This is an opinion editorial by Dan, cohost of the Blue Collar Bitcoin Podcast.
A Preliminary Note To The Reader: This was originally written as one essay that has since been divided into three parts. Each section covers distinctive concepts, but the overarching thesis relies on the three sections in totality. Part 1 worked to highlight why the current fiat system produces economic imbalance; Part 2 and Part 3 work to demonstrate how Bitcoin may serve as a solution.
Part 1: Fiat Plumbing
Part 1 and Part 2 of this essay. We’ve established that a centralized monetary system with fiat as its base invariably leads to increased monetary manipulation. A prominent form of monetary manipulation is influencing interest rates. Short-term interest rates set by central banks are one of the most important inputs in both domestic and international markets (the most influential of which is the federal funds rate set by the U.S. central bank, the Federal Reserve Board). These centrally controlled rates dictate the cost for capital at the base of the system, which eventually seeps upward and impacts virtually every asset class, including treasury and credit markets, mortgages, real estate and eventually equities (stocks). I’ll once again defer to Lyn Alden to sum up the reasoning behind, and impact of, short-term interest rate manipulation:
St. Louis Fed
negative interest rates. My guess is that if you had told a bond trader 30 years ago that there would one day be trillions of dollars worth of negative nominal-yielding debt instruments, they would have laughed you out of the room — yet here we are. And although causes are multifaceted, it’s hard to deny that prevalent monetary policy, in the form of interest rate manipulation and enabled by fiat fundamentals, is at least partially to blame.
Because the short-term central bank interest rates (“risk-free rates”) are artificially suppressed, risk-free returns (or yields) are also suppressed. Consequently, savers and investors looking to grow their capital must get more creative and nimble as well as take on more risk. In 1989 a person could lock money in a certificate of deposit (CD) at their local bank and get a high nominal (and serviceable real) yield. But as the chart below demonstrates, times have changed — immensely.
index funds), which expose them to broad, systemic risks. (I am certainly not against passive investing and indexing — I do much of it myself — but the problem is these strategies have largely become synonymous with saving.)
An old tweet by Pierre Rochard highlights this well:
“Bitcoin Is The Great Definancialization” by Parker Lewis
proof of reserves3). But what does seem clearly imbalanced is the sheer size of today’s financial sector. In his article “The Great De-Financialization”, Parker Lewis wonderfully summarizes the impetus behind this dynamic:
“Financialization has turned retirement savers into perpetual risk-takers and the consequence is that financial investing has become a second full-time job for many, if not most. Financialization has been so errantly normalized that the lines between saving (not taking risk) and investing (taking risk) have become blurred to the extent that most people think of the two activities as being one in the same. Believing that financial engineering is a necessary path to a happy retirement might lack common sense, but it is conventional wisdom.”
velocity of money grew exponentially and the weaknesses of traditionally hard monies like gold became a hindrance — namely the weaknesses of portability and divisibility.4 This dynamic necessitated nascent monetary technologies and gave rise to paper currencies backed by gold, then eventually backed by nation-state promises — fiat as we know it today.
An investigation of Bitcoin invariably thrusts the learner into an exploration of the characteristics of money itself. For many, this journey leads to the recognition that Bitcoin harnesses and improves on gold’s timeless store of value strength: scarcity, while also rectifying (and many would argue perfecting) gold’s shortcomings of portability and divisibility. Bitcoin mitigates the inherent limitations of traditionally sound stores of value while also harboring the potential to meet today’s monetary velocity needs as a medium of exchange. For this reason it has entered the contemporary financial whirlwind as a great decomplexifier. It introduces a natively digital token with immediate cash finality, while simultaneously assuring holders of a fixed supply by way of a decentralized ledger.
bearer asset, and it can be self-custodied with no counterparty risk. This is a tremendously underappreciated feature, especially in high-debt environments where the financial stack is based on increasingly vulnerable promises.5 Architecturally, Bitcoin may be the best money our species has ever had, and unlike gold, it’s built for the 21st century. If you own Bitcoin, you are mathematically, cryptographically and verifiably guaranteed to maintain a certain size stake in the network — your piece of the pie is set in stone. This single digital asset is equipped to buy gum at the grocery store while simultaneously resting at the very base of the financial system in sovereign wealth funds, in both cases with no intermediary or counterparty risk. Bitcoin is a form of money that can do it all.6
As a result, Bitcoin simplifies the investment landscape for the average individual. Instead of perpetual confusion regarding appropriate investment strategies, average wage earners can allot at least a portion of their capital to the best savings technology ever discovered — a network specifically designed to counter the assured debasement of existing fiat units and the risks of exposure to investments like equity, fixed income and real estate (if that risk is unwanted by savers).7 Some laugh when Bitcoin is described as a “safe haven asset,” but it is important to remember that volatility and risk are not the same thing.8 BTC has been incredibly volatile while also generating more alpha than almost any asset on the planet over the last decade.
At this date and time, Bitcoin is largely a “risk-on” asset, coupled to the NASDAQ and broader stock market, but I agree with hedge fund manager Jeff Ross when he states:
“At some point in the future, Bitcoin will be seen as the ultimate ‘risk-off’ asset.”9
As liquidity in the Bitcoin network continues growing exponentially, I believe we will see more and more capital flood into BTC rather than cash, treasuries and gold during periods of economic uncertainty and distress. The game theory suggests that the world will wake up to the best and hardest form of money available, and therefore economic participants will increasingly denominate goods and services in it. As that trend continues, Bitcoin is likely to become an all-weather asset with the ability to perform in a variety of economic environments. This is the beauty of an inherently deflationary10 store of value that can also function as a unit of account and medium of exchange. Bitcoin could become a one-stop shop for the everyday wage earner — something they may one day get paid with, buy goods and services with, and store wealth in without fear of purchasing power depletion. The Bitcoin network is developing into the ultimate financial simplifier, depriving centralized policymakers the ability to siphon capital out of the hands of those who don’t know how to play the financial game. Bitcoin is monetizing in a parabolic fashion before our eyes, and for those motivated and privileged enough to recognize the fundamentals driving it, this protocol represents an unparalleled wealth preservation mechanism — a direct foil to the fiat Ponzi. As a result, middle and lower class basement dwellers, knee-deep in leakage, who elect to protect themselves with Bitcoin will very likely find themselves above grade in the long run.
