Why Bitcoin Is The Ultimate Wealth Preservation Technology


Bitcoin provides the ultimate form of transferable value because it preserves the encapsulated wealth.This is an opinion editorial by Leon Wankum, one of the first financial economics students to write a thesis about Bitcoin in 2015.Evolutionary psychologists believe that the ability to "preserve wealth" gave modern humans the decisive edge in evolutionary competition with other humans. 


Nick Szabo wrote an interesting anecdote about how in his essay “Shelling Out: The Origins of Money.” When homosapiens displaced homo neanderthalensis in Europe circa 40,000 to 35,000 B.C., population explosions followed. It's difficult to explain why, because the newcomers, homosapiens, had the same size brain, weaker bones and smaller muscles than the neanderthals. The biggest difference may have been wealth transfers made more effective or even possible by collectibles. Evidence shows homosapiens sapiens took pleasure in collecting shells, making jewelry out of them, showing them off and trading them. It follows that the capability to preserve wealth is one of the foundations of human civilization. Historically, there have been a variety of wealth preservation technologies that have constantly changed and adapted to the technological possibilities of the time. All wealth preservation technologies serve a specific function: storing value. Chief among the early forms is handmade jewelry. Below I will compare the four most commonly used wealth preservation technologies today (gold, bonds, real estate and equities) to bitcoin to show why they underperform and how efficiently bitcoin can help us save and plan for our future. For equities, I focus specifically on ETFs as equity instruments used as a means of long-term savings. Detail of necklace from a burial at Sungir, Russia, 28,000 BP. Interlocking and interchangeable beads. Each mammoth ivory bead may have required one to two hours of labor to manufacture. 


 What Makes A Good Store Of Value?As explained by Vijay Bojapati, when stores of value compete against each other, it is the unique attributes that make a good store of value that allows one to out-compete another. The characteristics of a good store of value are considered to be durability, portability, fungibility, divisibility and especially scarcity. These properties determine what is used as a store of value. Jewelry, for example, may be scarce, but it's easily destroyed, not divisible, and certainly not fungible. Gold fulfills these properties much better. Gold has over time replaced jewelry as humankind's preferred technology for wealth preservation, serving as the most effective store of value for 5,000 years. However, since the introduction of Bitcoin in 2009, gold has faced digital disruption. Digitization optimizes almost all value-storing functions. Bitcoin serves not only as a store of value, but also as an inherently digital money, ultimately defeating gold in the digital age. Bitcoin Versus Gold Durability: Gold is the undisputed king of durability. Most of the gold that has been mined remains extant today. Bitcoin are digital records. Thus it is not their physical manifestation whose durability should be considered, but the durability of the institution that issues them. Bitcoin, having no issuing authority, may be considered durable so long as the network that secures them remains intact. It is too early to draw conclusions about its durability. 


However, there are signs that, despite instances of nation-states attempting to regulate Bitcoin and years of attacks, the network has continued to function, displaying a remarkable degree of “anti-fragility”. In fact, it is one of the most reliable computer networks ever, with nearly 99.99% uptime. Portability: Bitcoin's portability is far superior to that of gold, as information can move at the speed of light (thanks to telecommunication). Gold has lost its appeal in the digital age. You can't send gold over the internet. Online gold portability simply doesn't exist. For decades, the inability to digitise gold created problems in our monetary system, historically based on gold. With the digitization of money, over time it was no longer comprehensible whether national currencies were actually backed by gold or not. Also, it is difficult to transport gold across borders because of its weight, which has created problems for globalised trade. Due to gold's weakness in terms of portability, our current fiat-based monetary system exists. Bitcoin is a solution to this problem as it is a native digital scarce commodity that is easily transportable.Storing Gold Versus Storing Bitcoin Source Divisibility: Bitcoin is purely digital, so its divisibility is much better compared to gold. Information can be subdivided and recombined almost infinitely at almost zero cost (like numbers). A bitcoin can be divided into 100,000,000 units called satoshi. Gold on the other hand is difficult to divide. It requires special tools and carries the risk of losing gold in the process, even if it's just dust.Fungibility: Gold can be distinguished for example by an engraved logo, but can be melted down and is then fully fungible. 


