This is the third article in my introductory exploration of Bitcoin here on Wealth.net. Part 1 and Part 2 were written in the wake of the big Bitcrash and it is interesting to observe that rather than “going to zero” as many prognosticators predicted, Bitcoin seems to have (kind of) stabilized somewhere north of 1 BTC => 100 USD
I said at the end of Part 2 that “Bitcoin is different” and today we’re going to talk about why.
It is crucial to understand that money depends on confidence, not edict. Governments can make various “decrees” about money and value, and for awhile a given populace may play along with that. However if and when confidence collapses, whatever the government says about money is immaterial: they may institute a currency peg or adjust an existing one, but if confidence doesn’t support it, a black market quickly springs up around the edges to reflect the true “market value” of the currency.
Specific objections to the viability of Bitcoin fall into two camps: on one side, it’s a ponzi that will eventually collapse to zero and on the other, it’s built-in deflationary nature renders it useless as a currency.
On the “ponzi scam” side of things, every objection I’ve seen levelled against Bitcoin can be more appropriately levelled against the current debt-based fiat monetary regime (and some of the sacred cow welfare state institutions it coddles) that we are all immersed in today:
“It’s headed for zero” – there is not much need to comment on this aside from posting a chart of the purchasing power of the current world reserve currency since 1913, the year the Fed was introduced:
Moving right along, we come to:
“It’s just numbers in a computer” or “Somebody can just create more numbers or bit coins or digital currencies” – as asserted in Slate’s “Fool’s Gold“.
Which is true, Bitcoins are just numbers, but so is the money you’ve been using for everything since 1973.
The difference is that Bitcoin is devised in a way where it cannot be inflated on demand.
The fiat monetary system is inflated by keystrokes all the time, by nearly every government. At the time of writing we are in “QE4”, which is quite literally the creation of $85,000,000,000 of new money per month which is then used to buy government debt and blow up asset bubbles (does anybody really think the DOW and S&P would be hitting new nominal highs without it?)
Ironically, Bitcoin is designed with far more rigid monetary discipline baked into it than the “new money” governments simply create at whim.
Yes, new crypto-currencies can emerge, and this is exactly what is happening. What they are then doing is competing in an unfettered marketplace – may the best currency win. Things go better with competition and all monopolies are bad. Anybody can create a new crypto currency, but if it doesn’t achieve enough network effect to gain momentum or market share than it will simply sink into failure without impacting anything.
Contrast with national / central bank fiat currencies, which since 1973 all float against each other, but they also all cheat (because of the money printing and the artificial suppression of interest rates).
Since the powers-that-be are creating gross distortions within economic markets (ZIRP, QE, bubbles, bail-outs & bail-ins); necessity dictates the invention of something like Bitcoin. Given the aim of all central banks and sovereigns (stated or not) is to devalue their currencies in a global race to the bottom; further that Calvinball finance will be employed to rewrite rules on-the-fly in favour of the banksters, the economic imperative to transmit true market discovery & unfettered movement of capital has made the emergence of crypto-currencies inevitable.
As my old friend Mark Rostenko once famously wrote “nothing is bigger than The Market”, so if the global governments and banking cartels are going to hold the market’s head underwater with their foot, it will assert itself in some other fashion an emerge elsewhere.
The global flight to (physical) hard currencies and the emergence of digital crypto currencies is it. In other words, crypto-currencies have evolved precisely because of government and central bank control over and misuse of, fiat money.
The deflationary argument against Bitcoin is also a red herring. Again, from Slate Bitcoin Will Spiral Up and Down Forever:
“But where I think the analogy breaks down is with deflation. As computers started looking more and more useful and demand for computers grew, the world started building more computers. Bitcoins are deliberately designed to represent a finite supply. So if over time more and more people want to use Bitcoins to conduct transactions of various kinds, then the price of bitcoins is going to have to rise and rise. The problem is that if the price of a bitcoin is on a steady upward trajectory, then nobody’s actually going to want to spend a Bitcoin on anything. And if everyone’s hoarding their Bitcoins, then the network is actually useless.”
Two things. First, deflation today being is widely regarded as an unthinkable, unacceptable scenario (which it is, if your money is based on debt and your economy is largely premised on consuming more than is produced and doing so before anything is produced).
But Bitcoin is not based on debt and deflation has not always been a bad thing. The era of the Classical Gold Standard saw prosperity and productivity soar through the Industrial Revolution while prices remained mildly deflationary for over 150 years (there was also no central bank in the US, no income taxes and you didn’t need a passport to enter most countries)
Second, we’ve already seen first hand the benefits of beneficial deflation in our lifetimes, but we don’t call it that. It’s a little something called the Internet. If deflation was truly a show-stopper than the Internet would never have happened because nobody would have invested in it. Why put money into computers today when they will be cheaper tomorrow? Why do anything now when it will be cheaper tomorrow?
Again, because deflation is death when your way of life is built around consumption before production, consuming more than production and perpetually living beyonds one’s means. In other words, deflation kills when your money is based on debt and you live in a treadmill economy, constantly trying to outrun government induced inflation.
The real game-changer in crypto- currencies.
First, given their design, crypto currencies are inherently stable (yes, Bitcoin is volatile right now, but it is volatile in relation to fiat currency exchange. So is gold, so is silver, but they are both indisputably more durable and stable than fiat currencies, given that the latter all go to zero in time and the former do not).
Add to the counter-inflationary discipline built into crypto-currencies the fact that, unlike gold and silver, they are largely immune to government confiscation and capital controls makes it a game changer right there.
But that’s not all.
In addition to the monetary, currency functions, you can also do things with crypto-currency that are unwieldily with anything else. After all is said and done, the biggest killer app to come out of all this may end up being micro payments – that elusive Holy Grail that has been sought after since the dawn of the internet.
Not only that, but because of that same divisibility that makes micro payments possible (if not inevitable) the same mechanisms can be used to transmit meta data about identities, reputations and other scoring systems. Joe Cascio gives us a brilliant introduction to this in his article on using Bitcoin to facilitate Collateralized Identities
I’m not saying that Bitcoin is going to be a game changer, what I’m realizing the more I dive into it is that Bitcoin has already changed the game.
From here on in there are going to be two kinds of people who understand this: those who recognize this development as free market evolutionary response to current geo-political policy failures, and those who desperately want to put it back in the jar and screw the lid on tight. Too bad for the latter that it’s impossible to do so.