Digital Assets are Useful Today Despite What the Naysayers Say
If Bitcoin protects even one family, one person, or one child from the ravages of hyperinflation, then it is worthy of our time, and a useful technology for the world.
Back in 2018, similar to the bear market we find ourselves in today, I went and saw Andreas Antonopoulos speak about Bitcoin. I had heard online about a free talk he was giving in my city and I randomly grabbed a ticket. I didn’t know much about Andreas, only that he wrote a book on Bitcoin. I remember almost bailing on it because it was storming outside, but for whatever reason, I got in my car, and off I went.
At the time, I had bought some bitcoin before the run-up in 2017. Back then, my view of Bitcoin was very superficial. I didn’t care about the potential use cases. I didn’t care about the technology. I saw Bitcoin as nothing more than an investment opportunity to get rich quickly. To me, it was just another speculative bet that could bring me more fiat riches and perhaps allow me to retire early. When I arrived at the venue, there were only a couple dozen people in a half-empty room (it was the bear market after all). I grabbed a seat, and little did I know it would be one of the most impactful nights of my life.
After listening to Andreas speak that night, my whole mindset around Bitcoin changed. I’ll never forget one thing he said on stage. It impacts me to this day and continues to motivate me here at Swan. I’m paraphrasing Andreas here, but he said something along the lines of…
After the talk, I got back in my car and sat in the parking lot, digesting what I just heard, listening to the raindrops pattering my windshield. I realized right then and there the magnitude of the invention I had stumbled upon. Ever since that night, I now recognize Bitcoin not as a speculative asset, but as a tool to protect individuals less fortunate than me from the harmful effects of central bank and government policies around the world.
The reason I share this story is that it’s been about 4 years since that night, and yet a majority of people around the world still view Bitcoin the same way I did before I heard Andreas speak. They see Bitcoin as a useless technology and a symbol of speculation. They view it as a waste of energy and nothing more than a misallocation of resources.
A perfect example of this thinking came one month ago when twenty-six technologists penned a letter to Congress titled “A Letter in Support of Responsible Fintech Policy”. In the letter, these self-proclaimed “experts” make sweeping statements with zero evidence to support their claims about the uselessness of Bitcoin and other “cryptoassets.” The purpose of the letter was to implore Congress to take a responsible approach to regulate the industry, aka to stop it.
Here are two excerpts from the letter that I’d like to highlight here:
1.) “We strongly disagree with the narrative—peddled by those with a financial stake in the crypto-asset industry—that these technologies represent a positive financial innovation and are in any way suited to solving the financial problems facing ordinary Americans.”
2.) “By its very design, blockchain technology is poorly suited for just about every purpose currently touted as a present or potential source of public benefit.”
My goal with this article is to dispute these technologists’ claims that “crypto-assets” are not solving any financial problems or acting as a source of public benefit. I will share data on the problems that currently exist in the global economy, how Bitcoin and stablecoins are helping people around the globe today, and how Bitcoin can continue to be used to help those less fortunate than the technologists who signed this letter.
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If we focus on the first quote from the letter mentioned above, it reads how “cryptoassets” are not solving the financial problems currently facing Americans. While I would argue that this is not true, it highlights how these critics think. They seem to believe that the world starts and ends at the borders of the United States of America.
These authors are displaying what Chief Strategy Officer of the Human Rights Foundation, Alex Gladstein, refers to as “financial privilege.” They don’t seem to be aware of, or lack the empathy to appreciate, the struggles facing billions of people in Emerging Market economies today.
Bitcoin is a global asset that cannot be inflated, censored, or seized. In America, we have the privilege of having access to the most stable financial system in the world, backed by the most reliable fiat currency, the dollar. For the citizens of less fortunate countries, the American financial system seems like a dream. Many countries around the world have banking systems run by unstable governments and central banks. Regrettably, the people in many emerging markets are all too familiar with inflation, confiscation, and censorship when it comes to their savings. The problem is, given the amount of debt in the system, rising inflation, and a newly hawkish Federal Reserve, Emerging Market economies face even more challenging times ahead.
Just this past week, the Bank of International Settlements released its 2022 Economic Report. In the report, the BIS offers a stark warning, “The risk of stagflation looms over the global economy as the threat of a new inflation era coincides with a weaker outlook for growth and elevated financial vulnerabilities.” They go on to write, “the world is at risk of entering a new era of high inflation.”
In the report, they highlight how there has been a sharp rise in inflation over the past two years. The number of countries with inflation over 5% today has increased to over 150 countries.
Furthermore, the rate of inflation in Emerging Market economies is on average higher compared to Advanced economies. According to the World Bank, the average inflation rate across Emerging Market economies stands at ~8% compared to ~5% in Advanced economies.
