Please click the link to listen to the 44th episode of my weekly crypto podcast ‘Two Minute Crypto.’ These are intended to be short, single-topic ramblings on some aspect of the cryptosphere. Comments and critiques welcome.
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Two Minute Crypto – Wild Thoughts 5 – Bitcoin as Time
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.
Welcome to Two Minute Crypto this week I’d like to indulge in a little offbeat reflection on Bitcoin and discuss the concept of BTC as time or return on time invested.
The theory is quite simple -BTC is a scarce asset that
with every passing block moves closer to increased scarcity. Ever four years
the supply of newly minted BTC is halved with the next halvening less than a year
away. The current annual inflation is around 4% – so in under a year Bitcoin will
have already matched the 2% rate generally targeted by central banks. Four
years further down the road will see Bitcoin inflation drop to 1%. Such deflationary
supply lies at the heart of BTC design.
Contrast this with a typical currency which has no fixed supply and which year by year increasingly saturates the market ‘devaluing the current fiat in circulation. As we are all aware the longer you hold cash the less it is worth as its purchasing power declines as supply continues to expand. The last 10 years of ‘quantitative easing’ have substantially exacerbated this process -flooding markets with access to cheap credit.
Now to time – as you save cash – each and every year the buying power of that money diminishes and of course that loss of buying power compounds. A decline of 2% doesn’t seem like much but year by year and over a number of decades, it certainly does. It’s true that salaries do often track inflation, so wages generally rise. However, the value of each dollar saved nonetheless diminishes with each passing year. Actual real inflation rates are debatably much higher than 2%, and in some nations, double-digit inflation is the norm.
In order to earn that money, you invested ‘time’ – you
worked a job and saved a portion of your wages.
Bitcoin, however, establishes a different time to value ratio. Bitcoin earned now – all other factors remaining the same – will be worth more in the future. A Satoshi saved now will buy more in the future not less and the longer you hold the more it will purchase relative to other assets. Fiat and BTC exhibit directly contrasting time return propositions -cash debases at a steady rate – demanding a continued investment of time to acquire ever more fiat to attempt to retain purchasing power or saving’s targets. Bitcoin through ever-increasing scarcity offers a compounding appreciating return on investment – the earlier you set it aside the more it will be worth in terms of purchasing power the less you need to work to attain more of it in the future.
This scarcity and increasing return relative to time held is a core principle of Bitcoin and not is subject to the whim of any government or corporation.
Of course, underlying this thesis is the assumption that
Bitcoin does become a successful store of value with a degree of broad market
penetration. This is by no means inevitable but nor is it a ‘longshot’. Should
BTC achieve an ongoing place in global finance year by year its purchasing power
relative to inflationary currencies and assets will inexorably increase.
Bitcoin is designed to appreciate through time – whereas
fiat through a system of targeted inflation debases creating an inverse reward
relationship between BTC and fiat which compounds through time.
Thanks for Listening