The Debt Disincentivizer
In Part 2 we established that the economy as a whole is heavily indebted, but let’s take another look at debt as compared to gross domestic product (debt/GDP). The chart below trends all types of U.S. debt (total debt) as a multiple of GDP:
Total U.S. debt is currently 3.5 times that of GDP (or 350%). In comparison, debt was just over 1.5 times that of GDP in 1980, and prior to the Global Financial Crisis, total debt was 3.7 times that of GDP (just slightly higher than where it is today). The system tried to reset and delever in 2008, but central banks and governments didn’t fully allow it and debt remains preposterously high. Why? Because financial policymakers have relied on overused expansionary monetary policies to avoid a deflationary crisis and depressions (policies such as direct interest rate manipulation, quantitative easing, and helicopter money).<FN11> To keep debt from unwinding, new money and/or credit is required. Think about this in terms of the individual: without increasing their income, there is only one way someone can service debts they can’t afford without going bankrupt — take out new debt to pay the old. At a macroeconomic level, unsound money enables this game of “debt balloon” to go on for some time, since the fiat money printer repeatedly assists in mitigating systemic insolvency and contagion. If air is consistently blown into a balloon and never allowed to exit, it simply keeps getting bigger … until it pops. Here’s Lyn Alden summarizing the precariousness of a financial system increasingly built on debt and credit:
Bitcoin Is Venice,” Allen Farrington states:
Part 1, namely a substantial amount of credit risk has transferred from the financial system to the balance sheets of nation-states, with the error term in the debt equation being the fiat currency itself.16)
collateral. The collateral pledged to lenders in today’s financial system is often far from their possession — things like borrower income statements, investment account totals, homes, cars, even cash in the bank. When someone is unable to make payments on a mortgage or loan, it can take months or years before the lender gets restitution, and the borrower can often play “get out of jail free cards” such as foreclosure and bankruptcy. Compare this to Bitcoin, which allows for 24/7 by 365 liquidity in a digital, immediately cash final, global money. When someone takes out a loan and pledges Bitcoin as collateral — meaning the creditor holds the private keys — they can be immediately margin called or liquidated if their end of the bargain isn’t upheld. Responsible creditors in the already existent and exponentially growing Bitcoin borrowing and lending landscape often describe Bitcoin as “pristine collateral,” some reporting close to 0% loan losses.17 It seems inevitable that more and more lenders will recognize the protections an asset like Bitcoin provides as collateral, and as they do, borrowers will be held to greater account. When loan payments aren’t made or loan-to-value ratios aren’t upheld, restitution can be immediate.
“Bitcoin Versus Digital Penny Stocks” by Sam Callahan
Bitcoin First” by Fidelity Digital Assets sums this up nicely.
“Bitcoin’s first technological breakthrough was not as a superior payment technology but as a superior form of money. As a monetary good, bitcoin is unique. Therefore, not only do we believe investors should consider bitcoin first in order to understand digital assets, but that bitcoin should be considered first and separate from all other digital assets that have come after it.”18
“Why Investors Should Care About Interest Rates and the Yield Curve”
2. Source is Parker Lewis’ “Bitcoin Is The Great Definancialization”
3. For more on proof of reserves, see Nic Carter’s Proof of Reserves page
“BTC001: Bitcoin Common Misconceptions w/ Robert Breedlove”
“Why Gold And Bitcon Are Popular (An Overview Of Bearer Assets)” by Lyn Alden
6. If this seems far-fetched, remember Bitcoin is open source and programmable like the internet protocol stack itself. Without compromising its core consensus rules, applications and technologies can be built on top of it to meet future monetary and financial needs. This is being done currently on second layers like the Lightning Network.
7. These aforementioned asset classes are not inherently bad. Investment and lending are key drivers of productivity and growth. However, because today’s money is decaying, saving and investing are becoming synonymous, and even those who want to avoid risk are often forced to take it on.
8. Jim Crider is the first person I heard describe this distinction within the following podcast episode: “BCB029_Jim Crider: The Black Sheep of Financial Planning.”
9. From podcast episode “BCB046_Dr. Jeff Ross: Treating Septic Markets”
The Price of Tomorrow.”
“Principles for Navigating a Big Debt Crisis” by Ray Dalio
12. From “The European Central Bank Is Trapped. Here’s Why.” by Lyn Alden
13. Extreme indebtedness is not unique to the middle class — all of society is over-leveled from the top to the bottom; however, due to lack of knowledge, education, and access, it’s my contention that the lower classes have a propensity to use debt less advantageously.
14. Allen Farrington now has a book by the same title: “Bitcoin is Venice.”
15. From Jeff Booth comments at Bitcoin 2022 Conference during a macroeconomics panel.
“Why Every Fixed Income Investor Needs To Consider Bitcoin As Portfolio Insurance” (specifically on page 23).
17. See podcast episode “BCB049_Mauricio & Mario (LEDN): The Future of Financial Services”
18. From “Bitcoin First” by Chris Kuiper and Jack Neureuter
This is a guest post by Dan. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.