Why Bitcoin is the Ultimate Wealth Preservation Technology

This opinion editorial is by Leon Wankum. Leon was one of the first students in financial economics to write a thesis on Bitcoin in 2015. Evolutionary psychologists believe that modern humans have the advantage in evolutionary competition because they can “preserve wealth.” In his essay “Shelling Out, The Origins of Money,” Nick Szabo shared an interesting story about this. Population explosions followed when homosapiens replaced homo neanderthalensis around 40,000 to 35,000 B.C. in Europe. It is difficult to understand why, as homosapiens, the newcomers, had the same brain size, weaker bones, and smaller muscles as the neanderthals. The most significant difference could have been wealth transfers made easier or possible by collectibles. There is evidence that homosapiens sapiens enjoyed collecting shells and making jewelry from them. They also traded them. The ability to preserve wealth is a foundation of human civilization. There have been many wealth preservation technologies over the years that have changed and adapted to technological changes. All wealth preservation technologies have a specific function: they store value. Handmade jewelry was the first form of wealth preservation. Below, I will compare four of the most popular wealth preservation technologies (gold, bonds and real estate) to bitcoin to show how they perform and how bitcoin can help us save for our future. Detail of necklace taken from a burial at Sungir (Russia), 28,000 BP. Interlocking and interchangeable beads Each mammoth ivory beads may have taken one to two hours to make. Vijay Bojapati explains that when stores of value are competing against each other, it’s the unique attributes that make a store of value stand out. A good store of value should have the following characteristics: durability, portability and fungibility; divisibility; especially scarcity. These properties determine what can be used as a store value. For example, jewelry is scarce but can be easily destroyed and not divisible. It cannot be fungible. These properties are better fulfilled by gold. Over time, gold has replaced jewelry as the preferred technology for wealth preservation. It has been the most efficient store of value for 5,000 year and has been so for over a century. But, gold has been subject to digital disruption since 2009’s introduction of Bitcoin. Digitization optimizes nearly all value-storing functions. Bitcoin is not only a store of value but also an inherently digital currency, eventually defeating gold in digital age. Bitcoin Versus Gold Durability. Gold is the undisputed king in durability. The majority of the gold that has been extracted is still in existence today. Bitcoin are digital records. It is not their physical form that should be considered but the durability and reliability of the institution that issued them. Bitcoin, which has no issuing authority may be considered durable as long as the network that secures it remains intact. It is too early to draw any conclusions about its durability. There are signs that the network is still functioning, despite attempts by nation-states to regulate Bitcoin and years worth of attacks. It is actually one of the most reliable computer networks, with almost 99.9% uptime. Portability: Bitcoin’s portability surpasses that of gold. Because information can move at lightning speed (thanks to telecommunication), Bitcoin is much more portable than gold. In the digital age, gold has lost its appeal. You can’t send your gold via the internet. Online gold portability is simply not possible. Our monetary system, which was historically based on gold, has been plagued by problems for decades due to inability of digitizing gold. It became difficult to understand whether national currencies were actually backed with gold or not, as a result of digitization. It is also difficult to transport gold over borders due to its weight, which has caused problems for globalised trade. Our current fiat-based monetary system is a result of gold’s inability to be transported. Bitcoin is a solution to this problem as it is a native digital scarce commodity that is easily transportable.Storing Gold Versus Storing BitcoinSourceDivisibility: Bitcoin is purely digital, so its divisibility is much better compared to gold. Information can be subdivided, recombined almost endlessly at almost no cost (like numbers). One bitcoin can be divided into 100,000,000 units, called satoshi. It is more difficult to divide gold. It requires special tools and can be lost. Fungibility is difficult with bitcoin. Bitcoin is digital information. It is the most objectively discernible substance (as is the written word). Because all bitcoin transactions can be seen, governments may ban bitcoin from being used for illegal activities. This would impact bitcoin’s fungibility as well as its use of it as a medium for exchange. Because money is not fungible, each unit has a different value, and the money has lost the medium of exchange property. This does not affect bitcoins store-of value function. However, it can negatively impact its price. Although gold’s fungibility is better than bitcoins, its portability disadvantages render it ineligible as a medium for exchange or digital store of value. The annual inflation rate for gold is 1.5%. But, the supply isn’t limited. There are always new discoveries and large space deposits of gold. The price of gold is not inelastic. There is an incentive to mine more gold when gold prices rise. This can increase the supply. It is possible to dilute physical gold with less precious metals, making it difficult to verify. Additionally, gold stored in online accounts via ETCs and other products can often be used for multiple purposes, which can make it difficult to control and adversely impact the price by artificially increasing the supply. Bitcoin’s supply is limited to 21,000,000. It is designed to be