The goal of this post is not to dive into every nook and cranny of Bitcoin. While there are many layers to Bitcoin (cryptography, game theory, energy markets, macroeconomics, the history of money, etc.), the purpose of this post is to present a clear cut case for why Bitcoin exists and why you would be wise to do more research before writing it off.
Why does Bitcoin exist?
Bitcoin was created out of the ashes of the Great Recession. In 2009, an anonymous individual (or group) going by the name of Satoshi Nakamoto released Bitcoin into the world. Since then, Bitcoin has transitioned from a toy for nerds to a globally sought after asset. Today, Bitcoin is worth more than PayPal, Mastercard, Visa, and Walmart. It is rapidly gaining on Warren Buffett's company, Berkshire Hathaway.
This sounds great on paper, but it begs the question: what benefits does Bitcoin provide that make it as valuable as it is? To find out, let's look at a simplified version of the present world we live in.
Example Scenario: Bob and Alice
In today's world, money is created and controlled by government entities called central banks. When the central bank decides to create more money, it does so with a simple computer entry. Each time new money is created by a central bank, it provides an advantage to whoever receives the new money and a disadvantage to everyone else.
Let's say we live in a mini-community with 100 total dollars. As of yesterday, Bob owns 10 dollars, Alice owns 5 dollars, and an average home costs 5 dollars. Here's a snapshot of what this community looked like before any new dollars are created:
- Total money available: 100 dollars
- Bob owns10% of all the money (10 dollars)
- Alice owns 5% of all the money (5 dollars)
- An average home costs 5% of all the money (5 dollars)
Now, let's say the central bank decides to create 50 new dollars and gives them to Bob. Here's a snapshot of the community after 50 new dollars are created and given to Bob:
- Total money available: 150 dollars
- Bob owns 40% of all the money (60 dollars)
- Alice owns 3.3% of all the money (5 dollars)
- An average home costs 5% of all the money (7.5 dollars)
Finally, here's a summary of the shift in the community:
- Total money available increased by 50% (from 100 dollars to 150 dollars)
- Bob increased his wealth four times over (400% gain)
- Alice's wealth was slashed down by a third (~33% loss)
- The average home price increased by 50% (from 5 dollars to 7.5 dollars)
Bob is happy, but what about Alice? She is clearly worse off by no fault of her own -- she works the same job and the same hours, yet she can't afford the same things that she could have purchased before. All the money she had saved up over the years decreased in value, simply because a group of people decided that Bob should receive the new dollars. Alice went from being able to afford an average home to being priced out of an average home.
Real Life Implications
Central banks and governments across the world have the power to create new money and direct it toward whomever they desire. The motives of different central banks range from nefarious to well-intentioned, but the result is the same either way: the Bobs of the world accumulate wealth, resulting in a gradual devaluation of savings for the Alices of the world. Put more generally, those closest to the money spigot win at the expense of everyone else. Here's what that looks like in chart form:
Those closest to the newly created money have no issues paying for prestigious colleges, world-class healthcare, and elaborate housing. Meanwhile, everyone else has trouble affording what their parents could easily afford a few decades ago, including the ability to save for the future. In 1970, it took about 30 hours of work to purchase one share of the S&P 500. Today, it takes about 120 hours of work to make the same purchase.
Bitcoin Fixes This
At its core, Bitcoin exists not because of what it can do, but rather what cannot be done to it. Bitcoin has no authority that can create more of it. No central bank can decide that the Bobs of the world should be granted newly created Bitcoin at the expense of the Alices. Because of this, Bitcoin is a life boat to exit an unfair (and uncertain) global economic system. Many view Bitcoin as an investment; a speculative asymmetric bet that could hugely pay off. While it can be these things, those who truly understand Bitcoin see it as an exit ramp to remove themselves, their friends, and their families from a congested and risky global economic highway.
