Bitcoin Crashed Yet Again. That Is Good News.

Part 2 of 2: The Upside.

Sell in May and go away! This old proverb coined in the stock market held more true for Crypto in 2021 than for equities.

Some of the disadvantages of cryptocurrencies identified in my previous blog post have meanwhile materialised and caused (yet another) crash, leading in some cases to a price decline of more than 50%, with Bitcoin being among the hardest-hit cryptos.

So, should you sell and just forget about cryptos — an obscure, over-hyped and ultimately foolish investment?

The occasional crash can prove useful: it allows investors to acquire more units, shakes out over-leveraged positions, and helps reduce the kind of adverse public exposure that might hinder a smooth, non-contentious path toward mainstream adoption.

Let us recapture the benefits of decentralised cryptocurrencies and the fundamental drivers behind the stratospheric rise of crypto assets.

Monetary Literacy

Regardless of whether you are considering an investment in any cryptocurrency or dismissing crypto assets as a fad: engaging with the space will have you ask important questions that extend well beyond making a quick profit.

In the beginning you will only see price charts and polarising headlines.

Then, you will discover the world of asymmetric encryption, hash algorithms, distributed ledger technology (DLT), blockchains, trustless and permissionless systems, and peer-to-peer networks.

Next, you will find yourself confronting questions around money creation, the differences between hard money and fiat currency, inflation, and central banks.

Ultimately, you will find yourself inquiring into topics of social prosperity, individual freedom, privacy, and the role governments are playing — or ought to play.

What you gain in the process is something highly valuable: enhanced technological, monetary and economic literacy.

Inflation Hedge

Bitcoin proponents claim that Bitcoin is a counter-inflationary asset, because:

• Unlike fiat currencies — which can be, and are being, created without limitation — Bitcoin’s supply is algorithmically capped and will never exceed 21 million units.
• Different from fiat currencies but somewhat similar to precious metals, new monetary units cannot be created at will; they can only be produced through an effort-based process called mining.
• Where the value of a fiat currency is eroded through governmental or central bank incompetence, or as an effect of deliberate expansionary policy, fiat currencies increasingly lose their usefulness as a store of value.
• In such a scenario, Bitcoin — much like gold — could become a novel store of value that also functions as a means of exchange.

The so-called Genesis Block, the first block ever created in Bitcoin’s blockchain, contains a message from its pseudonymous creator Satoshi Nakamoto:

The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.

While the intended meaning of this message remains unknown to this day, Bitcoin was clearly conceived in response to the expansionary monetary policy we have witnessed over recent decades — most notably during and after the 2008 Financial Crisis.

Bitcoin is designed as an inflation hedge. Although only time will tell, I will take the bet that it will deliver on that promise.

Self-Custody: Your Keys — Your Crypto

Bitcoin and other decentralised cryptocurrencies represent the height of monetary sovereignty. To execute transactions on the blockchain, all a user needs is a private key.

This means three things:

• As long as the private key is kept safe, funds can neither be accessed nor confiscated. The laws of mathematics and cryptography disallow it.
• If the private key is lost, the funds are lost permanently.
• If a bad actor gains possession of a private key, they have access to the funds as if they owned them.

Careless users stand to lose all of their Bitcoin by misplacing their private key. In a world where a lost credit card or forgotten PIN is “no big deal” — because of the widespread use of intermediaries, custodians and insurance — Bitcoin reintroduces the virtues of self-reliance and self-accountability.

In return, it offers full monetary autonomy and zero dependence on third parties. Diligent users are thus able to take full control of their assets in a way that literally no other asset class permits.

Why does this matter?

• Because control over and access to your money matters.
• Because third parties like banks introduce risks of their own.
• Because convenience always comes at a price.

Contrary to what many people believe, their bank savings are not legally “theirs.” What they actually hold is a legal claim against the bank to repay an amount up to the savings balance upon request. That claim is worthless if the bank goes bankrupt.

Banks do go bankrupt. It may not happen often, but once or twice during an average person’s lifetime is well within the realm of possibility. Between 2009 and 2020, 511 banks failed in the United States alone. There will be more.

Many people lost money on poor Bitcoin trading decisions. Many lost their crypto through inadequate private key management, and more still by entrusting their keys to unreliable exchanges.

Yet no one has ever lost their Bitcoin because the network engaged in fractional lending, corrupt practices, or otherwise gambled away their holdings.

Cryptocurrencies like Bitcoin eliminate counterparty risk entirely. As long as you retain exclusive control over your keys, your funds will be available if, when and where you want them.

Permissionless

Moving money within the traditional financial system has become increasingly bureaucratic:

• You cannot simply go to your bank and demand immediate encashment of your savings. Banks typically require advance notice, along with an explanation.
• You cannot send money freely to whomever you wish. Transactions are processed through a chain of intermediaries and compliance controls, each of whom may grant or deny permission. Try sending money cross-border and you will encounter just how slow, expensive and erratic this antiquated process can be.

What happens in an emergency — a bank run, civil unrest, or war? What if your bank wrongfully denies a transaction? What if you happen to live in a jurisdiction where funds disappear along the way?

If none of this concerns you, good. But if you accept that life does not always run smoothly, Bitcoin offers a reliable alternative. It will not require a notice period. It will not engage intermediaries. It will not ask what you intend to do with what is rightfully yours.

As Bill Gates put it concisely, if in a different context:

We need banking. We don’t need banks.

Inexpensive

Millions of expatriate workers send their savings home to support their families. They depend on payment providers such as Western Union or Ria, who take a generous cut of hard-earned wages.

Cryptocurrencies offer faster, cheaper and more convenient alternatives. Certain currencies are specifically designed to bring banking services to millions of unbanked people, at minimal cost and with a very low entry threshold.

The small country of El Salvador took a significant step in this direction by adopting Bitcoin as an additional official currency — partly to facilitate the remittances its expatriate population sends home, which form a meaningful share of the country’s GDP. It may prove to be the first of many.