Bitcoin as a Store of Value in Times of Uncertainty

  • by: Emile Phaneuf
  • On: 15, Jun 2021
13 min read

Q1 of 2021 has seen price surges in asset classes such as stocks, housing, and commodities as both individuals and companies have sought to protect themselves against perceived high inflation in the wake of unprecedented money inflation around the world. Until recently, I had always referred to the worldwide spike in economic growth over the past two millennia as “the mother of all hockey sticks”. But, as it turns out, this mother has an evil twin: the sharp increase in the supply of US dollars since COVID-19.1 Both charts hockey stick even when switching from linear to logarithmic chart views. As the US dollar is, at least still at this point, the world’s dominant reserve currency, it is difficult to imagine a scenario in which this will not have severe economic consequences worldwide. (But we need not become doomsdayers. It is sufficient to say, “Tough times ahead”).

Professional investors and the general public alike are looking for alternative assets that are capable of maintaining a store of value under high inflationary conditions. Billionaire founder of Bridgewater Associates Ray Dalio, for example, is warning against holding both cash and bonds and advocating “currency diversification, asset class diversification, country diversification”.

Cryptocurrencies as an asset class

For various reasons, cryptocurrencies have seen a spike in interest as of late. Not only has bitcoin received new support from the likes of PayPal and Square — allowing their large user base to convert fiat into cryptocurrency — but bitcoin has also received significant institutional investment over the past few months from companies like MicroStrategy and Tesla. MicroStrategy has, so far, put in over 2 billion USD, acquiring over 91,000 bitcoins for its balance sheet (that is, near a half a percent of all 21 million bitcoins that will ever be created).2 Tesla also went in big with a 1.5 billion USD investment (albeit at a later time and higher price than MicroStrategy), acquiring 48,000 bitcoins. In addition, Tesla CEO Elon Musk announced that the company is now accepting bitcoin as payment and holding it rather than converting it to fiat currency. Perhaps not surprisingly, Coinbase’s recent filing with the SEC in the United States reported similar unprecedented levels of trading volume in crypto assets by institutional investors for Q3 and especially Q4 2020.3

In New Zealand, NZ Funds announced that it also had invested in bitcoin for its KiwiSaver Growth Strategy fund.4

Why bitcoin specifically

Bitcoin, in my view, is uniquely well-positioned to continue to be a fantastic long-term store of value. It is not only that it was the first cryptocurrency and blockchain application (going back to January 2009 in the wake of the Global Financial Crisis). It is also not only that it receives the lion’s share of infrastructure pouring into the ecosystem (companies built around bitcoin such as wallet providers, payment processors, and the like). It is that scarcity is built into the foundation, and has decentralised governance enforcing that scarcity.

As I detailed in a previous article, the rate at which bitcoins enter into existence halves about every four years (or every 210,000 blocks to be precise). Initially, 50 new bitcoins were “mined” into existence every 10 minutes (on average), then 25, then 12.5, and then (for now) 6.25. This continues until the bitcoin supply approximates (but never arrives at) its 21 million asymptote.

The below graph depicts bitcoin’s monetary supply over time beginning with the January 2009 genesis block, when bitcoins came into existence for the first time, until 2030, when we can predict the supply with a fair bit of precision. At the bottom of the graph, above the years, are the supply of bitcoins (in millions) as of January of each year. As we see, as of January 2021, the supply of bitcoins had reached 18.6 million, which means that we had arrived at 89% of bitcoin’s so-called supply cap. Said another way, only another 11% of all 21 million bitcoins remain to enter the monetary supply.


Software code (especially free and open source code) is endlessly malleable, copyable, editable, relaunchable, and rebrandable. So how is bitcoin “able” to enforce a monetary policy at all (including supply cap and halvings)? The answer is mildly complicated to wrap one’s head around but only because it is so different from the centralised way in which fiat (government-issued) currencies are managed. Bitcoin operates under a decentralised governance framework. No single party can dictate how things are done; instead a consensus is reached by the network of users.

