A previous post from April 2019, but still holds true.
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(We recommend you view these slides first to better understand Bitcoin’s value proposition)
Some say Bitcoin is nothing more than another PayPal/Visa, gold 2.0, a glorified database, a waste of electricity, a ponzi or pyramid scheme.
I say Bitcoin = Money. Perhaps the best we've ever had. But first, everybody wants it and it's integral to everyday life, but...what is money?
”Money was created many times in many places. Its development required no technological breakthroughs — it was a purely mental revolution. It involved the creation of a new inter-subjective reality that exists solely in people’s shared imagine.
Money is not coin and banknotes. Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services.” -Sapiens (2011) by Yuval Noah Harari
"Money is a central element of human relationships." - IMF
Humans have used many different forms of money throughout the years.
Economists like to give three functions of money; a unit of account (UoA), a store of value (SoV), and a means of payment/medium of exchange (MoE).
As of this moment, the US Dollar (USD) is King Money. Services and products are priced in USD globally = UoA.
Most of the globe will accept USD = MoE.
The problem with USD is SoV. It doesn't hold its value very well; it slowly, but inevitably loses value over the years. This is why our parent say things like, “In my day that only cost a dollar, money doesn’t go as far as it used to.”
This is due to our economic policy of targeted low inflation. Every year a fresh supply of USD gets added, diminishing the value of existing dollars.
If you should happen to have an economic downturn (depression, recession, overthrown govt) the managers of money almost always take the short term least painful route and print more currency, diluting existing value.
Let's not forget supply and demand. It is now trivial to add more money to the supply when all you have to do is hit a few buttons on a keyboard. Add to this perspective that countries with economic downturns don't typically have much demand for their currency, and it becomes easy to see how things can spiral out of control with more printing to "stimulate" the economy.
Bitcoin isn't a revolution. It is an evolution.
Aristotle defined good money consisting of five characteristics, durability, divisibility, convenience, consistent, and use value in and of itself.
Durability - Bitcoin is durable. One of the arguments received against Bitcoin was that it was dependent on the internet and if that goes down, no more Bitcoin. Most of the modern world functions via the internet especially money and finance. Bitcoin is a distributed global ledger, because an EMP/nuke/solar flare affects some corner of the world, the blockchain will continue to exist.
At this point, if the internet were to go down globally, for any long duration, it would be a collapse of society and money will be the least of our troubles.
Divisible - Has there ever been a more divisible money? Some fret over only 21 million bitcoins, that there's not enough to sustain an economy let alone the global economy. We are conditioned to two decimal points in dollars, change/cents. Bitcoin has eight decimal points, dividing down to its smallest unit, a Satoshi/SAT (named after the creator) 0.00000001. Therefore, each bitcoin is 100,000,000 million SAT's, or 100 million units.
Convenient - As long as you have an internet connected device bitcoin is exceptionally convenient, transactions are as simple as sending an email. Trends prove more of the world is coming online, not less. Soon we will all be connected to the internet, and the internet will have a native currency, its own sovereign platform. Bitcoin also never closes, unlike banks.
Consistent - Every bitcoin is precisely like the other, you cannot counterfeit a bitcoin. It is trivial to prove you own legitimate bitcoin(s). Unlike precious metals, where history has shown the money masters will dilute the value of a gold/silver coin with a base metal.
Intrinsic Value - Gold bugs like to argue, "1's and 0's on a computer has no real value." Gold has industrial uses other than its claim to fame of former money and jewelry. The logic follows, if people were to no longer value gold the jewelry (major use case), gold should retain some value due to its other uses, like a component in computer hardware.
Value is subjective, and money is a shared story we (society) tell each other and agree upon. Right now we recognize that sovereign paper notes (fiat currency like Dollars, Euro, etc.) are money. We used to decide it was seashells.
Paper notes have no intrinsic value, the world uses these paper notes; thus, we have already agreed upon money without inherent value. Also, 90% of USD is digital and not cash/paper, but 1's/0's on a computer all connected to the internet. Google's search engine algorithm is nothing more than 1's/0's on a computer, and it too had skeptics claiming no fundamental value... until it did, then it was undeniable.
Bitcoin marks a transformational shift in the perception of fundamental value. Which is why believing in ideas before others understand them provides the most significant investment returns.
To many, Bitcoin feels like a 21st-century version of gold. Gold depends on the fact that it takes a great deal of human effort to extract it from large quantities of earth. Bitcoin also requires large amounts of exertion (computer power). They are both deflationary over time, Bitcoin more so. There is only so much gold in the earth, but there are only 21 million bitcoins. This marks a major SoV use case for Bitcoin over the coming decades as gold has enjoyed over the previous centuries. Except, one will be increasingly more useful in our new digital world.
Let's check the scoreboard, Bitcoin vs Gold vs Fiat...
The bottom two traits are extremely powerful and something not possible with money previously—programmable and decentralized. We have never had programmable money. We have never had a money NOT controlled by a king, govt, or bank. The possibilities are immense. Bitcoin is a better money and more suited for the online world.
The USA is currently enjoying the dominant global currency, and we are soon to exceed the historical average length of dominance.
Here is a list of 590 failed national currencies over the last 300 years. Over 500! Nearly 2 per year average, collapsed. Mostly due to war or hyperinflation (mismanagement). Many repeat offenders on the list as well.
We currently have over 160 currencies worldwide, most of which are not healthy. Some say the dollar is not healthy.
What will people do when their govt fails them yet again, causing widespread social disruption. Will they choose plan B? Trustless free-floating currency not controlled by anyone. I believe they will.
South America
Data to consider. In Venezuela their money has literally become worthless, actually cheaper to use than toilet paper.
When inflation rises it takes more of the currency to buy products or services. Milk could cost 100 Bolivars (their dollars) one day, 5000 the next.
As their currency began to hyper inflate (lose value rapidly), we can see an exponential increase in Venezuelan bitcoin trading volume, from virtually zero, overnight.
It is not just Venezuela, anywhere with poor money management we see major increases in bitcoin volume.
Something to also consider, while these countries do have somewhat reliable access to the internet, they don’t compare to the internet penetration of the 1st world nations. 1st world currencies collapse too. Accessing and using the internet is trivial for these citizens, unlike South America, and I fully expect many to opt for plan B in those times.
In closing, the hardest thing for society to get right is money. It is a cornerstone to a civilized and free society. If blockchains can get the most challenging part of society correct, imagine all the less complicated stuff, like insurance, voting, supply chain management, deeds, gambling, banking, etc. The list is plentiful of industries blockchains can disrupt…..and thus blockchains.
Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to the assets discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained within. Past performance is not indicative of future results. Never invest more than you can afford to lose.