deflationary, which means that there will be less over time. The current annual inflation rate for Bitcoin is 1.75%. This rate will continue to decline. According to the protocol’s code, Bitcoin mining rewards are halved approximately every 4 years. Its inflation rate will be negligible in 10 years. In 2140, the last bitcoin will be mined. The annual inflation rate for bitcoin will be zero after that date. Auditability: Although this is not a unique selling proposition, it is still important as it provides information about the suitability of a store or value for a fair and transparent system. Nobody knows how many gold there is in the world, nor how many US dollars are in the world. Sam Abbassi pointed out to me that bitcoin is the first globally auditable asset that can be publicly and easily disclosed. This prevents banks and brokers from using assets that have been posted as collateral by clients for their own purposes. This removes a lot of risk from the financial system. It allows for proof that reserves have been established. To prove their reserves, a financial institution must provide their transaction history and bitcoin address. SourceBitcoin Versus bondsIn 1949, Benjamin Graham, an American economist, professor, and investor from the United Kingdom, published “The Intelligent Investor”, which is widely considered to be one of the most important books on value investing and a classic in financial literature. He believed that bonds would protect investors from the risk of stock market volatility. One of his principles was that a balanced portfolio should include 60% stocks and 40% bonds. Graham’s original advice is still valid today. However, I believe that bonds, especially government bonds, are no longer a good hedge to a portfolio. The yields on bonds cannot keep up with inflation, and the entire monetary system of which bonds are part is at risk. The financial health of many governments that make up the heart of our financial and monetary system is at risk. The implied risk of default by a government was virtually zero when its balance sheets were in good shape. This is due to two reasons. Their ability to tax. Secondly, and most importantly, their ability print money to repay its borrowings. This argument was valid in the past, but printing money has become a “credit bogie man”, as Greg Foss explained. Governments are now circulating more money that ever before. The Federal Reserve, the central bank of the United States, has data that shows that the broad measure of the dollar stock, known as M2, increased from $15.4 trillion at January 2020 to $21.18 trillion by December 2021. This is 37.53% of total dollars. This means that the dollar’s annual monetary inflation rate has been well above 10% for the past three years. U.S. Treasury Bonds yield less. SourceThe theoretical return one could earn on their money tomorrow by parting with it today should be positive to offset risk and opportunity cost. Bonds have become contractual obligations to lose money if Inflation is included. There is also the possibility of a systemic failure. The global financial system is in irreversible trouble and bonds that are its foundation are at risk. There is an excessive amount of credit on the market. Over the past decades, central banks have had loose debt policies and nation-states have taken on large amounts of debt. Already, Venezuela and Argentina have defaulted. There is a chance that other countries will default on their debt. They can still print more money to pay off their debts, but this default is not a guarantee that they will. This would devalue a nation’s currency, which could cause inflation and make bonds with low yields even less appealing. Investors have fled to the safety of bonds, which can appreciate in “risk-off” environments, for the past 50 years when equities fell. This dynamic was the basis of the 60/40 portfolio, which collapsed in March 2020 after central banks flooded the market with money. The attempts to stabilize bonds will only lead over time to a higher demand for bitcoin. Graham’s philosophy was to first preserve capital and then to grow it. It is possible to store wealth in bitcoin without any credit risk or counterparty. It is difficult to keep money in a savings account due to the high level of monetary inflation over the past decade. Many people now hold significant amounts of their wealth in real property, which has become one the most valuable stores of value. Bitcoin competes with real property in this capacity. The properties associated with bitcoin make them an ideal store of wealth. It is finite in supply, portable, divisible and durable. It is also noncustodial and censorship-resistant. As a store of value, bitcoin is not comparable to real estate. Bitcoin is more rare, less liquid, easier to transport, and harder to seize. It can be sent anywhere on the planet at the speed and cost of light. However, real estate is very easy to confiscate and difficult to liquidate during times of crisis. This was recently demonstrated in Ukraine where many people used bitcoin to protect their wealth, accept donations and make payments, and to meet their daily needs. Michael Saylor, a former real estate investor, discussed the negatives of real property as a store-of-value asset. Saylor explained that real estate needs to be maintained. Real estate is expensive. There are high costs for repairs, rent, and property management. For example, commercial real estate is expensive and not appealing to most people. Additionally, attempts to make the asset easier to access have failed. Second tier realty investments like REITs and real estate investment trusts (REITs), fell short of actually holding the asset. As Bitcoin (digital asset) continues its adoption cycle it may replace physical property (real estate) as the preferred store value. The value of physical property could plummet to utility value, and lose its monetary value as a store-of-value. As