In 2015, the country with the largest Oil reserves on Earth ran out of toilet paper.

According to the International Monetary Fund (IMF), the inflation rate in Venezuela reached 65,374% in 2018. This means that a loaf of bread that cost 100 bolivars at he start of the year would have cost 6,537 by the end!

Last week, we explained the fundamental laws of the Debt-based Economic machine. We unveiled how the creation of credit forms ongoing cycles with booms and busts that repeat over, and over, and over again. We discovered that countries print money to stimulate the economy, and contract the money supply via the manipulation of interest rates. We found out that most countries are in vast amounts of debt, with government spending deficits continuously creeping higher. We analyzed US data to predict that we are within, or on the verge, of the contractive and recessionary stage of the cycle with Europe in a similar position.

We also touched on the fact that the busts of the long-term debt cycles can cause deep routed contractions, often resulting in depressions and economic crashes that can be devastating. The cyclical nature of huge booms and bustssis due to one factor - Money printing. It’s a hot debate if the creation of money does far more damage than good. The concentrated power of money creation doesn’t destroy nations, but it does destroy those within. To start this weeks issue, we’re going to analyze why centralized money creation can be a bad thing… Who would’ve thought ey?

Centralized Crooks = Monetary Collapse

Venezuela was once the richest country in Latin America, yet inflation rates reached 65,374%, and over 5.4 million Venezuelans have fled the country due to dire economic conditions since 2015. Why? Political and geopolitical disasters, populist uprisings, and most importantly - economic turmoil. Here’s a high-level overview of what went on in Venezuela:

• With the largest OIL reserves in the world, Venezuela heavily depended on oil exports for its revenue.

• When oil prices plummeted in the early 2010s, the government faced a significant budget shortfall. (They were spending far too much)

• To bridge the gap, the government resorted to printing money.

• This printing continually devalued the currency, the bolívar, and further increased government deficits.

• This led to a loss of confidence in the bolívar's value, causing people to seek alternative stores of value, such as foreign currencies or assets.

• The Venezuelan government imposed price controls on many goods and services, including basic necessities.

• These controls often led to shortages as producers found it unprofitable to produce and distribute goods at government-mandated prices.

• Venezuela accumulated significant foreign debt and faced economic sanctions from various countries.

• These factors reduced the country's ability to access international financial markets and obtain foreign currency, making it challenging to service its debt and manage its finances effectively.

The Venezuelan Government rapidly inflated the supply of the Bolivar and then set strict control measures over the exchange rate between the dollar, setting an artificially high “official” value compared to the real market rate. This official rate was used for government transactions and essential imports. As a participant in the economy, you physically could not store wealth in a sound monetary asset. You were forced to hold a rapidly inflating currency, with FX Exchange close, and only those in power able to exchange freely and the “official rate”.

The statement I am trying to make is that you need permission to benefit from the Credit-based economy. You must rely on approval from a select few to access financial instruments, bank accounts, exchange rates, and much more. Those systems are fine when they work, but disastrous when they don’t.

Within the debt-based system or fiat system, a central authority controls the data of the monetary system. They can print more, restrict you from accessing, set artificial rates, or do whatever they wish. And it's not just Venezuela that has fallen to manipulated currencies; since the 1900’s, over 66 countries have experienced hyperinflation.

You must gain approval and trust that those in charge will stick to a sound policy. Venezuela is an extreme example, so let’s look closer ashore.

• According to the Federal Deposit Insurance Corporation (FDIC), there have been 565 bank failures in the United States since 1970.

• This results in an average of 11 bank failures per year over the past 50 years.

• According to the Bureau of Labor Statistics, the purchasing power of the dollar has lost about 47% since 2000.

Even having the option to trust the bank is a privilege... 1.7 billion people around the world don't have bank accounts, with Banks requiring no reason to reject an application.

Greed, manipulation, control, are there any alternative solutions for participants?

The Bitcoin (mini) Thesis

With the creation of Bitcoin in January 2009, a permissionless cryptographic economy was forged.

