I’ve been quietly watching the BTC market figure out how to explain why BTC is profoundly positive for society. I’ve been disappointed with the attempts I’ve seen and so I’ve decided to throw my hat in the ring.
First we should define currency strength, which so many erroneously suggest is measured against other currencies as with DXY (a dollar index measuring USD conversion rates against a basket of currencies). Measuring a currency strength relative to other currencies is akin to a group of stage 4 cancer patients arguing who among them is the strongest. The reality is they were all stronger prior to their cancer.
As with each cancer patient, their strength is not meaningful as a relative measure outside of themselves. It’s only meaningful as a measure relative to themselves on a historical basis. That is, are they stronger today than they were last month. In the real world to real people, currency strength too is a historical concept based on purchasing power. Since I only purchase things in USD I don’t care how much I could purchase using Sterling. I only care if I can purchase more today than I could yesterday in USD. That brings me to the point of the article – aggregate net purchasing power, also known as, wealth and the impact of currency.
The key principle difference between USD and BTC is that the former is a depreciating currency based on a principle of inflation (i.e. increasing money supply) while the latter is an appreciating currency based on a principle of finite supply. All the BTC magic is wrapped in the economic principle of finite supply versus dynamic demand. Or for the finance fellas… fixed vs float. So long as the floating demand parameter has a positive slope the asset will appreciate. That results in deflation (i.e. the persistent increase in purchasing power).
BTC is the antithesis of inflation, devaluation, and fiat. It is the first appreciating currency in the industrialized world. But who cares? What is the significance of deflation (appreciating currency) vs inflation (depreciating currency)?
Having a 10-year history now provides enough observable data to draw out some of the fundamental differences between depreciating and appreciating currencies and the profound social and economic impacts of those differences. So let’s get started…
There are three main points I’m going to illustrate in this article. The first is the impact to consumers, second is to savers, and finally the impact on the structure of capital allocation.
Let’s start by using Big Macs to illustrate the impact on consumers.
The above chart depicts the price of a Big Mac, over the past decade, in both USD (green line) and BTC (orange line). What we see is that in 2010 a Big Mac cost $3.73 or 37 BTC. Today a Big Mac costs $5.71 or .0001 BTC. Let’s assume we didn’t buy the Big Macs 10 years ago and instead put $3.73 and 37 BTC in a drawer. Now let’s assume we just found those currencies in the drawer and decided to go ahead and get us a Big Mac today.
The $3.73 would not get us even one Big Mac while the 37 BTC would get us 323,993 Big Macs today. The former is called inflation and the latter, deflation. Economists proselytize inflation is good and deflation is bad, however, I’ve never once seen or heard a logical proof that inflation is good for the worker or consumer, despite the incessant narrative. The proof simply does not exist.
Now let’s have a look at the absolute mind-blowing impact that an appreciating currency has on savers. We’ll start by looking at the federal minimum wage over the last decade.
10 years ago minimum wage workers received $7.25/hr and today they receive $7.25/hr. Let’s look at that in terms of purchasing power using Big Macs. So in 2010 an hour of work (i.e. $7.25) would have purchased 1.94 Big Macs. Today that same hour of work (i.e. $7.25 minimum wage) would purchase us 1.27 Big Macs. The lesser amount is because the USD is a depreciating asset based on the principle of inflation.
Let’s take a parallel economy where minimum wage workers are paid in an appreciating asset (i.e. BTC) but pegged to the USD equivalent minimum wage. That would mean in 2010 the minimum wage would have been 72.5 BTC (equivalent to $7.25 in 2010). Today, the minimum wage would be .000145 BTC (equivalent to $7.25 today). It means the purchasing power of an hour of work is the same today whether they’re paid in USD or BTC. That is, they could buy 1.94 Big Macs in 2010 and 1.27 Big Macs today regardless of which currency they are paid in. So the inclination is to suggest that the worker is no better off being paid in BTC than USD. But that inclination is dead wrong. Here’s why.
Savings. Imagine that each worker in the parallel economies puts 10% of their income into a retirement savings account that earns 0% interest. Let’s compare the USD paid worker vs the BTC paid worker for the past 5 years.
Over the past 5 years the worker paid in BTC saves a total of .887 BTC with a USD equivalent value of around $45,000, today. The worker paid in USD would have saved a total of $7,250, today. It means that the BTC wage worker has 600% more purchasing power (i.e. wealth) after just 5 years.
The mechanism of excess wealth creation in the BTC economy is that real interest rate becomes interest rate plus appreciation rather than interest rate minus inflation. This is as profound as it gets in finance. The implications literally reshape society by reconstructing the framework of the economy.
The profundity of that one change reaches all stakeholders. After just 5 years the BTC minimum wage worker has accumulated 600% more wealth than the USD minimum wage worker and that spread will continue to grow over time. Perhaps most explosive is that the wealth was generated without taking risk. It means that even minimum wage workers would be able to generate wealth over time. Poverty essentially disappears for anyone that is able to work in a world based on appreciating currencies.
Another major effect is that borrowing costs will also equal interest rate plus appreciation resulting in a higher borrowing costs leading to an economy driven by productivity rather than liquidity. Money is scarce when supply is finite and thus things like NFTs do not exist in an economy based on appreciating currency. NFTs are derived assets to which excess liquidity can be allocated to slow hyper inflation when money supply exceeds money demand.
In an economy with money scarcity demand always exceeds supply resulting in further appreciation. Capital allocation is prioritized toward productive investments rather than financial investments due to scarcity. This nurtures strong economic fundamentals, things like low debt to GDP, low debt to income, and low debt to net worth. Rome would still be an empire today if it had a BTC based economy.
Perhaps you spotted the pattern of low debt fundamentals and that should clue you in as to why there has been an incessant opposing narrative for the past 110 years with respect to inflation and deflation. The bankers lose in an economy based on an appreciating currency because borrowing becomes less relevant to the consumer and lending becomes limited due to scarcity.
I’ll leave it here but understand there is infinitely more to this story. The implications are endless and the topic could very well be a university course. The main takeaway is that BTC, as an appreciating currency, isn’t just a cool new way to transact, but when fully adopted will quite literally and fundamentally restructure society, completely.
I hope to see more people begin to think about BTC in terms of how it restructures real aspects of the economy and markets and put those thoughts to paper.
When the benefits of appreciating currencies are understood by consumers and workers, the giant con of inflation will become apparent and change will become politically impossible to reject.
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I am the MacroHeathen and I will be writing from time to time. You can find me at macroheathen.com.