the new superior form of money will take over and makes the older forms of money obsolete.

SURVIVAL AND EXTINCTION

[From our first edition on The Perfect Storm for Bitcoin]: This new system is a system in which no-one and at the same time everyone has power instead of only a select group of people (decentralised). It is a system in which currencies cannot be printed unlimitedly with all the damage along with it (scarce). It is a system in which your monetary freedom cannot be taken away from you because of your political standpoints (censorship-resistant). It is a system in which you can transfer your wealth freely among the world with instant settlement without any third parties (such as central banks) veryfing your transactions (portability). It is a system in which you do not need to trust anyone with your money, and instead we all rely on mathematics and therefore removing human errors from the system (durable). It is this system that is exactly created to improve the current financial system and was created after the great real estate bubble in 2008 as an answer to problems that only show themselves in large force only 12 year later.

Central bankers of the world have positioned themselves to be the solution towards all your financial troubles while they themselves have actually created nearly all problems that we currently face in the global economy. The current financial system is a system that can only grow by increasingly amounts of debt and that spends money from generations before they are actually born. We derive our wealth by increasingly spending money we borrow that needs to be paid back with increasingly rising interest rates by generations in the future that do not wish to be burdened by our growing debt. Yet we destroy the planet for our search for more wealth but consequently do not wish to look what our actual problems are. We have become so addicted to consuming and spending money that we spend more than we earn and our system of debt have thought us that we can simply borrow the difference. But this is not how actual economic growth is determined or created, we are simply blowing up our bubble with more and more air untill eventually it will burst. Since 2020 and the pandemic, the path towards this collapsing global buble is speading up significantly and we are racing towards the edge at an ever increasing speed.

People around the globe now have an option to opt out of all this goverment induced trouble, as they are now able to use and store their wealth in unconfiscatable form of money (store of value) that is not controlled by any goverment or central third party. People, now have the option to use Bitcoin, a peer-to-peer decentralised network. A type of digital currency in which a record of transactions is maintained (verifiability) and new units of currency are generated by the computational solution of mathematical problems, and which operates independently of a central bank. People now for the first time in human history, have the ability to store value in an asset that cannot be confiscated by goverments and is freely transported across the world, that does not care about your race, or sexual preference.

To be continued….

DISCLAIMER

Eurykleia Investments is not a registered investment, legal or tax advisor or a broker/dealer. All investment/ financial opinions expressed by Eurykleia Investments are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that the all information is accurate and up to date, occassionally unintended error and misprints may occur.