Perhaps the easiest way to convey Bitcoin to friends and family is something to the effect of "you could 100x your investment in 10 years!" While compelling (and perhaps true), this misses one of the central points of 'Why Bitcoin Exists.' Bitcoin allows a Venezuelan farmer to exit his hyperinflating currency. It helps activists across the world (Belarus, Hong Kong, Nigeria, etc.) continue to advocate for their rights when an authoritarian government freezes their bank accounts. It provides the Alices of the world a new opportunity to convert their hard work into an asset that does not get perpetually devalued on purpose by a central authority. These are not hypothetical use cases for Bitcoin -- all of these things are happening right now, across the globe. Simply put, Bitcoin exists to allow people across the world to shift to a freer and fairer economic system.
Should you learn more before writing Bitcoin off?
If you're not entirely sure how or why Bitcoin can accomplish such varying achievements for so many different types of people, you're not alone. If you are worried that it's a bubble, magic internet money, or a Ponzi scheme, you are not alone. However, Bitcoin has been declared dead hundreds of times, only to come back stronger, over and over again. As mentioned at the beginning of this post, Bitcoin is incredibly complex. It is a brand new technological system with no comparisons that can fully capture what it is. These are big statements which are not to be taken lightly. But, if what I'm saying is true, perhaps it's worth digging deeper into the potential uses for Bitcoin before writing it off.
Bitcoin as an Asymmetric Bet
First, if the potential payoff for holding Bitcoin is truly in the ballpark of 100x in the long-run, then there is a significant financial opportunity cost to owning zero Bitcoin. This could be similar to the opportunity cost of not owning any technology stocks in the early 2000s. Where the monetary policy of nations across the globe is governed by central bankers, Bitcoin's monetary policy is governed by computer code that anyone is free to verify for themselves. One of the most important features of the Bitcoin code limits the total supply of Bitcoin to 21 million units. Because the supply of Bitcoin is capped at 21 million units, we can easily calculate the average Bitcoin owned per person. 21 million units divided by 7 billion people comes out to 0.003 Bitcoin per person. Five years ago, 0.003 Bitcoin would have cost about $1.20. One year ago, it was $20. Today, it costs about $85. As global demand for Bitcoin continues to increase, it may be much more financially challenging to obtain the global average amount of Bitcoin in the coming months and years. For those purely seeking future economic gains, Bitcoin is worth further examination.
Bitcoin as a Savings Technology
Second, consider what a global economic depression might look like. As is the case with any recession, traditional assets that have done well over the past (e.g. stocks, real estate, etc.) could get hit exceptionally hard. As we saw with the Great Recession and COVID-19, governments around the world would react by creating huge volumes of new money, devaluing any funds held in a checking or savings account. Bitcoin, with its known and limited supply of 21 million units, cannot be devalued in such a way. If there's a chance that Bitcoin is the best life raft available to avoid the devaluation of hard-earned savings, it is well worth putting in the time to understand it for yourself, your friends, and your family. For those seeking a safety valve during times of unprecedented economic uncertainty, Bitcoin is worth further examination.
Bitcoin as a Tool For Freedom and Fairness
Finally, think about the implications for less privileged people across the globe. A person born in Iran did not choose to be excommunicated from the rest of the world's economic system. A Zimbabwean resident did not opt for her government to hyper-inflate her life's savings to zero. An activist in Hong Kong protesting an authoritarian regime does not deserve to have his ability to buy groceries halted. Of course, there are problems in more developed nations as well. Does it really make sense that the default option for the non-wealthy is to store the economic output of their life's work in a currency that is designed to lose value over time? If it can help people across the globe escape broken financial systems, live a freer life, and achieve economic independence, Bitcoin is worth exploring beyond the surface level.
Whether you desire to own a new and exciting asset class, shield the value of your hard work against devaluation, or achieve new economic freedoms for yourself and others, Bitcoin is worth the time it takes to understand it. I've found the best places to start are here (podcast), here, (articles / videos), and here (book).
If you'd like to dig deeper into Bitcoin, we're here to help. We offer free 30 minute consultations to get you started, as well as more targeted paid options to help you learn, buy, and securely store your Bitcoin.
2. Alex Gladstein (@gladstein) Twitter thread on how millions across the globe rely on Bitcoin: https://twitter.com/gladstein/status/1340836877595594752?s=20
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