Price stability is not something anyone can expect to exist and yet is so coveted that our society’s economic intentions revolve around it. Prices reflect the current availability of goods and services. In a world where the future is uncertain, prices also reflect uncertainty and expectations; therefore, prices enable us to allocate scarce resources however imperfectly.
Money helps people prepare for price variability because money itself is the least uncertain asset. It is the reason we want to hold money – to have some certainty, despite our inability to know the future. Money is something that you believe will have long-term purchasing power, a store of value. It is also a measuring stick, a unit of account, that you know cannot be diluted or manipulated. Lastly, it is something that you will trade for future value, as a medium of exchange, rather than consume today.
Store of value, unit of account, and medium of exchange are all necessary when using money to hedge against future uncertainty.
When you think of the US dollar, how long would you be willing to hold it as physical cash before you worry about its future purchasing power? A month? A year? Five years? Thirty years? While a person’s answer will vary relative to his time horizon, goals, and risk tolerance, all can agree that the dollar does not hold value over the long-term. It is a reason professional financial advisors like me exist. In addition to helpful financial planning, we help you convert your dollars into investments to outpace inflation, a mechanism in our economy that debases the currency by design.
Critics often say bitcoin is not a good store of value because it has 70-90% drawdowns in purchasing power over short periods of time. Short term performance, however, is not a good indicator whether an asset will be a long-term store of value. Contrast this with the US dollar which consistently loses its purchasing power by 1-8% per year and promises to dilute its holders out of future purchasing power.
With inflation running rampant and no end in sight, the world is deciding whether it wants bitcoin to be its money. I would call this a big change for our economy! In which case, bitcoin’s volatility, both to the upside and downside, is to be expected. Without price signals, there can be no bitcoin adoption. Bitcoin’s exponential growth over time is a very strong signal. Conversely, stability in bitcoin’s price would reflect full adoption. Bitcoin’s short-term price instability is a feature that reflects its waves of adoption and through the cycles increases a holder’s purchasing power. In addition, bitcoin is easily verifiable and its supply of 21 million coins is impossible to change, making it a good store of value.
We have standard units of account that we all know and recognize. For instance, a one-foot ruler will always have 12 inches subdividing it (and 30.48 cm for the metric folks out there). If we change the unit of account of a ruler, it becomes impossible to measure or build anything. Imagine one day the “Federal Length Board” decides to have thirteen inches instead of twelve. This would significantly affect how lengths were measured! Conversely, if later there are “too many inches” and the “Federal Length Board” decides to contract rulers down to eleven inches, this would leave builders very confused and unable to operate. Yet, this is how our dollars work today. We use dollars as a unit of account, but we have no idea whether there will be eleven, twelve, thirteen, or more on any given day of the year.
Bitcoin’s certain monetary policy makes it a great unit of account. Every 10 minutes a new block is created. Bitcoin are issued according to a schedule, with the last satoshi expected to be mined in 2140. Thousands of full nodes secure the network thereby enforcing the consensus rules of bitcoin’s blockchain.
Medium of exchange is how most “know” money. People think money should be used nearly exclusively as a medium of exchange, while traditional assets like stocks, bonds, private investments, and real estate are available as a “store of value.” Modern currencies’ inflation is used to encourage instant consumerism, orienting people towards materialism. We need our stuff and experiences, and we need them now! If a person can move dollars quickly to get plastic things and mindless fun, the currency is deemed “good”.
It is impossible for you to use a money as a medium of exchange unless you also expect it to be a store of value. If someone wants to give you money in exchange for your good or service, you must want to hold this money. You must want to hold the money, even if for only a short period, because you will not have immediate needs for the money as soon as it arrives even in a high-velocity trash economy. Alternatively, if everyone tried to spend their money immediately and nobody wanted to hold it, it would drive the value of said money to zero. Bitcoin makes for a great medium of exchange because it is easy to transact with and also a good store of value.
There are sub-characteristics of money that make sending, receiving, and holding money possible, exceptional, or cumbersome. No money is going to score highly on every single characteristic. For example, while bitcoin is highly verifiable, it has a shorter history than most monies. Bitcoin’s rapid rate of adoption over the past decade reflects its advantageous balance of the following characteristics:
Transferability
Bitcoin can be sent anywhere in the world within minutes (or instantly on the Lightning network). You simply copy the recipient’s address or scan a QR code into the send field of your bitcoin wallet and money can be sent. Admittedly, there is work to be done to make sending and receiving bitcoin easier for the mainstream.
Durability
Bitcoin’s durability is encouraging. Bitcoin private keys are just intangible information: therefore, they can be stored such that they cannot be destroyed through wear and tear in your wallet or a fire. Furthermore, the decentralized network that backs bitcoin has global redundancy.
Portability
Bitcoin is the most portable of all the monies. If you had access to all the bitcoin in existence, you could theoretically put it all on one hardware wallet and take it to the moon (or simply move it to a new bitcoin address).
Fungibility
For the most part, one bitcoin equals one bitcoin. There have been instances of addresses being blacklisted by governments due to illegal activity, but this only affects regulated exchanges, not the peer-to-peer Bitcoin network itself.
Divisibility
Bitcoin is the most divisible money. The smallest unit on the Bitcoin network itself is a satoshi, which is 100 millionth of a bitcoin. On the Lightning network, a satoshi can be further divided by 1,000, resulting in millisatoshis.
Verifiability
Bitcoin is easily verifiable. Bitcoin’s blockchain is a distributed ledger. Anyone can run and use a full node to verify that the bitcoin received is, in fact, real bitcoin. It’s desktop software like a web browser. The node software is free and open source.
Censorship-resistance
Bitcoin is designed to be permissionless at the network level. This means that no third-party meddler can get between you and your money. There are no capital controls and no gatekeepers preventing money transmission.
History
Bitcoin has existed for over a decade. In that time, it has increased in value as quickly as monetarily possible, with no sign of withering. The Lindy effect suggests that the longer a money or currency exists, the longer we can expect it to continue to exist.
Scarcity
Proponents of sound money describe bitcoin’s 21 million cap as its distinguishing feature. Due to bitcoin’s scarcity, its purchasing power is historically the most deflationary. Holding an asset that increases in value (deflationary) is better than holding an asset that decreases in value (inflationary) over time. As advisors, we are opposed to holding copious amounts of cash in savings accounts due to inflation causing a cash drag on the overall portfolio. Bitcoin is a long-term savings technology, an upgraded cash that can actually be held in a portfolio.
Skeptics who argue that bitcoin is not money are simply making a bearish prediction about bitcoin losing its purchasing power. They are entitled to their opinion, but bitcoin is empirically money from a neutral economic standpoint. Even if the users of bitcoin are not buying their daily coffee with their stack, merely holding it is a signal that they anticipate spending it in the future.
Origin Wealth Advisers LLC is a fee-only, financial planning firm helping bitcoin families live their most fulfilled lives. Origin provides financial advice and does not sell any products. Prior to founding Origin, Morgen started her career trading equity options and later worked for two large private wealth management firms serving ultra high net worth clients. Morgen has two podcasts, “Bitcoin for Advisors” and “Money Owners,” and also wrote the “Personal Finance QuickStart Guide.” In her free time Morgen homeschools her two young children, cooks, and spends time outside with her family.