Part Two – by Aaron Koenig
Read: Part 1
In Part One of this series we compared Bitcoin’s stock-to-flow ratio with that of gold, the world’s traditional safe haven. We have seen that Bitcoin’s scarcity by design is one of the main reasons why it could develop into a safe haven for investors in the near future. But scarcity alone is not enough for an asset to have a high and growing value. Equally important is its usefulness. And this is where Bitcoin can show its real strengths, especially in times of crisis, which we seem to enter.
Bitcoin is not only a digital currency, but first and foremost a global payment system which has been working reliably well with hardly any downtime for more than 11 years. It is completely independent from the traditional banking system. Bitcoin has been designed to work without middlemen and without the need to trust anyone. When the financial system collapses, which seems to be inevitable, Bitcoin will continue to function. You will still be able to transfer money anywhere in the world at a low cost, even to countries in which you cannot send money via traditional channels.
If you want to use this new payment system called Bitcoin you need to own the currency with the same name. The more people discover the advantages of such a digital cash system, the more valuable will be this system’s built in currency.
Safe Against Inflation
Governments and their central banks are creating money by piling up more and more debt. Currently they do so at an unprecedented speed because of the Corona lockdowns and its economic consequences. They claim to help businesses without revenues or employees who have lost their jobs. This is understandable and probably the only way to avoid social uprisings and even violent riots. But in the long run, the sharp increase of the money supply will dilute a currency’s purchasing power and the value of everyone’s savings.
It is very likely that many countries will experience hyperinflation as Germany in the 1920s or today’s Venezuela. In such a scenario, Bitcoin will be extremely useful, as its money supply cannot be arbitrarily inflated. Bitcoin also inflates, but in a very slow and totally predictable way. No central bank has the power to create new Bitcoins out of thin air.
Owning Bitcoin when traditional currencies lose their value will be similar to owning US dollars in Weimar Germany or Socialist Venezuela. I know it from personal experience, as I lived in Brazil when the country went through hyperinflation of more than 1000 % per year. While many people were struggling, I lived quite well on a modest student’s grant by a German foundation, which of course was paid out in German marks. Consumer prices went up about once a week, but my German marks would rise against the Brazilian currency every day.
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A Swiss Bank in Your Pocket
Another big plus for Bitcoin: In times of crisis, governments will probably introduce all kinds of instruments for financial repression, such as capital controls and limits on how much money you may withdraw from an ATM. If banks get into trouble, governments might even try to „save“ them by stealing the money on your bank account – they call this criminal act a „bail-in“. But if you keep your money in Bitcoin, you are on the safe side.
No government can stop a Bitcoin payment, freeze your account or confiscate your money. Barack Obama was quoted that Bitcoin is „like having a Swiss bank account in your pocket“. But he was not correct. If you own Bitcoin, you have a Swiss bank in your pocket, not just an account run by someone else.
If governments introduce capital controls to keep you from moving your money out of the area they rule, you may still do so by using Bitcoin. And if you want to leave a country with all your money, the government cannot stop you, even if they use sniffer dogs and metal detectors at borders and airports. Twelve English words which you can store on a piece of paper or even in your head is all you need. From this so-called „seed phrase“ all private keys that give you access to your Bitcoins can be derived.
These qualities make Bitcoin a true safe haven for your money. Taking the control over money out of the hands of governments is very important. Who controls the monetary system controls our lives. We should therefore stop using money issued by governments and only accept decentralised digital cash such as Bitcoin for all payments.
To be continued…
This is an excerpt of Aaron’s book A Beginner’s Guide to Bitcoin and Austrian Economics
Aaron Koenig is an entrepreneur, consultant, writer and film producer, specialised in Bitcoin and Blockchain technology. He creates short commercial films for clients, most of them Bitcoin and Blockchain start-ups. He has been actively promoting Bitcoin and Blockchain technology since June 2011 by writing about it and by organising events and meetups. He has been a speaker and panelist at numerous conferences. Aaron is the author of the books A Beginner’s Guide to Bitcoin and Austrian Economics, Cryptocoins – Investing in Digital Currencies and The Decentral Revolution.