Return of the Prodigal Son: Bitcoin’s hunger signals an appetite for hard money

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This week marks 50 years since President Richard Nixon announced that the United States would abandon the gold standard. Instead of buying back the dollar in gold, the government let its value float freely in the market.

Thus began a sharp devaluation of the world’s reserve currency of choice under the US-led Bretton Woods system. Priced in gold, the dollar has lost more than 90 percent of its value since the Nixon shock. During this time, the pound sterling has lost more than 40 percent of its dollar value.

The pandemic has only accelerated this process, illustrating how soft paper currencies really are. Governments have been printing money in unprecedented amounts, with one-fifth of all dollars created by the Federal Reserve in 2020 alone.

Under the easy money regime, those who control the printer assume considerable power, while the savings of all those who do not are constantly devalued. Today, $ 100,000 has the same purchasing power as $ 14,945 in 1971.

Faced with this uncertainty of traditional currency, the rise of digital currencies is not surprising. Crypto adoption has grown 881% this year, up 2,300% since the third quarter of 2019, according to new data from Chainanalysis. In January 2021, the number of crypto owners exceeded 100 million for the first time. Just six months later, the figure has more than doubled, reaching 221 million at the end of June.

Aggressive adoption was driven by an appetite for a stable store of value. Supporters of Bitcoin, the king of cryptocurrencies, have long promised that it will deliver a return to hard money that is not controlled by governments or central banks.

It wasn’t just the legendary wealth of the early Bitcoin investors that earned the currency the nickname digital gold. Bitcoin scarcity is programmed into its underlying algorithm, making it comparable to rare metals used as currency.

Like gold, the supply of Bitcoin is limited and it is difficult to mine. New bitcoins are created as a reward for miners who solve algorithms to add new blocks, containing transaction data, to the bitcoin blockchain. The flow of new bitcoin will stop, however, when bitcoin reaches its maximum supply of 21 million units. The rules governing this system are sacrosanct. They cannot be changed without the consensus of the entire bitcoin network, making an increase in supply highly unlikely.

Importantly, this means that, like gold, bitcoin has what is known as a high stock-to-flow ratio, in other words, the rate of creation of new bitcoins is low compared to its existing supply. This means that Bitcoin cannot be devalued by people creating more and more coins as its price increases, a trap that has undermined less important metals such as silver.

The design of bitcoin means that mining a new block, the process that creates bitcoin, takes an average of ten minutes. This quality of hard money is key to how bitcoin is valued by investors and even gives predictability to its price movements.

The dramatic increases in the price of bitcoin in 2013, 2017 and 2020 were triggered by the halving of events, which reduces the speed at which new coins can be created. Its rarity and low flow are an integral part of its price.

Investors and analysts were quick to jump on this quality as proof of the value of bitcoin as a currency. In his bestselling book The Bitcoin Standard, Saifedean Ammous boldly asserted that if bitcoin continues to function like this, other currencies such as gold and paper money will become quaint anachronisms alongside it.

It’s a pretty big one though. Bitcoin’s carbon footprint has been a major stumbling block. The extraction process is so energy intensive that its carbon footprint exceeds that of entire countries, including Finland, Greece or Belgium. This is incompatible with the climate commitments of the world community.

Price volatility is also a major concern, as it is strongly linked to investor confidence. Bitcoin is experiencing one of its biggest deviations below the price prediction of stock-to-flow models after China banned cryptocurrencies and Elon Musk reneged on his promises to accept crypto payments at You’re here. If a currency is tied to a billionaire’s tweets, it can hardly offer the same stability as the dollar.

Whether or not bitcoin becomes the digital currency of choice, there is a way to go crazy. The rapid adoption of crypto sends a strong message that investors are wary of inflationary issues with fiat currencies.

When Nixon addressed the nation through their televisions to announce the end of the gold standard, he could hardly have imagined the enthusiastic return to hard money that would occur half a century later.

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