Bitcoin: Currency or Hedge?
Bitcoin has turned the world upside down since its launch in 2009. It is no coincidence that the decentralized currency was made available in the aftermath of the 2008 financial crisis. With a capped, scarce supply and transparent security, it grew in immense popularity. As the nature and use of Bitcoin continue to change, it’s important to understand its best use cases.
The market’s use of Bitcoin
Bitcoin is by far the most in-demand digital currency by market capitalization. It currently exceeds the next most popular cryptocurrency, Ether, by a factor of 20. Clearly what the market desires most is its decentralized, proof-of-work consensus mechanism that is secure, incorruptible, and universal. Yet 60% of Bitcoin owners hold the asset as an investment hedge, not as a transactive currency.
While investing in different currencies is nothing new, Bitcoin offers a completely different store of value, in contrast to the foreign exchange market.
Rather than harboring investments in one fiat currency or another, Bitcoin investors are stocking up on a capped asset free from central bank control; and investors are growing by the millions every month.
Consider these key data points:
180M Bitcoin users exist worldwide.
250,000 Bitcoin transactions occur each day.
Bitcoin wallet creation has increased 237% since 2018.
172M Bitcoin wallet addresses are economically relevant.
46M Americans (22% of the US adult population) own Bitcoin.
As a currency
One big criticism of Bitcoin––albeit mostly from people who do not understand crypto––is the adage “you can’t buy a loaf of bread at the grocery store with it.” Well, that’s true in most situations; but neither can you buy bread with a bar of gold either.
Yet, Bitcoin critics like Peter Schiff, ballyhoo gold all the time. But that doesn’t mean that merchants and retailers aren’t looking into using it as a form of payment.
The type of store can also determine what form of payment can be accepted. Farmers’ markets and e-commerce platforms can accept Bitcoin more easily than corporate chain grocery stores.
Earlier this year El Salvador famously adopted Bitcoin as its sovereign currency. In April the Central African Republic did the same.
Though critics have railed against these decisions, it is clear and logically sounds that a country subjected to perennial inflation and deep corruption would adopt a decentral currency to stabilize its economy.
However, Bitcoin does have the capability to help nations avoid economic sanctions. Decentralization can be a double-edged sword when used by countries like North Korea.
As for achieving legal tender status in most countries, Bitcoin is not without its challenges. Its transactions-per-second are extremely slow––often taking hours to mine a single transaction. Scalability is also bottlenecked, presenting many other challenges. Moreover, there are major disagreements between Bitcoin enthusiasts over several details.
Unless and until Bitcoin can overcome these challenges, mainstream adoption will not take place. Unless a majority of populations adopt Bitcoin on an individual basis, nations will continue to be dependent upon fiat currency.
As a hedge
Popular orthodoxy says that Bitcoin is a hedge against inflation since it is a capped asset; demand grows as supply decreases, thus raising the market price. In one sense this is true––Bitcoin is a capped asset whereas the fiat dollar is not - but not everyone agrees.
Bank of America published their view that Bitcoin does not hedge against inflation, citing its historical price fluctuating in tandem with the stock market and with gold. Other Bitcoin critics, such as Peter Schiff, argue that Bitcoin is the new Tulip Mania and is fool’s gold.
From a TradFi perspective, it is easy to assume that Bitcoin is no different than any other asset valued in dollars. The data leaves out the fact that industry investors treat Bitcoin as though it were another tech company like Apple or Google.
The tech sector is the most volatile of all market sectors, hence it is almost always a bellwether in market trends. Cryptocurrency is an even more volatile market, thus it stands to reason that TradFi investors who do not distinguish between a digital currency and a tech company would sell crypto when balance sheets call for it.
Future use of Bitcoin
The codified slogan that the U.S. fiat dollar is “backed by the full faith and credit of the U.S. government”, has always been a misnomer. There is “full faith” because the U.S. dollar has largely been considered to be backed by oil since 1971 when President Nixon removed the U.S. dollar from the gold standard.
And this is where the great debate over Bitcoin and fiat goes through the looking glass. The difference is that the dollar is controllable by centralized entities and Bitcoin is not.
Critics argue that Bitcoin is used for drug trafficking and illegal arms sales; that mining is energy-intensive and harms the environment. Some of that is true; but just like the stock market volatility argument, it does not present the whole picture.
Oddly enough, the mainstream arguments against Bitcoin could be made against the fiat dollar––in spades. The U.S. is the currency of the drug trade and illegal arms trade; its production is also far more environmentally harmful than Bitcoin mining.
Bitcoin’s adoption as mainstream legal tender––especially in the U.S.––is the holy grail for Bitcoin maximalists. But it has a long, steep hill to climb if it is going to overtake fiat currencies, CBDCs, and bureaucratic control.
Nevertheless, it remains the best alternative option the world has ever seen. Unlike gold and real estate, it is easily transferable and cheap to transfer.
As Bitcoin maximalist Michael Saylor puts it, “Bitcoin is an instrument of economic empowerment.”
