Bitcoin at the End of 2020
Written Dec. 23 2020
This paper is a follow up to my previous paper, 2021 Outlook, and hopes to address a cumulative trove of knowledge teaching readers about bitcoin and economics. The goal of my first paper was to quickly highlight Bitcoin’s decentralized origin and then use a quick timeline to get a nocoiner (someone who does not own or may not even be aware of the existence of, bitcoin) up to speed. In principle, bitcoin education is voluntary and done without ill intent, my goal is to outline how bitcoin is an up and coming asset that will revolutionize global finance and likely personal liberty and the entire structure and role of government. That’s a lot, I know. At least for entertainment purposes, assume that isn’t a crazy idea.
To quickly recap 2021 Outlook, Bitcoin started from nothing but chatter on internet forums led by Satoshi Nakomoto and cryptographers from around the world to create a digital, decentralized money with a fixed supply. The system is fully open source, transparent and voluntary. Bitcoin is a new form of money, powered by a new form of technology with an embedded incentive structure that allows it to exist as a self-sustaining, unkillable system. In 2021 Outlook I outlined Bitcoin’s continuing adoption, despite mainstream media losing interest and prices being below all time highs. The price per bitcoin at the time of writing was about $10,600. As of writing this piece, the price sits around $23,000 USD. More attention is sure to come to bitcoin over the next year. Since writing my previous piece, several very important developments have taken place since the start of October and they are worth discussing. The first is the continued expansion of the US’s M2 Money supply and the strengthened case for bitcoin. The second is the recent SEC lawsuit aimed towards Ripple and XRP, which will surely have impactful changes on the current cryptocurrency industry.
To start, perhaps this should have been included in the previous piece, everyone’s money is rapidly losing value. I am of course talking about inflation. This is an intentional market intervention where additional units of money are created to lower the purchasing power per unit of currency. Think of how $100 used to buy a lot of food or clothes 40 years ago, compare that to 10 years ago or compare that to today. Inflation has two primary goals — control consumption levels (how much people spend/invest) via varying levels of inflation and make the government’s debt burden less burdensome over time. The second function may be less explicit, however, no government can survive growing debt and interest payments if the currency is gaining value over time — this doubles the debt burden. Inflation is impossible with bitcoin.
The 2021 Outlook showed bitcoin’s entire supply schedule, where new bitcoin issuances to miners top after 21,000,000 and miners only collect fees from there on out. Bitcoin has a fixed supply, this means that:
1 bitcoin = 1/21,000,000 of the entire bitcoin supply
This was true ten years ago, it is true today and it will be true ten years from today. This cannot be said for any other asset. Each bitcoin is divisible up to 100,000,000 subunits, this is far more subunits than our current financial system is capable of handling (dollars or euros etc usually are denominated into 100 subunits). The high divisibility of units allows Bitcoin’s hard-capped supply to fulfill all the usage the system must facilitate. Let’s compare bitcoin vs gold. This is a useful exercise because the two share the property of being money that is scarce, durable over time, portable and it cannot be illegitimately created (gold can only be created within supernovas). Gold has an elastic supply curve. A supply curve’s elasticity refers to how much the total quantity of goods produced increases or decreases relative to a change in the good. For example, the price of gold rises, thus less profitable mining operations can mine gold despite higher costs of production, the higher revenue from the higher per-unit value covers this. This is true for most goods. However, this is not true for bitcoin. Bitcoin’s supply curve is perfectly inelastic, meaning it is absolutely unit production is absolutely unaffected by changes in the price per bitcoin. When demand for bitcoin rises, bitcoin is purchased and the price per bitcoin rises. Unlike gold miners or any other form of good/service supplier/producer, a bitcoin miner cannot expand production more than the predetermined, periodic bitcoin distribution that happens at the end of each block (about every 10 minutes). This explains why bitcoin’s price moves up faster than other goods — when demand rises, only price can rise to force selling to satisfy demand. The less selling happens in the face of rising demand the more the price rises in response.
