Doc's Daily Commentary
Mind Of Mav
Bitcoin vs. Fiat Currency In 2021
The price of Bitcoin has reached an all-time-high once again.
However, awareness has not. Most people haven’t heard much about Bitcoin, a.k.a. peer-to-peer digital money, since 2017. According to Google Trends and Twitter popularity, Bitcoin search interest is currently a fraction of what it was at its peak.
Despite low retail interest, Nic Carter explains many of the reasons Bitcoin’s price is rising alongside other fundamental indicators in a cogent essay here. Institutional investors like Renaissance Technologies, Guggenheim Partners, Stanley Druckenmiller, Paul Tudor Jones, etc. have all indicated an interest in owning Bitcoin in the past year. At the same time, consumer finance platforms such as Coinbase, Square, and Paypal are building Bitcoin on-ramps across the world.
The dollar value of the Grayscale Bitcoin Trust (GBTC), which is “popular because it is available on mainstream brokerages like Fidelity and Schwab and can be held in a tax-advantaged way, in an IRA or 401k” has increased substantially over the course of 2020.
Bitcoin’s narrative as a store of value has been growing among institutional players, and even central banks. In the words of Federal Reserve chairman Powell, Bitcoin is “a store of value, a speculative store of value, like gold.” Compelled by Bitcoin and the invention of stablecoins, central bankers are increasingly positive toward the idea of Central Bank Digital Currency (CBDC). Major central banks across the world are in the research, development, or pilot phases of creating CBDC.
Novel forms of digital currency such as private sector stablecoins and CBDC will reinvent the global monetary system. One day money will be as free and universally accessible as the Internet. The distinction between stablecoins and CBDC is nuanced, however. According to the governor of the Bank of England:
“Stablecoins and CBDC are not necessarily mutually exclusive. Depending on design choices, they could sit alongside each other, either as distinct payment options, or with elements of the stablecoin ecosystem, such as wallets, providing consumers with access to a CBDC. So there will likely be a role for the private and public sector working together in the future of payments.”
Stablecoins and CBDC will combine many of Bitcoin’s innovations with the familiarity of fiat currency as a unit of account. Peer-to-peer, 24/7, global, programmable, and near-instant money will reinvent the global monetary system via Bitcoin, stablecoins, and CBDC. Search interest for Central Bank Digital Currency has been rising.
As the Bank of International Settlements has reported, “The most transformative option for improving payments is a peer-to-peer arrangement that links payers and payees directly and minimises the number of intermediaries… Examples that have garnered attention in recent years include Bitcoin and so-called “stablecoin” initiatives like Libra.”
Alongside demand for private sector stablecoins, indicating a deepening liquidity reserve for the crypto-asset ecosystem. Stablecoins issued on-chain have recently surpassed over $20 billion. On average, over $5 billion of stablecoins are transferred on-chain per day as of writing.
Stablecoins are on the cutting edge of the fiat currency pyramid. As such, stablecoins are also dependent on the soundness of the private institutions holding the reserves and the soundness of the central bank setting the value of the base money. The core innovation of Bitcoin is that it does not need to rely on the traditional pillars of monetary trust. In 2017 Carl-Ludwig Thiele, Executive Board member of Germany’s central bank explained:
“Too little attention is being paid to Nakamoto’s primary goal of constructing a groundbreaking, trustless electronic payment system which, like cash, would facilitate peer-to-peer (P2P) transactions. At the same time, Nakamoto was looking to create a currency which was not based on trust. This aspect — forging a new currency that does away with central banks — has become a major talking point in the current debate.”
Or in the words of Satoshi Nakamoto, Bitcoin’s mysterious creator:
“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.”
Bitcoin is sound money for the 21st century. Unlike fiat currency, Bitcoin’s monetary supply is highly predictable. Bitcoin is censorship-resistant, programmable, and borderless. There will only ever be 21 million bitcoins among increasing trillions of dollars, yuan, euro, etc. In the past year, Bitcoin’s monetary supply has increased by less than 3% while the base monetary supply (M0) of U.S. dollars has increased by over 50%. M0 base money is defined as “The value of physical currency circulating in the economy and the liquid assets held by the central bank.”
According to the member of Germany’s central bank who also praised Bitcoin’s trustlessness, trust is the underpinning of modern money. Historically gold was the foundation of money, and it served as an inherent limit on money creation. To this day, Germany’s central bank has the second largest gold holdings of any other because it has an institutional memory of Weimar hyperinflation, when fiat money was rendered meaningless.
As Germany was facing the huge logistical challenge of transporting 54,000 gold bars from New York to Germany in 2013, the idea and implementation of digital gold was advancing. Bitcoin presents a myriad of improvements over gold such as portability, auditability, and censorship-resistance. Both gold and Bitcoin are implementations of sound money.
One of the most powerful myths behind Bitcoin is that it is a hedge against fiat currency. And there is compelling evidence to support this claim. Since the start of 2019, Bitcoin has appreciated by at least 351% and up to 924% against the range of G20 fiat currencies.
Bitcoin is a store of value to rival gold and dollars that can be especially useful in countries with monetary repression. As evidenced by its global node distribution, Bitcoin is truly borderless. Unlike fiat currency, anyone, anywhere with Internet and a digital wallet can generate a Bitcoin address to send or receive near-instantly. No bank account required.
Misconceptions surrounding Bitcoin are eroding, alongside the public’s faith in modern money. As the fiat money supply grows via central bank printing, commercial bank lending, and government spending, the new supply of bitcoins is asymptotically decreasing. Bitcoin has revitalized John Nash’s asymptotically Ideal Money. Since its creation on the eve of the 2008 Financial Crisis, Bitcoin is gradually reaching toward a monetary inflation rate of zero percent.
In his proposal for Ideal Money, the Nobel economist described how fiat money is based on the Keynesian idea that “bad money is better than good money.” Modern money is made to lose value over time so as to compel citizens to spend and take on debt. Ideal Money “would be intrinsically free of ‘inﬂationary decadence’ similarly to how money would be free from that on a true ‘gold standard” according to Nash.
Modern, inflationary money has entered an unprecedented era. Global interest rates are nearing or have gone below zero. Negative-yielding debt has recently reached a record high of over $17 trillion.
Where does the modern monetary system go from here? In a speech that considers the future of the global monetary system, stablecoins like Facebook’s Libra, and a new kind of global money based on a network of CBDC’s, the former Governor of the Bank of England observed in 2019:
“Past instances of very low rates have tended to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.”
Global interest rates have been on a steep decline since 1971, the year that the dollar was broken from the gold standard.
When real rates are well below zero due to the prospect of inflation, citizens are discouraged from saving. Incentives to work hard, save, and plan for the future become debased. Incentives are the life-force of capitalism.
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”
-Bitcoin: A Peer-to-Peer Electronic Cash System“
“Acting as a trusted third party is precisely what a central bank does.”
–Bank of England: Central banks and digital currencies
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