Why every person, company, asset manager and government will eventually own Bitcoin: Part 1 — People
The global financial system is in the midst of a transformation. While Satoshi’s whitepaper in 2008 will likely be considered the start of this transformation, I believe when we look back in thirty years, 2020 and 2021 will be seen as a catalyst that accelerated this change on a global level. The global pandemic forced governments to print money at record levels in order to provide support, which in turn has sparked conversations about the role of the Fed, the role inflation plays in contributing to wealth inequality and the power and weaponization of the dollar as the world reserve currency. It will be seen as the time in which people started questioning the idea of government manipulated fiat currencies and ultimately began taking steps to hedge against the current financial system. Slowly, but then increasingly faster, more people will begin to turn to alternatives. We see it happening already. Which is why I believe that in time, every person, company, financial institution and government in the world will eventually own Bitcoin.
In part one of this series, I will attempt to lay out what I consider the most compelling arguments for why every person on earth will own at least some amount of Bitcoin. Before diving in, I want to caveat this series of posts with the fact that although I am discussing only Bitcoin in this series, I believe that multiple cryptocurrencies will succeed. Bitcoin, Ethereum and other cryptocurrencies will thrive over the coming decades, each solving different problems. Also, just because all these groups I discuss will own Bitcoin, it doesn’t mean they will only own Bitcoin. It very well may turn out that we use CBDCs, Stablecoins, NFTs, DeFi tokens or some other digital medium of exchange for various financial transactions and other use cases. Regardless of how this all plays out; I believe Bitcoin will still be used as the digital reserve asset, base settlement layer and possibly a medium of exchange in time.
Financial Freedom & Control
The number one reason everyday people will own Bitcoin is it allows them to take back control and preserve whatever wealth they have without having to rely on banks or governments.
In its most recent study of global perceptions, Edelmen found that trust in banks and economic institutions has yet to fully recover from the economic crisis of 2008. Trust in banks declined even faster in 2017 and 2018 as more scandals from Wells Fargo and Bank of America made headlines. A 2018 Economic Forum survey of millennials showed that only 28% trust banks to be fair and honest. According to Edelman, “A majority of respondents in every developed market do not believe they will be better off in five years’ time, and more than half of respondents globally believe that capitalism in its current form is now doing more harm than good in the world.” In short, most people do not trust the current financial system or those who run it, do not believe its working for them, and are looking for alternatives.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”
- Satoshi Nakamoto, Bitcoin open source implementation of P2P currency
In two previous posts I laid out why Bitcoin is a new computing platform based on trust and why Bitcoin is the best store of value asset in history. The combination of these two characteristics makes Bitcoin an extremely attractive asset for the general public to hold.
With regards to trust, Bitcoin is not controlled by government entities, corporations or any individual. The reason this is important is most people don’t want their wealth at risk due to other people’s decisions or mistakes. Americans do not want to bail out the banks again due to reckless behavior. There is growing frustration that Wall Street continues to profit from a stock market that has hit all-time highs at the same time unemployment reaches record levels and small businesses are forced to shut down. More Lebanese are embracing Bitcoin due to the current economic crisis. I doubt the people of Greece, Zimbabwe, Venezuela, Argentina or Cyprus trust their governments to store their savings in their local currencies. Bitcoin offers an alternative to relying on the current financial system and allows everyday people to take back some control by opting into a transparent, predictable, and decentralized financial system.
With regards to growing value, a large percentage of the population feels like it can never get ahead and is increasingly frustrated by the growing inequality gap. The biggest reason for this is the inability or inexperience to invest in assets that preserve and grow one’s wealth. To actually grow wealth, one must generate returns greater than the inflation rate. While this post is not about what the true inflation rate is, there are numerous independent studies that suggest it’s much higher than 2%. This means people need to invest what capital they have and generate returns above whatever inflation rate you want to use in order to prevent the wealth they have accumulated from slowly disappearing over time.
