In this article, we examine three reasons that Bitcoin, a decentralized peer-to-peer payment system, has appeal against centralized financial systems:

  1. Centralized financial systems can fail
  2. Centralized financial systems can inflate the money supply
  3. Centralized financial systems can confiscate and exclude

#1: Centralized Financial Systems Can Fail

In October 2008, the pseudonymous Satoshi Nakamoto published a 9-page white paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Although the white paper was released in October 2008, he probably started formalizing the concept of Bitcoin in late 2006 and began coding the Bitcoin software around May 2007[1]. So although Nakamoto conceived of Bitcoin prior to the 2008 financial crisis, the release of his white paper was fortuitous and serendipitous. During the 2008 financial crisis, multiple large banks went bankrupt and some banks were even acquired by governments to prevent a total collapse of the world’s financial systems.

The 2008 financial crisis cost the global economy trillions of dollars and destroyed trust between large financial institutions and the public, who were left to pay the price, while the large banks were bailed out.

In such a crisis, the danger of centralized intermediaries became clear to all. These centralized intermediaries formed a single point of failure: if the banks fail, financial transactions fail and all money held at failed banks is lost forever (apart from $100,000 FDIC insurance).

#2: Centralized Financial Systems Can Inflate the Money Supply

Since the 2008 financial crisis, the world’s monetary institutions have become addicted to quantitative easing (QE). QE is a monetary policy where central banks increase the money supply in order to stimulate a weak economy. QE is not technically just “printing money.”[2] Central banks are buying assets (usually bonds) from the private sector and/or the government. This infusion of money helps the private sector stay afloat in times of economic crisis and enables more government spending. Up until 2021, there were no clear signs of inflation in the U.S. economy, but that has changed.

The COVID-19 pandemic led the U.S. Federal Reserve to buy $700 billion in assets starting in March 2020. And the U.S. government responded by spending roughly $5.5 trillion on various relief measures with varying levels of effectiveness. In the summer and fall of 2021, the Democrats have proposed $4.5 trillion in additional spending in two separate bills: a $1 trillion infrastructure bill and a $3.5 trillion social welfare and climate change bill. So far, neither of these bills have passed, but the serious consideration of more spending has led to inflation and the search for alternative investments.

"The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust." (Satoshi Nakamoto, "Bitcoin open source implementation of P2P currency")

In world history, it was usually heavy wartime expenditures, lavish social welfare, or both, that contributed to the economic decline of wealthy nations. In the 1960s, it was the combination of expansive social welfare under President Lyndon Johnson's The Great Society and a war of attrition in Vietnam that led President Richard Nixon to take the United States off the gold standard in 1971. This decision has slowly, but surely debased the U.S. dollar. Without the gold standard, increasing the money supply became too easy, since the money supply was no longer required to be backed by gold reserves.

The United States has enjoyed a long period of economic prosperity as the world’s strongest economy since the end of World War II. But only arrogance would lead us to believe that such economic strength will continue on forever. It is nearly guaranteed that at some point in the next century, the U.S. dollar will collapse. No nation and no national currency endures forever.

The history of money extending back to ancient times tells us that governments cannot not sustain massive levels of spending without their money eventually becoming debased, devalued, and eventually worthless.

#3: Centralized Financial Systems Can Confiscate or Exclude

In the modern-day West, we are not accustomed to government confiscation of assets, except in the case of criminal activity (e.g., the FBI seizing assets of drug dealers). But bankrupt governments turn to desperate measures. In 2016, when the Greek government was in a debt crisis, Greek tax authorities seized half a million bank accounts containing $1.6 billion euros. In 2018, when the Venezuelan economy was on the brink of collapse, banks limited withdrawals to 10,000 bolivars per customer (about $0.06 USD at the time). People would wait in lines for hours and ATMs would be empty. In 2016, the Venezuelan government withdrew from circulation the 100-bolivar note, its largest and most commonly used bill. Immediately, all 100-bolivar bills become worthless pieces of paper. One third of Venezuelans don’t even have bank accounts, so cash transactions are critical to their economy.

In the West, we also take banking services for granted. However, about 1.6 billion adults in the world are “unbanked,” defined as a person “not having access to the services of a bank or similar financial organization.” Many countries simply do not have the financial infrastructure to provide banking services. But in other cases, government and financial authorities intentionally exclude certain people from access to banking services. In the Arab world, only about 35% of women had a bank account in 2018. In some places like Iraq, only 7% of bank accounts were held by women in 2014. Much of this discrimination against women in the Arab world is based on patriarchal cultural norms that exclude women from gaining financial independence. Even in the United States, there is evidence of discrimination against LGBTQ individuals by financial institutions: “Same-sex couples were 73% more likely to be turned down for a mortgage than similarly qualified different-sex couples, and same-sex couples who were approved for mortgages paid about 0.02% to 0.2% more, on average, in interest and fees” (Hua Sun and Lei Gao, “Lending practices to same-sex borrowers”)

Fundamentally, Bitcoin is designed as “censorship resistant digital cash.”[3]

Conclusion: Bitcoin as store of value

When we consider these problems with centralized finance, we begin to see the value of a decentralized peer-to-peer payment system that does not require a trusted third party. In the West, the most pressing problem is inflation.

Hedge fund billionaire Paul Tudor Jones in his paper, "The Great Monetary Inflation," suggested nine possible protections from runaway inflation: gold, the yield curve, NASDAQ 100, Bitcoin, US cyclicals (long)/US defensive (short), AUDJPY, TIPS (Treasury Inflation-Protected Securities), GSCI (Goldman Sachs Commodity Index), and the JPM Emerging Market Currency Index.

After reflecting on each of these options, Jones felt that over the next ten years, "If I am forced to forecast, my bet is [the winner] will be Bitcoin." Jones's assessment was based on four factors: (1) purchasing power, (2) trustworthiness, (3) liquidity, and (4) portability. While not the strongest in any one category, Bitcoin (in the aggregate) seemed to have the most potential in the next 10-15 years.

Everyone needs a plan to protect themselves from these problems with centralized financial systems. There are many possible protections (e.g., gold, bonds, cash, commodities), but we think that Bitcoin has the most promise in the next 10-15 years as a durable store of value that will retain purchasing power, become trustworthy, and will remain liquid and portable.


[1] Chris Burniske, Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond, p. 7.

[2] Antony Lewis, The Basics of Bitcoins and Blockchains, p. 76-78.

[3] Antony Lewis, The Basics of Bitcoins and Blockchains, p. 153.