In the event of massive fiat debasement & sovereign bond contagion, why do I value Bitcoin over other hard assets?
Adapted from a response to @Esquiste from Michael Malice’s Locals.
I would argue that all hard assets will not debase equally. If you think about how the government currently measures inflation, they love to give one hard number (CPI, PPI, etc) and say, "this is how much a basket of goods is inflating with respect to the dollar.” I would argue that this is the wrong way to think about this.
The government is simplifying inflation to a single scalar, meaning you can buy 7% less of a given basket now compared to an earlier time. Intuitively, we know that money printing helps the rich but hurts the poor, though; so, not everyone is affected equally, and this basket differs from person to person. Let’s model this a different way. Instead, let's first view inflation with respect to the housing market. Normally, this is given in terms of median home price or average home price or something. It doesn’t really matter for reasons I’ll talk about shortly.
Each housing market did not and will not inflate equally. The price of beachside property in Miami inflated at a much faster rate than a farm in northern Indiana from 1930 to 2020. If we were able to discretize all housing markets to an n x 1-dimensional vector, where n is locations, we could see the ratio of dollars needed increasing per each location’s housing market. This is the first derivation of this model. It offers a higher resolution of our inflation problem, but does not fully capture the inflation phenomenon.
We've only looked at the home price with respect to location. Each market's upper, middle, and lower class housing markets do not inflate equally, either. A house in Miami's ghetto will not inflate at the same pace as a beachside condo. We need to increase the dimensionality of our model. So now, our vector becomes an n x m matrix, where n is the market location, and m is the caste of the purchaser (for lack of a better term).
Since we intuitively figure that inflation helps some but hurts others, we can further hypothesize where the markets are inflating compared to others (hard assets, with the harder the asset the higher the inflation), but that's not the point at hand. Remember, we've only looked at one market so far: housing. We now have to consider every market, everywhere, for everyone.
What we end up with is a series of matrices (a tensor) measuring the exchange rate of dollars to a field of everything that a dollar can buy. Historically, gold was recognized as the universal store of value between sovereigns. We did not use fiat to communicate this exchange. The modern fiat standard is a historical anomaly. Throughout the rest of time, we used a single, universal medium to communicate this exchange. Gold was the best medium humanity found to universally communicate value to each other in this way. Everyone would accept gold, because it was universally scarce. Just like the beachfront property in Miami is more scarce than the Hoosier farmland, gold beat silver and all other precious metals as a medium of exchange. That brings us to Bitcoin, our first mathematical constant in economics, to be measured against all other digital assets.
Bitcoin is the first digitally scarce asset ever created. It is now the most robust and decentralized distributed computing network out there, and it is extremely unlikely that will change. Its value is derived from its network and its immutability. Any change which would affect the underlying is counterproductive to the network.
All other protocols have the potential to be valuable, but their value is derived from the problem that Satoshi first solved: digital scarcity. Those protocols are also inherently more susceptible to the influence of outside powers. This is counter party risk. This is the reason why the banks needed to be bailed out in 2008.
Very few people in the market for mortgage credit default swaps kept their financial allocations from being somehow interlinked with mortgage backed securities in 2008. Those who were ONLY involved in the credit default swap market were unaffected by the collapse of the mortgage market. It was the only negatively correlated asset. It was a force outside of the polluted mortgage market. It was insurance on its failure. The system was unstable, and an external force was able to act on it and create a pressure differential, and that force inhaled all the value contained by the system.
Bitcoin is the least susceptible cryptocurrency to counter party risk. Other protocols might act as insurance against fiat just by their nature of digital scarcity, but they are more susceptible to counter party risk in the event of sovereign debt contagion than Bitcoin because they don’t have Bitcoin’s narrative, they might not have its anti-fragility, and they might not even be proof-of-work. If the US government, arguably the most powerful sovereign state, threw everything they had at stopping the crypto market tomorrow, the protocol they would have the least likelihood of affecting the long term trajectory of is Bitcoin. I’m not sure if you could say that about any other crypto, despite their individual utility.
Bitcoin is now the external force acting on an unstable fiat system. It is not a matter of if, but when. And when your house is on fire, you had better hope you bought the best insurance you could.