Bitcoin is back in the news after recently hitting all-time highs. “Speculative frenzy spills into Crypto as Bitcoin Tests Highs,” read a recent Bloomberg headline. The daily swings make for good headlines and yes, Bitcoin has proven to be an excellent long-term investment.
However, if you focus only on the daily price moves, you’ll miss the more profound truth: Bitcoin is now more than just a systemically important financial asset held by investors as a portfolio diversifier and alternative store of value to gold.
Bitcoin is strengthening its case as the future of money itself.
Money is one of humanity’s greatest and most enduring creations and it is once again on the brink of epochal revolution. Money, which has evolved through the millennia from cowrie shells to clay tablets to precious metals, bank notes and bank balances, is taking another step into the future. Money is becoming digital.
Bitcoin is the largest, most consequential and valuable new form of digital money today. The Bitcoin Network is greater than the market capitalizations of JP Morgan, Wells Fargo and Goldman Sachs combined. Precisely because of its success, it has attracted other stakeholders such as governments and corporations who also have their sights set on the future of money.
The next decade of innovation will prove decisive as these legacy institutions and organizations compete with the assertive digital civil society that spawned Bitcoin for control over the lifeblood of our economic lives.
These groups all have different goals. For some, the digitization of money is an opportunity to further entrench the dominant businesses of today (such as Facebook) who have their eyes on the reinvention of money. For governments, it’s a chance to either defend the status quo, in the case of the U.S. dollar as global reserve currency, or create a new global hegemon, in the case of China’s central bank digital currency. If you want to understand our collective future, follow the money.
While the competition from governments, banks, and other legacy stakeholders will doubtless be formidable, Bitcoin has a very strong case.
In fact, there are at least nine unique and powerful reasons why Bitcoin could win the battle for digital money:
1. Bitcoin Is the New ‘Digital Gold’
Gold was the original money and Bitcoin is starting to take its place as a store of value, diversifier, and hedge against currency debasement. Like gold, Bitcoin is a scarce asset that takes time and energy to produce and is not controlled by governments. However, unlike gold, Bitcoin is easy to move and store, impossible to forge, and is infinitely divisible… Whereas gold is costly to store and move and is limited by its physical nature. Forgery is too common in gold investments, but Bitcoin is impossible to forge. Over time, investments will rotate from gold to this new “digital gold.” Recently, firms such as J.P. Morgan, BlackRock, and others have made a similar case for Bitcoin to their clients and in the media.
Investment is a precondition to utility, and mainstream investors are increasingly buying Bitcoin as a portfolio diversifier and as a digital gold. Analysis suggests that by adding a small amount of Bitcoin to your portfolio improves risk-adjusted returns because of its low correlation to other asset classes. The floodgates are open with firms such as Guggenheim Alliance Bernstein, Ruffer, and Mass Mutual making this case, and this trend will only accelerate… Not everyone (yet) makes the explicit connection to Bitcoin as digital gold, but all smart investors see the potential as a diversifier and hedge against other elements of their portfolio, a role that gold has typically played in history. Gold is a $7 trillion market versus Bitcoin, which is about one-tenth the size. And as Bitcoin gains greater traction as a store of value, its share of attention and fund flows will increase.
2. Bitcoin Is Used in Corporate Treasury Purchases
In the fall of 2020, MicroStrategy, a medium-sized Nasdaq-listed software company, ushered in a new era of corporate cash management by buying Bitcoin to sit alongside its cash and other short-term investments. MicroStrategy wasn’t the first to do it… The website bitcointreasuries.org lists over 20 public companies that own some Bitcoin. But MicroStrategy’s decision set off a spark that has spread like wildfire and captured the imaginations of more than a few CEOs and corporate treasurers. The decision to buy Bitcoin also sent MicroStrategy’s stock soaring as investors saw the business as an indirect way to get Bitcoin exposure. This trend kicked into high gear on February 8 when Tesla revealed it had purchased $1.5 billion worth of Bitcoin for its treasury. Bitcoin rose another 10% or more following the news. The decision first by MicroStrategy and later Tesla cemented Bitcoin as a viable cash equivalent (and alternative) for big publicly listed firms. How can other firms continue to claim Bitcoin is not suitable when one of the 10 largest corporations in America is buying it for its treasury?
3. Bitcoin Offers a Digital Alternative to Cash
Cash, essential to financial freedom by allowing for anonymous transactions, is in terminal decline. This is regrettable… Cash enables private, free exchanges of money outside state surveillance. This trend is not new. For decades, credit-card payments have chipped away at cash’s role in our economy and the pandemic accelerated that trend as reports (later proved false) that cash was a carrier of COVID-19 caused many merchants to switch to card-only. While cash is still widely used in some parts of the world, the trend is against it. In the two largest developing economies, China and India, governments have taken steps to reduce cash in the economy. In China, the government wants to replace many transactions with a central bank digital alternative to keep a closer eye on how people spend money. In India, with a clumsy attempt to limit the role of cash in the informal economy, the government took high-denomination notes out of circulation. The demise of cash highlights the need for a digital alternative to ensure private, safe payments between individuals. For example, in a China without cash, your access to credit, payments, and savings can simply be switched off if you disagree with the government, a form of financial de-platforming. Bitcoin is the solution. This also leads us to #4:
4. Bitcoin Can’t Be De-Platformed
Removing cash and moving all financial transactions onto rails monitored by governments raises the potential risk for de-platforming of financial services. Despite what you might think, this is not unique to China and other emerging markets and/or authoritarian regimes. The recent de-platforming by big social media companies has raised concerns of similar risks in financial services, such as accessing bank accounts, credit cards, and so forth. Regardless of your politics, the ability for big technology firms with unelected leaders to silence individuals and groups should raise alarm bells for everyone. This tactic, common in authoritarian regimes, could become more common at home and spread to banking. But you simply cannot be de-platformed from Bitcoin.
