What is Bitcoin’s role in the future of finance?

Over the last 12 months, we’ve witnessed a litany of financial catastrophes.

From the collapse of the LUNA cryptocurrency and UST stablecoin in May 2022 to the bank failures of March 2023 and everything in between, it now seems apparent that almost nowhere can be considered a monetary safe haven.

Stocks, bonds, cryptocurrencies, and commodities have all faltered or remained flat during this time, with the exception of the NASDAQ, which is up about 25% year-to-date. In Q1/Q2 of 2023, gold and silver appear to be doing better than usual.

But other than that, only one asset has remained steadfast amongst a sea of red: Bitcoin.

Vindication for Hodlers

After many years of debate and even outright ridicule from doubters, Bitcoiners have been vindicated in their view that Bitcoin represents the ultimate safe haven asset. Investors faced with no other option will find themselves looking for an “escape hatch” when turbulent times present themselves.

A form of unconfiscatable digital hard money, Bitcoin can be seen as the ultimate way to preserve purchasing power and protect the value of an individual’s labor. No other asset offers the same advantages. And all other assets carry greater risks.

This might seem like a radical statement to some. After all, the volatility of Bitcoin versus the US dollar can be legendary at times. And because investors tend to associate risk with volatility, it stands to reason that Bitcoin has one of the highest risk profiles around.

But this line of logic is, and always has been, flawed.

Photo by Traxer on Unsplash

If there’s one lesson many investors have learned the hard way over the past year, it is that risk involves more than just volatility.

This is a major part of the message that Bitcoin hodlers have been preaching for many years now. While numerous risks can be mentioned, two of the most prominent include:

  • Counterparty risk, and
  • Currency devaluation risk.

Let’s take a closer look at each of these.

Currency Devaluation Risk

The problem with other, more traditional investments is that they can all be classified as currency derivatives.

Bonds, stocks, ETFs, real estate, fine art…all of them can go up in value, of course. But their nominal value (the number of dollars they are worth) differs from their real value (price in dollars after accounting for inflation).

The S&P 500 index, for example, is one of the most often cited measures of stock market performance. The index tends to rise by about 7% per year on average, historically.

During normal times, this seems like a reasonable return. If inflation is 2%, then the real rate of return for an S&P 500 index fund could be 5%.

But what about years like 2021 and 2022, where inflation rises far beyond 2%? In those years, the real return of the S&P goes negative.

For the price of real estate, the results can be somewhat better. Real estate prices tend to keep pace with or exceed the inflation rate. In fact, some market observers argue that the price of real estate is a better measure of inflation than the aggregate measures utilized by government agencies.

After all, the price of housing is among the average person’s greatest expenses. If the Consumer Price Index (CPI) rises by 9%, but the cost of your rent rises 25% in one year, which one are you likely to be more concerned with?

Counterparty Risk

Counterparty risk can be seen as even more of a threat than currency devaluation. While fiat currencies are constantly losing value, the process is a slow one, which is why many people don’t notice it.

When counterparty risk rears its ugly head, investors or depositors can lose everything overnight.

We’ve seen this with the recent banking collapses of 2023. We saw it happen even more dramatically in 2022 with the continuous collapses of crypto companies like Celsius, Vauld, BlockFi, and others.

Photo by Mariia Shalabaieva on Unsplash

In the former case, the only reason depositors didn’t lose everything was due to Federal Reserve (America’s central bank) coming to the rescue by printing hundreds of billions of dollars to insure deposits that exceeded the Federal Deposit Insurance Corporation’s (FDIC) limit of $250,000.

Important Bitcoin Metrics on the Rise

While many people prefer to focus on the dollar price, there are several other, more important Bitcoin metrics worth looking at. These metrics point to Bitcoin’s role in the future of finance.

Among these are the network hash rate, the number of new wallets being created, and the increasing frequency of attacks against Bitcoin.

Hash rate

Bitcoin’s hash rate has reached new record highs in 2023.

On May 2, Bitcoin.com published an article entitled “Bitcoin Hashrate Reaches All-Time High of 491 EH/s, Close to Half a Zettahash, as Network Preps for Next Difficulty Change”

In the simplest terms, this means the network has never been more secure. It also signals that miners have confidence in the near-term price. More miners coming online means that companies believe they will be able to turn a profit by mining for new coins.

New wallet addresses

In early 2023, the number of Bitcoin addresses with non-zero balances hit a new record high.

There’s evidence that these new wallets are mostly being created by newer, smaller investors.

This is great news for adoption.

Attacks Against Bitcoin

This one is a bit unconventional and might seem strange. Why would attacks against Bitcoin be seen as a positive?

Simply put, Bitcoin was designed to be attacked. The more the network and its proponents become forced to defend themselves, the stronger they become.

While Bitcoin grew slowly during its first few years, things develop even faster as attacks mount.

Adoption is growing and hash rate is rising while attacks also increase. While there may not necessarily be a causal connection here, there definitely seems to be some sort of correlation.

One of the most popular and preposterous anti-Bitcoin narratives is the idea that “Bitcoin is bad for the environment.” Of course, this has no basis in reality.

Bitcoin is a net-zero technology. Mining machines are 100% electric, meaning they create no carbon emissions, just like electric vehicles.

Most of the electricity used to mine Bitcoin comes from renewable sources or stranded energy. So, the grid that powers the Bitcoin network is greener than the grid that powers an electric vehicle.

Those who claim Bitcoin hurts the environment must say the same about EVs. Yet they do not.

All that aside, mining consumes about 0.1% of the world’s energy, so it’s not even worth discussing in this context in the first place. True environmentalists will focus on the other 99.9% of energy usage.

Bitcoin’s Role in the Future of Finance is Now

It’s often been said that Bitcoin is “the future of money.”

I disagree.

It seems more like Bitcoin is the new form of money for right now, this very moment. Bitcoin’s role in the future of finance has already been reached, at least in part.

As the banking system continues to collapse, more and more people begin to realize they need to have something outside of that system – something that can’t be confiscated, censored or devalued.  

This might be why regulators have been shutting down banks that deal with crypto-related companies, and why the Fed has plans to launch its “Fed Now” program later this year. Some say Fed Now will make it harder for people to move money between fiat and crypto.

In the end, it won’t matter. Bitcoin can’t be stopped.

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