Why Bitcoin Matters in Today’s Economy
Have you ever thought about why Bitcoin exists? Many people associate it with scams and a variety of names but we should take a closer look at why it exists.
Bitcoin is a form of money that lives on the Internet and is not issued by any state or government. It is believed to be a complete financial system that facilitates the new international digital money.
In his white paper, Satoshi Nakamoto, the founder of Bitcoin, critiques the current financial system. He states, ”The current financial system has evolved to rely on “trust based” Institutions. Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model.”
This revelation underscores Bitcoin’s core philosophy to reduce reliance on the traditional banking system.
Bitcoin emerged from the idea that the problem with conventional currency is all the trust that’s required to make it function.
I certainly do agree that the banking system is based on trust and trust is needed for the financial system to work effectively.
Banks are trusted to facilitate electronic transactions but with our savings, they have lent and speculated on the financial markets with little reserves. In good times, they have been rewarded for taking excessive risks but in bad times they turn to the government for bailouts.
This is the core problem with the trust-based system – the government has no choice but to bail them out or find a solution to keep the trust. Although this has improved since the 2008 banking crisis it’s still an issue especially with the ‘too-big-to-fail’ banks.
As I once read in the Daily Telegraph, since the British pound was introduced 40 years ago, the pound has lost 70% of its buying power due to inflation.
Does that mean if you had £100,000 in savings now is worth £30,000?
Of course, the nominal value of it is still the same but it’s the purchasing power that has reduced by 70%.
The same article also stated that the average house cost £27,386 40 years ago, now it’s £281,913. That’s an increase of 929%.
When we look at Bitcoin’s historical performance it has compounded 109.27% p.a. since August 2011. In the last 10 years, Bitcoin is up 14,040%.
However, that does not mean this trend will continue.
Bitcoin is not tied to any government or authority which makes it immune from poor monetary policy and also has the potential to power borderless economics.
We here in the West are privileged to have a stable currency and economy so we might not appreciate the value those alternative currencies have to offer, but if you live in Argentina or Zimbabwe you certainly will.
Let’s look at Argentina, inflation averaged 189.97% p.a. from 1944 until 2024, while the interest rate has recently been cut from 100% to 80% in March 2024.
The African nation Zimbabwe recently replaced its Zimbabwean dollar with a gold-backed currency called the ZiG and the US dollar.
The ZiG is the sixth attempt to have a stable currency since 2008 after a 500 billion percent hyperinflation that decimated people’s pensions, savings and investors’ confidence.
This year the Zimbabwean dollar has lost 80% of its value while Bitcoin is up more than 130%.
I know this is a short term but it just shows you how bad inflation can get and how evilly it’s destroying people’s hard-earned retirement incomes and savings.
This is a reminder for all of us of the potential effects if the currency and economy are not run properly and the devastating effects of printing money.
Even in the US since 2020 the US dollar has lost 25% of its purchasing power due to inflation.
Recently the US government passed an Act called the REPO for Ukrainians Act that gives the US authority to confiscate $300 billion worth of Russian sovereign assets within the US banks to benefit Ukraine.
Other countries are also watching the vulnerability of the state’s control currency and how this can be played against them if there is any adverse relationship with the US.
The Bank of Japan owns almost 60% of all Japanese government bonds and its debt to GDP is at its all-time high standing at 268% at the time of writing.
However, the valuation of Bitcoin remains a complex question. Is it tied to energy consumption during its mining or some other form of valuation?
Around 94% of Bitcoins are already mined and only 6% remains to be mined which will take years as the halving of Bitcoin reduces the reward for Bitcoin mining by 50% every four years.
There are also significant regulatory risks the industry is facing along with price volatility.
However, some investors prefer volatility over stability as the founder of Microstrategy Michael Saylor stated “I prefer a volatile appreciating asset over a stable depreciating one.”
The question is can Bitcoin become the global monetary system that is not controlled by government? Bitcoin is for sure questioning the current financial establishment and offers viable alternatives for those adversely affected by poor monetary policies. With El Salvador adopting Bitcoin as legal tender and the recent approval of Bitcoin ETFs bolstering regulatory frameworks, Bitcoin’s role in global finance continues to evolve. However, we have to remember that Bitcoin has been around for only 15 years and if the Lindy law holds – which means that something’s life expectancy increases the longer it survives or continues to be used in the future- Bitcoin has a lot to prove in comparison to gold which has proved to be a great storehold of wealth.
Awet Ghirmay, Head of Investment Research
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