With bitcoin, fungibility is “tricky”. Bitcoin is digital information, which is the most objectively discernible substance in the universe (like the written word). However, since all bitcoin transactions are transparent, governments could ban the use of bitcoin that has been used for activities deemed illegal. Which would negatively impact bitcoin's fungibility and its use as a medium of exchange, because when money is not fungible, each unit of the money has a different value and the money has lost its medium of exchange property. This does not affect bitcoin's store-of-value function, but rather its acceptance as money, which can negatively impact its price. Gold's fungibility is superior to bitcoins, but gold's portability disadvantages make it useless as a medium of exchange or a digital store of value.Scarcity: Gold is relatively scarce, with an annual inflation rate of 1.5%. However, the supply is not capped. There are always new discoveries of gold and there is a possibility that we will come across large deposits in space. Gold's price is not perfectly inelastic. When gold prices rise, there is an incentive to mine gold more intensively, which can increase supply. In addition, ​​physical gold can be diluted with less precious metals, which is difficult to check. Furthermore, gold held in online accounts via ETCs or other products often has multiple uses, which is also difficult to control and negatively impacts the price by artificially increasing supply. 


The supply of bitcoin, on the other hand, is hard-capped, there will never be more than 21,000,000. It is designed to be disinflationary, meaning there will be less of it over time. Bitcoin's annual inflation rate is currently 1.75% and will continue to decrease. Bitcoin mining rewards are halved roughly every 4 years, according to the protocol’s code. In 10 years, its inflation rate will be negligible. The last bitcoin will be mined in 2140. After that, the annual inflation rate of bitcoin will be zero. Auditability: This is not a unique selling proposition for a store of value, but it is still important because it provides information about whether a store of value is suitable for a fair and transparent financial system.Bitcoin is perfectly audible to the smallest unit. No one knows how much gold exists in the world and no one knows how much US dollars exist in the world. As pointed out to me by Sam Abbassi, bitcoin is the first perfectly, publicly, globally, auditable asset. 


This prevents rehypothecation risk, a practice whereby banks and brokers use assets posted as collateral by their clients for their own purposes. This takes an enormous amount of risk out of the financial system. It allows for proof of reserves, where a financial institution must provide their bitcoin address or transaction history in order to show their reserves. Source Bitcoin Versus BondsIn 1949 Benjamin Graham, a British-born American economist, professor and investor, published „The Intelligent Investor“, which is considered one of the founding books of value investing and a classic of financial literature. One of his tenets is that a "balanced portfolio" should consist of 60% stocks and 40% bonds, as he believed bonds protect investors from significant risk in the stock markets. While much of what Graham described then still makes sense today, I argue that bonds, particularly government bonds, have lost their place as a hedge in a portfolio. Bond yields cannot keep up with monetary inflation and our monetary system, of which bonds are a part, is systematically at risk. This is because the financial health of many of the governments that form the heart of our monetary and financial system is at risk. When government balance sheets were in decent shape, the implied risk of default by a government was almost zero. 


That is for two reasons. Firstly, their ability to tax. Secondly, and more importantly, their ability to print money to pay down its borrowings. In the past that argument made sense, but eventually printing money has become a “credit boogie man”, as explained by Greg Foss, Governments are circulating more money than ever before. Data from the Federal Reserve, the central banking system of the US, shows that a broad measure of the stock of dollars, known as M2, rose from $15.4 trillion at the start of 2020 to $21.18 trillion by the end of December 2021. The increase of $5.78 trillion equates to 37.53% of the total supply of dollars. This means that the dollar's monetary inflation rate has averaged well over 10% per year over the last 3 years. U.S. Treasury Bonds are yielding less. Source The return that one could earn on their money tomorrow, by parting with that money today should theoretically be positive to compensate for risk and opportunity cost. However, bonds have become a contractual obligation to lose money when Inflation is priced in. In addition, there is the risk of a systematic failure. The global financial system is irreversibly broken and bonds as a foundation of it, are at high risk.There is an irresponsible amount of credit in the market. In recent decades, central banks have had very loose debt policies and nation states have incurred large amounts of debt. Argentina and Venezuela have already defaulted. 


Source : [Why Bitcoin Is The Ultimate Wealth Preservation Technology](bitcoinmagazine.com/culture/bitcoin-wealth-preservation-technology) by Leon Wankum - December 16, 2022

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