Bitcoin and Economics

The only form of currency that has dominated the world after the Gold standard is the fiat currency, issued by the governments. Its value is upon the trust on the government issuing it. Fiat currencies are like the USD, KES, JPY, and GBP.

The governments have the ability to print more money and introduce it to the money supply; this causes inflation or debasing of the currency. The amount of money you had 3 or 4 or 5 years ago cannot be worth it was today. Thus very hard to grow both economically as a country and as a citizen of the respective country.

Inflation is the decrease in purchasing power of a currency. It is reflected in the general increase in price of goods and services in an economy. It grows at 6-9% annually according to most of the reported economic data release. If economy grows at the same rate as inflation, things could just equal out and everything will be in order, but for most countries, especially the developing countries, economy doesn’t grow that much, it grows at about 1-2% annually.

With this kind of imbalance, it becomes very hard for individuals to keep up with the inflation rate or rather moving ahead in terms of growth and acquiring wealth. This is because so much of your economic energy is lost overtime by holding it in the fiat standard. In most of the countries we no longer have the middle class anymore. We have the upper class who are very few and the large number of lower class who can’t seem to get ahead.

Wealth is acquired through acquiring assets or creating assets. Assets like stocks or Treasury bonds. Then after acquiring these assets you also need to have store and preserve the wealth generated by the assets you’ve acquired. That leaves you with the option of Gold or acquiring more assets and the cycle is the same. Most of these assets are cash derivatives; this is to mean there value depends on the underlying currency. This drives us back to the fiat currencies. In many instances all around the globe, average citizens may not be able to get to that level of wealth. While an average citizen is still saving in fiat for the investments, inflation is dragging them two steps behind. If you are saving in fiat the government prints more and debases the currency, if you decide to buy shares from a company, more is sold and as well companies need to grow their cash flow faster than inflation. When the rich store their economic energy in Gold, more is found or even more problems at the national state level. We have had cases of seizing gold from individuals.

Bitcoin is an engineered monetary system. It has so far proven to be a safe haven, both as a store of value and medium of exchange. As more goods and services cross borders, the world needs a less friction medium of exchange operating 24/7 365 days.

Bitcoin as a store of value

Since most of the assets no longer represent a safe haven anymore, the design of Bitcoin with a fixed supply makes it perfect for the function. You can store its energy forever and move it across time and space. Most of the people rich or poor are opting into Bitcoin for this. It is a hard asset that services the basis of the 21st century the world has ever hoped for.  Bitcoin is a hedge against inflation. There will only ever exist 21 million Bitcoin. No more can be added to the network. This makes it a perfect store of value. It is built upon mathematics 1BTC=1BTC forever. While the value of Bitcoin has increased due to its popularity, it doesn’t lock out any individual. Average, rich or poor you can save in Bitcoin with as low as $1. Companies are allocating 1-10% of their assets to Bitcoin.

Bitcoin has two financial components that is in none of any other assets

  1. Protects your purchasing power
  2. It is a hedge against inflation

It is the most desirable asset. While some people are investing with the idea of just speculating its rise in price, it can be source of wealth creation and preservation for generations.

Bitcoin as a medium of exchange

It has been very difficult to pay for goods and services across the globe. Bitcoin is borderless you can have instant transaction from one country and pay for goods or service in another without the interference of a third party. Any amount of Bitcoin worth billions is easily transferable across borders. It was built upon trust, as long as you can trust the other, you can transact without the need of a 3rd party. Bitcoin transaction fees are often very minimal. As it popularity continues to grow, it becomes the most preferred medium of exchange.

Some states like El Salvador have already adopted Bitcoin as a legal tender in the country. Eventually every individual, institutions, companies, will hold Bitcoin in their balance sheet.

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