Rachel’s note: We’re closing out the week on news that President Trump and First Lady Melania Trump have contracted COVID-19.
Predictably, U.S. stock market futures plunged… and volatility, measured by Wall Street’s “fear gauge,” the VIX Index, spiked.
This has shaken a lot of investors around the U.S.
But this brings to light one of our core beliefs at Casey Research… crisis can be just around the corner. And it’s important to always be prepared.
Regular readers know we believe owning Bitcoin, along with physical gold, is one of the best ways to protect your wealth in times of crisis. In fact, Casey Report chief analyst Nick Giambruno refers to Bitcoin as the “New Crisis Currency.”
But we understand cryptocurrencies can seem daunting.
So today, Nick answers a reader’s question about digital assets… and explains why Bitcoin is the only one guaranteed not to be just some “Ponzi scheme”…
By Nick Giambruno, chief analyst, The Casey Report
“I have been trying to educate myself financially and have yet to hear a clear explanation of cryptocurrency or digital assets. If a crypto’s value fluctuates, is not backed by anything, and can’t be used to buy a pizza or loan a friend a few bucks, just what good is it? How is it not a Ponzi scheme?! Please educate me!”
– Stuart W.
Thanks for your question, Stuart.
First, we have to start with the basics.
What is money? Simply put, it’s something that facilitates storing and exchanging value… That’s it.
Certain characteristics make for a good money, just as certain characteristics make for a good shoe or a good computer. Briefly, a good money should be durable, divisible, consistent, convenient, scarce – and most important – hard.
The best way to measure the scarcity of something is to look at its “hardness” – how difficult it is to produce relative to its existing supply.
“Hard,” in this case, doesn’t mean something tangible or physically hard, like metal. It means “hard to produce.” By contrast, “easy” money is easy to produce.
Think of it like this…
As prices rise, it incentivizes more production of something.
Increased production creates more supply, which eventually puts downward pressure on prices.
“Hard” assets are relatively more resistant to this process. But Bitcoin is totally resistant to this process. It’s the world’s first – and only – scarce digital asset.
No other cryptocurrency is genuinely scarce and decentralized like Bitcoin.
All other cryptos have key players, insiders, and development teams that can potentially act like central banks and increase the supply if they choose to.
It’s a temptation that humans will likely find impossible to resist. Eventually, it will happen – that is the nature of putting the potential to tinker with monetary policy in the hands of humans.
For example, there have been debates within the Ethereum community – the second-largest cryptocurrency after Bitcoin – on what the inflation schedule should be.
The fact that altering the ether supply is not only possible, but a practical proposal under serious discussion, is proof that it is not a hard asset.
Bitcoin, on the other hand, takes humans out of the equation. Its non-discretionary monetary policy is in the hands of an unalterable protocol.
Bitcoin is the only crypto that is truly not controlled by anyone. Nobody can get together and alter its supply, which is fixed for eternity.
That’s the essential difference between Bitcoin and all other cryptos.
And that’s a big reason why it’s the hardest asset the world has ever known.
Bitcoin Is a Superior Form of Money
Next, we must grasp that all value is subjective.
One of the first – and most important – things free-market Austrian economics teaches is that all value is subjective.
There’s no such thing as objective or intrinsic value. Something has value because someone perceives it to have value to them.
For example, when people didn’t understand what crude oil was, they’d find it in their backyards and think it was waste. They’d pay to have it removed from their property.
Later, once people understood the economic potential of crude oil, it was transformed from unwanted waste into a lucrative commodity.
The oil didn’t change; it was still the same oil. What changed was how people valued it.
The concept that all value is subjective applies to all goods, including monetary goods like Bitcoin.
The Bitcoin phenomenon is the birthing of an entirely new form of money.
We’re talking about the emergence of a new asset that became a significant global money in less than a decade.
It happened because millions – soon billions – of people around the world subjectively valued Bitcoin as money because of its superior monetary properties.
The “New Crisis Currency”
Bitcoin gives regular people a safe haven. They can use it to send and receive wealth while bypassing the unsound banks, worthless currencies, and government confiscation schemes of their home countries.
That’s why I like to call Bitcoin the “New Crisis Currency.”
When a crisis hits, a government can easily steal money in the banks or steal purchasing power by printing currency units. But it cannot easily steal Bitcoin, prevent people from using it, or confiscate value from savers through inflation.
In a crisis, Bitcoin is invaluable to the common man. This is why Bitcoin use will soar during the next crisis. With the world on the precipice of numerous crises, I believe the next one is not far off.
That’s why right now is a great time to take a serious look at Bitcoin.
I have a lot more to say about this in my urgent briefing, and suggest you check it out for more information.
Chief Analyst, The Casey Report