The 2020 Index of Economic Freedom, published by the Wall Street Journal and Heritage Foundation “measures the degree to which a country’s laws protect private property rights and the degree to which its government enforces those laws.” Countries like Singapore that score highly on the Property Rights Index have greater GDP per capita on average, and vice versa.
In practice, would you be motivated to work hard if your savings could be unjustly confiscated at any moment? In many developed countries like the United States, democratic rule of law protects against such scenarios. Yet for billions of people worldwide, this is a distressing possibility.
For billions, there is a similar force that is equally disheartening: What if your savings devalue by >3.5% each year due to a force known as inflation? Oxford defines inflation as a general increase in prices and fall in the purchasing value of money.
Countries that score highly on the larger Index of Economic Freedom tend to have low and stable rates of inflation (~2%) and vice versa. Beyond property rights, the Index of Economic Freedom also measures factors such as government integrity, judicial effectiveness, government spending, tax burden, fiscal health, business, labor, investment, trade, and financial freedom.
Billions of people experience monetary devaluation that is >3.5% per year, especially in emerging market countries such as Brazil (3.5%), China (3.5%), Russia (3.7%), India (4.6%), Nigeria (11.5%), Turkey (13.3%), and Argentina (52.9%).
Another way to measure monetary devaluation is to compare global currencies versus the dollar, the world’s reserve currency. Since 2018, the U.S. dollar has appreciated significantly against nearly every other global currency. Citizens in emerging markets tend to experience the most severe devaluations.
Since 2018, the U.S. dollar has appreciated by over 250% against the Argentine peso, nearly 100% against the Turkish lira, and 78% against the Brazilian real. Even compared to most developed market currencies with modest inflation rates of ~2% per year like the U.S., the dollar has appreciated considerably. The only currencies to have appreciated or maintained parity against the dollar are the Japanese yen and Swiss franc.
Given the choice between holding U.S. dollars or local currency, many global citizens would likely choose the dollar. Yet billions of people cannot freely make this choice.
By accounting for the Open Markets Index of Economic Freedom, billions of people live in “Unfree” or “Repressed” markets. China comprises much of the global population living in “Repressed” capital markets, although for the broader Index it scores in the “Moderately Free” group.
In countries that score poorly, accessing dollars is difficult or impossible for most citizens. In such countries, gold is a potential safe haven against inflation and capital controls. This past decade China has experienced the highest consumer gold demand of any country.¹ Notably China also indicates outsized interest for Bitcoin, often known as digital gold.
China currently accounts for 65% of the Bitcoin mining network, although it has dropped by 10% in the past few months according to University of Cambridge research. Miners timestamp transactions and are awarded a fixed and increasingly limited supply of new bitcoins. However, mining influence over the network is superseded by computers called nodes that enforce the rules of Bitcoin’s core protocol.
Nodes are found in at least 101 countries, especially in developed markets. Miners are found in at least 78 countries, especially in emerging markets. Bitcoin is truly global: miners continuously timestamp transactions, which are verified by nodes that enforce a protocol maintained by hundreds of developers across the world. This confluence is completed by users, holders, and speculators valuing its electronic coin.
Bitcoin nodes verify that today, new bitcoins are supplied at an inflation rate of ~1.7% per year, below the targeted inflation rate of developed market currencies. With a similar inflation rate as gold, Bitcoin cannot be produced on a whim by global central banks or governments. Like gold, Bitcoin can prosper in countries across the entire spectrum of Economic Freedom.
According to the Statista Global Consumer Survey in 2019, Bitcoin adoption is highest in highly inflationary countries such as Turkey, Brazil, Argentina, South Africa, etc. Bitcoin has proven to be a viable store of value in these countries, performing as a global inflationary hedge. Since 2019, Bitcoin has appreciated by over 200% against the Turkish lira, Brazilian real, Argentine peso, and South African rand. As a benchmark, Bitcoin has appreciated by only ~140% against the U.S. dollar in the same timeframe.
Not all of these pairs are liquid and this is a theoretical calculation. However, Bitcoin liquidity has been permeating via peer-to-peer trading platforms such as LocalBitcoins.
Both emerging and developed market currencies show considerable volume on LocalBitcoins. Researcher Matt Ahlborg suggests that in Latin America: “Bitcoin is being used not as a store of value endpoint, but as a channel on the road to obtain more stable currencies such as the US dollar… and various stablecoins.”
Bitcoin’s technology has catalyzed an evolution of digital dollars known as stablecoins. Stablecoins such as USD Coin maintain the stability of the U.S. dollar while gaining Bitcoin’s technology such as 24/7 transferability to anyone, anywhere with an Internet connection and a crypto wallet. According to the Bank of International Settlements:
“There are 1.7 billion people globally who are unbanked… In principle, stablecoins could enable a wide range of payments and serve as a gateway to other financial services. In doing so, they could replicate the role of transaction accounts, which are a stepping stone to broader financial inclusion.”
Yet in contrast to stablecoins, Bitcoin is censorship-resistant, has a fixed and predictable monetary supply, and is governed by a truly global consensus of nodes, miners, developers, and users. Users in any country with an Internet connection and a wallet can receive and maintain direct custody of their Bitcoin. Eric D. Chason, a legal professor at William and Mary Law School explains How Bitcoin Functions as Property Law:
“Satoshi Nakamoto has created a form of property that can exist without relying on the state, centralized authority, or traditional legal structures.”
As a result, Bitcoin is enabling economic and monetary freedom worldwide. Research by NYU School of Law concludes:
“The history of money suggests that there will always be a demand for a non-state currency that serves as a check on inflationary monetary tendencies… Should that demand persist, it is likely that some private decentralized digital currency will continue to exist.”
- Index of Economic Freedom Methodology
- Bitcoin and the Promise of Independent Property Rights by Hasu and Su Zhu