In fact, bitcoin is so decentralised, that anybody with enough knowledge to do so can take the code, “fork” it, and announce that “My new bitcoin is the real bitcoin”. And, indeed, this was done already in 2017 with what is now called Bitcoin Cash (BCH). But not even an early bitcoin evangelist like Roger Ver was able to convince the vast majority of the community that Bitcoin Cash was the “real” bitcoin. Among the several indicators you could point to is the price. Bitcoin’s (BTC, XBT) price remains a great deal higher than Bitcoin Cash’s (BCH). Software and cyberspace seem to be the one area in the universe in which you can actually have your cake and eat it too. You changing bitcoin in a way that the majority of the network does not agree with does not stop the majority of the network from having bitcoin the way they like. So feel free to fork bitcoin, modify it to your own liking and then call your new modification “bitcoin”. When almost nobody from the incumbent network follows you, and the vast majority of new adopters adopt the coin you forked from rather than the coin you forked it to, consensus reveals which is the real bitcoin. That’s decentralised governance.

A similar (yet accidental) occurrence happened in 2013 when the 0.8 upgrade to bitcoind (part of the older Bitcoin-Qt client) “switched the database that it used to store blocks and transactions from BerkeleyDB to the more efficient LevelDB as part of an effort to reduce blockchain synchronization time”. Version 0.7 didn’t follow the switch, and bitcoin forked, meaning there were two simultaneous versions of bitcoin with two separate versions of the ledger. Bitcoin developers noticed the fork and quickly notified key players in the industry (miners, exchanges, wallet providers, etc.). In the end, miners running version 0.8 who had led with the longest version of the chain, decided to forgo their legitimately-mined bitcoins since the fork and downgrade to 0.7. Vitalik Buterin summed up the trade-offs nicely for Bitcoin Magazine (a couple of years before he launched Ethereum):

Ultimately, there could only be one; a monetary system cannot function if there are two different databases of how much money each person has. The 0.8 fork had much more computing power behind it, and was already eight blocks ahead by the time the community could muster any effort toward fixing the problem, and upgrading to 0.8 is something that will have to be done eventually. On the other hand, if the 0.8 fork took over, thousands of users on 0.7 would be forced to upgrade in order to use Bitcoin at all, something which would not happen if the 0.7 fork took over since both versions of bitcoind can read it.

But beyond Bitcoin Cash and the accidental hard fork of 2013, there has been a number of other forks (and even forks of forks) since these incidents. Yet none of these remotely compare to the hashing power, number of full nodes, market price or market capitalisation of the bitcoin (BTC) they forked from. In evolutionary terms, we may say that they all share a common ancestry and that the common ancestor itself continues to evolve. But by every meaningful indicator, there is an obvious majority consensus on which is the real bitcoin: the common ancestor.

Attempts at increasing bitcoin’s supply cap

It is theoretically possible to increase bitcoin’s supply cap. But to change bitcoin’s supply cap would, no doubt, be considered a change in the fundamental nature of bitcoin. The supply cap has been and (so far) remains one of the main selling points for bitcoin. As we have seen, anyone with the technical know-how can fork bitcoin now from their parents’ basement, modify the cap from 21 million to 100 million, announce it to the world as the legitimate version bitcoin, and voilà! But the world is unlikely to follow, and now you have injured your reputation, promoting a coin with few users other than yourself. Ultimately, as long as miners mine for profit, power rests with the so-called economic majority — not with the miners.

Besides a self-organised fork, one could, in fact, utilise the normal channel to submit a pull request to Bitcoin Core over GitHub requesting a supply cap increase. Once done, we would expect a great deal of resistance against it. But let’s say for the sake of argument that Bitcoin Core had been taken over by inflation-friendly and activist Keynesians or Modern Monetary Theorists who eagerly programmed a supply cap change from 21 million to 100 million into the node software. What then?

Bitcoin’s existing 21 million cap serves as a Schelling point, which means that even in the absence of communication between players on the network, there is a bias in favour of leaving the existing cap where it is rather than increasing it. But in the hypothetical and unlikely scenario in which Bitcoin Core did change the code for this purpose, the change would still require the acceptance of (and survive resistance from) miners, full node operators, exchanges, wallet providers, and users.5 So good luck trying.

1The monetary supply measurement I cited in paragraph was M1. M2 (a broader measurement of monetary supply) is more encompassing. The US Federal Reserve no longer calculates or publishes M3. Click here to understand how they are calculated.

2I highly recommend MicroStrategy CEO Michael Saylor’s fascinating podcast interview about his company’s investment into bitcoin.

3See Coinbase’s full filing here.

4See also Stuff’s March 2021 article here.

5For more detail on bitcoin’s decentralised governance, check out Pierre Rochard, co-founder of the Nakamoto Institute on the Stephan Livera Podcast.


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