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. The following article is the final part of a series in which I attempt to explain some of bitcoin’s benefits as a “tool.” There are many options. I chose three areas where bitcoin has been a great help. Bitcoin allowed me to take my entrepreneurial ventures to the next level. It allowed me to efficiently and easily manage my money, and build savings. Part one explains the benefits of bitcoin for real estate investors. Part two explains how bitcoin helped me to take my entrepreneurial endeavors to the next level by allowing me to efficiently manage my money and build savings. Nick Szabo shared an interesting anecdote about the origins of money in his essay “Shelling Out”. A population explosion occurred 35,000 years ago when Homo sapiens sapiens replaced Homo neanderthalensis. It’s hard to understand why, as the newcomers H. s. sapiens had similar brain sizes, weaker bones, and smaller muscles than the Neanderthals. The most significant difference could have been wealth transfers made easier or possible by collectibles. H. s. sapiens enjoyed collecting shells, making jewelry from them, and showing them off. Neanderthals did not. 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 technology. Below, I will compare bitcoin with the four most popular wealth preservation technologies of today — gold bonds, real estate, and equities. This will show why they underperform, and how bitcoin can help us save money and plan for the future. I will be focusing on ETFs, which are equity instruments, as a way to save money long-term. Vijay Boyapati explained that when stores of value compete with each other, it’s the unique attributes that make a store of value stand out. A good store of value has the following properties: durability, portability and fungibility. These properties determine what can be used as a store value. For example, jewelry might be rare but it is easily destroyed, not divisible, and certainly not fungible. These properties are better fulfilled by gold. Over the years, gold has become the preferred technology for wealth preservation. It has been the most reliable store of value for over 5,000 years. But, gold has been subject to digital disruption since 2009’s introduction of bitcoin. Digitization optimizes almost every value-storing function. Bitcoin is not only a store of value, but it is also inherently digital money. It ultimately defeats gold in the digital age. Bitcoin Versus GoldDurabilityAccording to Boyapati, “Gold is the undisputed king of durability.” The majority of the gold that has been extracted is still in existence today. Bitcoin is a digital ledger. It is not the physical manifestation of bitcoin that should be considered. But the durability and reliability of the institution is what matters. 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, boasting a 99.9% uptime. PortabilityBitcoin’s portability surpasses that of gold because information can move at lightning speed thanks to telecommunication. The digital age has made gold less attractive. You can’t send your gold via the internet. Online gold portability is simply not possible. Our monetary system has been plagued by problems for decades due to inability of digitizing gold. It was unclear whether national currencies were really backed by gold after the digitization of money. Due to its weight, it is also difficult to transport gold across countries. This has caused problems for globalized trade. Because gold is not easily portable, our fiat-based monetary system is in place today. Bitcoin is a solution to this problem as it is a natively digital, scarce commodity that is easily transportable.Storing gold versus storing bitcoin (source)DivisibilityBitcoin is purely digital, so its divisibility is much better than gold. Information can be subdivided, recombined almost endlessly at almost no cost. One bitcoin can be divided into 100,000,000 units, called satoshis. It is more difficult to divide gold. It is difficult to divide and requires special tools. It is difficult to prove fungibility with bitcoin. Bitcoin is digital information. It is the most objectively detectable substance in the universe. 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 loses its medium-of-exchange property. This does not affect bitcoin’s store-of value function, but it can negatively impact its price. While gold’s fungibility is better than bitcoin’s, 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%. The supply is not 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. Physical gold can also be diluted with less valuable metals, which can make it difficult to verify. It is also difficult to control the supply of gold in online accounts, whether they are exchange-traded commodities or financial products. This artificially increases the price. However, bitcoin’s supply is limited to 21,000,000. It is deflationary. This means that there will be less bitcoin 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 four years. Bitcoin’s inflation rate will drop to zero in 10 years. In 10 years, bitcoin’s inflation rate will be negligible. Bitcoin can be heard by even the smallest unit. It is impossible to know how much gold is in the world or how many dollars are in the world. Sam Abbassi pointed out that bitcoin is the first globally auditable, publicly available asset. 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 Bitcoin address and transaction history. (Source)Bitcoin Versus bonds In 1949, Benjamin Graham, an American-born economist, professor, and investor, published “The Intelligible Investor.” It is considered one the most important books in value investing and a classic in financial literature. Graham believed that a balanced portfolio should contain 60% stocks and 40% bonds. This was because bonds could protect investors from the risk inherent in stock markets. However, I believe that bonds, particularly government bonds, have lost their role as a hedge in a portfolio. Our monetary system is constantly at risk because bond yields can’t keep up with monetary inflation. The financial health of many governments, which are the heart of our monetary system and financial system, is also at risk. The implied risk of default by a government when their balance sheets were in a good state was almost zero due to two main reasons: their ability tax and more importantly their ability print money to pay off debt. While this was a sensible way to allocate bonds in the past, printing money has become a “credit boondoggle man” as Greg Foss explains. The amount of money that governments are circulating is greater than ever before. The Federal Reserve data shows that the broad measure of the dollar stock, also known as M2, increased from $15.4 trillion at 2020 to $21.18 trillion at 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. Treasury bonds yield less. Source: The return one could earn tomorrow by parting with the money today should theoretically be positive to offset risk and opportunity cost. Bonds are legally obligated to lose money if inflation is taken into account. There is also the possibility of a systemic failure. The global financial system is in irreversible trouble and bonds are at risk. There is also an excessive amount of credit on the markets. Over the past decades, central banks have had loose debt policies. 