This is especially concerning given that inflation tends to be more disruptive in emerging markets. The BIS writes, “Since inflation expectations are less well anchored in some of these countries…larger nominal policy rate increases are required to control inflation. Surging food prices are also more disruptive. Sharp rises in food prices have been associated with social instability and the imposition of export controls in the past, ” When inflation hits the economies of these countries, it hits them hard.
If we shift our attention to another report, the World Bank released its Global Economic Prospectus in June, and in it, we hear a similar message. The World Bank warns that rises in CPI inflation are particularly pronounced in Emerging Market economies and that there’s an increased risk of currency depreciation.
They go on to say how EMDEs are also more sensitive to inflation than Advanced Economies (AEs) due to their experiences with inflation in the past. Most AEs have not experienced significant inflation in many decades, but that’s not the case for these EMDEs. These people are sensitive to price changes because they have lived through periods of damaging inflation before. As a result, when inflation arrives, they change their spending behaviors rapidly to protect their savings, further accelerating the inflationary pressures. You can observe this trend in the chart below. In EMDEs, long-term inflation expectations jump nearly double the amount in response to high inflation prints compared to AEs.
The IMF has also warned of the risk of currency depreciations in emerging markets all the way back in January citing a new Federal Reserve tightening cycle as a potential major driver. They reported, “Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally. These developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.”
Since the IMF’s warning, the Federal Reserve has increased the federal funds rate at the most aggressive pace since 1994. As a result, foreign currencies have depreciated rapidly over the last several months. Said differently, the citizens of these countries are seeing their savings devalued at an accelerated pace. This is the result of a strong dollar that is hurting Emerging-Market currencies.
The U.S. Dollar Index (DXY) is a measure of the dollar against a basket of 6 major foreign currencies and is used as a general measure of dollar strength against other fiat currencies. The WSJ Dollar Index (BUXX) is a similar metric but measures the dollar against 16 foreign currencies. The DXY is currently at its highest level since 2003 and is up 13.6% YoY, and the BUXX is up over 12% YoY.
A stronger dollar hurts Emerging Market economies by weakening their currencies and spurring inflation in those countries. There are no signs of this trend abating soon as investors are fleeing to the safety of the dollar as fears of a global recession grow. To give you an example of the current rate of foreign currency depreciation, here’s how seven selected foreign currencies have performed against the dollar since early May.
For the citizens of these emerging markets, there are few alternatives available for them to protect themselves as their local currencies depreciate. With EmergingMarket debt currently sitting near all time highs, these economies being more sensitive to inflation spikes, and a Federal Reserve continuing to tighten, this is bound to get worse for emerging markets before it gets better. For citizens of these emerging markets, the fruits of their labor are disappearing before their eyes. What are they supposed to do to protect their savings?
Well…one trend we are seeing emerge over the past couple of years is some of these people are finding refuge in digital assets in these precarious times.
As the risk of inflation and currency depreciation increases for individuals in emerging markets, many are looking for ways to protect their savings. One way they can protect themselves is by saving in more stable fiat currencies, like dollars, which are more likely to hold their value than many of other Emerging-market currencies. However, getting access to dollars can be difficult for a person in these countries which is why they are increasingly turning to stablecoins.
Stablecoins are easier for these people to access than dollars because all you need is a phone and internet connection. This is why so many individuals are turning to dollar-backed stablecoins to protect themselves against currency devaluation. All one needs to do is look at the explosive growth of stablecoins in recent years to see that there is clear demand for stablecoins abroad. The total fiat-backed stablecoin supply has increased from $12 billion to $132 billion over the last two years, an 11x increase.
Furthermore we are seeing that countries with higher inflation rates in developing countries are more likely to have greater cryptocurrency adoption. In a report published earlier in the year, Gemini surveyed 30,000 adults across 20 countries about the likelihood of purchasing cryptocurrency. The results showed that respondents in countries with 50% or more devaluation against the dollar over the last 10 years were more than 5x more likely to purchase cryptocurrencies in the coming year, compared to those who experienced less than 50% inflation over the same time period.
This survey provides evidence that supports the idea that individuals who live in countries with historically higher inflation rates are increasingly viewing cryptocurrencies, like stablecoins, as a way to protect their savings from devaluation.
Furthermore, if we look at Chainalysis’s 2021 Global Crypto Adoption Index, the countries that are seeing the most cryptocurrency adoption are in countries with more unstable currencies.
The overlap on display here of cryptocurrency adoption and emerging markets with substantial currency depreciation speaks volumes. Many emerging markets face significant currency devaluation in the future which should continue to drive the residents of these countries to cryptocurrencies to preserve their life savings.
