“Disruptive innovation is another way of saying “creative destruction” – Cathie Woods
The case for Bitcoin as an inflation hedge has stampeded this bull market forward since its inception. As our money supply increases through central bank money printing, the inflation hedge narrative has become the mainstream undercurrent for many Bitcoin investors, who shill the mother of all cryptocurrencies for its fixed 21 million supply. They also believe that Bitcoin is the best way to counteract the tsunami of fiat entering the world markets, which devalues traditional currencies and causes prices to rise.
There is, however, an alternative narrative not often discussed in the context of crypto economics… but its possibly an even more powerful driver of crypto’s success, and that is productivity.
Peer-to-peer, decentralized exchange is the essence of crypto and the source for large scale productivity gains happening at an exponential rate. Currently, the world is centralized: governments, businesses, and our technological infrastructure. As far as markets are concerned, centralized businesses are the conduits of many forms of exchange, and this is not limited to financial transactions alone. Data exchange, which includes video, voice, streaming, and social media are also centralized and ripe for disruption through crypto and blockchain technology.
To fathom how massive the potential is for the coming age of crypto disruption, you would have to grasp the extent of the entire infrastructure supporting centralized business models. Let’s start with finance. In a centralized economy, the bank and its network of skyscrapers, loan officers, processors, examiners, retail outlets, computing infrastructure, accountants, regulators, etc. add up to an extreme amount of cost. Enter Bitcoin, with an infrastructure built upon full nodes, miners, and developers—the entire need for the existing supportive infrastructure disappears.
With crypto, transactions take place peer-to-peer. The code itself handles the accounting, and lending/borrowing activity. These features are being built into cryptocurrency protocols through smart contracts. DeFi applications like Aave, or Uniswap support groundbreaking finance products that run completely peer-to-peer. The productivity gains unlocked through the mass adoption of this technology frees up an inconceivable amount of capital, as money always moves toward the most efficient way of transacting.
What many don’t understand is that this transition is inevitable. Decision makers will utilize these resources to save themselves and their businesses money. Thus, crypto is a productivity increasing resource driving massive economic disruption.
We are also in a world where hacks, security breaches, and ransomware are attacking centralized businesses at a growing rate. Cryptocurrency, through the cryptographic algorithms it runs upon, offers the ability to secure the transfer of anything digital over the internet—unleashing new paths of values through the “creative destruction” of existing, inefficient, and centralized infrastructure.
At its root, a public blockchain is an advanced database technology, enabling highly secure transfers throughout its network, without the need for a central entity to control the flow of the data. If you understand that the current internet is a multitude of databases running on central servers, this new internet enabled by blockchain, and cryptocurrency, will be a decentralized internet… not owned by any single institution or power.
I bring these details up only to give a sense of the extreme productivity gains cryptocurrency will offer—hyper productivity, so to speak, that will allay the inflationary pressures caused overreaching stimulus, low interest rates and money printing.
The industries set to be disrupted are run by the middleman, the toll collectors, the centralized data controllers of the current economy. It’s not just the banks, it’s the Googles, the Facebooks and the Microsoft that are ripe for disruption as the world unfolds toward a decentralized digital ecosystem owned and run not by us… the people, rather than big tech corporate regimes and banks.
Inflation verses Innovation
Thus, there are two sides the crypto coin. On the one hand, Bitcoin with its fixed supply, is strongly backed by many economists concerned about the exorbitant amount of money printing, which is creating assets bubbles (inflation). And then there are the massive productivity gains through crypto that run counter to inflation and help ease its grip on consumers. It is no wonder why Bitcoin seems to follow its own agenda rather than trade in sync with any traditional asset class. Bitcoin fits both bills: inflation hedged and disrupter.
Gold for example, is often considered the ultimate inflation hedge as its supply is consistent, and investors can turn toward it as a store of value for wealth. Though Bitcoin shares these inflationary hedge characteristics, these elements are only a minor portion of what Bitcoin is. At times, people pour money into Bitcoin as an inflationary risk hedge (as when Cyprus turned to Bitcoin during economic crisis), and at other times—Bitcoin believers invest in it as they would a like a technology growth stock.
You see, Bitcoin successfully wears both hats. It is both a haven and disruptive technology primed for massive growth. It has the qualities needed to be a rock in terms of its fixed supply, but because of its ability to transact peer-to-peer… it is also a game changing, productivity enhancing technology, with use cases that we are just now beginning to conceive of and implement.
This extends to the other cryptocurrencies as well. Ethereum, for example, has just become deflationary with its most recent upgrade. Ethereum transaction fees are now burned based on how busy the network is, thus decreasing the total supply of Ethereum whenever network activity causes transaction fees to spike in price. In this regard, Ethereum too syncs with the inflation hedge narrative; while on the productivity side, Ethereum smart contracts are enabling all sorts of peer-to-peer digital exchange, causing massive disruption to traditional computing infrastructures.
There are some concerns, however, when it comes to Ethereum. Unlike Bitcoin, where the protocol updates are in the hands of full node operators (and anyone can operate a Bitcoin full node with low cost), with the Ethereum network, you must stake 32 Ether token to become a validator. Only validators have a say in the Ethereum network protocol updates, and whoever control the protocol, controls the network. the issue is, at the time of writing this, 32 Ether is about $95,000 USD. A person needs this money capital to have a voice in the future direction of Ethereum. Though this is much better than a company having full control over the protocol, like Microsoft or Facebook, it does raise the question of an equitable distribution of power.
Regardless, Ethereum is only one of many crypto contenders to aid in the decentralization of the economy and the business infrastructures of the world. And the greatest means to defy inflation is through innovation and productivity. Thus, crypto is fighting on both fronts, positioning itself as both a haven asset and a great disrupter of virtually anything centralized.
If hyperinflation rips through our economy, Bitcoin, and other winning fixed supply cryptos will be there as a hedge; if we somehow find a way to escape from exuberant money printing by the central banks, you can be assured that it will have been innovative technologies like blockchains that rescued us from such a fate.
Think of it this way. When money supply is increased, the price of orange juice tends to go up for consumers (since more money supply lessens the value of the currency to buy the product with). And as money printing devalues the currency making things more expensive, the price rise (inflation) needs another force to counter it.
Productivity is that force. In our example, if the manufacturer invents a technology that will help lower the cost to produce the orange juice, the manufacture can then keep the price of the orange juice low, thus countering the inflation.
Of course, with crypto, the productivity hedge against inflation is happening on a mass scale. It remains to be seen how unlocking massive productivity gains will play out in the markets. Will inflation pressures be too much for the economy to handle causing a black swan event, where people rush to safe-haven assets? Or will the great breakthroughs in technology such as blockchain be enough to balance the exuberant money printing by the central banks? It would appear, that if either of these scenarios were to play out, cryptocurrency is well positioned long term to benefit.