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 the national currency and cause inflation. It would also make bonds with their low yields ever less attractive. Investors fled to the safety of bonds, which would appreciate in risky environments, over the past 50 years. This dynamic was the basis of the 60/40 portfolio. It collapsed in March 2020 when central banks decided that the market needed more money. The attempt to stabilize bonds will only lead over time to a higher demand for bitcoin. Graham believed that capital should be preserved first, and then it should be grown. It is possible to store wealth in bitcoin without any credit risk or counterparty. Bitcoin vs. Real Estate Due to the high level of monetary inflation over the past decade, it is not enough for money to be kept in a savings account. Many people have invested a large portion of their wealth in real property, which has become one the most valuable stores of value. Bitcoin is able to compete with real estate in this capacity. Bitcoin is a great store of value because it has many properties. It is portable, divisible and durable, fungible and resistant to censorship. Bitcoin is more rare, more liquid, easier and less difficult to seize. It can be sent anywhere on the planet at almost no cost and at a speed of light. Real estate can be easily confiscated and very 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 meet their daily necessities. Michael Saylor, a recent interviewee, discussed the negatives of real estate as a asset that is held in high-value. Saylor explained that real estate requires a lot of attention in terms of maintenance. This includes repairs, rent, property management, and other high-cost items. Commercial real estate is extremely capital-intensive and, therefore, uninteresting for most people. Attempts to make the asset more accessible failed as well, with second-tier investments such as real estate investment trusts falling short of actually holding it. Additionally, bitcoin (digital asset) may eventually replace physical property as the preferred store for value. The value of physical property could plummet to its utility value, and lose the monetary advantage of being stored as a store. As bitcoin is only at the beginning stages of its adoption cycle, bitcoin’s future returns 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 explains in his article “The Conclusion Of the Long-Term Debt Cycle And The Rise of Bitcoin”, governments often tax citizens when this happens. It is easy to tax real estate and it is difficult to move out of one jurisdiction. Bitcoin cannot be arbitrarily subject to taxation. It is not subject to seizure or censorship outside of its jurisdiction. Source: Bitcoin Versus ETFs. ETFs are a form of index investing. This passive strategy requires that a manager ensure that the fund’s holdings correspond 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 held one tenet. Active stock picking is pointless. 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 purchase a human productivity index. Bitcoin is an “ETF on steroids”. Let me clarify: Everyone should be aware of the promise of Bitcoin. Bitcoin is a decentralized computer network that has its own cryptocurrency (bitcoin). This allows the exchange and storage of value as a peer to peer network. It is the best money available and the base protocol for Lightning Network, the most efficient transaction network. In the near future, Bitcoin will likely be the dominant network for transactions. 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. The SPDR S&P 500 ETF Trust, the oldest and largest ETF, is the most popular. It tracks the S&P 500 stock index. The average annual return was 16.68% over the past decade, or 168% performance. This is quite impressive, especially considering that an investor only had to hold the bitcoin. (Source)Bitcoin’s performance over the same period was 158.382.362%. More than 200% per year. We all know the expression, “Past performance is not an indicator of future results.” While that may be true for some stocks, it is not true for bitcoin. Because of the P/E ratio, the more a stock is valued, the more risky it becomes. Not bitcoin. Because of its liquidity, size, and global dominance, bitcoin becomes less risky to invest in. Due to the Lindy effect, the Bitcoin network has reached a size that will last. Therefore, bitcoin is expected to continue outperforming ETFs in the future. Bitcoin also has some advantages over ETFs. It has a lower cost structure. ETFs can also be a basket of securities that is held by a third party. ETFs are not yours to sell. Your ETFs cannot be taken from you if your bank closes your account. 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. It is a digitally scarce asset that can be used to store wealth. It cannot be inflated, has no counterparty risk and is easily transportable. It is a digital store of value that can be transferred on the most powerful computer network in the world. The Bitcoin network could theoretically store all the wealth in the world, which is $530 trillion. This makes it one of the most efficient ways humans have ever discovered to store value. Your wealth will be protected and likely to increase as bitcoin is monetized over the next few decades. To close, I want to mention Jack Bogle who had a tremendous influence on me. Eric Balchunas describes Bogle’s life work as addition by subtraction. He got rid of management fees, the turnover, the brokers, the human emotion, and the bias. I believe bitcoin fits well into his investment philosophy. Bogle believed in common sense investing. He told Reuters in 2012 that his primary philosophy was “common sense” investing. You’ll end up with nothing if you don’t save. “Bitcoin is very much like passive mutual funds, which Bogle designed for investors. It’s a long-term savings vehicle that allows them to save their disposable income at a low cost and with little risk. Don’t let bitcoin’s volatility and negative press distract you. Jack Bogle advises to “stay the track.” We’re just getting started. Keep humble and stack sats. Leon Wankum contributed this guest post. Your future self will be grateful. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.

 

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