bitcoin is only at the beginning stages of its adoption cycle, bitcoin’s return on investment will be much greater than real estate. We will not see the same returns on real estate investments that we have seen in the past. House prices have risen nearly 70 times since 1971. As Dylan LeClair, a podcast-turned-article, “Conclusion of the Long-Term Debt Cycle”, points out, governments often tax citizens when this happens. It is difficult to move out of one jurisdiction after being taxed on real estate. Bitcoin cannot be arbitrarily subject to tax. It is immune to seizure or censorship outside of the jurisdiction of any one country. SourceBitcoin vs ETFs Index investing is a passive investment strategy that requires that a manager ensure that the fund’s holdings are comparable to a benchmark index. Jack Bogle, founder and CEO of Vanguard Group, created the Vanguard 500 index fund in 1976. It tracks the returns from the S&P 500. ETFs now manage over $10 trillion. Bogle believed that active stock picking was a futile exercise. In interviews, Bogle stated that there was only a 3% chance that a fund manager will consistently outperform market over the course of a lifetime. He concluded that it would be difficult or impossible for average investors to beat the market. This led him to prioritize ways to lower expenses and offer products that allow investors to save money and participate in economic growth. Index funds are more tax-efficient than funds that have more active management schemes, and require less trades to maintain their portfolios. Although the concept of an ETF is great, bitcoin is better. An ETF can cover a lot, but you have to stick to one industry, one region, or one index. You can buy bitcoin to buy a human productivity index. Bitcoin is an “ETF on steroids”. Let me clarify: Everyone should hear the promise of Bitcoin by now. A decentralized computer network (Bitcoin), with its own cryptocurrency (bitcoin), that, as a peer to peer network, allows the exchange and storage of value. It is the best money available and the base protocol for the fastest transaction network (Lightning Network). In the near future, Bitcoin will likely be the dominant network for transactions as well as a store of value. It will then be an indicator of global productivity. The more productive we become, the more we create value. The more transactions we execute, the more value that needs to be stored. The higher the demand for bitcoin, and the higher the price of bitcoin. Instead of using an ETF for specific indices, I can use Bitcoin to contribute to the productivity of all humanity. As you might expect bitcoin’s returns outperform all ETFs since its inception. It tracks the S&P 500 stock index. The average annual return for investors was 16.68%. This is a 168.0% performance over the past decade, from October 26, 2012, to October 25, 2022. This is not bad considering that an investor only had to hold bitcoin. Source Over 200% per year. We all know the expression “past performance is no indicator for future performance”. This may be true. Bitcoin is a different story. Because of the P/E ratio, the more a stock is valued, the more it is considered to be risky. Not bitcoin. Because of its liquidity, size, and global dominance, bitcoin is less risky to invest in. The Bitcoin Network has reached a size that will last (Lindy Effect). We can conclude that bitcoin will continue to outperform ETFs in the future. Bitcoin also has many advantages over ETFs. It has a lower cost structure. The second is a group of securities held by a third-party. You cannot dispose of your ETFs. Your ETFs will also be lost if your bank closes your account for any reason. Bitcoin, however, can’t be taken away or denied access. Additionally, bitcoin can be moved across the internet at will at the speed of light, making confiscation nearly impossible.ConclusionBitcoin is the best wealth preservation technology for the digital age. A digital native bearer asset that is extremely rare and cannot be inflated. It can also be easily transported. The world’s most powerful computer network makes it possible to transfer digital assets. The Bitcoin network could theoretically store all the wealth in the world (global wealth reached a record high at $530 trillion in 2021 according to the Boston Consulting Group). This may be the most efficient way humans have ever found to store value. Your wealth will be protected and likely to increase by 10x,100x or 500x during the early stages of monetization. If you wait for the next few decades. To close, I want to mention Jack Bogle, who had a tremendous influence on my life. Eric Balchunas describes Bogle’s life work as adding by subtracting. The management fees, the turnover, the brokers, the bias, and the human emotion are all eliminated. His entire life was in the same direction. I believe bitcoin fits well with his investment philosophy. Bogle believed in common sense investing. In 2012, he told Reuters that his primary philosophy was “common sense” investing. He told Reuters in 2012. You’ll end up with nothing if you don’t save. Bitcoin is very similar in concept to passive mutual funds, which Bogle also envisioned. An investment vehicle that allows investors to save their disposable income over the long-term. It is low-risk and low-cost. Don’t let bitcoin’s volatility and negative press distract you. Jack Bogle said it best: Stay the course. We are just beginning. Keep your head down and stack sats. You’ll be a better person for it. This article is the final in a series of three. I want to help you understand the benefits of Bitcoin as a “tool.” Part one explained the opportunities that bitcoin offers real estate investors. Part two described how bitcoin can help us find hope for a brighter tomorrow. This is Leon Wankum’s guest post. These opinions are not necessarily those of BTC Inc. or Bitcoin Magazine.

 

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