To The Bitcoin Skeptics, Are You Sure You Figured It Out?

On Jun 9, 2022

BitcoinActuary is an actuary based in the U.K. exploring Bitcoin.

This is an article for your nocoiner friends, seeking to view bitcoin from a slightly different angle.

Bitcoin is still around $30,000 and you have no idea why. All you can still see is a melee of “crypto” Ponzi schemes that will crash to zero any day now. Bitcoin is just another one of them, if anything, superseded by other cryptocurrencies with more utility and newer tech.

Hence you might well ask, “How on Earth is bitcoin still some 50% higher than its previous all-time high prior to late 2020?!” Let’s dive into one slightly different angle by which to look at it.

Let’s start by considering the world’s currencies. How might we compare them in terms of size? To measure this, it would make sense to look at the value of the monetary base — the most irreducible form of each.

Porkopolis Economics has a table illustrating the stats and I’d recommend the “TFTC: A Bitcoin Podcast” episode #310 (and others previously) with Marty Bent and Matthew Mežinskis for some discussion on this.

It might surprise you that, on this basis, one of the largest 10 monies in the world (in terms of base money value in circulation) does not belong to a country, but it is internet native and has some very different properties from all of the others — let’s take a look at how.

(Spoiler alert, it’s bitcoin.)

It offers zero risk-free yield, so isn’t worth holding on that basis compared to fiat currencies. All else equal, fiat currencies will strengthen when their base rate of interest goes up, as one can now realize a higher interest rate when holding them. (Russia is an example earlier in 2022, using interest rate rises as a defensive mechanism when the ruble was falling.)

On the flip side — and this is key — the total amount of its supply that will ever be issued is known, unlike any fiat currency. As fiat currencies inevitably debase faster than bitcoin, demand for bitcoin is likely to persist. Please note, this is not strictly a claim for bitcoin to be a direct inflation hedge, i.e., for the consumer price index (this has been a lazy recent criticism). It is rather that the inflation of the bitcoin supply is already low at approximately 1.8% per year, with the issuance halving every four years and known with certainty.

Within this natively internet money, there is no coercion within its makeup. No one is compelled by its existence to hold it or to use it; they do so by choice alone. Moreover, it is open to all and permissionless — barriers to entry are little more than a smartphone and an internet connection.

Unlike physically located nation states, it doesn’t bow to any political pressure over its issuance or operations. It can’t be shut down. It’s also very hard to ban people from using it or to confiscate it.

It can’t be mindlessly rehypothecated. Why not? Since it’s extremely portable, divisible and easy to take custody of the underlying asset, holding it via third parties that rehypothecate it introduces counterparty risk, so rational actors will generally avoid it, or at the very least demand market-based compensation for taking on that risk.

Bitcoin is freely traded 24/7, 365 days per year, and the costs of exchanging it are likely to be driven ever lower by competition over time. Of course, its exchange rate (this term is a better framing than “price” in this discussion) is highly volatile. This is in contrast to currencies where there may be restrictions on trading and governments may intervene in currency markets. As may be logical, the bitcoin exchange rate flourishes in times of debasement of other currencies but struggles in periods of them tightening. (Examples of recent dollar tightening are 2018 and 2022, so far.)

Fiat currencies certainly have huge sources of demand for them that bitcoin currently doesn’t have, namely to meet future transactions priced in those currencies. These could comprise taxes due, or payments for goods and services, or investment into properties, equities, etc. Commodity wise, much is made of the relevance to oil being globally priced in dollars. This undoubtedly has contributed to the number of foreign nations holding dollars in their reserves. Why? If the oil price in dollars can remain relatively stable, holding dollars will help closer match the cost of future energy needs than another currency.

I deliberately hesitate to term “bitcoin” as a currency by the way. It is another lazy criticism that it has already failed to have the qualities required to be one. I think the Bitcoin white paper avoided the word for good reason. Bitcoin has many years and decades ahead for sovereign nations to decide to adopt it as a currency or not, but that will not change its operations.

In Summary

Due to its fixed supply and other unique attributes, it’s only logical that many have started exchanging other, more rapidly debasing currencies for bitcoin. Undoubtedly, there are many short-term traders around, but the long-term exchange rate is likely driven more by those taking a long-term outlook in their positions to ride out the volatility. Note this is not “investing”; bitcoin is a form of money. It’s saving.

What about altcoins as competing money? We don’t see them in the aforementioned top 10. Take the time to learn why bitcoin has no meaningful competitors in the above context. Why proof of work is so important to bitcoin’s immutability and fully decentralized nature. And why any additional “utility” developed in another altcoin appears meaningless if they can’t match bitcoin’s monetary properties — they can’t.

Just like conventional currency exchange rates or baskets, such as the DXY (a commonly observed basket of the Great Britain pound, euro, Canadian dollar, Swiss franc, Swedish krona and Japanese yen against the dollar), it’s pretty tricky to predict where bitcoin will hit any particular price level in future. As we’ve seen above, bitcoin has several interesting and unique attributes as money when compared to fiat currencies. These make it likely that demand for it will continue to increase as fiat currencies compete to debase. As Bitcoiners often say, it’s just math(s).

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