5. Bitcoin Encourages Freedom From Financial Oppression
Bitcoin usage in the global south is increasing rapidly, albeit from a small base, especially in areas where people are unbanked and underbanked. While Bitcoin has long been touted as a better alternative for unbanked peoples who don’t have the means, access, or even the basic proof of identity to open a bank account, it turns out its greatest value to people living in emerging economies is its censorship resistance. Consider what happened in Nigeria… In 2020, protests erupted in Lagos and across the country against the government because of the brutal and illegal actions of a unit in the police force called The Special Anti-Robbery Squad (SARS). Within days, groups supporting the protesters had their bank accounts frozen. With no other option, they turned to Bitcoin, raising funds that sustained the movement. Now, exactly one year later, the government has made the drastic decision to ban all cryptocurrency accounts, threatening severe sanctions. The young, tech-savvy and vocal population of Nigeria is gearing up for a fight. How it will end is not clear, but it reveals the power and potential of a censorship-resistant form of money in the hands of an oppressed people. Nigeria’s story is a harbinger of what to expect across the world wherever young people with access to technology are unbanked and disenfranchised.
6. Bitcoin Offers an Alternative to the Dollar’s Declining Purchasing Power
The pandemic has required governments to become far more involved in the economy through unprecedented fiscal and monetary schemes. Some of this was necessary to stem the tide of the pandemic, but there are concerns that governments won’t pull back and that their actions will cause a steep increase in inflation. Already, inflation expectations are at their highest since 2013. Recent statements by Federal Reserve Chairman Jerome Powell that inflation is no longer a priority of the Central Bank has stoked fears even more. With concerns that savings will erode, and wages will be worth less than before, many more people may turn to Bitcoin. A prominent NFL player, Russel Okung, recently made the decision to take half his salary in Bitcoin. The decision has not only protected him from future inflationary risk but increased his total compensation as the price of Bitcoin has soared. More companies may be obliged to follow suit if employees demand it.
7. Bitcoin Has Demographic Support
It’s no secret younger people feel very differently about many things than their parents. Russell Okung, age 32, is increasingly typical for his generation… graduating from college in the aftermath of the Financial Crisis and experiencing his formative years in a political crisis of confidence in our democratic institutions. Bitcoin resonates with this group of people (incidentally the largest generation ever) that has felt the system tilted against them. In the U.S., for example, young people view Bitcoin more favourably than their parents. Gen Z and Millennials are growing into the largest cohort of consumers and spenders, and soon will inherit trillions from their baby bomber parents in the largest wealth transfer in human history. They will invest and spend as their conscience dictates. In a recent research note to clients, J.P. Morgan touted Bitcoin as millennials’ preferred store of value investment over gold.
8. Bitcoin Has Been Adopted by Global Payments Companies
Somewhat ironically, legacy payment companies, such as PayPal and VISA, will help turbocharge the adoption of Bitcoin as a medium of exchange. These companies have succeeded by embracing technology, capitalizing for decades on the steady migration of payments to online and offering innovative and convenient services to customers and merchants alike. Unsurprisingly, they see that Bitcoin and other digital assets will be foundational to the future of their businesses. It may not be obvious given these companies’ recent robust growth, but they along with all other legacy financial firms are standing on a burning platform, where the risk of staying put is greater than the risk of jumping off.
The smart firms have already built a life-raft to the future by embracing Bitcoin. For example, PayPal has enabled Bitcoin purchasing for its more than 300 million users and for its more than 25 million merchants. VISA recently announced it would work with existing cryptocurrency companies to “enable users to purchase these currencies using their Visa credentials or to cash out onto a Visa credential to make a fiat purchase at any of the 70 million merchants where Visa’s accepted globally.” Peer-to-peer Bitcoin payments will always be possible for those who want to stay off these corporate rails. But for the majority of users, these companies are building a superhighway to the future with Bitcoin in the fast lane.
9. Bitcoin Has a Meme Value and ‘WallStreetBets’ Effect
Recent coordinated efforts by groups of investors in the stock market to marshal many small investors and weaponize memes highlights the power of the Internet to empower self-organized communities, and to tilt advantages towards groups of smaller investors compared to institutional investors. Efforts to boost struggling companies like GameStop or AMC are inevitably destined to fail (as we saw so vividly when the bubble popped in early February). However, communities and the memes they create are a new and incredibly powerful force in markets. In the broader world of digital assets, there are various strong and resilient communities that advocate fiercely for their favorite project.
By sheer size, durability, and longevity, nothing comes close to the Bitcoin community. There are millions of people who want it to succeed more than anything. If the GameStop episode revealed a distrust by ordinary investors of big institutions, then Bitcoin is the ultimate expression of economic populism. It gains strength from being dismissed… And every day it exists makes it more likely to succeed. Its ownership base is fiercely protective of it. Few investors feel so strongly about their other holdings. The only thing that comes close in traditional capital markets is Tesla, whose community of investors, boosters, and customers is religious in its devotion. Certainly, central bank digital currencies or corporate stablecoins lack any of this missionary zeal.
The rise of Bitcoin fits a pattern of human ingenuity that has spanned millennia. We have used a myriad of creative ways to represent stored value, to transact, and to do business. Throughout history, money has been reimagined or reinvented as nations rise and fall and technology spreads around the globe. Changes to monetary regimes rarely happen more than once in a lifetime and so can seem a permanent and immovable fixture of our lives. As humans, we generally tend to overestimate the short-term impact of new technologies such as electric vehicles, the Internet, and even Bitcoin, but underestimate them in the long term. In the future, money will almost certainly be digital… And Bitcoin has a good chance of winning the battle for the future of money.