As the outlook for these emerging markets continues to look grim given the global macroeconomic picture of slowing economic growth, rising interest rates, and increasing inflation, we should continue to see adoption of cryptocurrencies grow as citizens seek refuge from the depreciation of their local currencies.
Stablecoins are certainly a good option for residents of jurisdictions suffering from currency debasement. They are relatively more stable than many Emerging-Market currencies and are especially helpful for people when they need to protect their purchasing power in the short term. Bitcoin’s volatility doesn’t make it the best option when these individuals are trying to protect their savings to pay their monthly bills or to buy necessities like food and fuel, but are stablecoins really something someone should hold for the long term?
Since most stablecoins are pegged to the dollar, they are still susceptible to the same risk as all fiat currencies, debasement at the hands of the central bank that issues them, and with U.S. CPI inflation currently sitting at 8.6% YoY, the risk of debasement hasn’t been this high since the 1970s. If people in emerging markets decide to hold their wealth in stablecoins long term, then their savings will steadily lose purchasing power over time. This is guaranteed to happen, the only question is, at what rate?
The meme to the right highlights this risk beautifully. The little guy holding dollars may feel safe, but his wealth is trending steadily downwards, and that slope downwards is only growing steeper as the rate of inflation rises.
Notice the little guy holding bitcoin though, he has a much more volatile road, but over long periods of time, his purchasing power has increased. If a citizen in one of these emerging markets is lucky enough to have some disposable income to invest, then Bitcoin would be the better option over stablecoins to protect their wealth from currency debasement over the long term because Bitcoin is impossible to debase
Even with its short-term volatility, Bitcoin is a better option for people going through a true currency crises like in Venezuela and Turkey, where the inflation rates currently sit at 167% and 78.6% YoY respectively. Even the IMF in a recent article sees why Bitcoin may be preferred by people whose local currency is going through a crisis,
As a country’s currency collapses, the savings of the people are diluted forever. They will never get their purchasing power back. On the other hand, Bitcoin may fluctuate in price over the short term, but given its properties, Bitcoin has the ability to increase in value over the long term, something none of these fiat currencies can say. Therefore, Bitcoin can be viewed as a long-term safe haven for these people suffering from currency crises despite its short-term price volatility.
Bitcoin has proven to be able to maintain its value over long periods of time, therefore, it is a good long-term option for people in emerging markets who are trying to escape their failing local currencies. By holding Bitcoin for 5 years or more, these people will be able to better afford essentials like food, water, and fuel than they ever could if they held fiat currencies instead, including the dollar.
Earlier this month, the Federal Reserve posted charts to their website that inadvertently highlighted how Bitcoin’s deflationary nature allows it to protect purchasing power better than fiat currencies over the long term. The charts were meant to show how how Bitcoin’s volatility makes it unsuitable for investors, but when you zoom out, Bitcoin’s strengths are clear as day.
When you lengthen the timeframe to 5 years, these charts show how the price of food, fuel, and shelter have gotten substantially cheaper for anyone who held bitcoin over that timeframe. Bitcoin helps investors afford the things they actually need far into the future.
Here’s how cheap eggs have become for Bitcoin investors over the last 5 years:
Here’s the average price of ground beef:
Here’s the average price of chicken breast:
Here’s the average price of gasoline:
Here’s average rent of primary residence:
Nearly every chart for any food, shelter, or fuel metric shows the same pattern when priced in Bitcoin. In fact, here’s Bitcoin priced against the global price index of all commodities over the last 5 years.
These charts display how Bitcoin helps people better afford the things they actually need like shelter, food, and energy when it is held long term. Bitcoin holds its value over time whereas fiat currencies, including the stablecoins that are pegged to them, are continuously losing purchasing power at an increasingly rapid pace. Although stablecoins are useful for short term needs, Bitcoin remains the superior hedge against currency debasement over longer time frames.
This makes Bitcoin a great alternative for people throughout the world suffering from the ill-effects of inflation and currency devaluation. Bitcoin can be easily purchased with a phone and internet connection and is proving to be a useful technology to help people protect their savings from the harmful policies of central banks and governments around the world.
Thus far, we have focused on how Bitcoin and stablecoins together are helping people across the globe protect their savings from inflation and currency devaluation. In my opinion, this evidence already disproves the technologists’ claims in their letter to Congress that this technology is “not a source of public benefit”, but it should be said that Bitcoin is providing utility well beyond protection from currency devaluation.
One big difference between Bitcoin and stablecoins is Bitcoin’s resistance to censorship and seizure. With a stablecoin, an individual still needs to trust that the centralized issuer of the stablecoin is managing its balance sheet appropriately, will not censor their transactions, and will not seize their funds.
