Many people don’t understand Bitcoin or the cryptocurrency phenomenon. Perhaps this is because they don’t understand money and therefore don’t understand national fiat currencies and how they are being robbed through inflation. Perhaps it is because they don’t understand the Open source distributed consensus ledger technology.
If you have only heard about these concepts through the mainstream media you can be sure of one thing only – that you have heard the propaganda. You have heard that it’s a fraud, it’s magic Internet money, tulip mania, a fad, a bubble, a ponzi scheme. But to understand it and appreciate its enormous implications for your future, it is necessary to step outside the Matrix for a clearer look.
For the purpose of this post I will use the term Bitcoin to represent the distributed consensus technology in general and the cryptocurrencies collectively as a new idea.
What is money?
Money is a very important commodity, but how do we define it? And is it the same as currency? It is shocking that a so-called education at a modern school leaves most people unable to answer these basic questions. It falls to us to educate ourselves and fortunately there are many resources to help us. According to Mike Maloney of www.goldsilver.com in his excellent series “The hidden secrets of money” for something to be used as money it must fulfill the following criteria. It must be…
- A medium of exchange
- A unit of account
- Fungible (= interchangeable)
- And a store of value due to scarcity
Money versus Currency
Currency can be used as money but it is something different because it lacks one very important attribute – scarcity. Currencies are created by governments and declared ‘legal tender’ for the payment of taxes and the settlement of all public and private debts by decree – hence the term ‘fiat’ currency. In other words, people are forced to use the government currency as money, they do not choose to because it is the best option. Currency is not a longterm store of value because it is not scarce. But why?
The value of currency is constantly eroded because governments just can’t resist creating more of it at will, in either digital form or using the printing press. And as something become less scarce it becomes less valuable. The creation of money by governments and central banks (acting in a creative exchange of paperwork) inflates the amount of currency in circulation and this is where the term inflation comes from. It doesnt refer to price inflation – that is a result. It refers to an inflation of the supply of currency. The increase in supply decreases the value and hence prices increase. The US Dollar, for example, has lost 98% of its value since the creation of America’s central bank, the Federal Reserve in 1913.
Inflation is not a natural phenomenon and it is not inevitable. It has been called a hidden tax. In fact it is a scam to transfer wealth from people to governments by the use of the legal prerogative of money creation. So much for currency. No one wants to have their wealth ‘transferred’ away from them. This is just a form of theft the man on the street is unaware of.
The evolution of money
Throughout history all sorts of things have been used as money – even seashells. But over time gold became seen as superior due to its specific attributes.
- It is scarce
- It is fungible and uniform, every piece is the same as the other, unlike Gem stones such as rubies
- It is transportable with a high value to weight ratio.
- It’s easily Identifiable
- It is highly durable
- And it’s supply is steady and predictable
These attributes made gold a great means of exchange as money for many centuries. And if we understand that it is the specific attributes of something that make it potentially a good form of money, then we can also understand that we can potentially find an even better form of money by finding something with even better attributes.
When it was backed by gold, currency was indeed a better form of money than gold. Currency first appeared in the form of paper claim checks on gold that was deposited in the safes of banks. Paper money was an improvement over carrying the physical gold around. Thus, the convenience made it a better form of money. With a gold standard backing the paper currency, the ammount of paper ‘claim checks’ (currency) could not be inflated.
However, with the advent of central banking governments commandeered the creation of money, removed the backing of gold, and destroyed its scarcity by inflating the supply. Also, by creating a monopoly on the money supply the evolution of money has effectively been frozen for about the last 100 years. Governments grip on the money supply has prevented free market development, or the invention of new forms of money superior to government currencies – until now.
Satoshi Nakamoto created Bitcoin in late 2008 and published a white paper in December of that year making the source code publically available. Although it may take many years for the full implication to come into being the monopoly on money appears to finally have been broken. Bitcoin is a form of money far better than gold or fiat currency.
The pound and the dollar (and indeed all fiat currencies) got their value not by merit on an open market but by force of government decree. The value of Bitcoin and all the other Crypto-currencies doesn’t come from force but through an extensive list of attributes that make them extremely useful – as money, or a host of other things as well. For example, if we look specifically at Bitcoin for a moment…
- It is easy to divide and recombine. [into 100 million different pieces that can be recombined on a phone.]
- It cannot be counterfeited like the dollar or gold (filled with tungsten)
- It is durable: As long as certain precautions are taken Bitcoin will not degrade over time Cryptocurrencies
- It can be sent anywhere instantly at near zero cost.
- This is not possible with Gold due to physical constraints
- And its not possible with Fiat currencies due to legal constraints
- It is scarce. It has an inflationary schedule that is easy to understand and a finite end amount.
- It cannot be manipulated, restricted or seized by any central party. It shares this property with Gold, yet is more discreet than gold and easier to hide!
As Eric Voorhees said “Just as men have engineered aeroplanes to fly in, cars to drive over distances, and houses to live in. So we can engineer a perfect medium of exchange.”
