Your Wealth Is Melting: Why Bitcoin Is The Deep Freeze Your Portfolio Desperately Needs

6 months ago 4

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Originally published on Unchained.com.

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Bitcoin is a deep freeze

As humanity continues to excel in producing goods, services, knowledge, and financial assets, we're now made painfully aware of a new problem: how ineffective our saving is when everything we save can be produced in greater quantities or devalued by competitive markets. Traditional saving methods, from dollars to real estate, are increasingly challenged by our own capacity for production, which in turn devalues these assets. Another way to think about this is that these assets are simply “bad money,” but compared to what?

"Bitcoin is the only thing in the world that is inelastic to price."
- Michael Saylor

Enter bitcoin, a paradigm shift in the concept of saving. Bitcoin stands apart as a novel monetary tool with unique properties that redefine what we consider to be money. Unlike traditional assets, bitcoin is designed with an immutable, fixed supply–there will only ever be 21 million bitcoin—making it immune to the inflationary tendencies that plague fiat currencies and all other asset classes. Bitcoin operates on a programmatic, exponentially decreasing supply schedule, enabling its initial distribution, cementing its long term scarcity, and ensuring that as more miners attempt to mine more bitcoin, mining difficulty increases indefinitely to keep the predetermined supply schedule on track.

“There are two common arguments against bitcoin being scarce. I'll distill them down here:
It's not scarce because people can still create other currencies
It's not scarce because I don't understand fractions"
- Phil Geiger

“Only 21 million bitcoin will ever exist, and the element of trust is removed from the equation entirely. Bitcoin’s fixed supply is enforced by a network consensus mechanism on a decentralized basis. No one trusts anyone, and everyone enforces the rules independently. As an aggregate of these two functions, bitcoin is becoming the scarcest form of money that has ever existed.”
- Parker Lewis in Bitcoin Obsoletes All Other Money

Immutable scarcity is at the core of bitcoin's value proposition as a savings tool. In a world where other assets can be perpetually produced or devalued, bitcoin’s fixed supply offers a permanent solution. Bitcoin's monetary properties align with the economic principle that systems tend to converge on the one most marketable tool as money. Just because something has a scarce supply doesn’t make it valuable. What makes bitcoin valuable is that it is the best money due to its superior monetary properties.

It is the world’s first perfectly scarce good with sufficient monetary properties. In contrast to all the melting assets people use as savings vehicles today, bitcoin is a deep freeze at absolute zero.

Parker Lewis explains bitcoin’s credibly enforced fixed supply as well as as anyone in his book, Gradually, Then Suddenly:

Recognize that there is nothing about a blockchain that guarantees a fixed supply, and bitcoin’s supply schedule is not credible because software dictates it be so. Instead, 21 million is only credible because it is governed on a decentralized basis and by an ever increasing number of network participants. 21 million becomes a more credibly fixed number as more individuals participate in consensus, and it ultimately becomes a more reliable constant as each individual controls a smaller and smaller share of the network over time.
- Parker Lewis in Bitcoin Obsoletes All Other Money

Money solved the double coincidence of wants—the problem of requiring two people in a barter system to have precisely what the other wants at the same time. In a barter system, if you have apples and want bananas, you must find someone who not only has bananas but also wants your apples. This makes trading incredibly difficult. Money eliminates this issue by acting as one universal tool for trading. The double coincidence of wants problem is solved by individuals within economic systems converging on one best tool to be used as money, and that best tool is now bitcoin. This is objectively true, given its superior monetary properties.

While all value is ultimately derived from the fact that there will only ever be 21 million bitcoin, its improvement on prior money doesn’t stop there: it’s also fungible (no unit of bitcoin can be distinguished from another), portable (it can be moved permissionlessly and globally at very low cost), durable (it’s data that can be physically preserved in many mediums), and divisible (one bitcoin equals 100,000,000 satoshis, allowing bitcoin to be used for commerce at many scales.

With bitcoin’s superior monetary properties in mind, we can begin to look at the landscape of the market through the lens of bitcoin. Because these properties stand in stark contrast to the properties of every other good, and because monetary systems converge on one money, it’s not only reasonable, but prudent to visualize traditional storeholds of wealth as measured in this superior asset.

Your wealth is melting

As human ingenuity and technological innovation drives greater efficiency in producing commodities, services, and information, we find that we predominantly save in assets that we, as a society, can create more of. Traditional saving methods, including holding fiat currency, bonds, stocks, gold, and real estate, are all either themselves vulnerable to being increased in quantity or devalued over time or fundamentally linked to assets that can be.

Of course there are still short, medium, and even longer term profits to be made by investing in various asset classes. How much of a given asset could exist in the world—its supply—is not the only factor affecting its price, even in the long term. However, in a world with bitcoin, we must begin to ask if they might be overvalued in light of their risk-adjusted returns:

Is holding the US dollar wise when, if there is a 2x increase in the production capacity of CPI goods, the Federal Reserve must respond to that productivity increase by debasing the currency to maintain their 2% inflation target?

Bonds are simply contracts for a future amount of US Dollars. Is holding a fixed amount of future US Dollars, with added potential default risk, wise when these Dollars will be debased by design as well?

Is Apple a good long-term storehold of wealth at a 30 P/E ratio (pay $30 for every $1 of annual earnings) when a plethora of consumer technology companies could produce similar devices or disrupt their walled garden ecosystem, diminishing the unique value proposition ultimately shrinking margins and potentially revenue?

Gold, despite its physical scarcity, is a commodity that could be mined indefinitely with sufficient technology. Is holding it wise when it can be perpetually produced?

Is investing in an apartment complex a sound long-term store of wealth, considering the potential for real estate market saturation, where the influx of new developments could lead to a commoditized housing market, filled with fierce competition and shrinking rental yield margins?

All of these investments may be logical for some time, however, on a long enough timeline, they all face the consequences of the innovation trap—their streams of future cash flows or yield can and will be competed away—or their supply can be simply increased—by free market forces. This ruthless competition is part of why we live in a time of such severe financialization: None of these savings vehicles sufficiently preserve your wealth for the long run, so you must hire or become a money manager.

The promise of bitcoin is that it reintroduces the concept of true savings.

“There is and always has been a fundamental difference between saving and investment; savings are held in the form of monetary assets and investments are savings which are put at risk. The lines may have been blurred as the economic system financialized, but bitcoin will unblur the lines and make the distinction obvious once again. Money with the right incentive structure will overwhelm demand for complex financial assets and debt instruments.”
- Parker Lewis in Bitcoin is the Great Definancialization

Once you begin to accept that using traditional assets for long-term savings isn’t wise because bitcoin exists and has a credibly finite supply, bitcoin itself only further illuminates the problem it solves by serving as a constant to measure other asset classes against. When measured in a perfectly scarce asset like bitcoin, the ways the long-term value of all these asset classes is challenged becomes clearer than ever, particularly in an age where production capabilities are rapidly expanding and markets are increasingly global, interconnected, and highly competitive.

[END EXCERPT. Click HERE to download the full report: "Your Wealth is Melting" by Joe Burnett, for Unchained]

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