The sad reality is that most people do not even have the capital to invest in the first place. Most Americans don’t have a lot of spare capital given 40% can’t even afford a $400 surprise expense. This is especially true for younger generations. Stagnant wages, student debt, and rising home prices are making it harder for millennials to save than ever. 62% millennials are living paycheck to paycheck and as a result, people under 35 are the only age group with a negative savings rate. Of those fortunate enough to save and invest, at least 90% aren’t accredited. This leaves the vast majority of people legally barred from accessing many asset classes even if they wanted to.
Assuming one does have the ability to invest and wants to invest in assets they do have access to, it takes a certain level of financial literacy to do so. In the past few years, technology has lowered this bar and made it much easier for everyday people to invest without paying high fees, but there is still a learning curve and it’s intimidating for many Americans. As a result, only 14% of Americans directly invest in stocks, although 52% do have some public market investments from owning retirement accounts such as 401(k)s. That’s roughly half of the US population that saw zero benefit from the incredible bull run of public stocks over the last decade. And the numbers drop to 33% for lower-income and minority demographics. While sad, these numbers aren’t surprising. It’s pretty ridiculous to expect a teacher, a dentist, a waiter or any other non-finance profession to also be a sophisticated investor in order to protect their earnings.
As a result, a significant portion of the population stores what little value they have in dollars. These dollars sit in a bank account and their value is depreciated away over time. It’s no wonder so many people feel like they can never get ahead and live paycheck to paycheck.
Bitcoin has the potential to help eliminate this. The best performing asset of the last 10 years is open to anyone. It retains its value and purchasing power far better than fiat currencies which could help close the wealth gap in our country. It incentivizes people to save rather than spend. The trust and store of value features of Bitcoin combine to make it an attractive alternative to the growing number of people who do not trust bankers and feel as though they can’t get ahead in the current economic environment.
While Bitcoin does come with a learning curve on how to properly secure and store it, it does not require any investing expertise since the best thing to do is acquire it either through buying or getting paid in Bitcoin, and simply holding it. Its more akin to having a savings account (one that actually substantially increases in value over time) rather than investing in the stock market and that is something just about everyone already understands.
This does not mean everyone will stop interacting with the current financial system completely. However, few trust the government or Wall Street enough to store ALL of their wealth with them. Over time, more and more value will migrate from the current financial system and move into Bitcoin.
Protection Against Unlawful Seizure of Assets
Another catalyst for Bitcoin’s adoption around the globe will be protection from governments’ ability to unlawfully seize an individual’s assets. So long as individuals self-custody their Bitcoin and have good private key management, Bitcoin cannot be confiscated or accessed by anyone else, including governments. Thus, Bitcoin enables personal financial sovereignty which is critical in regions where property rights are not recognized or enforced.
There are very recent examples of fiat money being confiscated by governments around the world. In 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes, which many critics considered confiscation of property without due process. In 2019, HSBC seized the funds of individuals affiliated with the Hong Kong protests in order to support Beijing’s national security law that in turn is expected to give the bank “greater profit potential in China.” There are numerous examples of illegal confiscation of assets throughout the Middle East including in Iraq and Saudi Arabia.
But the most egregious example of all occurred in Cyprus in March 2013. Still reeling from the 2008 economic crash, the Cyprus government needed to come up with $7.5 billion as part of a bailout package otherwise their entire banking system might have gone bust. Their solution? Sweep the money directly out of people’s bank accounts. This was a European Union country that unilaterally decided to take billions of dollars directly from its citizens overnight in order to pay its debts.
One of the most uplifting examples of Bitcoin being used to circumvent oppressive regimes is the protests currently going on in Belarus. Following the disputed election in August, hundreds of thousands of people took to the streets claiming incumbent leader Alexander Lukashenko rigged the election results. To support those standing up to the regime, the Human Rights Foundation has set up a Belarus Solidarity Fund and are using Bitcoin as a censorship-resistant way of getting money to those striking in order to supplement their lost wages.
Admittedly, this is less of a concern in the US where property rights are some of the strongest in the world. However, that does not mean US citizens are immune to unlawful seizure. The most notable instance occurred in 1933 when the United States Government banned and confiscated the private ownership of gold, a ban that persisted for more than 40 years. More worrisome, a provision in the Dodd Frank Act allows for bank “bail-ins” in which the government can take over a distressed bank and use the money of its creditors, bondholders and most importantly, depositors to restructure the capital from debt to equity in order to keep the bank afloat. Those depositors are everyone with a bank account which means the federal government has the legal authority to sweep money out of people’s bank accounts to keep a bank solvent. If you are thinking that sounds like what happened in Cyprus in 2013, the answer is yes, that’s exactly what they have the power to do.
