Currencies are in constant competition between each other, and people choose to hold currencies for various reasons. In countries like Argentina, Venezuela and El Salvador people have long held US Dollars, as the US dollar has been a ‘harder’ currency than their own currencies.
So what does it mean that one currency is harder than the other? Easy money will be more easily inflated out of existence, it will not hold its value over time, and conversely the harder money/currency will hold its value better over time.
Before 1971 the world was on a Gold standard, mainly because gold historically has the highest stock to flow at about 71 /1, while silvers’ stock to flow can ramp up to 20/1 .
So how is this relevant to our situation today in 2021?
Saifedean tells eloquently the story of how India and China in the 1800s chose silver as their monetary standard, while Western nations chose gold. Over several decades the corroding effects of constantly slipping purchasing power in China/India meant that the big Asian nations languished.
Compared to the Western countries where the nations/companies/people were able to maintain and even increase their purchasing power, over time meant that the Western nations were able to dominate the world economical, political and military arenas.
To quote from the Bitcoin Standard by Saifedean Ammous:
The demonetization of silver had a significantly negative effect on the nations that were using it as a monetary standard at the time. India witnessed a continuous devaluation of its rupee compared to gold‐based European countries, which led the British colonial government to increase taxes to finance its operation, leading to growing unrest and resentment of British colonialism. By the time India shifted the backing of its rupee to the gold‐backed pound sterling in 1898, the silver backing its rupee had lost 56% of its value in the 27 years since the end of the Franco‐Prussian War.
For China, which stayed on the silver standard until 1935, its silver (in various names and forms) lost 78% of its value over the period. It is the author’s opinion that the history of China and India, and their failure to catch up to the West during the twentieth century, is inextricably linked to this massive destruction of wealth and capital brought about by the demonetization of the monetary metal these countries utilized. The demonetization of silver in effect left the Chinese and Indians in a situation similar to west Africans holding aggri beads as Europeans arrived: domestic hard money was easy money for foreigners, and was being driven out by foreign hard money, which allowed foreigners to control and own increasing quantities of the capital and resources of China and India during the period. This is a historical lesson of immense significance, and should be kept in mind by anyone who thinks his refusal of Bitcoin means he doesn’t have to deal with it.
Ammous, Saifedean. The Bitcoin Standard (pp. 49-50). Wiley. Kindle Edition.
So how does this relate to current events and Bitcoin? I believe the following:
- Storing wealth (= saved labor) in a superior currency (Bitcoin) can
have long-lasting positive effects, with increasing returns as more
individuals, companies and ultimately nations converge on it.
This means returns in excess of investment returns to be found in
traditional markets. - Why is that?
Because Bitcoin introduces a stable system that people can trust, that can not be manipulated or inflated away by any actors, and Bitcoin is programmed to have a high stock to flow ratio. In 2025 Bitcoin will have a higher stock to flow ratio than gold, and the flow is programmed to be halved every four years after that. - Why is this good?
Bc as more people learn about Bitcoin, learn WHY they can trust Bitcoin as the
hardest, best money in existence, they will want to keep their money (savings)
in Bitcoin.Currently only about 5% of people in the industrialized nations have tried cryptocurrency, so the penetration level among individuals is low, and it is almost non-existent among companies and countries. - Why is the current state bad? Because storing wealth in a currency that is depreciating, being inflated away at about 15%-20% per year due to money printing, will have long-lasting deleterious effects in inflating away the stored value that we/you have worked hard to accumulate.
- In particular for El Salvador- Bitcoin and the Lightning network allows El Salvadoreans massive efficiency gains by removing the money transfer middle-men that deduct about 4-5% of their GDP.
On Sep 7th 2021 El Salvador became the first country in the world to adopt Bitcoin as Legal tender, and I believe / hope that El Salvador will blaze a path for many other countries to come.
Happy Bitcoin day!