By Corey Paul
Sourcing Note: The economic theories referenced in this post are sourced from the public writings of the following people: Saifedean Ammos, Carl Menger, Loudwig Von Misis, Friedrich Hayek, Peter Thiel, and Michael Saylor. I would like to extend my deepest gratitude to each for sharing their knowledge with the world.
“It ain’t what you know that gets you in trouble, it’s what you know for sure that just ain’t so.” -Mark Twain
Our human nature makes us resistant to change. Either through gaslights or willfully blind eyes, we refuse to acknowledge important changes taking place right in front of us. This is especially true when such changes are forced upon us, causing feelings of discomfort that are rooted in the fear of the unknown. Our need for control makes us impulsively say “No, I’m doing just fine where I am” before we even stop to ask ourselves...are we really?
There is perhaps no greater example of this folly than that of Kodak. The company that invented photography itself created a business model that had worked beautifully for over a century. Year after year it ran like clock work. The employees and the city they lived in prospered. Until one day, they looked up and saw trucks full of unsold film, and a world populated with people who now preferred digital photography instead of film.
What is particularly brutal here is the fact that the whole world saw digital photography coming. That is, everyone except Kodak and the executives who ran it. With all the arrogance of unchallenged dominance, they stubbornly refused to put serious resources behind unproven digital business models. By the time they did, it was far too late.
It brings me no pleasure to say the harsh (but true) reality is those who continue to deny Bitcoin's inevitable dominance of the financial world, are no different than the Kodak executives who denied the inevitable dominance of digital in the photography world. My goal in writing this essay is not for such people to feel belittled, but rather, for them to feel they have been given good reasons to think critically about our current financial system.
Part 1: Only the free market can decide what money is.
Politicians proclaiming only the government can determine what constitutes money are simply unaligned with reality.
Virtually anything can be viewed as money so long as it solves “the coincidence of wants” between two peers. Meaning, if a buyer only has items that differ in value from what a seller is offering, a medium of exchange is needed to achieve equilibrium, and solve the coincidence of wants. Life and resources are finite, which forces peers to be very careful when trading with one another.
For this reason, our natural human instincts will always drive us towards the most sound money available. In other words, humans will always prefer money that is demonstrably scarce, easy to divide, sailable across space (how easily the currency can be transferred from peer to peer across physical distance), and sailable across time (how well the currency holds its purchasing power over the long term).
No currency in it’s present form (including gold) even comes close to competing with Bitcoin in regards to adhering to the principals of sound money. Since it is by far the most sound money available, it is the one humans will naturally gravitate towards over the long run. While there are plenty of other matters we will get to below, this, first and foremost, is what makes Bitcoin's dominance of the financial world inevitable.
The government can, however, disrupt on ramps to alternative currencies, and force the wide spread use of their own currency through the threat of violence or imprisonment. For example, the private ownership of gold in the US was outlawed in 1934. However, this did little to prevent the market as a whole from viewing gold as more preferable to the US Dollar. Gold did not magically disappear in the collective mind of society once this decree of illegality was made. On the contrary, it created a thriving black market for gold, and ultimately the situation only served as proof of gold's value proposition. To this day, central banks continue to hoard gold in vaults around the world, and not only is the private ownership of gold once again legal, it’s value continues to rise against the US dollar.
Humanity’s natural gravitation towards ever sounder money can be slowed down by government in the short term, but it cannot be stopped over the long term. This is especially true for Bitcoin, because Bitcoin’s on ramps are orders of magnitude more immune to disruption than gold. Any government attempting to ban Bitcoin might have marginal short term success, but will be running a fools errand over the long run.
Part 2: Fallacy of “Injecting Liquidity” into markets.
The notion that one can “inject liquidity” into markets to “stimulate” the economy is as naive as believing one can sell 150 tickets to a theatre that only holds 75 people.
"Money is NOT a resource. Money is a claim to resources" - Saifedean Ammos
The only thing liquidity injections succeed in doing is adding more claims to present resources, causing prices to artificially rise. This leaves non-monetary matters, such as increases in production efficiency, or the discovery of cheap alternatives, as the only hope for increases in consumer purchasing power. Losses in purchasing power caused by liquidity injections are an invisible tax on every person with with cash in their pocket or bank account. It is legalized theft that is every bit as moral as robbing a bank, yet history shows us that those given the power to debase the national currency always will.