Okay, so bitcoin is the most scarce asset ever conceived. This is not a debatable opinion, it is fact. It’s an impactful principle and it's irrevocable. Think about it long and think about it often. Its consequences are not immediately comprehensible, somewhat similar as one could not forecast the nuanced ways communications and media consumption would change in the face of the ‘rising internet’ at the turn of the millennium. This is an extremely important concept to understand. It's very important to bitcoin. Essentially, every feature in bitcoin exists to ensure fair access and unrestricted exchange of money with a supply that cannot be increased under any circumstances.
Now we know bitcoin has an unalterably fixed supply, but do you know what doesn’t have a fixed supply? The US Dollar. The US dollar’s total supply continuously increases due to the primary goals mentioned above. Yet due to the Covid-19 lockdown, governments around the world have reduced economic activities through various forms of lockdowns. To compensate for this, most governments are raising debt and printing money and giving money directly to struggling businesses and economic participants. The measures were temporarily effective at staving off economic turmoil at best. More currency issuance is on the rise. A lot more than usual. Historically, the amount of U.S. dollars created each year is about 5–7%, however this year that figure has risen by more than 25%, which is absurd. Click here and you can see the steep recent uptick, or let Keanu show you.
The pumping of cash into debt markets to prevent corporate debt from rolling over and keeping bankruptcies at bay is the likely cause of the massive increase in stock prices over the last year, despite poor performance and economic outlooks in many regions, Under the thesis of sound, hard money, bitcoin aims at being the ultimate savings technology. No one can debase the holdings of others no matter the rationalization. This makes bitcoin a valuable “inflation hedge” or “wealth preservation” tool. As this narrative gains momentum, it is likely to be even more self-fulfilling. With the price of bitcoin surpassing its all time high, despite major price declines since its December 2017 peak, bitcoin has brushed off the idea of being a bubble or a fad, gaining acceptance not only as a real asset but one that can potentially hold tremendous value someday. What about severely changing societal structure? It has the power to eventually do that, but that’ll be a later piece. Bitcoin’s potential upside combined with its scarcity principle has drawn investment from many prominent investors and large companies seeking a safe, long term form of wealth preservation. In fact, you can track bitcoins disclosed in various companies’ balance sheets here.
The big recent news and my motivation for writing up this piece before New Year’s, is to provide some commentary on the recent SEC lawsuit aimed towards Ripple and its two primary actors.
My take on this will be brief. Ripple is being sued for an unregistered securities offering. You can’t do that. Ripple tried to replace the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. While doing so, they proposed that a digital token they invented called XRP, was essential to providing faster and cheaper payments when in reality is it was more expensive. This was once the ‘number two crypto’ back in its hay day (late 2017-early 2018, the same irrational exuberance many altcoin investors hope to repeat. XRP will likely tank in price and lose all of its exchange liquidity and investor support. There are a couple of important takeaways. Illegal actions still receive repercussions even if it is a digital/blockchain-type asset. Secondly, you aren’t decentralized if you can be killed or shut down. Bitcoin cannot be shut down. It has grown so widely and is supported by so many that trying to stop bitcoin would be akin to trying to stop the internet. The SEC’s actions against Ripple will likely have consequences for every firm in the space. Ripple founders pre-made all of the XRP currency and sold it to enrich themselves. This is often the ulterior motive for most altcoins. This is quite different when compared to bitcoin motives. The long term motive behind holding bitcoin is that bitcoin gains so much traction, price and popularity in the face of dying, ill-managed central bank issued currency that you don’t need to sell you bitcoin. Bitcoin IS the endgame. This is what bitcoin is all about. The bitcoin world or ‘hyperbitcoinization’ seems like an inevitability. Bitcoin is a new form of money that can’t be killed. And it is the only asset in existence with a fixed supply.
