Bitcoin vs Fiat
What is money?
Money is a medium of exchange that allows us to peacefully trade with each other and ease the ability to price goods and services because it is universally accepted by all participants in the market (merchants and clients). It allows us to move and preserve energy through time and space. It is the most marketable good in an economy and we sacrifice our time and energy in exchange for it. Money is a form of communication. If not corrupted, it communicates real prices within an economy. It is amoral and an expansion of human consciousness that has a powerful pull towards commercial structures and strong communities. Money is defined by 5 properties: Durability, Divisibility, Recognisability, Portability, Scarcity.
Where does money start?
Money starts as a Collectible. Early societies used cows, shells, specific stones, or anything that everyone in a certain market environment trusts to have value and therefore is able to exchange for goods and services. We as a human race love shiny metals like copper, silver, or gold, which as a matter of fact naturally became a collectible. The collectible automatically evolves to be a Store of Value, meaning we are willing to sacrifice our time and energy in form of work today to then exchange it for the collectible that stores value. Mainly because we trust it to be valuable in the future.
After being a store of value, money becomes a Medium of Exchange. In the history of humanity, people naturally needed a medium to exchange goods and services. With the agricultural revolution, people specialised more and more in certain trades. For example, I am a tailor, and you are a baker. We then exchange clothes for bread. But it is extremely inconvenient to exchange all specialised goods and services directly in a market the more that market grows. i.e., the need for food is omnipresent, whereas the need for clothes is to an extent limited. We don’t need new clothes every day, but we do need food every day. So, what does the tailor do when the baker doesn’t need any more clothes, but the tailor needs more bread? If there is no money the tailor will need to find another merchant to exchange his clothes for another specific good, which in return he hopes is accepted by the baker in exchange for bread. Additionally, it’s hard to create reliable price signals in the market. For example, how many clothes can I exchange for a house? Money solves this problem because it is the most sellable good that is universally accepted by all market participants, and therefore naturally becomes a Unit of Account. As a unit of account, it simplifies all transactions big and small because everyone in the economy agrees on its value and we can set universally accepted price signals in line with supply and demand.
Money, as a matter of course, takes a winner-takes-all approach. Gold naturally evolved to become the dominant form of money for all of humanity. Silver played a big role initially but over time it was too plentifully available and much easier to mine or counterfeit.
Inflation/ Deflation
The world inflation comes from inflating the money supply to such a degree that it loses value and has less purchasing power. One of the crucial factors of modern western Keynesian economics is that governments want inflation. Better to say they need inflation because the system has been artificially infatuated to a degree that there is no other way out with the existing guidelines.
The reason governments want, and furthermore need inflation is that in theory, it helps increase production. More dollars translate to more spending. More spending translates to more companies being able to expand and create more jobs. It also means that it’s cheap to borrow money because the governments want to incentivise borrowing. When you see the central banks announcing interest rates in the news, that’s exactly what they are talking about. They have been lowering interest rates for decades to lend it to banks cheaply who then pass it on to the economy in form of home loans, business loans, or anything else that we can’t afford right now, but desperately want. On paper that doesn’t sound too bad, does it? I am not a doomsayer, the system had great positive effects on the prosperity of our civilisation and more people are better off than 100 years ago. In saying that, I do believe that change is inevitable, and we clearly see that this specific system isn’t sustainable anymore and through our technological advancement we have a natural deflationary force, which means products and services become more affordable. However, we are stuck in our old way of thinking, governments are trying to artificially increase prices through the printing of more and more money. What this really means, is, first of all, most hard workers become wage slaves pursuing to buy things that they simply can’t afford right now. Therefore, they take financial burdens upon themselves that trap them in the system. Secondary it means that the market has been flooded with huge amounts of money to keep it artificially alive because for 50 years there have been massive misallocations of money into endeavours that aren’t moving our society forward. Ever heard of a government spending money on a project that turns out to be 100x the price and takes 10x the time it initially meant to? That is a perfect example of misallocation, and it happens all the time. Essentially infatuated governments and institutions have no need to allocate money efficiently and worry about the bottom line, as they can just print more of it knowing for certain that they devalue the money of every non- asset owner and abolish the chance to create an abundant future in the process. What happens when the average Joe follows a project that turns out to be much higher in cost? Let’s say we buy a house which’s payments we can’t afford after 10 years. The bank will simply take our house away and let us deal with the consequences, whilst hypocritically having done the same exact thing an order of magnitude higher without any repercussions. If the government can’t use inflation, it would mean they would need to increase taxes and let their people know for what reason. Naturally, most of us wouldn’t agree and revolt as governments and many big institutions have evidently proven they aren’t capable of completing these projects effectively.
To give a brutal example of how the decreasing scarcity or oversupply of money affects geopolitical and socioeconomic processes across the world let’s take a look at the Weimar Republic. Being from Germany I had to study this part of history thoroughly. When Germany lost the first world war, the other European countries demanded huge repair payments because they held Germany responsible for the war. Because this burden was too big to carry the Weimar Republic, which was the German state from 1928 to 1933, exceedingly printed money to make the payments. At the peak of money printing, we ended up having billion-dollar paper notes. This had severe consequences which we can all study in the history books. The people weren’t able to buy food from their hard-earned wages anymore and this created a complete distrust in the government. Eventually, this gave rise to Adolf Hitler and his party which ended in the death of 75–100million people. The concerning thing is that the exact same thing is happening right now across the globe. Do we really want history to repeat itself? No wonder extreme parties on the left and right are on the rise when people can’t feed their families from their hard work. Losing trust in the government is a natural consequence of the money devaluation that the same government actively pursues. We often think of money as a simple means to an end but once we dig deeper, it becomes clear that money has a much greater influence on society. In fact, we are currently experiencing the biggest money manipulation period in the history of the world. It’s really straightforward. Let’s say you have the power to create money out of thin air like the central banks and governments have today. Wouldn’t you feel tempted to push that button even though you know it’s not right in the long run? All power corrupts whether it’s taken or given. Essentially what Nixon did in 1971, when we completely left the gold standard, is saying, “We as a government gave you all a promise that we hold gold in our reserves that is exchangeable for the money that we supplied but we won’t come up to our promise anymore.”
