Bitcoin — The world’s hardest asset and an inflation (modern time theft) hedge
A series on Bitcoin for Governments: Part 4
“Bitcoin is the classic textbook closed system. There is 21 million coins, virtual bars of gold in the system. You can´t remove any and you can´t add any (except what is scheduled by the independent algorithm). There is no inflation. The entire thing is like a massive monetary battery. It is storing energy and there is no power loss. That is the genius of it. In the first time in the history of man we created a monetary energy network that will store the energy over time without power loss. It is really an engineering breakthrough.” — Michael Saylor
If you are member of a government and you have debt measured in the billions of dollars, how do you best pay back the debt? By increasing standards of living and productivity until you can grow yourself out of it, right? Bitcoin is an unstoppable force. You can either choose to participate in it and evolve with it or you can cut the country off turn to the past. Bitcoin certainly can help the government as the next chapter will show.
The following statistics can be found on the trend of inflation in Georgia (https://www.laenderdaten.info/Asien/Georgien/inflationsraten.php):
“The inflation rate for consumer goods in Georgia has ranged from -0.9% to 162.7% over the past 25 years. For the year 2020, an inflation of 5.2% was calculated. During the observation period from 1995 to 2020, the average inflation rate was 13.3% per year. Overall, the price increase during this period was 1,189.44%. So, a product that cost 100 Lari in 1995 was priced at 1,289.44 Lari in early 2021.”
Average wages have almost doubled in 10 years. Assuming an average inflation expectation of approx. 4% from 2012 to 2021. Prices have increased by about 42%. So wages increased faster than the loss of purchasing power, which is a positive aspect.
In addition to price increases, the exchange rate of the Laris against the Euro or USD is of course very important. Georgians from abroad send money back home or Georgians from home send money abroad, for example, to finance the lives of their children studying there. The countries with large central banks have a very different power to appreciate or depreciate their currency. This puts emerging market countries in particular in a difficult position. For example, the Georgian Lari lost about 25% of its value against the dollar over 5 years.
Georgia has about 3.5 billion USD in reserves according to the World Bank. The risk/benefit-ratio of buying Bitcoin is vanishingly small. What is the risk of investing about 5% of the reserves in Bitcoin in the long term? That would be a 175 million USD investment in an asset, Bitcoin, that increases on average 142% annually. Bitcoin is often referred to as digital gold. If Bitcoin gets a similar market capitalization as gold, it would increase its value by a factor of ten. Then 175 million USD, would become 1.75 billion. Money that could be well invested.
Ross Stevens states it this way: “At the most superficial level, buying Bitcoin as a portfolio diversifier, or as a hedge against inflation, makes good sense, and I, obviously, strongly believe that a 0% allocation is the wrong number.“.
Currently, the government would not even have to invest directly, but could profit from the reward for securing the network via mining.
Dependence on the USD or EUR is a danger for developing markets. The current system with emerging markets only works as long as the USD is stable. Bitcoin is the lifeboat in the likely event that the USD loses value and its status as the world’s reserve currency weakens as the American economy becomes over-indebted. Bitcoin is valuable to people and governments outside of the dollar bubble. When a leader (Mario Draghi) of the ECB says, “The ECB is ready to do whatever it takes to preserve the Euro.” means that a betrayal to all countries that are monetarily tied to major nations with their central banks.
2020 was a remarkable year. Unfortunately, that year also showed that paper money is really paper money. Money is the greatest force for good when the foundation is stable. Something happened there 2020…
“There is an infinite amount of cash in the Federal Reserve.” – Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, March 22, 2020
“We’re not even thinking about thinking about raising rates.” – Jerome Powell, Chairman of the Federal Reserve, June 10, 2020
What happened will go down in the history as the greatest destruction of saved working time and wealth in the history of mankind. The FED injected more than 3 trillion USD into the market within a few months. Since then M2 Money Supply has been rising without interruption. Any country that is dependent on the USD will unfortunately feel this painfully in the future. This is irresponsible. No country in the world should have such power over other countries by being able to expand its own currency, which is the world’s reserve currency, at will.
Ross Stevens (CEO of Stone Ridge Asset Management) expressed it as follows: “When Chairman Powell, no matter how well-intentioned, says in June 2020: “We’re not even thinking about thinking of raising rates,” at Stone Ridge we respond, “We’re not even thinking about thinking of not buying more Bitcoin,” and we did. Bitcoin is our peaceful weapon of choice against central bank-driven time theft.“
With money, people value their working time. They sacrifice their time for money. For money that is apparently completely expandable. Every inflation triggered by large central banks makes money worth less and thus destroys working time. No matter if the working time comes from the USA, Germany or Georgia. The government must ensure that this working time can be stored safely, because we want to protect the future and provide a better life for the next generations.
Unfortunately, in the current system of fiat money as paper money, this is apparently not possible. As a government, you can help your population by legalizing Bitcoin ownership and providing infrastructure to easily and securely purchase Bitcoin. In this way, you can make an entire population less dependent on the central banks of the big nations.
Bitcoin is the hardest asset in the world. Ross Stevens writes in his shareholder letter the following about it: “There will only ever be 21 million Bitcoin. Bitcoins annual supply growth, which asymptotically approaches zero over time, is now down to about 1%, on par with the historical annual growth in the supply of gold. While far from perfect, gold is Bitcoins closest real-world analogy. However, the ultimate supply of Bitcoin is fundamentally limited by the design of the protocol itself and cannot be increased regardless of its value or the level of demand. Bitcoin is the first store of value in history for which its supply is entirely unaffected by increased demand. From this perspective, Bitcoin is better at being gold than gold.“
The scarcity of Bitcoin is not a problem for making payments. 1 Bitcoin is exactly equal to 100,000,000 Satoshi. One Satoshi is 0.00000001 BTC. The conversion factor is 100 million in each case. You can also convert Satoshi to fiat currencies and then exchange one Satoshi for a fraction of a dollar. Thus, any number of microtransactions can be conducted with Bitcoin without the need to inflate it.
The current stock-to-flow ratio (The underlying value is, on the one hand, the available quantity of an asset, i.e. all units of a currency, and the quantity of Bitcoin that is added to this stock every year. Finally, the ratio of the two values, stock and flow, describes the total amount of time it would take to reach the total stock at the current rate) of Bitcoin is 53.6, making Bitcoin the hardest asset in the world (https://stats.buybitcoinworldwide.com/sf- gold/). The inflation at which new Bitcoins are created is halved every four years (bitcoin- halving). It is an asymptotic journey to 0% inflation rate per year.
A series on bitcoin for nations: Part 4
Read more about Bitcoin on my blog or follow me on Twitter!