Originally published on Unchained.com.
unleashed is the official US collaborative custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on the services offered, custodial products and the relationship between Unchained and Bitcoin Magazine, please visit our website.
Bitcoin is a deep freeze
As humanity continues to excel in the production of goods, services, knowledge and financial assets, we are now painfully aware of a new problem: how inefficient our savings are when all we savings can be produced in greater quantities or devalued by competitive markets. Traditional methods of saving, from dollars to real estate, are increasingly challenged by our own productive capacity, which in turn devalues these assets. Another way to look at it is that these assets are simply “bad money,” but compared to what?
“Bitcoin is the only thing in the world that is price inelastic.”
-Michael Saylor
Enter bitcoin, a paradigm shift in the concept of savings. Bitcoin stands out as a new monetary tool with unique properties that redefine what we think of as money. Unlike traditional assets, bitcoin is designed with a fixed, immutable supply (there will only ever be 21 million bitcoins), making it immune to the inflationary trends that plague fiat currencies and all other classes of assets. assets. 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, the difficulties of Extraction increases indefinitely to keep the predetermined supply schedule on track.
“There are two common arguments against the scarcity of bitcoin. I will distill them here:
This is not uncommon as people can always create other currencies
It's not uncommon because I don't understand fractions.”
-Phil Geiger
“Only 21 million bitcoins will ever exist, and the element of trust is removed from the equation entirely. Bitcoin's fixed supply is reinforced by a network consensus mechanism on a decentralized basis. No one trusts anyone and everyone applies the rules independently. By combining these two functions, bitcoin is becoming the rarest form of currency that has ever existed.
– Parker Lewis in Bitcoin makes all other money obsolete
Immutable scarcity is at the heart 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. The monetary properties of Bitcoin align with the economic principle that systems tend to converge on the more marketable tool of money. Just because something is rare doesn't mean it's valuable. What makes Bitcoin valuable is that it is the best currency due to its superior monetary properties.
It is the world's first perfectly rare commodity with sufficient monetary properties. Unlike all the melting assets people use as savings vehicles today, bitcoin is a deep freeze at absolute zero.
Parker Lewis explains Bitcoin's credible fixed supply as well as anyone in his book, Gradually, Then Flashlight:
Recognize that there is nothing in a blockchain that guarantees a fixed supply, and that Bitcoin's supply schedule is not credible because the software requires it. 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 credible fixed number as more individuals participate in the 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 makes all other money obsolete
Money solved the double coincidence of desires – the problem of two people in a barter system having to have exactly what the other wants at the same time. In a barter system, if you have apples and want bananas, you have to find someone who not only has bananas but also wants your apples. This makes trading incredibly difficult. Money eliminates this problem by acting as a universal trading tool. The problem of double coincidence of needs is solved by individuals within economic systems converging on a better tool to use as money, and that better tool is now bitcoin. This is objectively true, given its superior monetary properties.
Even though all value ultimately arises from the fact that there will only ever be 21 million bitcoins, its improvement over previous money doesn't stop there: it's also fungible (no units of bitcoin cannot be distinguished from another), portable (it can be moved without authorization and globally at very low cost), durable (this is data that can be physically stored on many media) and divisible (a bitcoin is equivalent to 100,000,000 satoshis, allowing bitcoin to be used for commerce on multiple scales.
With bitcoin's superior monetary properties in mind, we can begin to examine the market landscape through the lens of bitcoin. Because these properties contrast sharply with those of any other good, and because monetary systems are converging toward a single currency, it is not only reasonable, but prudent to visualize traditional reserves of wealth measured in this superior asset.
Your wealth is melting
As human ingenuity and technological innovation lead to greater efficiency in the production of goods, services and information, we find that we save primarily 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 subject to being increased in quantity or devalued over time, or fundamentally linked to the assets which can be.
Of course, it is still possible to make profits in the short, medium and even long term 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 where bitcoins rule, we need to start wondering if they are overvalued given their risk-adjusted returns:
Does it make sense to hold on to the US dollar when, if the CPI's capacity to produce goods is multiplied by 2, the Federal Reserve must respond to this increase in productivity by devaluing the currency to maintain its inflation target of 2%?
Bonds are simply contracts for a future amount of U.S. dollars. Does it make sense to hold a fixed amount of future U.S. dollars, with additional potential default risk, when those dollars are also purposefully devalued?
Is Apple a good long-term store of wealth with a P/E ratio of 30 (paying $30 for every dollar of annual profit) while a plethora of consumer tech companies could produce similar devices or disrupt their walled garden ecosystem, thereby diminishing the unique value proposition ultimately decreasing margins and potentially revenue?
Gold, despite its physical scarcity, is a raw material that could be mined indefinitely with sufficient technology. Is it wise to keep it when it can be produced perpetually?
Is investing in an apartment complex a solid long-term store of wealth, given the potential for saturation in the real estate market, where the influx of new developments could lead to a commoditized housing market filled with competition fierce and a reduction in rental yield margins?
All of these investments may make sense for a while, however, over a long enough period of time, they all face the consequences of the innovation trap – their future cash flows or returns can and will be put into competition – or their supply can simply be reduced. increased – by free market forces. This cutthroat competition partly explains why we live in an era of such severe financialization: none of these savings vehicles sufficiently preserve your wealth over the long term, so you must hire or become a fund manager.
The promise of Bitcoin is to reintroduce the concept of real savings.
“There is and always has been a fundamental difference between saving and investing; savings are held in the form of monetary assets and investments are savings exposed to risk. The lines may have been blurred as the economic system has become financialized, but Bitcoin will erase them and make the distinction obvious again. Money with a good incentive structure will overwhelm the demand for complex financial assets and debt instruments.
– Parker Lewis in Bitcoin is the great definancialization
Once you start to accept that it's not wise to use traditional assets for long-term saving because bitcoin exists and its supply is credibly limited, bitcoin itself only illuminates further the problem it solves by serving as a constant to measure other asset classes. When measured against a perfectly scarce asset like Bitcoin, the way in which the long-term value of all of these asset classes is being questioned becomes clearer than ever, particularly in an era where the capabilities of production are growing rapidly and where markets are increasingly global, interconnected and highly competitive. .
(END OF EXTRACT. Click on HERE to download the full report: “Your Wealth is Melting” by Joe Burnett, for Unchained)
Originally published on Unchained.com.
unleashed is the official US collaborative custody partner of Bitcoin Magazine and an integral sponsor of related content published through Bitcoin Magazine. For more information on the services offered, custodial products and the relationship between Unchained and Bitcoin Magazine, please visit our website.