Bitcoin. The new monetary system.
People do not change, but the circumstances in which they live are constantly changing. Technology is the driver of this constant change - the electric current, the automobile, the telephone, atomic energy, the computer, the Internet and now Bitcoin. This technological change creates new living conditions, it destroys existing structures and creates new ones. It changes our society, economy and politics, creating new rulers. Only the laws of nature do not change. Physics and nature remain in control.
The invention of the decentralised blockchain and bitcoin, specifically, is one of those moments that will radically change the circumstances in which we live. As always, many areas of our lives will be affected by this change. Existing structures will be destroyed, new ones will be created and new leaders will rule our daily lives.
Bitcoin is not owned by a person, a company, a foundation or an organisation. It cannot be sued because it has no owner and is neither a natural person, nor a legal entity. It does not exist in a specific place. Yet, it does exist, is operational and is already used by over 220 million people.
The characteristics of the Bitcoin network are immutably defined in a technical protocol. One can transfer, receive and store Bitcoin. For this, you do not need a bank, nor a bank account. As per the protocol, the maximum number of Bitcoins is set at 21 million units for all eternity. It also specifies the method by which one may “produce” or create this set amount of Bitcoins. This process does not require a central bank or the legitimacy of a government, but a particular technical infrastructure. The system, therefore, does not need a bank to hold, transfer and receive Bitcoins and does not need a central bank to create them.
Another important feature of Bitcoin is that it can be used across territories and borders. A user can transfer, receive and store Bitcoin from anywhere in the world, at any time, without technical barriers. Bitcoin is not bound to any one place. It is entirely decentralised, unlike the US dollar, which is centrally issued, or "produced", by a central bank.
If you compare Bitcoin to the US dollar, it is very clear that the features of Bitcoin are superior in certain respects. It is cheaper to “produce”, transaction costs are lower and infrastructure costs, such as clearing and capture, are cheaper. Every Bitcoin transaction is transparent and can be tracked in the blockchain by any person or organisation, making it less prone to money laundering. However, Bitcoin is not globally accepted, compared to the US dollar, nor can all transactions be made through it. In some regions, such as China, Bitcoin is even banned.
Conversely, the US dollar offers other features. It is under the control of a central bank and its respective government, it can be produced without limits, unlike Bitcoin’s 21 million supply cap, it is much less volatile and it is accepted across global markets. It is under the influence of the American government and is thus predictably used to further the political interests of its owner. This unbacked so-called fiat currency, enjoying global acceptance and reflecting global trust in American institutions, has established itself as the world's reserve currency. This trust, however, has been waning in recent decades and the US dollar is losing purchasing power.
By comparison, Bitcoin is built on a mathematical formula that is verifiable, unchanging and traceable. The trust lies in mathematical procedures that define its properties in a fixed way and make it impossible for persons or organisations to change or corrupt its protocol. As an example, it is not possible to "print" more than 21 million Bitcoins.
The characteristics, technical functions and utility of Bitcoin are more similar to gold than to the US dollar. They are both used as a store of wealth. Compared to gold, however, Bitcoin has improved and unlimited mobility, as well as being protected by cryptography. Unlike gold, however, Bitcoin facilitates the transfer of any amount, is boundlessly mobile and protected from hostile interference by cryptography. None of these features are present in physical gold. The main commonality remains that both are a store of wealth.
The potential success of Bitcoin depends, not only on trust in the technical protocol and its immutability, but, also, on the acceptance of users and the market. This acceptance is measured by the number of Bitcoin users, the number of transactions undertaken in Bitcoin and, finally, the price of Bitcoin, which is currently reported in fiat currencies.
In short, the US dollar is a currency, or means of payment, under the control of a central bank, based on trust in US institutions, which can be reproduced without limit. Bitcoin, on the other hand, is a technical protocol that has no owner, is based on trust in its mathematical formula and is limited to a maximum of 21 million units. The US dollar is the world's reserve currency. Bitcoin is not.
Now let's leave the world of sober descriptions and try to take the perspective of the user, or, as we like to say, the customer. The customer is the user of the US dollar. He can carry out any worldwide transaction without restriction, make purchases, buy stocks and real estate, pay his bills, receive his salary or income and save. The downside is, if the Federal Reserve prints new dollars, the value of his dollar savings decreases and he loses purchasing power. The customer cannot do anything against the fact that the central bank prints more dollars, since he has no influence on it. The customer has to pay for this loss of value himself. Furthermore, the central bank determines interest rates. Here, too, the customer has no influence and must bear the costs.
Two questions thus arise from this. Firstly, why does the customer accept this? Because he has no choice. There is no alternative. Secondly, why does the Federal Reserve print new dollars? Because it needs more and more money to cover the rising costs of the state and the government spends more money than it raises. The Federal Reserve thus also has no choice.