Inflation across present day society is far worse than indicated by the Consumer Price Index (CPI). The concept of how the CPI is constructed is laughable at best, because the relevant underlying metrics are constantly redefined. The way the CPI was calculated in 1980 is far different than how it is calculated in present day. Thus, accepting the CPI as an accurate picture of reality is no different than allowing a child to change the rules of a game as it is being played.
What is truly heart breaking about this particular type of theft, is that it is mostly overlooked by society so long as the loses in purchasing power remain modest within the short term. Most consumers have far more salient issues in their lives than a 2% year over year (YOY) loss in purchasing power. If the price of a cup of coffee rises from $1 to $1.02, most consumers won’t even notice, let alone see it as a major issue in their day to day life. The US Dollar and other major global currencies are managed well enough that the effects of inflation, in general, are only felt across long term horizons of at least a decade. It is only when YOY inflation becomes abnormally high (like it is at the time of this writing) that questions start being asked.
“Liquidity injections” are financial heroin in that they provide euphoric effects in the short term, and devastating effects in the long term. More over, the longer the heroin is abused, the more painful our withdrawals will be. If the US dollar’s elastic supply is our heroin, Bitcoin’s fixed supply of 21 million coins is our shot of Narcan.
Part 3: Distributed replication of centralized monetary layering
This is easily the most over looked miracle of Bitcoin, because it involves the solving of an extremely complex problem most don’t even know exists in the first place.
Focusing solely on libertarian ideology is a flawed approach to understanding Bitcoin’s value proposition. Features such as pseudonymity and unquestionable scarcity are of course legitimate aspects to be excited about, but they don’t tell the whole story of why Bitcoin is a world altering technology. Bitcoin’s value as a revolutionary payments network is arguably equal to that of its scarcity.
The mistake most people make with regards to Bitcoin as a payments network, is seeing it as in competition with the likes of MasterCard or Visa.
First, limits on block size (the number of transactions that can be processed on Bitcoin’s block chain per second) make on-chain transactions unattractive as a competitor to current payment
processors. Who is going to wait the 10 minutes it takes to confirm a block, just to buy a cup of coffee? Moreover, Bitcoin’s network has grown to a point where current on-chain transaction fees are often far greater than those of centralized solutions like MasterCard.
When we pay for something small like a cup of coffee with a credit card, the transaction may clear in a matter of seconds via a simple balance verification, but it takes days and sometimes weeks before the transaction settles. In between the seller and consumer are a network of trusted 3rd parties, who must digitally pass the money along to its final destination in order for settlement to be achieved.
In other words, there are layers to every transaction between peers.
The key point here is that payment processors like Mastercard are merely a single layer inside a multi-layer network. Bitcoin on the other hand, is the network.
In the Bitcoin network, the 1st layer block chain is used for settlement and security, and 2nd layer solutions (such as the lightning network) integrate with payment processors (3rd + layers) that can be used for instant clearance at scale. This is a concept that is clearly not understood by those who argue block size limits are an impediment to scalability. Further, an increase in the block size will result in a decrease in the number of nodes on the network, as some will not have the required capabilities needed for handling ever larger blocks. Any decrease in the number of nodes on the network hurts the network’s overall decentralization, which makes the network as a whole less secure. A less secure network will always equate to a less valuable network. More over, on a purely technical level absent regulatory realities, MasterCard could just as easily integrate with Bitcoin as it can with the Euro, US Dollar, or any other major currency. The key difference is that the open source nature of the technology, in combination with the technologically trivial work loads of 3rd + layers, results in transaction fees that are once again orders of magnitude lower than current centralized solutions.
The Bitcoin network demonstrably replicates the layered network we currently use, but with the revolutionary ability to obviate the need for 3rd parties by distributing the task of transaction clearance and settlement to nodes all over the world. You need not ask your government or bank for permission to send payments across the world, or to controversial causes. Everything
from pseudonymity, to coin authenticity, to supply immutability, to transaction irreversibility, is guaranteed by various mathematical laws being followed within the code, and cannot be altered by anyone — especially governments.
Bitcoin is our life raft in a sea of overprinted currency and overzealous authority. Since monetary systems control virtually all aspects human life, Bitcoin is arguably the most important invention ever created by human life. It will never go away, and it cannot be stopped. It’s dominance over central banking is as inevitable as the sunrise, even though it may very well take another century to get there. In the years that follow this writing, governments, businesses, and individuals will both face ever increasing pressure to either get on board, or simply be left behind.
“History shows it is impossible to insulate yourself from the consequences of others holding money that is harder than yours” - Saifadean Ammous
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