World leaders and delegates depart a family photo session at the Group of 20 (G-20) summit in Osaka, Japan, on Friday, June 28, 2019.
There’s been a lot of news recently, especially with the advent of a news cycle focused on a potential recession, on the role of bitcoin and cryptocurrencies from a short-term investment perspective. Some have placed bitcoin and cryptocurrencies in the category of hedges, a form of digital gold or silver that can be used to store value through inflation and the debasement of fiat currency.
Yet that misses the forest for the trees. Bitcoin and cryptocurrencies at scale are not just a hedge for inflation and an ever-expanding monetary supply — they are a fundamental hedge against bad governance and bad governments. In this respect, it may be easier to evaluate them along a longer-term horizon than just a short-term store of value.
Start with the fact that bitcoin and cryptocurrencies are structured to be independent from central authorities and that decentralization is an explicit goal of the system. Bitcoin can be considered the first prototype of something more exciting than digital cash because it focuses explicitly on governance and issuance.
It’s not a central authority, governed by statute or accredited by loyalty or expertise that determines the current amount of bitcoin in circulation but rather individuals contracting together under a set of laws codified in code.
Anybody can start a node — it seldom matters where you live or whether you happen to be a political leader or economic leader in that area. And while mining has grown inevitably into a more centralized affair as it has become more commercial in nature, the egalitarian approach to electrical and computing power being the barrier to make economic returns in the system makes it more open to general access than appointed councils of technocrats.
The miners who issue bitcoin and cryptocurrency are a self-appointed set of individuals. Similarly, those who run a node are not bidding for power, but rather, they want to be in support of a growing ecosystem and community posed against centralized power.
Bitcoin and cryptocurrencies like it have shown that distributed governance can be used to create economic value and trust, and don’t require centralized authorities or governments.
Secondly, used at scale, cryptocurrencies can be used to support dissent and to support a diversity of different views. By enabling transactional pseudonymity and for some chains (such as Zcash and Monero) close to transactional privacy, cryptocurrencies allow individuals to make economic choices while deciding how to selectively reveal oneself to the world. Their global, distributed nature makes it extraordinary hard for a nation-state to enforce norms or censor transactions as seen with Wikileaks.
This makes it harder for governments to censor either through the monopoly of force or through trying to license social norms, behaviors that it might find undesirable or counter to its accumulation of power — seen, for example, in the anti-terrorism statutes or Espionage Act violations in the United States and the state subversion laws in China, both of which have been used in overly broad contexts to imprison individuals without due process.
Third, like any hedge, bitcoin and cryptocurrencies can be used as a way to funnel out of other assets that are depreciating. When governments are under stress and when their currencies are debased as seen in Venezuela and Hong Kong, people normally jump to commodities that have global value (such as the case of silver and gold) outside of the troubles of any domestic currency which they anticipate falling. Many will go to the US dollar, a traditional hedge — still, however, tied to a physical government.
Bitcoin and cryptocurrencies have the extra-special property of not being tied to any analog or physical authority. This means that in times of bad governance, rampant inflation, and economic troubles, cryptocurrencies can hold value and still be a viable medium of exchange regardless of domestic troubles — and it means you may not need other state currencies to be your hedge. Among other things, this is why both China’s state planning agencies and anti-cryptocurrency legislators in the United States want to ban cryptocurrencies: because of their potential potency in undermining the US Dollar or capital controls in Chinese Yuan.
Fourth, their principles help with newer forms of governance. Blockchain, bitcoin and cryptocurrencies have posed a very interesting question: if we can use distributed governance and code-imbued trust to create economic value out of nothing — something that required a government’s tax agency, use of force, and legions of lawyers and bankers beforehand — can we use the idea of distributed, action-meets-access principles to political power itself?
With blockchain principles and the rise of cryptocurrencies has come the rise of concepts like liquid democracy and quadratic voting proposing fundamental shifts in the mechanism design behind voting and delegating political power, giving an expanded citizenry the ability to hearken back to ancient Athenian concepts of direct democracy, while preserving the ability for a populace to handle distributed governance at scale — perhaps eventually removing the need for centralized political governance.
So, as you evaluate bitcoin and cryptocurrencies as a hedge for inflation, consider that it truly strikes at the root of inflationary problems — bad government and bad centralized governance — rather than just the inflationary tip of the iceberg. In a time where political leadership is growing more centralized and has become rather destabilizing, bitcoin and cryptocurrencies can act as the ultimate hedge.