Denominating Value in Bitcoin Terms

Stop measuring asset prices with nonsensical fiat metrics

Home prices continue to fall when measured against Bitcoin

Since the insane degrees of quantitative easing when the world lost its mind in 2020, currencies around the world have been significantly debased. This has meant that their unit value when compared with assets, goods and services has fallen dramatically. Of course, there are other reasons for inflation, such as the decimation of supply chains, but one would be hard pressed to argue that monetary inflation doesn’t lead to asset inflation. If there are more dollars chasing the same amount of houses, the prices of the houses increase in dollar terms. By contrast, if houses were being built more quickly than dollars were being printed, we may expect the opposite…

Rigged fiat metrics

The absurdity of the financial status quo now ought to be obvious to everyone, even those who are barely paying attention. The fact that one has to estimate and guesstimate what central bankers (and particularly Powell at the Fed) will do on any given day before making financial decisions is ridiculous. A society can never expect to be stable if the foundations are constantly being revised and tweaked. One analogy that has been growing in popularity as of late has been that of the construction worker: it would be far harder to build a house if you constantly had to defer to a central planning authority to find out what size they deem it appropriate for an inch to be. In the same way, interest rates in the UK largely depend on which side of the bed Andrew Bailey wakes up on.

It doesn’t just mean that the future is more uncertain and difficult to plan for, but also that historical data becomes far more difficult to contextualise: if the size of a metre changed by a few % every year then how are we to know who the fastest runners in the Olympics 100m race have been? More importantly, how can we measure the real growth and standard of living in any given society over time? If the money itself has been corrupted for political purposes and CPI measurements are little more than a useless farce, then the foundations upon which all economic decisions are made is tainted.

Deflation is good

Central banks around the world have, for decades now, stated that 2% is the optimal level of inflation. Why this figure?

The reason that 2% is the appropriate level of inflation (as per rigged CPI metrics — monetary inflation has historically been ~7%) is because it has been determined that this degree of theft can be sustained without too much societal turmoil. Keynesians will say that incentivising spending rather than saving stimulates the economy, and whilst this may be true in the short term it runs the moral hazard of destroying savings. Destruction of savings via such theft is not a valid reason to artificially stimulate the economy to massage politically favoured metrics.

Now, of course, central bankers are revising their 2% targets and discussing how they now perceive the optimal rate of theft to be around 4%, because they’ve completely lost control of monetary policy. Rather than considering inflation to be a failure in and of itself, the IMF has been building a case for greater degrees of theft. Coincidentally, this also benefits the IMF to the detriment of anyone who listens to them.

For those who denominate everything in Bitcoin rather than in dirty fiat, inflation is not a problem. Over time, everything becomes significantly less expensive.

For those who measure in sterling, we do see some technologies becoming significantly cheaper over time. For example, televisions today are far more advanced and less expensive than in the year 2000, music is now free to stream online and air travel is no longer restricted to the elite. These areas of innovation are able to outcompete the monetary inflation so that we recognise their price falling in dollars and sterling. By contrast, innovations in education and healthcare have not happened at a fast enough rate to outcompete inflation, which has made them significantly more expensive.

The reason that such deflation versus Bitcoin can be sustained is thanks to the relative abundance of everything other than Bitcoin, and the ease with which other such things can be created. Gold has a stock to flow of ~50, and real estate of ~100. Bitcoin currently sits between the two, but thanks to the halvening in April it will be scarcer than real estate and its stock to flow over the coming 117 years (the last satoshis to be mined in 2140) is on a trajectory to infinity. Of course, since Bitcoin hasn’t yet reached its full potential, it continues to grow alongside Metcalfe’s Law (n^2), which means that those who look at the world through a Bitcoin lens live in an even more deflationary world.

According to the ONS (so take it with a pinch of salt), the average house price in the UK in April 2023 stood at £286,000, which is roughly 14 Bitcoin at the time of writing. After the next halvening, Bitcoin will be scarcer than real estate, meaning that from that point forth it will always be easier to increase the relative supply of new houses than new Bitcoin. For someone interested in allocating capital with preservation in mind, it is important to consider dilution. The nature of human development is that over time society becomes more abundant and more things are produced. It’s not impossible to imagine that in 50 years there could be 10 times as many homes as there are today, competing for monetary premium (a necessary prerequisite for such inflated home values) with the same 21 million Bitcoin.

Moreover, it is important to consider the relative risks of holding different assets. I mention property because in the UK the vast majority of people’s wealth is held in their homes — the scarcity that comes from real estate relative to other assets has made it attractive and allowed homes to accrue the aforementioned monetary premium. It is far more likely, though, that property will burn down, be expensive to maintain, incur burdensome taxes, and limit your options relative to an asset whose priorities are security, storing value, and a universal medium of exchange. One would therefore expect that there will be a growing capital flow away from real estate into an asset that whose future in less uncertain because of its immunity to politics and the limits of the physical world.

In a deflationary world, the entire foundation of society changes. People can plan for the future far more effectively, and still experience the upside of human innovation and creativity pushing society forward. Rather than the benefits of breakthroughs accruing largely to benefactors of the Cantillon Effect, value accrues to everyone in the society.

When does the mental switch come?

There are many who have already made the mental switch of denominating prices in Bitcoin terms, but we are a tiny minority even in the Bitcoin community.

I would suspect that it takes a few years for most people to make this switch, unless they are forced by circumstance (such as hyperinflation of their fiat). It also seems more likely that people will begin to make the switch more easily as Bitcoin becomes more popular as a medium of exchange.

However, it is a dramatic mental shift to make and the majority of society won’t make it easily. Many people get into Bitcoin in order to sell at a later date, without realising that Bitcoin is the money, and to sell into fiat is to lose the plethora of benefits that Bitcoin offers to its users. People may be hoodwinked into selling their Bitcoin to buy a home, because property has a long track record and a reputation for appreciating in value. But if you measure property in Bitcoin, that isn’t the case — houses revert to consumer goods rather than investments, which makes a better world in which far more people own their own home.

Looking out a few decades, and given the assumption that Bitcoin is significantly more adept at storing value than any other asset class over the long term, it may be reasonable to assume that Bitcoin sucks the speculative value out of other asset classes that have been monetised, such a real estate. We can even make some conservative calculations to illustrate how this phenomenon will play out. Assuming (conservatively) that in the coming decades Bitcoin captures 10% of the market cap of residential real estate, and there are roughly 1 billion homes in the future (again, this is very conservative), the average price of a home falls to 0.21 BTC. What happens then? People build more houses, prices continue to fall forever, and the world becomes far more prosperous.