Bitcoin is Money Insurance

The impressive success of the new Bitcoin ETFs is foreshadowing of the potential adoption to come. And while some financial experts keep dismissing it as just a speculative asset with no other utility, they fail to realize that the same could be said about insurance.

The dictionary defines a speculative investment as one with a high risk of loss. That’s a good description of most kinds of insurance: an investment that’s likely to lose money. After all, nobody buys car insurance expecting to get into an accident — if they did they’d take the bus. People buy insurance as protection from the worst case scenarios that are unlikely to happen but are catastrophic if they do.

Bitcoin is insurance against the existing monetary order. In time, everyone from individuals to corporations to even central banks will want to hold some. Not because they expect Bitcoin to become their day to day money — hyperbitcoinzation will always be unlikely for a variety of reasons. They’ll want some because like a good neighbor — and unlike fiat money in a bank account — Bitcoin will always be there.

To understand why, we need to break it down to its component parts and compare them to the same features for competing forms of money.

Let’s start with the most obvious part: its fixed supply. Bitcoin’s supply is anemic and set by a decentralized protocol. There will only ever be 21 million coins, 19.6 million of which have already been minted. Changing that figure is theoretically possible but highly improbable — it would require near-universal agreement from an amorphous and heterogeneous community.

Bitcoin was designed to be stubborn.

National currencies by contrast are malleable. They are designed so a small and well-intentioned group of bureaucrats (at best) or kleptocrats (at worst) control the supply. This flexibility is not a bug of fiat money — it’s the core feature, and why unbacked money was introduced in the first place. Whereas creating a single additional Bitcoin requires almost universal agreement among millions of people, creating a trillion new dollars requires a simple majority of the Federal Open Market Committee. That’s seven people.

To be fair, there are benefits to having a flexible currency. Bitcoin’s rigidity is one reason I doubt it will ever become a day to day currency for most people. But there are also downsides to that flexibility — just ask anyone in Nigeria. Is a total monetary collapse likely in developed countries? No. But neither is you getting into a fatal car crash tomorrow. That doesn’t mean you should cancel your insurance.

Any insurance policy is only as useful as the ability to get paid when a claim is triggered. This leads us to a second, less obvious, but possibly more important feature of Bitcoin: the fact that it comes with its own payment system. Not even gold has that. And not just any payment system, but a purely digital global one that has operated flawlessly for over a decade.

Best of all, Bitcoin’s payment system is censorship-resistant, meaning it can be used by anyone. Fiat payment systems don’t work that way. Regardless of country, all such systems operate on top of the banking system and are highly censored. Governments and financial intermediaries decide who gets access and change the criteria regularly. People get kicked out all the time and entire industries can be banned. Banking is the only industry that can get away with discrimination because governments use financial access as a hidden lever of power.

This phenomenon even occurs on the international stage via sanctions. Reserve currencies like the dollar achieve that status thanks to their reliability. People have historically trusted the stability of the American political system and the neutrality of her financial system. Both are in decline, due to increased polarization and the weaponization of sanctions as a foreign policy tool. Regardless of justification, the freezing of Russian and Afghani foreign exchange reserves sent a strong message to every other government that saves in dollars. Run afoul of US foreign policy and your money is gone.

The problem for these countries is that there is no clear second option. Gold is a clunky store of value that is difficult to store or transact. Other national currencies have their own issues, like capital controls in China or negative interest rates in Europe. The lack of a clear alternative is one reason most experts don’t expect dedollarization.

But the one thing all fiat-money holders can do is buy insurance. Bitcoin is the best money insurance. It can protect anyone from inflation, oppression, censorship, and seizure.

This is why the Bitcoin ETFs have done so well. Their owners can’t take advantage of all of the cryptocurrencies featured — they get the inflation protection but not the censorship resistance. But they are betting that other people will want full coverage, and pay for it.