A Bitcoin Paradox

Banking In The Shadows Part 6

@CharlieLongren

We like to believe that our generations are different than generations past; that the world is different than it used to be. It is true that technology changes, the environment changes, and kings change, but people do not. At least, we do not change rapidly. We slowly iterate over thousands of years. When we understand this truth, we can look at complex systems and trace their iterations to their origins.

When bankers began creating their own liquidity and spawning the first seeds of the Eurodollar system, they were not doing anything new or revolutionary. Contrary to popular belief, the world’s first economies were not systems of barter. Because of a coincidence of wants we needed an instrument to deal with salability across time, space, and scale. Meaning we needed to trade with each other while preserving as much value as possible. The first money was not currency. It was credit. There was no need to trade sea shells with each other because everyone knew everyone else. You knew who was trustworthy, who would pay you back, and who would not. There was no need for currency because most people in the village knew of all of the transactions that occurred. Credit started out as a relatively hard form of money because the value accrued and saved by a community was always on display. In modern terms, the ledger was easily verifiable.

As the economy expanded we iterated through monetary systems, utilizing currencies and credit, until we arrived at the Eurodollar system. Unlike the credit in the first economies, credit in the Eurodollar system is soft money. In this system credit is easily created and difficult if not impossible to measure, making it a poor store of value and a poor unit of account. Currently credit is only backed by fiat dollars which can be measured but are easily created. The purpose of money (currency, credit, gold, ect.) is to express information about price. Hard money is better at expressing price than soft money is. This is one of the primary flaws of the Eurodollar system, and this is why the Bitcoin network is inherently a better monetary system than the Eurodollar system. The Bitcoin Network is a hard money system. Even so, Bitcoin will only fix the fiat part of the Eurodollar system. It will do little to fix the easy credit part.

With mass adoption of Bitcoin, we will see a stop to the inflationary spiral that causes many of our economic issues. Writers, plumbers, doctors and other non-financial professionals will no longer need to make complex financial decisions in order to retain the value of their work. You will not need a pension to save for retirement. The money you hold will not be so easily created and inflated away by unelected government officials. Under a Bitcoin standard only the best businesses that provide the most value to society will succeed, because only the best businesses will be able to acquire funding. All of this will happen due to a transition from an extremely soft monetary system to an extremely hard monetary system. But, there are two things that will prevent Bitcoin from becoming an economic utopia.

First, there is a paradox in Bitcoin. Its success will lead to many of the same problems we have in the Eurodollar system. In the future, we will likely see Bitcoin share the same fate as gold. Bitcoin deals wonderfully with inflation, but in hard money systems deflation is the primary concern. All growing economies are inherently deflationary. As technology improves, people produce more, resources become less scarce, and the value of the money increases. This is a great thing for everyone who earns money in an economy… to an extent. In a hard money economy, eventually the currency will deflate so much that people will not be able to buy regular goods and services using even the smallest unit of that currency.

With Bitcoin, the smallest unit is a satoshi. One Bitcoin equals 100 million satoshis. Under a Bitcoin standard, there will come a day when even one single satoshi will be too valuable to buy a pack of gum. This future is inevitable as long as the economy continues to grow. And in that future, Bitcoin will consolidate into the hands of governments and of the most wealthy. Once again we will see history repeat itself. Governments will have created new digital fiat currencies, they will break their pegs to Bitcoin, and we will enter another period of central bank interference in capital markets. Luckily, this is unlikely to happen within our lifetimes.

Secondly and more urgently, as banks adopt bitcoin as a balance sheet asset, they are likely to use the same accounting tricks and play the same financial games that they have played throughout history. More specifically, they will use Bitcoin as collateral in order to borrow funds and loan funds. They will hypothecate and rehypothecate their bitcoin, expanding their balance sheets, and creating money and credit in the same way they have in the Eurodollar system. The only way to prevent these risky banking techniques is to regulate them. Government officials have been either unwilling or unable to regulate risky banking practices in the past, therefore we can safely predict that they will not be able to in the future. The global monetary system may change, but banks will not. As mentioned before, the first economies were credit based economies. Credit has been used as a medium of exchange for thousands of years. We are unlikely to stop now. The global monetary system may change, but people will not.

Bitcoin’s saving grace and one of the primary features of the network is the freedom that everyone has to join the network. The Eurodollar system is forced on us by our governments. In order to save, invest, buy a house, and go to school, we have no choice but to transact using Eurodollar banks and Eurodollar currencies: all of which are controlled by unelected Eurodollar officials. It is a monopoly on the entire economy. Bitcoin will not stop the current system (or an iteration of the current system) from functioning, but it will give us an option to opt out. If you are tired of your dollars being inflated away, Bitcoin is your life raft. If you are happy with and stand to benefit from the legacy financial system, Bitcoin will not be forced upon you. It is the objective truth and a bastion of autonomy.

All else being equal, the Bitcoin Network offers what the Eurodollar system never could… choice.