Bitcoin, the Conservative Choice
Mainstream pundits like to paint Bitcoin as this hyper volatile, speculative thing that only a degenerate gambler would touch. Investing in the stock market, on the other hand, is usually promoted as a responsible, conservative thing to do with your money. But isn’t it actually the other way around?
"Writing a description of Bitcoin for general audiences is bloody hard. There's nothing to relate it to."
-Satoshi Nakamoto
The path to understanding Bitcoin is both enlightening and frustrating - as Satoshi pointed out, there is nothing to relate it to. In some aspects, Bitcoin is like many instruments we are already familiar with: cash, gold, banking and payment systems, even energy storage. At the same time, these comparisons fall short of fully capturing why Bitcoin matters. I believe the best Bitcoin characterization is simply that it is money. Bitcoin is money that operates on new principles that are surprisingly efficient at achieving monetary properties of scarcity, fungibility, durability, verifiability, and portability.
The thesis of Bitcoin being a new iteration on the age-old concept of money is gradually becoming accepted beyond the niche of bitcoiners and the adherents of the Austrian school of economics. Ricardo Salinas Pliego (Mexico’s third richest man), Ross Stevens (NYDIG founder and long-time investor), and Fidelity (one of the largest asset managers in the world) are among the many heavy-hitters who have recently remarked that Bitcoin is best understood as a monetary medium.
Source: Bitcoin First: Why investors need to consider bitcoin separately from other digital assets, Fidelity Digital Assets.
Investment, speculation, saving
In my previous article here at BTC Times, I wrote that Bitcoin is neither speculative nor an investment instrument, but rather a savings instrument. It’s important to distinguish between these terms, as each has a different risk profile and should be approached with different expectations.
Investment is in essence putting money into ventures with an expectation of future cash flow as the main source of return. Investment necessarily comes with a counterparty risk (you usually don’t hold the stock certificates yourself, but with your broker) and a risk of venture failure. Curiously, modern deposit accounts are effectively a form of investment as the money we put into a bank is immediately lent out and we are given a part of the return in the form of interest (however tiny).
Speculation is putting money into projects with an expectation of a quick turnaround. The only expected return comes from the instrument’s price rising in the short term. Many previously sound investment opportunities have gradually turned into pure speculation via inflationary monetary policy: bonds with zero or negative yield, quick house flipping, Robinhood-style stock gambling; all the result of “financialization”, a fallout of rapidly increasing money supply. “Crypto” trading is also pure speculation done in expectation of quick gains. Speculation is very risky because it’s sensitive to changing market moods and the rate of money printing, and comes with a third-party risk - crypto traders usually need to hold their coins on an exchange to react quickly. Compared to investment or saving, speculation is a zero sum game, where one man’s profit is another man’s loss.
Massive money printing (more than 40% of all the dollars were created in the past two years) has greatly inflated the asset prices, so that fundamentals and expected cash flows no longer play a role. The only thing that matters now for asset prices is what the central banks do next. This is why even the stocks of big corporations have dropped like stone after the Fed started hinting at tapering:
Paypal and Meta: are corporate stocks still investment or rather speculation when their price is a function of the central bank actions?
Saving means taking part of our paycheck and putting it aside for an indefinite time period. We save to preserve or increase our purchasing power for an uncertain future. There is no cash flow and there is no selling the instrument - the aim is to buy goods and services with the instrument at hand, since it is money itself.
Saving used to be possible when gold and silver were money. Up until the First World War, people were able to hold on to their coins for generations without losing any of their purchasing power. Moreover, following the industrial revolution of the late 18th century, the precious coins actually increased in purchasing power gradually, as the technology-led productivity growth led to falling costs and rising quality of goods.
Sound money and the good tradition of conservative family savings were among the many casualties of the disastrous conflict. Most countries abandoned the precious metal in favor of paper, with the US eventually giving up the gold standard in 1971. Saving under the current fiat standard is impossible, as the monetary unit devalues every year without fail. The only option left is risky investment that often turns into pure speculative folly.
Morpheus explains the concept of savings.
In other words, hodling bitcoin without an aim to sell it for fiat currencies - but rather to be spent directly on goods, services, housing etc. - is simply saving.
Get rid of the counterparty risk!
Frugality is one of the ancient virtues and throughout history, the most frugal thing people could do was to save a portion of their earnings and put it away to serve them in an uncertain future. We have been robbed of this option via a monetary system that rewards the profligate and punishes the thrifty.
Bitcoin is a conservative choice both in “crypto” (see the above mentioned Fidelity report for why that is the case) and increasingly also in the broad world of finance. Investment and speculation are risky activities that should be undertaken by specialists, not ordinary people striving to make ends meet. Ordinary folks should have the ability to preserve their purchasing power while undertaking the least amount of risk, just as was the case throughout history when all a family had to do was to put away a gold or silver coin here and there.
It’s quite mind blowing that we have the ability to save again without the risk of debasement and without a counterparty risk. But do keep one thing in mind: Bitcoin, the protocol, protects your savings from being debased; but it’s up to you, the user, to eliminate the counterparty risk. With Bitcoin, you have the option to safeguard your wealth without the need to trust anyone. Get yourself an open source wallet and self custody your coins: software wallet like Muun if you’re just starting out, hardware wallet like Trezor if you need to secure more than a few hundred dollars worth of bitcoin. Stacking sats directly into your wallet, you will have full control over your money and a good chance that your long-term purchasing power will be not only preserved, but rather greatly increased due to a monetary policy that is the very opposite of today’s fiat money.