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The problem with saving money

Published in

Coinmonks

8 min readOct 7, 2021

Let’s start with this, 40% of all US Dollar in circulation today was printed in the last 12 months.

This means compared to the financial system as a whole, if you just sit around with cash in your bank account in a year, you just became a lot less wealthy.

The tricky thing is, there’s nothing you can do about it….. or not?

Why do we “work” and what exactly is “saving”?

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The modern economy functions on the basis that one must work or provide some type of goods or services in order to exchange goods and services in of the same value. For example, an employee may work for an hour to gain $5.

Now, as time goes by, we expect to gain some sort of expertise in order to provide better goods and services. Because we now have some sort of expertise, we expect that other people are willing to pay us more for the improved quality of goods and services. Through this way, we aim to acquire more wealth in order to have better standard of living. To acquire this wealth, we are required to save or preserve our income in some type of asset that can later be exchanged for goods and services that determines our standard of living.

For example

Work : a chef must first work in order to gain money and support his basic needs. In the first few years, he may earn $5 per hour.
Expertise : After a while, his cooking skills became better and better, therefore giving him a much larger salary, let’s say $20 per hour.
Save : Because he now has an expertise of some sort, he can generate more income than his younger peers and aims to save his income in order to increase wealth.
Wealth : As he saves up larger and larger amount of money, he now has better financial status compared to his younger self who has no expertise and therefore have better standard of living.

To summarize, we work to gain expertise, then to save from more income from that expertise and gain more wealth which must essentially means we have better standard of living. However, why is this getting harder and harder in the modern economy?

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The curse of saving in modern world

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Most people usually save on their bank account as “fiat currency”. This gives you around 0.1% at best per year. Inflation rate on the other hand, is around 2%. Put simply, no matter what you do, if you save with just a savings account, you’ll definitely be less wealthy in 10 years time.

Now what you can do is invest. Most people would go with some kind of mutual fund, which gives a return of 7.16% in 10 years or may be the index fund with a return of 10% annually. Investing this way would definitely save you from the inflation rate at first glance.

But wait, remember that in the end you are still cashing those returns into fiat currency and remember our first statement? 40% of all US Dollar in circulation today was printed in the last 12 months.

Now OK, I’ll admit the FED doesn’t increase QE in that kind of rate every single year, but think of it this way what happens if we have the second COVID or third COVID? I mean really, who knows?

So to summarize, you go to work or you own a business, you earn some money, you invest and you save. But then what? you just became less wealthy again.

The sad cycle of saving.

So how do we escape this circle? Let’s dive in.

Sound Money

Sound money has a few definitions :

Sound money is money that is not vulnerable to depreciation or appreciation over time in a free market.
Sound money is a type of asset that can store wealth over time.
Sound money must be able to serve the fundamental economic purpose, to exchange goods and services.

Because our objective is to gain and preserve wealth, we essentially want to save in sound money am I right? But the question is, is Fiat currency really sound money as we want it to be?

Fiat currency and Sound Money definition

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Fiat used to be backed by gold. For the US Dollar, that was before the Nixon Gold Standard in the 1970’s. The fiat we currently have today is backed by nothing. In addition, the fact that FED’s QE policy exists, the US Dollar supply increases over time.

If you look closely, fiat currency has no purpose except a medium to exchange good and services. Because of the increase in supply, we know that the same amount of fiat currency will depreciate over time. This means that for the first and second criteria of Sound Money, fiat currency does not fit. The only definition of Sound Money that Fiat does apply is the third one, being able to exchange good and services.

Society has known for a long time that fiat currency, at its core, is corrupted. Gold and other types of assets may be an alternative solution, but at the end of the day, it is still controlled by the same people who controls the Fiat currency. These assets are centralized or controlled by a group of people who implements law that benefit themselves.This corruption of fiat currency then translates into the curse of savings, which essentially is making the poor poorer and the rich richer. Because we know that fiat currency is printed out of nothing, the only reason why it is valuable is because we trust in the entity that controls it.

Bitcoin

Up until now, we do not have an alternative solution to this problem. Then came Bitcoin, a truly decentralized currency, a coin that holds value because the society demands it has value and not by some central entity. Let’s see how Bitcoin matches up with the definition of Sound Money.

1. Sound money is money that is not vulnerable to depreciation or appreciation over time in a free market.

It may seem that Bitcoin’s value keeps getting higher when we compare it to fiat currency. However, this is not because Bitcoin appreciates in value, but because fiat depreciates in value over time.

Let’s think of it this way, if we were to fixed the price of Bitcoin to an actual good or services, we can see that the price will not change because the supply of Bitcoin is forever limited.

2. Sound money is a type of asset that can store wealth over time.

Let’s split this into two parts :

A. storing information of wealth

The blockchain records all previous transactions since the first transaction. No matter how long has passed, this will still be true, therefore we can always pinpoint how many Bitcoin each address (wallet) contains. No one can alter this so-called “truth” which is one of the reasons Bitcoin is incredibly powerful.

B. storing the amount of wealth

1 BTC will forever be equal to 1 BTC. In a system where the supply is limited and all of the supply can be traced to a certain address, this gives you the power to preserve how much you actually own in the system.

With this two facts, we can see that we can store our Bitcoins over time no matter how long has passed.

3. Sound money must be able to serve the fundamental economic purpose, to exchange goods and services.

It is no doubt that Bitcoin can handle a small number of transactions per second , around 7 to be exact. However, it is still a viable option of a medium to exchange goods and services. In addition, with lighting network , this transaction per second limit is no longer a problem.

As we can see, Bitcoin does hold up to the Sound Money definition. This means that we can safely or at least have some confidence in saving our wealth with Bitcoin. However, Bitcoin itself is fairly new and still has a lot of proof such as will it ever become a currency with mass adoption.

Let’s come to back to our problem : Saving

Before we discuss, let’s establish this fact : saving in Fiat does not work.

https://www.news.com.au/finance/money/costs/venezuela-in-crisis-as-inflation-spirals-out-of-control/news-story/27638560847eaa8531985e40eaa36901

Why ? Look at Afghanistan’s Afghani or Venezuelan bolívar. We assume that governments will not fail but never prepare for when they actually do. If the people of Afghanistan or Venezuela saved a portion of the wealth in BTC, it is certain that up to this day, they would still be able to persevere some of their wealth.

Now, I’m not saying you should move all your savings into Bitcoin. The technology itself is fairly new and we must all allow it to have its own adoption and refinement period. However, as we’ve seen countries like El Salvador starting to adopt it as the national currency, this may signal that mass adoption of the currency itself is very near.

Summary

The purpose of saving is to store wealth. This does not mean the only to way to preserve wealth is to invest in Bitcoin. Other assets, such as property or gold may also be a good choice. However, because assets like gold and property cannot act as a efficient medium of exchange, cryptocurrency like Bitcoin comes into the conversation. It is no doubt that when cryptocurrencies eventually become our new medium of exchange, BTC will surely preserve its value as the first digital currency.

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