To the Bitcoin skeptics, are you sure you found out?
BitcoinActuary iis a UK-based actuarial explorer of Bitcoin.
This is an article for your nocoiner friends, who want to see bitcoin from a slightly different angle.
Bitcoin is still around $ 30,000, and you have no idea why. All you can still see is a melee of “crypto” Ponzi schemes that will crash to zero anytime now. Bitcoin is just another of them, if anything, replaced by other cryptocurrencies with more utility and newer technology.
Therefore, you may well ask: “How in the world is bitcoin still around 50% higher than its previous all-time high before the end of 2020 ?!” Let’s dive into a slightly different angle to look at it.
Let’s start by assessing the world’s currencies. How can we compare them in terms of size? To measure this, it would make sense to look at the value of the monetary base – the most irreducible form of each.
Porkopolis’ economy has a table that illustrates the statistics, and I would recommend “TFTC: A Bitcoin Podcast” episode # 310 (and others previously) with Marty Bent and Matthew Mežinskis for some discussion on this.
It may surprise you that, on this basis, one of the 10 largest currencies in the world (in terms of base money value in circulation) does not belong to a country, but it is resident on the Internet and has some very different characteristics from all the others – let’s take a look at how.
(Spoiler alert, this is bitcoin.)
It gives zero risk-free return, so it is not worth holding on to in relation to fiat currencies. All other things being equal, fiat currencies will strengthen when their base interest rates rise, as you can now realize a higher interest rate when you hold them. (Russia is an example earlier in 2022, using interest rate increases as a defensive mechanism when the ruble fell.)
On the flip side – and this is the key – the total amount of supply that will ever be issued is known, unlike any fiat currency. Since fiat currencies inevitably fall faster than bitcoin, demand for bitcoin is likely to persist. Please note that this is not strictly a requirement for bitcoin to be a direct inflation hedge, ie for the consumer price index (this has been a lazy criticism recently). It is rather the case that the inflation of the bitcoin supply is already low at about 1.8% per year, with the issue halved every four years and familiar with security.
Within this original internet money, there is no compulsion in makeup. No one is compelled by its existence to hold it or use it; they do it by choice alone. In addition, it is open to everyone and without permission – access barriers are little more than a smartphone and an internet connection.
Unlike physically located nation states, it does not bow to any political pressure over issuance or operations. It can not be closed. It is also very difficult to ban people from using it or confiscating it.
It can not be reconsidered thoughtlessly. Why not? Since it is extremely portable, divisible and easy to take care of the underlying asset, it introduces counterparty risk to hold it through third parties who mortgage it, so rational players will generally avoid it, or at least demand market-based compensation to take it on. Danger.
Bitcoin is traded freely 24/7, 365 days a year, and the cost of exchanging it is likely to be increasingly lower by competition over time. Of course, the exchange rate (this term is a better framework than “price” in this discussion) is very volatile. This is in contrast to currencies where there may be restrictions on trading and authorities may intervene in foreign exchange markets. That may be logical, the bitcoin exchange rate is flourishing in times of depreciation of other currencies, but is struggling in periods when they are tightening. (Examples of recent dollar tightening are 2018 and 2022, so far.)
Fiat currencies certainly have huge sources of demand for those that bitcoin does not currently have, namely to meet future transactions priced in these currencies. These can include taxes due, payments for goods and services, or investments in real estate, shares, etc. In terms of raw materials, much is made of the relevance of oil being priced globally in dollars. This has undoubtedly contributed to the number of foreign nations keeping dollars in their reserves. Why? If the dollar oil price can remain relatively stable, keeping the dollar will help match the costs of future energy needs more closely than another currency.
I deliberately hesitate to describe “bitcoin” as a currency by the way. It is another lazy criticism that it has not already managed to have the qualities required to be so. I think the Bitcoin White Paper avoided the word for good reason. Bitcoin has many years and decades ahead of sovereign nations to decide whether to take it as a currency or not, but it will not change operations.
In summary
Due to its fixed supply and other unique attributes, it is only logical that many have started exchanging other, faster degrading currencies for bitcoin. There are undoubtedly many short-term traders around, but the long-term exchange rate is probably driven more by those who take long-term prospects in their positions to avoid volatility. Note that this is not an “investment”; bitcoin is a form of money. It saves.
What about altcoins as competing money? We do not see them in the mentioned top 10. Take the time to learn why bitcoin does not have any meaningful competitors in the above context. Why proof of work is so important for the immutability and completely decentralized nature of bitcoin. And why any extra “tool” developed in another altcoin seems pointless if they can not match the monetary properties of bitcoin – they can not.
Just like conventional exchange rates or curves, such as DXY (a frequently observed basket of British pounds, euros, Canadian dollars, Swiss francs, Swedish kronor and Japanese yen against the dollar), it is quite difficult to predict where bitcoin will hit a certain price level in the future. As we have seen above, bitcoin has several interesting and unique features such as money compared to fiat currencies. These make it likely that demand for it will continue to increase as fiat currencies compete to deteriorate. As Bitcoiners often say, it’s just math (s).
When you frame it in these terms, are you still sure that bitcoin is heading towards zero at any time now?
This is a guest post by BitcoinActuary. Expressed opinions are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
