Bitcoin.
What is it? How does it work? And why does it matter?
These questions are top of mind for millions of Americans waking up to the news that the Securities and Exchange Commission has approved the first spot Bitcoin ETF.
The ETF—which will be offered by BlackRock, Fidelity, and other large asset managers—marks a watershed moment as traditional Wall Street wades into the new digital asset economy. This new financial instrument will provide an onramp to millions of investors looking for exposure to the world’s most successful cryptocurrency. And with the reverberating effects of record inflation, it couldn’t come at a more critical time.
Lack of education has been the biggest obstacle to Bitcoin adoption. That’s why it took Wall Street 15 years to wrap its head around Bitcoin. And it’s why many Americans have questions to this day.
The good news? In reality, Bitcoin is incredibly simple. You don’t need a graduate degree in cryptography, finance, or economics to grasp the basics. To begin, you just need to understand the relationship between value and scarcity.
One number explains all of Bitcoin: 21 million. That’s how many Bitcoin will ever exist. Ever. Period. End of story.
This hard cap on Bitcoin’s supply is embedded in its code. It makes Bitcoin a deflationary asset. This means that as time goes on, the value of Bitcoin is likely to grow because there won’t be a large supply flooding the market. And as more people compete to get their hands on this increasingly scarce resource, its value is expected to rise even more.
Now compare Bitcoin’s finite supply to the U.S. dollar’s infinite supply.
The U.S. dollar is an inflationary asset. An American citizen will never know how many dollars will exist because Congress and the Federal Reserve can always choose to print more. Consider that during COVID alone, the federal government printed $13 trillion. That’s more than three times the price tag of WWII.
By injecting cash into capital markets, the Fed can ease economic shocks, but not without causing inflation. Printing money out of thin air diminishes the value of each dollar—something Americans know all too well. They feel the pain of runaway inflation each time they go to the grocery store, eat at a restaurant, or fill up with gas and find themselves paying much more than they used to.
Having established that Bitcoin is deflationary while the dollar is inflationary, what does this all mean in terms of purchasing power?
Everything.
Consider that a dollar today is worth about 30 percent less than it was ten years ago. By contrast, a single Bitcoin is worth 5,000 percent more today than it was ten years ago. In sum, Bitcoin’s deflationary properties make it an effective long-term savings instrument—especially when compared to the U.S. dollar.
Of course, you would never know this from the everyday news coverage of Bitcoin. That’s because Bitcoin usually only breaks news when it reaches an all-time high or experiences a significant crash. But the asset’s short-term volatility is really just a distraction from its underlying value proposition. The long-term trend for Bitcoin has always been up.
In that sense, Bitcoin can be thought of as a form of digital gold, which can also be a seamless means of exchange across borders with blockchain technology. But Bitcoin is even scarcer than physical gold and the difficulty of mining it only increases with time. That’s why Jurrien Timmer, the director of global macro at Fidelity, described Bitcoin as “exponential gold.” He likewise described it as “commodity currency that aspires to be a store of value and a hedge against monetary debasement.”
For a comparison, look to the launch of the gold ETF itself. In 2004, Wall Street debuted SPDR Gold Shares, an ETF that offered retail investors an easy way to own gold without having to custody it themselves. This allowed anyone with a brokerage account to gain exposure to the gold market. Millions of Americans began buying this precious metal amid the growing uncertainty of the Great Recession. Gold soon became a fixture of retirement portfolios as more Americans sought refuge from inflation. This flight to safety caused the price of gold to quadruple in the years following the ETF launch.
Will history repeat itself with “exponential gold?”
It’s certainly possible. The beauty of a Bitcoin ETF is that it will provide Americans of all stripes with easy access to one of the best performing assets of the last decade—no matter their level of technical ability. The extra step of setting up a new exchange account and the learning curve of storing Bitcoin on a hardware wallet have been major impediments to its mainstream adoption. But just like gold, the Bitcoin ETF will allow Americans to gain exposure to the digital asset without having to open a new account or custody it themselves. And it will allow institutional investors to do the same, making the Bitcoin market even more liquid.
As Americans from Main Street to Wall Street become aware of Bitcoin’s deflationary properties, it could very well follow in gold’s footsteps. Suppose it one day catches up to gold in terms of market cap—this would put each Bitcoin at a price of approximately $600,000.
If that sounds impossible, just remember that Bitcoin has sounded impossible from the very beginning. And yet, it continues to defy its critics. It has weathered 90% drawdowns, the COVID crash, major exchange hacks, the FTX blowup, corporate-sponsored smear campaigns, and even nation-state bans to become what it is today—the most antifragile asset in the digital economy. And now, thanks to the Bitcoin ETF, it is accessible to all Americans.