Protecting oneself from unlawful seizure is becoming increasingly important in our modern, digital lives in which corporations and governments can more easily invade our privacy.
Digital Natives Inherently Prefer Digitally Native Products
A digital native is someone who was raised in a digital, technology driven world. Because the vast majority of Millennials and GenZ grew up with smart phones and the internet from a very young age, these generations are native speakers of the digital language of computers, video games and the Internet.
To this group, the digital world of Instagram, TikTok, YouTube and Fortnite is just as important, perhaps more important, than the physical world. They are constantly connected through social media, messaging platforms, and gaming. Access to the Internet’s wealth of information and opinion has influenced their behavior as consumers, their views on society and their relationship with money. They tend to view the world as borderless and more horizontal, rather than hierarchical, as they embrace the benefits of sharing with each other. They are more comfortable adopting new technological innovations. Given these values, it’s natural that digital natives gravitate towards Bitcoin and intuitively understand that as we all live a greater portion of our lives in a digital world, it only makes sense to use a digitally native form of money.
In a recent post on Coindesk, investor and writer Pondering Durian outlined his thesis on “Bitcoin as an Exit.” Durian argues that the Fed’s monetary policy has stimulated the economy for so long that it has prevented normal economic down cycles from occurring and thus prevented millennials from buying assets at affordable prices. This is one reason why home ownership among millennials is much lower than previous generations, its simply too expensive. As a result, there is a growing discontent among millennials with expanding inequality and they are choosing to opt out of what they view as a rigged system by exploring alternatives. “Crypto is the new sandbox with algorithmically transparent rules of play. As cohorts age, more people and dollars will find themselves in the crypto sandbox.”
I agree with Durian’s assessment. Ask anyone over the age of 40 how they manage their finances and investments, and they will likely tell you they have a broker or financial advisor. Ask anyone under the age of 35 who their broker is, and they likely won’t understand the question. Instead, they use Neobanks. Millennials and GenZ do not trust middlemen, rather, they expect to have permissionless access and minimal to no fees. They do not like operating in the existing financial system and are eager to adopt new alternatives.
One of the most recent, high profile examples of this is Russell Okung. Okung is a Pro Bowl offensive lineman in the NFL, a super bowl champion and an out-spoken millennial. He also is the first NFL athlete to get paid in Bitcoin. Okung, who will now take half of his salary in Bitcoin, has long been “frustrated with the lack of economic power professional athletes — particularly Black athletes — currently hold.” Okung views bitcoin as a means of regaining financial independence and he isn’t the only professional athlete to think this way. According to the Bitcoin startup Zap, other pro athletes, including unnamed members of the Brooklyn Nets basketball team and baseball’s New York Yankees, have also begun receiving part of their salary in Bitcoin.
This trend is important because a recent study shows that millennials will hold five times as much wealth as they have today, and the group is anticipated to inherit over $68 trillion from their Baby Boomer parents by the year 2030. This will represent one of the greatest wealth transfers in the modern times and that wealth is not going into bonds or gold. A substantial portion of that will go into crypto as evidenced by a recent Charles Schwab report that shows Bitcoin is now the 5th largest holding of millennials. Furthermore, 55% of those aged between 18–34 say they are likely to buy Bitcoin in the next 5 years.
The digital native is becoming the dominant global demographic, and Bitcoin was built for the digital age. By 2050, digital natives will make up more than half the entire adult population of the world. It doesn’t take a genius to realize what will happen to Bitcoin’s adoption over the next 30+ years as digital natives grow in number and purchasing power.
Transition from Analog to Digital Leads to Increased Adoption
Historically, whenever a good or service transitions from an analog version to a digital version, the adoption of that good or service increases dramatically. This is primarily due to the fact that this transition lowers the barrier of entry for users through decreased cost, wider distribution, and increased convenience.
