Crypto’s True Value is Separation of Money and State

Coindesk has a thought-provoking piece today that redirects from the usual discussion of whether crypto is a hedge against inflation and gets to the heart of something more important. Coindesk argues the true value is crypto’s role in separating money and the state. They cover a lot of ground and there whole article is worth a read, but the key point is towards the end.

First, maybe inflation isn’t about the price of goods increasing, it’s about currency debasement.

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As Global M2 – the amount of money in circulation – changes year over year, it appears that bitcoin’s market value follows. In short, as economies introduce money into circulation, bitcoin’s price goes up because the additional money in circulation dilutes the rest of the existing money in circulation. So this supports the idea that bitcoin is a hedge against currency debasement (a fancy way to describe the dilution of money in circulation).

I’m not sure the data strongly supports this idea. Sure, there’s a visual relationship in the previous chart, but the rolling 30-month correlation coefficient between U.S. M2 and bitcoin’s value moves from negative to slightly positive (see the two following charts). Statistically, this doesn’t really tell you anything. Maybe the move is due to bitcoin maturing over time as it approaches its final resting place as an inflation hedge? I know the U.S. doesn’t stand in for the entire world economy, but still.

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Second, and more concretely, if you agree that we are in a war economy “where heads of state matter more than heads of central banks,” bitcoin is probably investable simply because it is separate from the “heads of state.” I’m not saying bitcoin’s price is immune to the acts of heads of state, but I am saying that bitcoin isn’t issued by any country and that the broader network a) doesn’t need any particular country and b) is resilient enough to buck China banning it.

So, in the event that bitcoin doesn’t behave as an inflation hedge, there might be something to be said for it acting as a way to bet on the separation of money and state.