How bitcoin will offer an escape from a Brave New World in the next two decades
Bitcoin should prove an excellent store of value as central banks muscle their way into the cryptocurrency world over the coming decades, writes Dominic Frisby.
If you asked me how many pounds, dollars or euros there’ll be in 2040, I couldn’t tell you. I could guess. That guess might be educated or informed, but it would still be a guess. That’s because the rate at which national currencies are created is arbitrary. It’s entirely at the whims of central bankers and the politicians they serve (see page 4). For example, at the start of this year – a few Chinese virologists with a keen interest in monetary policy aside – barely a soul could have predicted the sheer scale of money creation in 2020. Roughly 22% of all the US dollars in existence have been created this year alone, with the goal of cushioning the global economy from the impacts of lockdown. And there is no limit to how much more fiat money can be created. It is inherently inflationary.
However, I can tell you that there will never be any more than 21 million bitcoins. That figure will be reached not in 2040, but in 2140. The supply of bitcoins is deliberately capped. The currency was born in reaction to the central bank money printing and government action that bailed out the finance sector in 2008, and the economic inequality that unrestrained money supply creates. The supply of bitcoin is transparent, planned and programmed.
The evolution of cryptocurrencies
So far, 18.7 million bitcoins have been created. By 2040 that number will be just over 20 million, on its way to the eventual final figure of 21 million by 2140. The number that are actually in usage at that point will be lower – around 15% will be unusable, due to lost keys and passwords.
It is this limited, finite supply, which is deliberately designed to digitally replicate the preciousness of gold, that makes bitcoin so desirable as a store of wealth. Consider how much purchasing power the pound has lost over the past ten, 20 or 50 years. How much more food, clothing, energy or accommodation did a pound used to buy you? Bitcoin is the opposite. Because its supply is finite, it is a deflationary system of money and so its purchasing power increases over time.
What will the bitcoin price be in 2040? Now that would be guessing. But just as I can tell you with total certainty that a lot more fiat money will exist in 2040 than it does today, I can also tell you that the price of bitcoin will be a lot higher. The more the price goes up, the more people will want it – and the more those on the outside will cry “bubble!”. What’s a bubble after all, but a bull market in which you don’t have a position?
For sure there will be a plethora of copycats. Already there are thousands of other cryptocurrencies and there will be thousands more, each with their own functions and idiosyncrasies – crypto for fast payments, private payments, small payments, currencies to build apps on and create start-up business ventures. Some are proving more successful than others, but none, as yet, have the same network effect as bitcoin. Institutions too will start issuing their own currencies, possibly backed by “official” government-issued ones. Facebook’s Libra coin is probably the most advanced, but surely Amazon, Google and Apple are designing their own competitors. And how long before air miles and supermarket rewards points become freely exchangeable?
More significantly, central banks too are going digital. Covid-19 has accelerated the move away from cash, but this is bigger than that. Central bank digital currencies (CBDCs) – based on a basket of currencies – were a big theme of Mark Carney’s while he was governor of the Bank of England and interest in CBDCs has only grown since then. The European Central Bank, the International Monetary Fund and even Jerome Powell of the Federal Reserve have been talking about them.
And little wonder. Banning cash and issuing digital currency directly would enable central banks to circumvent (or even replace) banking and fiscal systems. When everyone has a digital currency account directly with the central bank, it will be possible to tax one group directly – perhaps by taxing payments, or levying negative interest rates – while implementing fiscal policy elsewhere (paying out furlough money for example, or even universal basic income, direct to bank accounts). It means that fiscal policy can be managed outside government balance sheets and all taxes will be deducted at source, giving authorities enormous power.
With the vast amounts of real-time data collected, the Ministry of Nudges – aka behavioural economists – will be able to deploy as many incentive, reward and punishment schemes as it can dream up. You might see this Aldous Huxley-type future as a good thing, or a bad thing, depending on your political leanings, but the available technology and the controlling, meddling instincts of governments mean it is almost inevitable.
It’s bad news for banks, whose role will shrink. It’s good news for fintech and central banks. And it’s good news for apolitical money whose value isn’t beholden to policy-makers – bitcoin and gold, especially. They will be the world’s escape and its hedge.