Let's imagine that the Federal Reserve could no longer print money, but had to limit itself to 21 million banknotes. The consequence would be that the government would have to massively reduce its expenditure. It would not be able to pursue certain projects and would have to reduce spending in sectors such as healthcare, infrastructure or defence. It would also need fewer civil servants and be limited in the amount of debt it could incur. In consequence, the government would have to leave the tasks it could not fulfill to private companies or organisations. Its influence would diminish and it would be able to finance fewer wars, having to strive instead for more peaceful relations with its neighbours to avoid costly conflicts. In return, the US dollar would have more value and its purchasing power would increase massively. One could trust that no more than 21 million bills would be printed. Customers’ savings would gain in purchasing power over the years. There would also, of course, be disadvantages. The economy would no longer be supplied with as much fresh money and may grow less rapidly. Conversely, it would overheat less often and have less violent financial crashes.
Of course, there are many more explanations for printing money and, where one falls on these debates, depends on whether one is a follower of "Austrian economics" or "Keynesian economics". Nevertheless, currency debasement remains currency debasement.
Let's imagine that, at some point, customers lose confidence in the US dollar. They are afraid of a further loss of purchasing power, through inflation, and they do not believe that their government's debt can ever be repaid. As always, these customers will try to invest their savings in gold, stocks and real estate. In other words, they will invest in tangible assets. They have no other choice. After a certain time, the confidence in the US dollar will decrease to such an extent that the customers of the US dollar will no longer want to accept it. Then, as always, there will be a currency reform. In other words, the US dollar will be phased out and a new currency will take its place. Slowly, people will trust again, and the game starts all over again. This cycle will repeat itself every 80 years or so. Why? Because there was no choice... until now.
As mentioned at the beginning, people do not change, but the circumstances in which they live change constantly. And it is yet again a new technology that will change our circumstances. This time, customers have an alternative in Bitcoin, even though it is not yet globally accepted and sufficiently adopted. And trust in the US dollar remains high. But this trust is waning significantly, not only among customers, but also among corporations and countries. 220 million customers already use Bitcoin and over 450m US dollars is invested in Bitcoin. Not much compared to the US dollar, but not little either.
So what will happen? We think customers will increasingly trust Bitcoin whilst increasingly distrusting the US dollar, as the Federal Reserve will keep printing ever more US dollars. Customers will like that you can send, receive and store Bitcoins easily. They will love that they no longer need a bank or bank accounts. And unlike gold, Bitcoins cannot be taken away from you. They are protected by encryption techniques (private key). And one day, the moment will come when we all realise that there is more value in Bitcoin than the US dollar. Then, customers and business clients will no longer accept US dollars unless the US dollar guarantees that, from now on, it will be backed by Bitcoin and that it will no longer be printed without limits. At that point, trust will be re-established. It would be the dawn of a new Bitcoin standard and a new monetary system.
But we are also convinced that the technical characteristics of Bitcoin are not suitable to replace the US dollar as a means of payment for private or professional use. The sheer number of transactions would overload the capacity of the Bitcoin network. For this reason, a currency will still be required that can be used as a means of payment. In all likelihood, this task will continue to be performed by the US dollar and other fiat currencies, which, at that point, will only be digital. This will mean the end of cash, but even these digital fiat currencies, like the US dollar, will only find acceptance among customers if they are backed by Bitcoin. If the US dollar does not take this step, another fiat currency will, or, as we think is more likely, an alternative cryptocurrency based on Ethereum. You can read more about this in our upcoming research report.
No government will be able to withstand the pressure caused by the technical innovation of the Bitcoin blockchain and, as always, the circumstances in which we live will change massively, even if people do not change. Of course, we know that this view is oversimplified, we appreciate the complexity of this matter and understand that it will take time for these changes to occur.
Our Numbrs Research will follow these changes very closely. We are a team of five analysts who are constantly monitoring and analysing these developments. We will try to explain the consequences of this new monetary system, in detail, in order to protect your assets and ours. Unlike banks, we enjoy the fruits and bear the consequences of our research, as we invest our own assets in Bitcoin. This gives us credibility and presupposes true diligence in our research activities.
The weekly Numbrs Research is exclusively available to Bitcoin account holders. We recommend anyone investing in Bitcoin to open a Numbrs Bitcoin account. We developed this Bitcoin account to protect our own assets in the safest country in the world: Switzerland. We have invested over CHF 50 million of our private assets in the development of the most secure custody of Bitcoin. Open a Bitcoin account in Switzerland and get access to our research.
Martin Saidler - Founder