Bitcoin: State-Proof Money

Last week, I discussed why you should state-proof yourself against hostile government policy and a failing state. I also explored how the principles of state-proofing applied to money. This week, I published a report for the Free Market Foundation (FMF) entitled “State-Proof Money: The Case for Bitcoin Adoption in South Africa.” In the following extract, I explain what Bitcoin is and how it can serve as a tool for monetary sovereignty and independence from state control

What is Bitcoin?

Launched in January 2009 in the aftermath of the Global Financial Crisis, Bitcoin (BTC) is the world's first fully digital currency.

Bitcoin has benefited from its first-mover advantage and network effects to become a legitimate alternative asset class and, increasingly, a day-to-day transactional currency. Today, Bitcoin has the largest market capitalisation of all digital currencies globally at approximately US$1.8 trillion.

Bitcoin has many state-proof qualities, including its decentralised structure, its scarcity and its ability to evade censorship.

Bitcoin is decentralised

Bitcoin operates as a fully decentralised peer-to-peer digital currency and payment network.

All Bitcoin transactions are recorded on a globally distributed ledger called the blockchain. The blockchain is fully transparent and borderless. Anyone with internet access, regardless of their location, can view or use the blockchain to transfer Bitcoin from one user of the network to another.

Bitcoin eliminates the need for trusted intermediaries, relying solely on the network for security. This enables users to bypass exchange controls and other international barriers to trade, making it especially useful for cross-border transactions.

Bitcoin can be seen as the first open and public digital payments system in the world: accessible to everyone yet controlled by no single individual or organisation.

Bitcoin is scarce

New Bitcoin is created through digital “mining” which relies on a consensus mechanism called proof of work (PoW) to validate transactions and secure the blockchain.

There will only ever be 21 million Bitcoin mined. This upper limit is hardcoded into the Bitcoin protocol, meaning that scarcity is inherent to the asset. Over 19.7 million (around 93%) of all Bitcoin has already been mined, meaning that only another 1.3 million Bitcoins remain to be mined.New issuance halves every four years (known as ‘halvings’), which reduces the price of newly minted coins.

Like gold, Bitcoin possesses a high stock-to-flow ratio, where “stock” refers to the existing supply of Bitcoin in circulation, and “flow” refers to the amount of new Bitcoin mined in one year. This high ratio makes the supply of Bitcoin relatively constant and therefore disinflationary.

Since the supply of Bitcoin is fixed and all transactions are visible on an open public ledger, it is impossible to inflate the supply and therefore debase the currency.

By contrast, in a fiat system, governments can print as much money as they wish, which can lead to inflationary effects.

This is especially tempting during periods of volatility. The Global Financial Crisis of 2008 and the Covid Crisis of 2020-2021 saw central banks around the world engaging in multiple rounds of “quantitative easing” or monetary printing.

This was one of the primary causes of inflation in the developed world in 2022. By way of example, in the United Kingdom, inflation rose from 0.8% in April 2020, at the beginning of the COVID lockdowns, to 11.1% in October 2022. In the United States, inflation stood at 0.3% in April 2020 and peaked at 8.5% in June 2022.

Having a state-proof mindset means cultivating a healthy scepticism towards government influence over the supply of money. Bitcoin provides such a mechanism for individuals to reclaim control from unaccountable authorities.

Bitcoin’s high stock-to-flow ratio and immutability make it ideal as a reserve asset and a hedge against inflation.

Bitcoin is censorship resistant

Not only is Bitcoin transformative from a technological and financial perspective, but it also has the potential to serve as an instrument of freedom more broadly.

Bitcoin’s decentralised nature means that no single political or financial authority can claim a monopoly on the production and use of money. This makes Bitcoin relatively immune to political interference, enabling individuals and businesses to maintain sovereignty over their own money.

Bitcoin can be transferred nearly instantly from one user to another, bypassing intermediaries and making it difficult for authorities to seize. By contrast, in a fiat system government can pressurise financial institutions to freeze accounts and seize the assets of citizens for partisan-political reasons.

Because the Bitcoin network is distributed across thousands of nodes around the world, it is impossible for governments to attack the entire network simultaneously. The only way for authorities to stop the use of the Bitcoin network at a local level is to disconnect the internet, but the global network will remain intact (although those with satellite-based internet like Starlink would generally retain access).

And unlike other cryptocurrencies, there is no central committee or group of founders who can be intimidated, sanctioned, or jailed. Bitcoin is an ideal tool for political dissidents, particularly in authoritarian systems, who might otherwise risk having their assets seized as a means of intimidation or censorship.

Pro-democracy activist groups in Russia, Hong Kong, Nigeria, and many other countries have been debanked by authorities and cut off from funding sources. In these examples, these movements have pivoted to Bitcoin to continue funding their operations. As Alex Gladstein of the Human Rights Foundation notes, for the 87% of the world that still lives in authoritarian systems, Bitcoin is “freedom money”.

In summary, Bitcoin is decentralised, scarce, immutable and censorship resistant – an ideal form of state-proof money.

Click here to read the full paper, which forms part of the Free Market Foundation’s Liberty First policy agenda.

Ansara is CEO of the Free Market Foundation.