Investors would no doubt have seen headlines around Christmas about the remarkable surge of Bitcoin. The digital currency is now trading at $33,472, after rising 156% in just three months.
The recent Bitcoin move is remarkable, and it is understandable that some investors may be questioning whether it is merely a speculative bubble that could burst at any moment.
Bitcoin is more than a fad. It is the future of money.
If investors can understand the fundamentals and history of money and Bitcoin, then they will better understand Bitcoin vs money and why it is not just a new vehicle for speculation, but a valid asset class that they should invest in now to enhance returns and protect against surging inflation.
The slow death of state money
Since the beginning of time, the human race has used all sorts of things as value exchange/barter mechanisms between each other, from shells and limestone rocks to pelts and livestock. Commodities such as silver and gold have been enduring stores of value throughout history.
More recently, fiat currency – Government-issued currency that isn’t backed by a commodity like gold – has become the most widely accepted form of money in modern economies.
Unfortunately our confidence in fiat/government paper money is in steep decline. To stimulate their economies during crises, Governments have been printing money to fund spending and ballooning debt, a process that has accelerated during the Covid-19 pandemic.
All state money is diminishing in value against gold, which means purchasing power is eroding away. As we discuss in The 5 steps to protect purchasing power against surging inflation the erosion of purchasing power can have a huge impact on investment returns and retirement.
Over many decades the US dollar has been the global reserve currency used as a store of value. However with growing concern over the scale of US debt today, the USD faces problems continuing to be a store of value going forward.
The good news is that money is adapting and people are working on creating the future of money with more modern stores of value. Money is entering a new era, one fit for a digital world. The main vehicle for this new era is Bitcoin.
The evolution of Bitcoin actually started 40 years ago…
One of the myths around Bitcoin is that it is something brand new and therefore fickle. But Bitcoin wasn’t created overnight. It has taken 40 years of trial and error and many advancements in computer science to build a system that can be used as a global store of wealth and payment network intrinsically bound together.
Several innovators over many decades built on each other’s knowledge and work to underpin the Bitcoin network today. Key step changes included elliptic-curve cryptography in the 1980s; Nick Szabo’s work on decentralised protocols and smart contracts; Adam Back’s Hashcash code design that underpins the proof of work algorithm in the late 90s; these were all foundational to Satoshi Nakamoto’s 2008 whitepaper – “Bitcoin – a peer-to-peer electronic cash system”, which is changing money as we know it.
Bitcoin vs Money
Bitcoin is arguably the most divisible, portable and durable store of wealth ever created. In the diagram below you can see the benefits of Bitcoin vs money and how it is shaping up to be the future of money.
Bitcoin vs Money
The main proposition of bitcoin is that it is decentralised: anyone in the world with an internet connection can use the system and know their wealth and transactions are being secured by the largest computer network in history.
Our financial system today relies on a central party to be entrusted to broker our financial arrangements. The Bitcoin mining algorithm however, ensures a network of computers that don’t know each other will interact with each other in a trusted and reliable manner. It shifts control to a decentralized model removing layers of overheads and inefficient handling.
Basically, Bitcoin possesses all of the traits of money and improves upon them. Winklevoss Capital is famed for describing Bitcoin as “better at being gold than gold”.
In the domain of new product and technology adoption, when a product is superior, 10x better than its closest substitute, it will supersede its competition.
The rise of adoption of Bitcoin
The powerful benefits of Bitcoin are starting to be recognised. We are seeing Bitcoin in the mainstream. Its performance is being reported alongside traditional stock markets on the nightly news. Dow Jones will report the crypto index in 2021, Square payments are in the top 3 companies holding bitcoin on their balance sheet, and Paypal recently opened up Bitcoin to 330m customers.
With brands we know and recognise adopting Bitcoin, investment is only expected to increase, particularly as central banks print more money.
Over the next few years, the Bitcoin conversation is going to radically change with big institutional investors now looking at it as a mature store of wealth.
It isn’t a matter of if, but when
“We are living through a monetary revolution so multifaceted that few of us comprehend its full extent. The technological transformation of the internet is driving this revolution. The pandemic of 2020 has accelerated it.”
Niall Ferguson (Bitcoin Is Winning the Covid-19 Monetary Revolution) Bloomberg
The Covid-19 pandemic has accelerated our adoption of technology. We live, work, shop and socialise in a digital world. This digital transformation took months rather than years. That acceleration has happened in finance and money as well.
People who had never used online banking services were forced to go online because they couldn’t get to branches or the branches were closed. Many more people were exposed to digital financial services and accepted them as part of their lives.
Bitcoin has been at the heart of this acceleration towards digital finance and money.
Because of its powerful benefits, and with Governments debasing their currencies by printing money to fund huge debt and spending, Bitcoin is now, too, being accepted as a store of value and an important investment vehicle.
We encourage investors to learn and understand how an allocation to Bitcoin may provide enhanced returns and lower risk for investors in a rising inflationary environment.
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