There are numerous examples in recent history.
- Film & Digital Photos — The number of photos taken with film peaked in 2000 with 85 billion. Fueled by digital cameras and later smartphones, digital photos decimated the film industry, but substantially grew the overall photo market. By 2015, more than 2 trillion digital photos were shared on social media alone. That figure doesn’t even take into account all the photos taken on digital cameras or smartphones that weren’t shared via social media. In fact, more digital pictures are taken per year than in the entire history of film.
- Blockbuster & Netflix — At its peak in 2004, Blockbuster had 9,000 stores worldwide with a market value of $5 billion and revenues of $5.9 billion. Fast forward to today, the Blockbuster franchise has dwindled to just one store in Bend, Oregon, which has since been turned into an Airbnb. Netflix, the digital version of watching movies at home, is the number one reason for the fall of Blockbuster. Today, Netflix not only has stolen all of Blockbuster’s market share, but it has also significantly increased the total market size. Netflix has a market cap of $200B (40x bigger than blockbuster at its peak) and revenue in 2020 expected to top $24B (4x bigger than blockbuster at its peak). Moreover, Netflix has yet to hit its peak as the company’s global user base continues to grow and will likely continue to do so in the coming years.
- Taxis & Ridesharing — Taxi & Limousine services in the US had their largest year ever in 2019 with a total market size of just under $40B. In comparison, the ridesharing industry was almost double that size in 2019. Furthermore, ridesharing is growing much faster than the taxi industry and is expected to have a market size of over $200B in the next few years. That’s 5x bigger than the current taxi market. Uber’s market cap alone is 2x larger than entire taxi industry.
- Mainframe Servers & Cloud Computing — One of the biggest transitions from physical to digital that is currently happening is the shift from on-prem to the cloud. According to Synergy Research Group, enterprises spent more annually on cloud infrastructure services than on data-center hardware and software in 2019. The difference between the two however, is that on-prem growth has slowed to 1% compared to 2018 whereas cloud computing is growing at 38% year over year. In a few years, the cloud market will be many multiples larger than the on-prem market ever was or ever will be.
The dominant narrative today is that Bitcoin is the digital version of gold. Bitcoin will not only steal a large portion of gold’s market share, but it will also grow the usage and market size. Bitcoin is easier to buy and cheaper to hold than gold is. Over time, more people will own Bitcoin than the number of people who currently own gold.
But store of value isn’t Bitcoin’s only use case. It’s also a digital settlement layer that is faster, cheaper and more secure than SWIFT and other global settlement systems. If Bitcoin is able to scale its throughput over time, there is a possibility that it could also become a digital medium of exchange superior to that of fiat currencies. Either or both of these would dramatically increase adoption of Bitcoin around the world beyond simply a store of value.
That adoption is already starting to happen as more and more people are coming to this realization and are owning Bitcoin. As Nic Carter recently pointed out, more people own Bitcoin today than in 2017 and by a significant amount. The chart below shows the number of addresses on the Bitcoin ledger owning $10 or more worth of the asset. The chart looks much the same for other thresholds, whether $1, $100, or $1,000. At all of these levels, there are simply more addresses on the ledger holding Bitcoin.
Part of the increase in adoption is that it’s getting easier to buy and hold Bitcoin. There are more on-ramps, including widely adopted platforms such as PayPal and Square. Bitcoin can be bought and held in your Fidelity account. Bitcoin can be bought in apps such as eToro and Coinbase. As of July 2020, banks in the US can provide custody services for Bitcoin. The barriers to entry are crashing down now.
A recent forecast based on S-Curve adoption cycles from Off The Chain capital predicts 90% of the population will own bitcoin by 2030. The rationale is based on an observation that the amount of time it takes for a new technology to go from 0% adoption to 10% adoption is roughly the same amount of time takes it to go from 10% adoption to 90% adoption.” In 2019, 10 years after Bitcoin’s launch, studies estimate 9–11% of Americans owned Bitcoin. Should Bitcoin follow the same adoption pattern as previous technologies such as cars, fax machines, PCs, internet, and others, 90% of Americans will own Bitcoin in a decade.