Bitcoin allows anyone, anywhere, with an internet connection to access and transact within a monetary system not controlled by any one entity. Rather than being secured by a centralized database, having an economic policy dictated by a Central bank with reflexive issuance, and controlled via a Bank’s approvals, Bitcoin is secured cryptographically, backed by a decentralized network, and issued via mathematical code.

Databases

It’s important to note that all systems that store and transact data store this data within a database. Your email, social media, search engines, savings, pictures, passwords, and almost everything about you shared online is stored on a server that is controlled by a centralized and single entity.

Within monetary databases, the system will track all your financial transactions, manage your data, and verify your account balances. If we look at the economy, the central bank manipulates the database to issue money and credit. This monetary database is often given the term Ledger.

You do not have custody of the data within the ledger and instead must trust the central authority to maintain the integrity and security of the data. Sometimes, as was evident in Venezuela, those in control leverage their powers in acts of greed rather than prosperity. 

For commodities such as Gold and Oil, their issuance and supply are not controlled via a private ledger but operate via the laws of nature. You can think of Mother Nature as a decentralized ledger. While humans can track supplies on a centralized ledger and ramp up technology to export increasing amounts, it’s the underlying natural processes that regulate the distribution and availability of commodities.

With this, let’s jump into Bitcoin.

Bitcoin is an engineered solution for a decentralized monetary database that removes the need to trust a single entity and allows you to custody your financial data. The database is an open-source distrubuted ledger that allows anyone within the network to transact, check, and verify the validity of the database.

Cryptographically secured

The term crypto comes from the Bitcoin network leveraging cryptography for database interactions. Users in the Bitcoin network have a pair of cryptographic keys: a public key (used to receive funds) and a private key (used to sign transactions and spend funds). All data is ordered within blocks every 10 minutes, with all blocks ordered in a continuous time-stamped chain, hence the name - Blockchain.

The network also utilizes cryptographic hashes which are critical for verifying the integrity of data within the blockchain. These hashes are a unique and fixed-length combination of letters and numbers that represent any data within the database. Any change to the data results in a completely different hash which is instantly verifiable by other network participants.

Decentralized security

The Bitcoin network is secured through a decentralized consensus mechanism known as Proof of Work (PoW). PoW sees participants secure the network by competing to solve complex mathematical puzzles to validate data (transactions) and add them to the database (blockchain). These participants are known as miners and are rewarded with the new issuance of BTC tokens.

The computational power required to solve these puzzles and the need for a majority of miners to agree on the validity of transactions make it extremely difficult for any single entity to manipulate or compromise the network's security. Additionally, as more miners compete against one another, the energy requirement to solve the puzzles increases, further increasing the work required to add data to the database.

The greater the requirement of energy, the more secure the network is deemed to be. This energy requirement required is known as the hash rate, and as evident in the graph below is constantly increasing.

Put simply, Bitcoin is secured and operated by energy. If a miner's hardware requires a significant amount of energy to run compared to a competitor, it would be too costly, and become outcompeted by more efficient competitors. This means that Bitcoin has tangible value because it costs tangible energy to create. It also incentivizes miners to seek the most efficient energy resource possible.

Similar to commodities, this means that Bitcoin’s ledger is regulated and distributed by nature. I would highly reccoment you read the below article. The public view point on Bitcoin being a net negative on nature is fundamentally wrong, and the article does a fantastic job of breaking it down.

Progromatical scarcity

With a fixed supply of 21 million tokens and an inflation schedule that halves every 4 years (210,000 blocks), Bitcoin is unlike any other nation's monetary policy. Previously currencies were backed by gold, and had tangible energy requirements to issue new currency (they needed the gold to back it). However, modern-day currencies are now inflated at will by those in charge. There is no backing required, nor ledger backed by nature. Venezuela is a pertinent example of when this goes too far.