If a centralized stablecoin issuer is tapped on the shoulder from a government or regulator and told not to allow people from specific jurisdictions to transact, then that issuer could easily accomplish this. This is where Bitcoin’s traits of decentralization and censorship-resistance really shine. It’s another reason why Bitcoin should be the preferred long-term option over stablecoins. The risk of confiscation and censorship is substantially reduced when using Bitcoin over stablecoins.
Unfortunately, our world is continuing to see more censorship and more financial warfare in the forms of sanctions, capital controls, and seizures than ever before. Many Westerners woke up to this risk during the Canadian Trucker Protest when civilian bank accounts were frozen with the click of the button for supporting the protest. Regardless of how someone feels about the protest, they should be extremely concerned about the response from the Canadian government and financial sector. This is all new for Canadians, but for the civilians of emerging markets all over the world, censorship, asset freezes, and capital controls are the norm. In this environment of increasing financial warfare, countless stories have emerged over the years of how innocent civilians have turned to Bitcoin as a tool of freedom.
There have been many examples of how Bitcoin has been used as a tool of freedom to overcome tyranny, censorship, and control in countries all over the world. Bitcoin has been used by people trying to escape authoritarian regimes or war-torn countries with their wealth. We heard many stories like this coming out of the Russian-Ukriane conflict. Bitcoin has been used by human rights protestors such as those in Belarus in 2020 who turned to Bitcoin as a way to transfer funds because, “other ways are under the total control of the government.” In countries where the civilians are cut off from the outside world due to a collapsing and broken local financial system, Bitcoin is providing a lifeline due to its open and permissionless nature.
In stark opposition to the technologists’ letter, twenty-one human rights advocates from twenty different countries wrote a letter to Congress to challenge the premises and conclusions of that original letter only 1 week after it was published. In the letter, these activists urge for responsible regulation and explain how Bitcoin has helped them and countless others across the world when all other have options failed.
These human rights advocates write:
“We can personally attest — as do the enclosed reports from top global media outlets — that when currency catastrophes struck Cuba, Afghanistan, and Venezuela, Bitcoin gave our compatriots refuge. When crackdowns on civil liberties befell Nigeria, Belarus, and Hong Kong, Bitcoin helped keep the fight against authoritarianism afloat. After Russia invaded Ukraine, these technologies (which the critics allege are ‘not built for purpose’) played a role in sustaining democratic resistance — especially in the first few days, when legacy financial systems faltered.” They go on to write, “To claim that the practical value and future potential of cryptocurrencies ‘does not exist’ denies the lived experience of millions of people like us and our colleagues who have depended on Bitcoin and stablecoins in times of crisis and autocracy.”
This letter is a powerful contradiction to the technologists’ claims that Bitcoin has no public benefit. Critics may gawk at the number of these stories and say a vast majority of people still do not use these digital assets for these purposes, but that misses the point. Bitcoin can provide refuge to these people. Bitcoin is allowing people to transact free of censorship or government control. Bitcoin does protect people from currency devaluation. These are simply facts.
Millions of people have figured this out, and because this technology works, millions and millions more will soon discover the utility of Bitcoin and stablecoins.
Over the last 5 years, many critics of this technology have chastised Bitcoin and stablecoins as useless and a waste. They have written countless articles in mainstream media about its uselessness and have even called for an outright ban on them.
I believe these critics 1) Do not understand the dangers that billions of people face today in terms of censorship and confiscation, 2) Do not understand the precarious state of our rapidly inflating global economy, especially in Emerging Market economies and, 3) Do not understand the ways people are using this technology as a tool of freedom and protection today.
The IMF, World Bank, and the Bank of International Settlements have all recently issued stark warnings echoing the same message, we are possibly headed into an era of slow growth and high inflation which could result in further currency devaluations across emerging markets. Emerging Market economies appear to be entering a very challenging time. The critics who wrote that disparaging letter about “crypto-assets” should be more thoughtful of those less fortunate than them, and learn more about how these technologies are helping people today before deriding them.
I too once only saw Bitcoin as a speculative asset. Luckily, I saw a presentation that changed the way I viewed this innovative technology. Perhaps this piece will have a similar effect on a critic reading this. However, it is important to note that an individual suffering from rapid currency devaluation in Argentina, Venezuela, or Turkey does not need an analyst like me to convince them why Bitcoin and stablecoins are important. They understand it intuitively because Bitcoin and stablecoins simply meet their needs as better money options compared to their collapsing local currencies. They understand the usefulness of Bitcoin’s open and permissionless nature because Bitcoin worked for them when everything else failed. Critics of Bitcoin and stablecoins would be wise to consider this before pleading with Congress to cut off one of the only lifelines these people have to transact freely and preserve their life savings.
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