Question: What if I gave you the opportunity to invest in an asset that’s loss 98% of its market value in the last century? How keen would you be to make that investment?
Well then sit down… I’ve got some bad news for you. Our current financial system has forced you to inadvertently do just that. But stick with us, because there are some unsung heroes out there, working to give your purchasing power a fighting chance, and in this article, we’re going to uncover these heroes and why they’re all-in on sound money via Bitcoin.
But first, let’s talk about exactly what that means.
Sound money - A brief explanation
Put simply, sound money is a form of money that is outside the control of any authority or government in the world. It is money that has a purchasing power determined solely by the intrinsic value attributed to it from the markets. Where easy money such as the fiat currencies that dominate the world today can have its supply expanded by the central banks and governments who govern them, sound money is hard and resilient against having its value inflated away over time.
One attribute of hard money is a high stock-to-flow ratio. That is, the amount of gold already in circulation is much greater than the amount of gold that can be injected into the circulation over any given period. The scarcity of gold combined with the immense time and effort necessary to mine it has meant the annual increase in gold supply from mining has consistently fallen below 2% over time. This attribute has made gold the store of value of choice throughout millennia, having existed as a means of value in virtually every civilized economy since the Romans in one form or another.
But why should you care about sound money? Where does Bitcoin fit into this picture? And how can we at Atomic Loans help you hold on to your sound money?
Ease of financial planning
First up in our list of unsung heroes is Jimmy Song, a Bitcoin Core developer who is also the author of Programming Bitcoin. Song argues that the presence of a sound monetary system makes financial planning orders of magnitude simpler for the average individual. To help illustrate this, let's examine the various ways fiat currencies make financial planning more challenging.
In his Youtube video, The importance of Sound Money, Song reasoned that “if you don’t have sound money…then you’re going to have some weird incentives in society”. First, the uncertainty around inflation makes it much more difficult for the average person to predict the amount of wealth they’ll hold over time. Additionally, individuals are constantly thinking about diversifying their portfolio and investing in different assets just so they can preserve their wealth amid constant inflation.
One example of this mentality is the real estate market. With housing and real estate being frequently portrayed as an excellent store of value, it’s no wonder that people are quick to pile in their wealth whenever there’s an uptick in the real estate market. In fact, some even go as far as comparing real estate to a glorified inflation-beating savings account. And as more people buy in, prices naturally appreciate more, which in turn brings in even more capital in a speculation frenzy. And just like that, a bubble is born. In response, real estate developers build more houses, continuously expanding the supply until a point where supply outstrips demand and the prices tumble.
Hong Kong, Vancouver, London. City after city, this is a story that has repeated time and time again. Bubbles start forming in a specific sector, overproduction ensues, prices tumble, and people lose their money. And this cycle will keep playing so long as people continue to use speculative investments to beat inflation, rendering the modern investment landscape a practical casino from one sector to the next. So long as there exists unsound money, only investments that have higher yields than the rate of inflation would suffice to protect the value of your money, creating massive incentives for high-return but high-risk investment and spending.
Capital accumulation and increased productivity
The years between the end of the Franco-Prussian War in 1871 and the outbreak of World War I in 1914 were a time of unprecedented economic prosperity and technological innovation. Known as La Belle Époque, or the Golden Era, economists also refer to this period as the era of the classical gold standard. With each government pegging its national currency to a fixed weight in gold, the monetary supply of every country was strictly dependent on the gold reserves of the central bank.
For exclusive early access to Atomic Loans or to learn more about how you could hold on to more of your sound money and leverage it to pay for expenses without middlemen, head to https://atomicloans.io!
This brings us to Saifedean Ammous, our second unsung hero of the day. Author of The Bitcoin Standard, Ammous believes that the economic prosperity many enjoyed was no coincidence, but a direct consequence of money’s peg to gold, our OG form of sound money. Where inflationary fiat currencies encourage debt and consumption, sound money promotes saving and investment.
In a society where people are confident in their ability to store their wealth in a currency that will maintain its value over time, Ammous believes individuals would be much more incentivized to save for the long term as opposed to spending in the short term. Through saving rather than consuming, individuals have more resources to invest in capital goods. This leads to greater productivity, which in turn leads to higher output. With increased output, even more capital can be invested, leading to a continuous cycle where there is ultimately an increase in quality of life over time.
Restoring the balance of power between people and state
At its core, unsound money grants governments the power to massively redistribute wealth. Perhaps the most prominent being the redistribution that occurs between debtors/borrowers and creditors/lenders. When there’s inflation, debtors gain as they’re able to repay creditors with dollars that are worthless in terms of purchasing power. And who are the largest debtors of all? Governments.
