Bitcoin isn’t perfect, but it’s the best escape hatch we have to leave the financial system (exit) if necessary. And in such a not-normal situation, a pandemic + economic recession + bubbles popping (real estate, corporate debt, student debt), chances of needing an escape hatch are higher than normal.
The Trouble With Today’s Financial System
Seigniorage. It’s a word we don’t hear about, but it’s the reason today’s money might fail.
What is it? Seigniorage is the value moved from your savings account, by a government when it prints money, to the central banks savings account.
It’s like a bank drinking your milkshake.
Here’s how it works (simplified version). Imagine…
Only $2 exist in the world (100% of all the money)
You have $1 (50% of all the money)
The bank has $1 (50% of all the money)
To stimulate the economy, the bank doubles the money supply by printing another $2
Now there are $4 in the world (100% of all the money)
You still have $1 (25% of all the money)
But now the bank has $3 (75% of all the money)
This is seigniorage value. It’s the value that is moved when the bank prints money.
Seigniorage sucks value out of your savings and goes into the bank's savings. In simple words, the money pie got bigger but your slice didn’t.
All countries face this problem, they all print money and make your savings worth less.
A fair system would evenly share the money it printed.
Governments are printing money faster than ever. Sucking the value out of your savings faster than ever.
You see the headlines on money printing into the trillions of dollars, but what you don’t see is the part where governments or large corporations get most of that value.
Stimulus packages are not evenly distributed. Main Street has received less than 3 cents of every dollar to help Americans with the Coronavirus shut down.
The money printing helps the people at the top. How long can this last? At some point do people want to leave a system that takes money from the middle / lower class and gives it to the richest most well-connected people?
This will break.
Is Crypto Different?
No cryptocurrency perfectly distributes newly created money to holders. Bitcoin’s approach is to not have seigniorage. Bitcoin doesn’t print more money. There will only ever be 21M coins. The % of that 21M is yours, no one can print more. No one can shrink the % of Bitcoin you own.
Another important point, printing more USD doesn’t cost anything. Bitcoin, on the other hand, costs miners almost as much to get as the coin is worth.
In other words, the energy cost to mine a Bitcoin is close to the value of the coins created.
Bitcoin is censorship resistant. Anyone can move any amount of their wealth, across a border, without the permissions
Stablecoins don’t offer censorship resistance, small-cap cryptocurrencies don’t either, this is where Bitcoin shines. Bitcoin lets you move a larger portion of your wealth from one place to another in a way that can’t be stopped by bad-intentioned bad-guys or good-intentioned good-guys.
Bitcoin gives people all over the world fair money and an easy way to protect their wealth.
Why Do We Need An Escape Hatch?
History tells us that people in power abuse their power.
Today, Bitcoin gives people a way to get out of a scary country's money (example: Venezuela & hyper-inflation) and move to less-scary money (ex: USD today with strong global demand).
In the future, Bitcoin might become the least scary money if all other fractional reserve fiat money (with unfair seigniorage) fails.