Hi there, today’s topic: the bitcoin versus capitalism.
Did you know ? A whole bunch of people believe that good old fiat money like we know it, might see its reign over the world reduced to only a share of the reign, or ideally, be scraped altogether. Those people are the early adopters of crypto-currencies.
It’s not just some crazy doctors’s experiment
You don’t just put 80 billion dollars into an experiment (that’s more than the USA ministry of education’s yearly budget).
No it’s real and here to attempt some amount of change. And not just an AirBnB/uber-ish kind of change, rather a turn-the-continents-over-their-heads kind of change. Because it could very well sound the death knell of uncle Sam’s buck. And auntie Merkel’s Euro. And the rest.
Buuuuut I’m not here to speak of this. Rather, I’d serve you with some orthogonal ideas.
Indeed I postulate that a virtual crypto coin, say bitcoin (call it BTC), holds more hard value than fiat money we own today.
What’s that ? How can a bunch of bits have more “hard value” than the metal coins I have in my wallet ?
Well that’s because there is no amount of debt, that composes a BTC. One bitcoin, is exactly what its worth, just like a coin of gold is worth its own intrinsic value as a precious metal. However, the zinc and copper coins we use as cash to trade a fiat currency-like dollars, have no value per se, they represent a “IOU” (promissory note). The bank acknowledges it owes you 2 dollars when you possess a coin with written “2” on it. But the coin itself, is not 2 dollars. So what is ? Until first half of last century, real dollars’s value was kept as gold. So a bank needed to have as much gold piles in reserve as they issued coins and notes/bills.
That started to be a problem when the population of earth started to count in billion. And a little problem called world-war-2-in-need-for-big-bucks as well.
Behold, the fractional reserve banking system.
Now, by law, banks are authorized to create money out of thin air when, and only when, a loan is extended. I’ll repeat that slowly, getting money from a bank institution when financing something means new money is created out of nothing.
And because today, lots of money in circulation are deposits made by recipients of payments made by borrowers, the hard value of a dollar has reduced to about a cent (no joke). This means, that 99% of the money currently flowing this earth, is devoid of value, since it’s pure magic.
Well, this does not happen in BTC. Or not nearly as much. It is impossible to create new coins other than spawning a new block, that is valid, has a high proof of work, and is finished before other competitors. Knowing the difficulty is adjusted so that it takes 10 minutes to compute, and about 12.5 BTC are distributed to the contributors of the computation. This value of 12.5 halves every 4 years, and integrating over this decreasing exponential gives us the number of 21 million.
21 million is the maximum number of bitcoin that will ever exist.
This means multiple things:
- BTC cannot create debt money
- BTC is deflationary
- Fractional reserve is inapplicable
So no fractional lending means that financing institutions will have to actually own the money they give out. Which will reduce the liquidity of the whole society. What do say I ? Reduce not it will, divide by 100 rather; since the reserve percentage imposed by law, has been lowered decade after decade, to a single digit value today.
That poses a serious problem to a system that Americans, I believe, tend to like a lot (Europeans too but they don’t want to admit it), and that is nothing less than capitalism itself.
Which I will not discuss here, but rather I will argue that mister crypto coin, announces a retrogression of the economic system.
Wait what ? How a super cutting edge technology full of jigowatts could be a retrogression ? And what the heck is this word anyway, retrogression !
Nevermind the word, but yes by my vision of things, the bitcoin and other cryptocurrencies are simply a suggestion to go back to before the abandon of the gold standard in 1933 by Roosevelt.
A friend once told me during discussions at the bar following the 2008 crisis, “without loans, the society is frozen”. I was a bit shocked, befuddled, taken aback.
It took me years to come to terms with this short string of words “without loans, the society is frozen”… I have thought about it from all angles during countless hours, but I finally came to conclusion that it has got to be true.
Indeed, having free loans means that we are compressing time. You see, time is money, and that’s not just a saying. We literally (mathematically) integrate effort over time to generate money. This is due to work. We work to create something, this has an added value, and that’s quantifiable with a price tag. Someone giving you money for what you built, is just trading time he spent to do some equivalent effort.
I often think of it this way, buying an apartment 200k means that it would take me 25 years to build it by myself. Using a bank loan, I can profit right now of 25 years of efforts. That’s very Einseiny, hypercubal even ! We are playing quantum physicists.
If loans were not free, it means there is no time compression, loans extended would amount to exactly their value of work, work that has been done in the past; not in the future. So it would become way harder to get one, because of lack of supply. And should you get one, the interests should mathematically be a hundred times higher than today, since we are effectively going from 1% of reserve to 100% of reserve.
In that way, a crypto-currency is a come back to 1933.
Well, having money that represents hard value, and is not generated out of thin air, has an air of seduction to it, doesn’t it ?
Surely not to everyone. Big names of the capitalist game, like Buffet, Musk, Morgan, Tillerson and co, they didn’t become that rich just with money they’ve made and re-invested. The “invest & compose returns” snowball effect, is multipliable by a wonderful thing called “leverage”. And that is accessible only when you are lucky (through consumer sales), or use a loan. There are thousands of big sharks up there who will not sit and see their opportunities of leverage go down the sink. Governments first. They are the first ones who spend like idiots and thus needs tomorrow’s time, right now. What’s it gonna be with BTC ?
This is the second angle of the consequences. A finite money supply means that if you consider this:
unity price = supply / amount of stuff in economy
When supply is a constant, and stuff increase, then price must decrease. That’s why BTC is deflationary by nature. Either we cool down the economy (and slow down the huge amount of waste we are doing anyway), either the prices will go down. It’s not a problem because it means that one BTC is going to be worth more. Deflation gives value to the money. That’s nice because people’s savings and deposits gain in value, for free. But that’t not nice because it becomes better to sit on cash than to bring it out to invest in stuff, because while it’s out there, the investment may bring less return than just sitting on it.
That’s another challenge that an intrinsically deflationary currency like BTC is facing.
I hope I’ve given you food for thoughts. be well !