With Bitcoin there is a tangible energy requirement to mine it, there is supply scarcity, and the supply that enters the market relative to the supply in the market is small. On top of these factors, Bitcoin is also easily divisible and transferable, which its metal counterpart inherently lacks.

Additionally while Gold is scarce, and mining production has flat-lined, there is still a considerable sum below the Earth’s crust that could be mined with a significant innovation boom in mining infrastructure.

Store of Wealth

Bitcoin issuance is programmed to halve every four years and has a set supply of 21 million tokens. Due to this programtical and immutable scarcity, Bitcoin has been the fastest appreciating asset and store of wealth for the past decade.

We have discussed a lot, so let's quickly recap. We have learned that Bitcoin is…

🟠 A Decentralised Database

🟠 Accessible to all with internet access

🟠 Leverages Decentralized security

🟠 Operates on a distributed Ledger fundamentally backed by Nature

🟠 Progromatically scarce with declining issuance

🟠 The fastest appreciating Store of Wealth for the previous decade

Bitcoin, over time, is undeniably a powerful solution to storing one's wealth and has been crowned the profound title of Digitial Gold. The Permissionless nature of Bitcoin has rallied supporters and cyberphunks from around the world, but it’s important to note that its nature is not only beneficial to the everyday person; it’s powerful for countries too.

Soverign Reserve Currency

The US is currently at the epicenter of worldwide economic activity. Global Oil, stock markets, commodities, and international trade are all denominated in the dollar, resulting in other countries holding dollars and dollar-denominated assets in their foreign exchange reserves. We discussed this in more detail in the first Issue.

But while the US dollar is currently the dominant currency for the world, the internal budget deficits, rapid reduction in purchasing power, and increasing debt burdens are putting strains on it’s status.

A centralized Reserve currency also creates conflicts amongst countries regarding the control it has. With trade denominated in the currency, the country has the ability to restrict, sanction, and even seize dollar-denominated assets from other countries' reserves. A term often coined is the “Weaponization of the Dollar.”

It’s important to note that political, geographical, and social change is constantly underfoot, and it’s undeniable that reserve currencies and FX reserves change over significant time horizons. The video below is a great overview of Ray Dalio’s view on where the US currency stands.

Spoiler: It doen’t look too great

This year, Central Banks around the world have begun stockpiling gold at unprecedented rates. Clearly, those centralized entities want to hold a permisionless asset.

If reserve currency or FX change is underfoot, BTC provides a non-sovereign option that is divisible and easily transferable relative to Gold.

This is not to say that Bitcoin will become the defacto Reserve Currency, it doesn’t have to be, but due to the difficulty of acquiring and storing a vast amount of gold, many believe Central Banks weary of sanctions will view Bitcoin as a worthy alternative.

The total value of assets held by central banks around the world is estimated to be US$31.8 trillion as of June 30, 2023. If even 1% of Balance sheets acquired BTC, there would be a net increase of $318 billion in Bitcoin, which is 60% of the current market cap.

We are already seeing the slow uptick begin…

Conclusion

To summarize, with the creation of Bitcoin, a permissionless cryptographic economy was forged. An economy backed by energy, secured by cryptography, decentralized, open source, portable, has fixed-issuance, offers a sovereign settlement reserve currency, and is the fastest-appreciating asset of the decade. In simple terms, Bitcoin is the people's alternative to manipulated monetary policy. Due to these factors, in 2020, Bitcoin adoption in Venezuela considerably ramped up.

While over time, Bitcoin is a fantastic store of wealth, it is certainly not stable. While there is the Bitcoin Lightning network that aims to act as the financial rails for everyday payments, many seek stability, and the netowrk has yet to live up to its potential.

My personal opinion is that Bitcoin's true power lies in its ability to store wealth and act as a sovereign reserve currency. I believe everyday transactions and financial instruments will fall within the other side of the perimsionless economy: Ethereum and DeFi. Keep your eyes out for next week's issue, where we will discuss exactly that. I appreciate every one of you that reads this far, if you enjoyed this issue, feel free to share it with others. 💙 🫡