Bitcoin Basics
Dec 19, 2023

99 Currency Wars But None With Bitcoin

Global Currency Wars: What happens to Bitcoin when nations compete for global trade

99 Currency Wars But None With Bitcoin

The Global Contest for Trade Dominance

Whether you know it or not, your country is engaged in an intense global contest for trade dominance. Every nation has its own circular economy managed by (mostly) well intentioned governments struggling for growth.

Whether you use a rational analysis of this system or you merely observe what takes place, you will see currency wars emerging as the game-theoretic culmination of this competition.

In this game, the objective isn't to strengthen the nation's currency; rather, it's a deliberate strategic race to devalue it.

Bitcoin as a Measuring Tool

This situation creates a stark asymmetry of interests. As an investor and a bystander in nation state currency wars, you have the option to choose how you measure your net worth. A rational person must acknowledge Bitcoin as a useful measuring tool with respect to currency, simply because it’s the only fixed unit in our financial system. 21M Bitcoin. No more, no less.

On the other hand, for governments, the exchange rate between Bitcoin and local fiat currency bears little significance in their economic policies.

The Fundamental Question: What is Your Unit of Account?

This divergence in priorities between individual financial health and governmental economic strategy arises because of a fundamental question - what is your unit of account?

Every government around the world is seeking to increase the income of its constituents measured by GDP but crucially this GDP figure has no reference to Bitcoin.

GDP, or Gross Domestic Product, represents the total value of all goods and services produced over a specific time period in local currency terms. It's a measure for governments, encapsulating Consumption (C), Investment (I), Government Spending (G), and Net Exports (X – M).

Consumption and investment are market-driven and difficult to control. Government Spending causes redistribution of wealth and it's highly political. But Net Exports (X-M) are a simple and attractive lever for economic growth.

This focus on Net Exports leads governments to a common strategy: currency devaluation.

Trade between countries can be beneficial for the global economy as a whole, there are benefits to specialization. But make no mistake, this is largely a zero sum game. When you go on a holiday, the country that sells you tourism wins, and the country which you thought about visiting but chose not to, loses. It’s a competition, and countries want to increase their share of the winnings.

Simply put, governments worldwide are in a continuous race to expand their exports. The simplest path to increasing exports is by lowering the price your trading partner has to pay. How do you accomplish that? You cheapen your own currency.

A classic example of this approach is China's long-standing practice of currency manipulation, aimed at strengthening its manufacturing sector and enhancing export competitiveness. Donald Trump famously called this out for decades, but China was just playing the game.

In reality, it's a common practice among nations vying to increase their export volumes. The reason is straightforward: enhancing net exports is economically beneficial, and currency devaluation presents a relatively easy method to achieve this. At the end of the day, incentives drive everything.

Bitcoin: The Steady Contender in a World of Devaluation

Simultaneously, we have the Bitcoin network. Simply operating as it was designed, becoming exponentially harder to inflate over time until there is zero inflation within the network.

As governments engage in this competitive devaluation, Bitcoin just keeps operating block after block,  becoming increasingly scarce over time.

In a world in which countries are competing with each other to devalue their own currencies, Bitcoin wins.

Bitcoin's lack of inflation ensures price in local fiat terms grows, but this is inconsequential to your government's economic policy. The government's goal is to manage its relative strength to other exporting nations. The Dollar / Yuan exchange rate matters, but the Dollar / Bitcoin exchange rate does not.

This is precisely why the exchange rate of all fiat / Bitcoin is in long continuous free fall. The systematic devaluation of your fiat currency relative to Bitcoin doesn't matter to your government.

It should however, matter a lot, to you.