Hedging against hyperinflation and authoritarianism

Appreciating the value proposition of bitcoin is much easier if you are a citizen of a failed state. Environments where the local currency is constantly devalued, or in which certain population groups are excluded from the financial system, or even oppressed and mistreated. In some of these cases, bitcoin could be a possible solution by protecting people’s savings from annihilation or offering financial inclusion to everyone.

But what about its usefulness for the people in the west?

Well, we usually hear that bitcoin could be used in an investment portfolio as a hedge against fiat money inflation, thanks to its limited supply. This common argument has merit and is based on one of bitcoin’s most indisputable properties. It’s digital scarcity. Some people though, go much further than that, claiming that bitcoin should completely replace fiat money and the central banks. I should confess that I’m quite sceptical on this view. I’m not convinced that sound money and austrian economics are a better alternative for achieving the promises of our modern era. Promises of abundance, freedom, peace, happiness and unlimited potential. I agree that our western governments and central banks aren’t perfect by no means, but I do believe that they genuinely care about the prosperity of their people. They are part of our societies success, and more or less they support the evolution path towards a more prosperous future.

Besides, I think it’s very challenging for a system with a constant monetary base (bitcoin standard) to improve the growth rate or deal with crises. When the value of the currency increases to reflect a growing economy, spending and crediting mechanisms are greatly affected. People have an incentive not to spend, something that in theory could damage the economic activity. Credit would certainly be a challenge too. People should familiarize themselves with the idea that having less money in the future, doesn’t necessarily mean they are getting poorer and with the idea of lending with negative interest. Furthermore, what happens in cases of major crises like the covid one, where many people are in desperate need for cash in order to feed their families? Would we have to rely on the merciful rich to lend them money? These are serious issues which can’t be just ignored. I don’t say there are no solutions, but that there are major challenges which should be considered. Of course all systems have weaknesses, and I can’t neglect the possibility of a catastrophic fiat debt crisis that could spiral down to hyperinflation. I don’t think the chances for such a collapse are high, but just in case, wouldn’t be wise to have some kind of insurance against it? I think it is.

Apart from this, I would like to address a different kind of hedging that is discussed much less. A hedge against authoritarianism or tyranny of any form. Someone might ask, why is this important?

Well, the reason is that in my opinion liberal environments are better than authoritarian ones, when measured against their capacity to fulfill the modern promises. Promises that gradually become more and more technologically and financially attainable and continue to spread in the minds of pioneers and thinkers across societies and cultures. This natural expansion process will force these ideas to emerge in the surface of common sense, which will be eventually expressed in the political order of liberal environments. On the other hand, even in the “best” authoritarian regime, a human benevolent dictator can only last for so long, not having much control on what happens after him. Apart from that, liberal environments can be more sustainable in the long term by offering decompression valves to societies.

In this context, I would argue that any sufficiently neutral network could act as a hedge against authoritarianism by putting barriers to its expansion and by opposing its presence. In order for bitcoin to play that role, it must absolutely preserve this mesmerizing property that arises from the decentralized nature of its network: Neutrality.

The reason that neutrality is important even in the liberal west, is simple but very well hidden under a few generations of freedoms and prosperity. Our democracies are not as solid as we like to think. They are still fragile and there are no guarantees for the future. We must not fool ourselves into thinking that the current evolution path is for granted. There is a tendency to believe that societies keep moving forward by default. This is nothing but an illusion. It just takes a series of unfortunate events, and we could very well find ourselves under a very different reality. Just remember how easily the Nazis, an extremist movement led by a paranoid individual with extreme hate and anger, managed to take the lead in a country like Germany that plays a huge role in global affairs. And this is not the only example.

Could the modern western democracies be degraded and fall into an authoritarian trap of any form, state or corporation driven? It is unlikely but not impossible. This is why we should be prepared even if the chances are small. We need to have the means by which we can escape the control of “evil” central actors, not only in the realm of information exchange but most importantly, in the realm of value exchange too. In these fronts, network neutrality is of paramount importance, followed by the property of privacy (in which bitcoin doesn’t excel yet). Bitcoin and any other network which is sufficiently neutral, would have a crucial role to play.

Counterarguments

The counterarguments are that these same networks will be used by criminals, hostile sanctioned states or authoritarian regimes themselves. They could threaten the dominance of western democracies by replacing the dollar as the global reserve currency, and that they contribute to global warming by consuming huge amounts of energy. Some of these arguments are fair. There is indeed a price we have to pay. But how high is that price really?

Let’s examine the criminals case first. There is a fundamental truth about us humans. Under “normal” circumstances, we are naturally good. Almost all of us. How many of us are murderers, rapists, or torturers? A tiny, tiny fraction. Yes, there are more people inclined to do major financial crimes, but they are still a small part of the global population. The average person just wants to live a peaceful and fulfilling life. Criminals are very resourceful in finding ways to overcome obstacles, so I argue, that we shouldn’t sacrifice an important defence against a potential future pitfall for the vast majority of people, for the sake of a small improvement in fighting crime. We have and should find more but different ways to fight it.

A neutral network of value like bitcoin, could be used by hostile entities to evade economic sanctions. Indeed it could, but what portion of sanctions’ success is based on denial of value transfer? I would argue that the most important reason that sanctions succeed is that the counterparties do not want to face the consequences of breaking the law and transacting with a sanctioned entity. I could be wrong though.

What about authoritarian entities using it? They could, but doing so, they would reinforce something that could undermine their authority. They might try to have as much control on it as possible, but they certainly will not want to validate it by using it extensively. Maybe as a hedge and only in secret. But does it worth to deny ourselves a hedge, just to deny them one too? I don’t think so.

Another point of concern is that bitcoin could speed up the dethroning of the dollar as the global reserve currency, reducing the power of western democracies. This though, can only happen if the dollar fails as a result of mismanagement. Using bitcoin as a small part of an investment portfolio shouldn’t greatly affect the trust on the dollar.

Bitcoin consumes of a lot of energy. Indeed, the neutrality of the bitcoin network is secured by a consensus mechanism that is based on a huge number of computing nodes which consume a lot of energy. A lot of our modern day activities are energy hungry though. Take televisions for example. They collectively consume a lot of energy, but we don’t condemn them because of that. We weigh in the benefits with the costs and decide that we want to use them. So the real question is if this energy consumption offers us something at least equally valuable. My opinion is clear. An insurance policy against a major threat, does worth it. Besides, there is a global shift towards renewable sources of energy, and it is a fact that bitcoin is already ahead of the curve in terms of renewables adoption. Not only that, but it could even improve the efficiency of renewables as the buyer of unused energy that can’t be stored.

Through this prism, I believe that western authorities should continue nurturing this new and rapidly evolving space since its benefits outweigh the costs.