Currency is not a good form of money. It relies on government coercion to make people use it. Cryptocurrencies are an excellent form of money and as a result people are buying in to them. Bitcoin has scarcity built into its design and it is incredibly useful. Combine these two attributes and something will have value and a price. People are voting by their actions and have demonstrated the value of Bitcoin.
A new form of money
Bitcoin isn’t just a new form of money, it is way more than that. It is a whole new kind of payment system, and this is its real value and the reason why it is such an exciting technology. Bitcoin as a form of money is just one use of the new distributed consensus ledger technology.
Throughout history ledgers have been kept to record transactions and ownership. Until now these have always been in one central place by necessity. Bitcoin is new because it is a distributed Ledger with copies all over the web. It requires no central control or verification. This is the attribute that threatens the established central banking system that governments rely upon and that has held the evolution of money in the freezer (so to speak) for so long. This is the first important point to note. The technology is distributed and not centralised.
Bitcoin uses Blockchain technology to distribute this ledger information between all participating computers (nodes). Each block of the chain is like a new page in the ledger. Instead of it being written on paper in a book, or held on a central database, this page is added to the Blockchain and becomes publically available for verification. So the second point to note is that the technology Bitcoin rests upon is a Ledger, a public record of transactions or agreements of any kind.
Thirdly, and most importantly, Bitcoin achieves something radically new. It solves the problem of trust and removes the need for a third party to ensure trust between the parties to a transaction. It enables distant participants unknown to each other to trust one another. This is a hugely significant invention that is on a par with the printing press or the Internet itself – it is the world’s first full consensus distributed ledger.
This has never been seen before and it is inevitable that markets and individuals all over the world will gravitate to this new superior technology as a platform for a new kind of money because money is a ‘good’ like all others.
A monumental invention
With an understanding of money and it’s central role in the world, we can begin to see the massive implications of Bitcoin like the implications of the first car or aeroplane. And if we further consider the broader use of money it looks even bigger because not all people are literate, not all people use cars, or even the Internet, but everyone uses money!
Another really exciting thing about Bitcoin is that the only thing that can threaten it is an even better Bitcoin. The only thing can supersede it is an even better version of it. The genie is out of the bottle and cannot be stopped by regulation because it is an idea. You cannot make ideas go away with legislation. Bitcoin can only fail if a superior cryptocurrency takes its place. And this is to be championed because it is the evolution of money back in motion again and can only lead to everyone benefitting.
Bitcoin has been dubbed as anti-fragile. This means that attacks on it simply strengthen it. Each new threat helps it to evolve and develop.
Like gold, Bitcoin is an excellent form of money, but it is much better suited to the exchange of value in the modern digital and internet economy. Even as it becomes more expensive to transact, it is likely to be superseded by some other of the Altcoins. Bitcoin does not need backing in the same way that fiat currencies have been backed by gold reserves because it has value in itself. In fact its lack of backing is an advantage.
Furthermore, as an asset with zero counter-party risk, it can be transferred easily and instantly to anyone on the planet. It is protected against government meddling and interference by design. Eric Voorhess has referred to it as a “superhero currency”, no one’s permission need to be sought to use it and its superior qualities mean it will inevitably displace inferior currencies, and it will free up commerce that has otherwise been thwarted by the old system of fiat control.
This is the revolution in money
Bitcoin is the currency of freedom because it enables everyone to be a player on the pitch of commerce, without any barrier to entry. Like the Internet it robs the incumbent powers that be of their prestigious positions of advantage. It levels the playing field and allows those until now unbanked and excluded from the market place to participate. For the first time in history a monetary transaction can take place instantly, cheaply, and easily, between any two individuals anywhere on the planet, without permission and without barriers.
It spells the death of things like inheritance tax, since wealth can now be passed on in the form of cryptocurrencies such as Monero or Zcash anonymously. The Black market and grey market economies will readily move into Bitcoin and there is a whole new incentive for whistle blowers to speak out since donations can be anonymous.
Bitcoin and the crypto currencies are the money where the people really do give it its value. Who knows which cryptocurrency will finally win the race to become the new money. It looks like it migh not be Bitcoin. There is a new technology called ‘Hashgraph’ that looks even better. But which one comes to dominate is not as important as the fact that money is evoling once again, and this can only benefit us all.
Join the revolution that is happening outside the Matrix and learn all about Bitcoin and the new cryptocurrencies. Most of all support this new technology. Learn about it and invest in it. What ever form of money wins through, wether Bitcoin, another Altcoin or Hashgraph, this new technology is the future because it shatters the monopoly of the state and breaks the control of the central bankers and supports our freedom.
Check our the interview with Jeffrey Tucker in Episode 32 of “Living outside the Matrix”
For more back ground in the economics of sanity listen to the “Living outside the Matrix” podcast episode 31 with Dr Mark Thornton.
For a brilliant explanation of cryptocurrencies and the open source distributed consensus ledger technology see Mike Maloney’s “Hidden Secrets of Money” Episode 8 below.
I hope you got some value from this post.
Feel free to join the conversation and leave a comment below
February 28th 2018