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Bitcoin Is an ETF on Global Ingenuity

The supply of money matters. What happens if there are 1000 units of money in the economy, you have 100 and the government increases the money supply by 1000 units? Your money is worth less. This is what is happening in the fiat economy. Government issued money (fiat money) is continually inflated and devalued by central banks. As the supply of money increases, money loses value and market participants are forced to look for ways to preserve the purchasing power of their money, and need to invest. Exchange Traded Funds (ETFs) have become one of the most popular instruments for investing. They emerged from index investing, which utilises a passive investment strategy requiring a manager to only ensure that the fund’s holdings match those of a benchmark index. In 1976, Jack Bogle, founder of the Vanguard Group, launched the first index fund, the Vanguard 500. This index tracks the returns of the S&P 500. From 2003 to 2022, global assets under management increased by 3,000 percent from US$204 billion to over US$10 trillion.

When allocating wealth, a rational actor would try to minimise uncertainty. An ETF allows them to achieve this by spreading risk (by investing in a range of companies) without the need for extensive research in each company. It can be a useful savings tool in the “fiat world” since fiat money does not act as a store of value. Now imagine a different world, where we have this nearly-perfect money; it’s called bitcoin. The supply is predetermined and capped at 21.000.000 coins (each divisible to eight decimal places). You may not agree that bitcoin is nearly-perfect money, but just for the moment imagine it is, and put all your objections temporarily to the side (attached are resources in the appendix that explain why bitcoin is becoming money). If it is almost perfect money, over time most people will adopt it and use it to conduct transactions and store value. If everyone uses the same money to store value and conduct transactions, then that money/monetary network (Bitcoin) acts as an economic battery, which stores the economic value created in the world. Because it is fixed in supply, its value will grow along with humanity’s productivity growth. By holding bitcoin, you benefit from the productivity of everyone else using it. It acts as an ETF on global ingenuity.

With near-perfect money like bitcoin, all other instruments for maintaining your purchasing power become obsolete. Investment is not required to offset monetary inflation; saving is enough. ETFs try to be savings, but are actually bad investments. It’s not saving, it’s investing in a financial instrument that has a unit of account, fiat money, that depreciates in value over time. Saving is the preservation of capital with the option to invest to seek growth. ETFs can hardly keep up with the level of monetary inflation and carry risk because individual companies can go bankrupt. In contrast, bitcoin is perfect for saving as it is fixed in supply and exists outside of the fiat system. Its supply cannot be arbitrarily increased.

What matters in a world of uncertainty is holding the most certain asset. That asset is bitcoin. Bitcoin has other key advantages over an ETF. Such as a lower cost structure, there is no management fee, no costs for buying and selling individual stocks of an index, only fees for buying and selling bitcoin, and (low) network fees for transactions. In addition, an ETF is a basket of securities held by a third party. If a bank or government, for whatever reason, decides to close a customer’s account, their ETFs may be gone too. Bitcoin, on the other hand, cannot be taken away from them or denied access so easily, because they have the option to self-custody. Bitcoin can be moved across the internet anytime, making confiscation virtually impossible. In times of geopolitical turmoil that are upon us, the ability to self-custody and protect money from confiscation becomes extremely important.

Conclusion

Growing up, Jack Bogle and his investment philosophy of saving for the long term were a big influence on me. He must have allowed me to understand bitcoin’s value proposition. Before I saved in bitcoin, I saved in ETFs for years until I understood that as a savings technology, they are limited by their reliance on the fiat system. Bitcoin serves that purpose much better, because it exists outside of the fiat system. It continues Boogle’s journey of making it possible for everyone to save, build wealth, and plan for the future.

For the entirety of the article we assumed that bitcoin is nearly-perfect money. Whether it is or isn’t, is outside of the scope of this article. If you are interested to find important information about it and decide for yourselves, you can find articles in the appendix below.

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