Sound money removes significant power from the state and that's a good thing. [Jimmy Song, 2019]
“With great power comes great responsibility,” the saying goes. But unfortunately, this is a power that has been abused throughout history, from the Weimar Republic in the pre-WWII era, to the present day examples of Venezuela and Zimbabwe. In these examples, individuals are forced to revert to bartering, going back to the very coincidence of wants problem that money was supposed to solve in the first place. But even in countries yet unaffected by hyperinflation, people’s savings, consumer prices, and the overall economic direction of a country are still at the whims of the governments that control the money supply.
One example of this occurs during periods of rapid inflation surrounding wartime, as was the case around World War I. Prior to the creation of the Federal Reserve, the mere idea of American entry into the conflict that eventually evolved to becoming WWI was inconceivable. Participation was an unpopular idea and the American people were unwilling to fund the World War I effort through increased taxes.
In the past, governments and kings were wise to avoid war, as those who engaged in unnecessary war were the first to go bankrupt. With its citizens being the only source of funds for wartime expenditures, governments only had so much money they could spend towards war. But the creation of central banks like Federal Reserve and a departure from the gold standard of La Belle Époque changed all this. Governments no longer had to depend on citizen support to go to war. Was it a coincidence that the century in which central banking was invented was the century of total war? Perhaps not.
Enter Bitcoin, sound money for the digital age
Before the conception of Bitcoin in 2008, gold was the de facto standard of sound money. With its durability as well as the high stock-to-flow ratio–attributed to the consistently low volume of new gold produced from mining–gold was the dominant store of value from one civilization to another. With that being said, gold wasn’t all that transportable. The thought of carrying, exchanging, and holding physical gold to facilitate trade was cumbersome and prohibitively expensive to do safely for the average person. International, cross-border transactions? Forget about it.
Nor was it very divisible. Could you imagine having to cut gold into small enough pieces to be useful for day-to-day commerce? How would you even go about denominating the price of a water bottle in ounces of gold? But perhaps most importantly, it was difficult to verify the legitimacy of payments in gold. Imagine taking the time to verify if each coin actually contained gold? And even if it did, what percentage of it was actually gold in the first place?
That’s why in the video below, our third unsung hero, Mastering Bitcoin author Andreas Antonopoulos, discussed how prone gold was to centralization. Economies of scale meant that it would be much easier and cheaper for a centralized party to store and secure the gold. In return, they would give you a piece of paper that represented ownership of that gold. Sooner or later, once someone does an audit of the gold vault, either the gold bar that someone thought they owned doesn’t actually exist, the bar is fake, or it corresponds to three pieces of paper that belong to 3 different people who all supposedly lay claim to that same gold bar. This centralized nature also meant that gold was much easier for the government or some authority to seize, as the US government did in 1933 by banning the private ownership of gold bullions.
With Bitcoin, supply is strictly limited and scarcity is guaranteed. The fact that there will only ever be 21 million bitcoins in existence is mandated by code. And with the code controlling the underlying Bitcoin protocol being run by a decentralized network of tens of thousands of nodes across the globe, the supply schedule for Bitcoin is unlikely to change any time soon.
Bitcoins are also easily divisible and transportable. It can be divided down to a hundred millionth of a bitcoin and transmitted at such infinitesimal amounts within minutes to someone else on the other side of the globe. Bitcoin is also durable. To destroy a bitcoin would mean having to decimate the tens of thousands of nodes on which the blockchain is run. All these features give anyone the ability to transact directly in bitcoin peer-to-peer without the need to resort to centralized custodians. This makes government seizures a hell of a lot more difficult so long as you keep your private key safe.
Lastly, the legitimacy and ownership of any single bitcoin can be verified through mathematical certainty with the help of the blockchain itself. Using cryptographic signatures, individuals can easily prove bitcoin ownership on a public ledger. All things considered, one might even argue that Bitcoin could be a superior form of sound money than gold…
Why does this matter to us?
Unfortunately, as of today, for most of us, we would find ourselves hard-pressed to find websites and vendors that take this form of digital sound money as payment in our day-to-day lives. With technologies like Lightning Network, that day may come, but we’re simply not at that stage of maturity for Bitcoin technology right now. But what if rather than having to sell that bitcoin and sound money for fiat to pay off your business or personal expenses, you could leverage it for liquidity and hold on to your bitcoin? On the other hand, what if you could put your fiat to work providing liquidity to those who need it, rather than letting it sit in a bank account losing value making little to no returns? That’s where Atomic Loans comes in.
2018 saw a boom in decentralized finance protocols… but only on Ethereum. The problem is, none of those protocols work with digital sound money, Bitcoin. It’s time to change that.
Do the arguments we highlighted about sound money resonate with you? Do you disagree with any of them? Was there anything that we missed? Comment below!
We are currently building a solution that uses atomic swap technology to bring the first cross-chain decentralized protocol for bitcoin-backed loans. For exclusive early access to Atomic Loans or to learn more about how you could hold on to more of your sound money and leverage it to pay for expenses without middlemen, head to https://atomicloans.io!