Two decades ago, Nobel Prize-wining economist Milton Friedman said:
"The internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash: a method whereby on the internet you can transfer funds from A to B without A knowing B or B knowing A."
Yes, that's correct. The 20th century's most prominent advocate of free markets described Bitcoin almost 10 years before its creation. A key element of Friedman's prediction, "reducing the role of government," is more salient now than ever.
Our economy, and the money we use to store and transact value, is being manipulated by government actors in ways that could devastate the value of the common person’s life savings.
The way out? Bitcoin.
Borrowing and expanding on thoughts from Chamath Palihapitiya, presented below is the case for Bitcoin as the ultimate "schmuck insurance" against the failure of our economy as we know it.
Traditional markets (stocks, bonds, real estate, commodities, etc) are all ultimately controlled by governments and the politicians that run them. Decisions made by our governments and central banks are in favor of short-term economic gain at the expense of long-term economic stability. Governments are motivated by their desire to stay in power, and sometimes manipulate markets to win favor among constituents.
This is evidenced by the drastic measures that governments have undertaken since the 2008 financial crisis, and doubled down on during the COVID-19 economic crisis. Central banks are essentially printing money, pumping it into the markets, and buying up debt. This is why we're seeing US stocks perform so well, even though 11.1% of America is unemployed, and initial unemployment claims are resurging
Since the 2008 financial crisis, the Federal Reserve has aggressively purchased nearly $7 Trillion of Treasury securities (government debt), mortgage-backed securities, and corporate debt. Our central bank is now responsible for over 34% of the country's GDP. The FED is fueling asset bubbles and unsustainable corporate debt addiction. Reversing course is impossible without an economic collapse.
Our government is going as far as it can to keep markets above water during an election year, but its actions will have long-term inflationary consequences and can wreak economic havoc. Inflated asset prices will collapse, and the debt bubble we've created will likely pop. Bitcoin is your insurance in this worst-case scenario.
Though Bitcoin’s price may seem correlated to other assets at times, Bitcoin is the only asset that's fundamentally uncorrelated to the existing political and economic decision-making process. Why? Because Bitcoin is a decentralized network. There's no central server and no controlling entity. Everything happens through a widely dispersed network of thousands of computers.
No government controls (or can control) Bitcoin. Thus, it exists outside of the politico-economic construct. The US government's monetary policy is determined by political actors who's primary motive is staying in office. Bitcoin's monetary policy is controlled by code and can be amended only through consensus among network participants.
This decentralization is inherently disparate from the centralized government actors who are doing everything in their power to prop up markets. Our debt-based, government-controlled economy is an effect resulting from a deeper root cause— government-created money.
As the US has become the highest-producing economy in the world over the last century, its currency has become the de facto reserve currency for the world. The Dollar is a relatively stable and liquid medium of exchange, and central banks globally have accumulated over $6.7 Trillion in their reserves.
However, the Dollar has lost 84% of its purchasing power in the last 50 years and will continue to lose value as the money supply is increased further by our central bank.
This isn't always how it worked.
Before 1971, the world operated on a loose gold-standard under a system called Bretton Woods. This kept the US Government's monetary policy in check because it had to keep enough gold in reserve to back a significant chunk of the money in circulation.
Nixon abandoned Bretton Woods and severed the link between the Dollar and gold. This granted the Federal Reserve the power to theoretically create as much money as needed to fund the government.
Now, fiat money (money issued and backed by governments) is only worth anything because our government says it is, and because we agree that it has value. This forces us to trust the government to uphold the value of our money.
Bitcoin, on the other hand, requires you to trust no central entity, and it's digitally scarce. Bitcoin's supply is finite. Only 21 Million Bitcoin will ever exist, of which roughly 18 million are currently in circulation. Bitcoin's supply economics are programmed into the protocol, only controlled by code and math.
Unlike Bitcoin, which has a finite supply, fiat money (like US Dollars) can be created at-will by governments. When more and more US Dollars are created, the value of the hard-earned dollars you've saved up and all the assets you hold in your retirement account decreases— AKA inflation.
Governments creating more money = your money losing value over time.
Bitcoin, on the other hand, is deflationary. Its rate of supply decreases over time. This ensures that as a currency, Bitcoin can't undergo devaluation as a result of supply manipulation.
We've seen supply-driven currency devaluation dozens of times throughout history. From France in the early 1700s, Weimar Germany in the 1920s, Argentina in the '80s, Brazil, Zimbabwe, the list goes on. And it's still happening today. History may not repeat itself, but it often rhymes.
When governments control the supply of the money we use to keep track of value, we're trusting the political system to act in the best interest of the economy and protect our wealth. Pushing this system to its extremes has failed time and time again.
Bitcoin, a scarce asset existing outside of the financial system, provides the perfect insurance against the system's failure. Bitcoin can be seen as insurance due to its asymmetric risk-reward profile. In other words, a minuscule bet can pay off very big.
This is a characteristic of any kind of insurance— a small amount of insurance can make you whole. Whether its a phone, a car, or a home, you make relatively small insurance payments so that you are protected in a worst-case scenario. The small payments you make have a large payoff if that scenario comes true.
When it comes to your wealth, the worst-case scenario is a debasement of the Dollar as a reserve currency and collapse of the global financial system as we know it. This sounds like a doomsday scenario, but it's within the realm of possibility. In this case, Bitcoin will at the very least become an incredibly useful store of value— a better version of gold.
Chamath writes, "If this is all Bitcoin becomes, a good question is: 'What would that make each Bitcoin worth?' Well, the value of all of the gold in the world is roughly $8 Trillion Assuming that Bitcoin can replace gold as a more useful store of value, then the upper bound of each Bitcoin would be almost $400,000 ($8 trillion/21 million bitcoins)."
However, in a best-case scenario for Bitcoin, it grows into more than just a replacement for gold— it becomes a global reserve currency. In this case, Bitcoin’s price would far exceed Chamath's $400K prediction.
Bitcoin has all of the characteristics of sound money— durability, portability, divisibility, fungibility, and limited supply. These qualities are achieved through math, code, and cryptography, secured by the most powerful computing network on the planet.
These characteristics enable Bitcoin to thrive as a viable reserve currency in the event that our existing fiat-based monetary system fails. In this scenario, a small bet on Bitcoin would have a meteoric payoff.
Right now, we trust our governments with the basis of wealth and money. If you're looking at stock prices, then sure, things look great. But if you pinch to zoom out, you’ll see a far more grotesque picture.
Our economy is addicted to debt. Central banks are creating unfathomable amounts of money— seemingly out of thin air, to fuel this addiction. They'll keep doing this because it makes markets go up and voters feel happy seeing more dollars in their retirement accounts. However, this will devalue people's life savings, and we'll only see it get worse.
If this year has taught us anything, it's that the people in power don't always make the best decisions on complicated topics. They aren't the smartest, brightest scientists or economists in the country. They're the people who were well-connected and could win elections. Bitcoin is a way to insure your wealth against these schmucks, however much or little you have.
You pay a few thousand bucks a year to insure your home, your car, and your health. Doesn't it make sense to put a small portion of your money into Bitcoin to protect your life savings?
(Disclaimer: The author works at Ryze, a Bitcoin-first company helping consumers stack sats.)