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.
Swan Private Insight Update #13
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Back in 2018, similar to the bear market we find ourselves in today, I 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. 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 worldwide.
I share this story because it’s been about four 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 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 “crypto assets.” 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 current challenges 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 abovementioned letter, it reads how “crypto-assets” are not solving Americans' financial problems. 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 display what Chief Strategy Officer of the Human Rights Foundation, Alex Gladstein, calls “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 worldwide 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 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 inflation rate in Emerging Market economies is, on average higher than in 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:
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 that EMDEs are also more sensitive to inflation than Advanced Economies (AEs) due to past inflation experiences. 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 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 also warned of the risk of currency depreciations in emerging markets in January, citing a new Federal Reserve tightening cycle as a potential primary driver.
Since the IMF’s warning, the Federal Reserve has increased the federal funds rate at the most aggressively 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) measures 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 flee 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, few alternatives are available 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. What are they supposed to do to protect their savings?
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 emerging-market currencies. However, getting access to dollars can be difficult for a person in these countries, so 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 a 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 see 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 ten 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 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. If we look at Chainalysis’s 2021 Global Crypto Adoption Index, the countries that are seeing the most cryptocurrency adoption are 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 the adoption of cryptocurrencies grow as citizens seek refuge from the depreciation of their local currencies.
Stablecoins are 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 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. 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, 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
Despite its short-term volatility, Bitcoin is a better option for people going through a true currency crisis, 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 people’s savings 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 can 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. Therefore, it is a good long-term option for people in emerging markets trying to escape their failing local currencies. By holding Bitcoin for five years or more, these people will be able better to 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 its 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 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 five years, these charts show how the price of food, fuel, and shelter has gotten substantially cheaper for anyone who held Bitcoin over that timeframe. Bitcoin helps investors afford the things they need far into the future.
Here’s how cheap eggs have become for Bitcoin investors over the last five 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 five years.
These charts display how Bitcoin helps people better afford the things they 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 helpful for short-term needs, Bitcoin remains the superior hedge against currency debasement over longer time frames.
This makes Bitcoin a great alternative for people worldwide suffering from the ill effects of inflation and currency devaluation. Bitcoin can be easily purchased with a phone and internet connection. It is proving to be a valuable technology to help people protect their savings from the harmful policies of central banks and governments worldwide.
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 by 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 shine. It’s another reason 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 continues to see more censorship and 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 a button to support the protest.
Regardless of how someone feels about the protest, they should be extremely concerned about the response from the Canadian government and the financial sector.
This is all new for Canadians, but censorship, asset freezes, and capital controls are the norm for the civilians of emerging markets worldwide. 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 worldwide. 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 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 one week after it was published.
In the letter, these activists urge for responsible regulation and explain how Bitcoin had helped them and countless others worldwide when all other options failed.
These human rights advocates write:
This letter is a consequential 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 allows 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 five 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:
Do not understand the dangers that billions face today regarding censorship and confiscation.
Do not understand the precarious state of our rapidly inflating global economy, especially in Emerging Market economies.
Do not understand how people use 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 are 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 how I viewed this innovative technology. This piece may have a similar effect on a critic reading this. However, it is essential 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 meet their needs as better money options than 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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Sam Callahan is the Lead Analyst at Swan Bitcoin. He graduated from Indiana University with degrees in Biology and Physics before turning his attention towards the markets. He writes the popular “Running the Numbers” section in the monthly Swan Private Insight Report. Sam’s analysis is frequently shared across social media, and he’s been a guest on popular podcasts such as The Investor’s Podcast and the Stephan Livera Podcast.
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