What about deflation? Deflation has been marked as an evil force in our economy. Deflation means our money has more purchasing power over time or looking at it from a different perspective, products and services become cheaper. This also means that interest rates to borrow money are higher and on a sound money standard companies and governments who do so actually need to allocate their money to projects that will add value to our society because they can’t just simply borrow more for nothing, even if their projects turn out to be inefficient. The remarkable thing is that in line with the laws of nature, everything we do today with our technological advancement, whether it’s the ability to harness power more efficiently or utilize resources better, should make products and services cheaper and put us in a situation where we need to work less and have more free time as opposed to slowly dying in a job we don’t like because we took that big mortgage and bought the new nice car. Even Keynes assumed that by today we should have a 15-hour workweek because products and services are abundantly available and therefore easier affordable. But because we live in a system that artificially increases prices and creates unnecessary scarcity the government needs to increase the money supply exponentially. This keeps us stuck in outdated jobs to pay for things we don’t need and impress people we don’t even like. First, they printed millions, then billions, now it is trillions and soon it will be quadrillions. The system is doomed to fail, it is inevitable that we need something new. It will come down without a doubt, the question is not if but when. How long will they be able to keep it alive and how long will they make us believe that we are too uneducated to see that it’s a scam.
Fiat money
Fiat money is a currency backed by nothing other than the government's promise that it has value and will have value in the future. It is entirely based on debt, meaning as long as we can keep people in debt, they will need to rely on fiat money to pay that debt. Simply put, if we take a loan for a car, we will work very hard to make the payments on that loan, because otherwise the car will be taken away from us by the lender. The system is inherently fraudulent because it is centralised, misguided, and unsustainable. It depends on never-ending growth on a planet with finite resources. It is centralised in the hands of the few and kept alive with massive artificial money injections that create debt out of thin air and no one is accountable to ever serve that debt once they are big enough as an institution or high enough in the fiat hierarchy. The problem is that there is no real value that backs up the numbers on the screens and pieces of paper that we accept as a medium of exchange.
There is a decay in our governments and biggest institutions. Nassim Taleb, who I admire for his writings but not for his hypocritic stand on Bitcoin, says in his book “skin in the game” that systems rod when skin in the game is removed. In the 20th century, we slowly but surely uncoupled our currencies from the gold standard, because governments had to dilute their currencies value significantly to rage several wars. Those wars couldn’t have been financed on a sound money standard, because the taxes on the population would have been too large and the people would probably have decided to not kill each other but instead live peacefully. Ever since, complicated-sounding economic systems have been created where resources have been wrongly allocated to increase the illusion of future wealth whilst, in reality, sacrificing long-term wealth for short-term gratification. 1971, when President Nixon completely uncoupled the US dollar from the gold standard was one of the last significant events in history that removed all skin in the game. The mortgage crisis in 2008 was the natural second-order consequence of this action. We literally removed all accountability and restrictions on the monetary regimes of the world so that they could finance whatever they desire. And one could argue that a lot of decision-makers in that process mean very good and simply don’t know the complexity of the outcomes of their actions. Otherwise, frankly put, we live in the biggest scam in history of the world that for the last 50 years created a completely false belief in monetary standards to increase the wealth of the few on the back of the many. The system by default incentivises short-term solutions. Long-term accountability has been removed entirely. We live in a free market that doesn’t allow for free corrections because institutions grew so big that their failure has too much of a follow-up effect to allow them to fail. Therefore, the entire economic system and all major price signals are completely distorted, and further interventions will just delay the inevitable collapse. The smoother we can make the transition to a new sound money standard and include as many people as possible, the better we will be able to create a prosperous future that decentralises wealth and allows its opportunity in every part of the world.
So what the hell is Bitcoin?
Bitcoin is hope. Bitcoin is freedom. Bitcoin is about empowering people, whilst our current government-backed money (Fiat) is about control and power over people. Bitcoin is the hardest money ever invented. It combines the best of both worlds, preserving value over time like gold, and swiftly moving value through space like fiat money. The protocol came to life during the financial crises in 2008 when big banks, despite nearly destroying the world’s economy, have taken home generous bonuses and it became clear to all of us that something isn’t right. He, she, or they, going by the pseudonym Satoshi Nakamoto, sent an email to a then very unknown group of cryptographers who have been trying to invent a native currency for the internet/ digital age for decades. Nakamoto has created a protocol that works in a decentralised trustless way and is superior in all properties of money. Bitcoin gives a real free market price signal that is in line with deflationary technological advancement. In our digital economy, things become services more and more. Crucially observed things don’t matter at all, it’s the services that these things provide that really matter. A home gives us a safe place to live and raise a family, a car gives us convenient transport or status, a phone gives us the ability to communicate across the globe. Just like Blockbuster didn’t see Netflix, Hotels didn’t see Air BNB, Taxis didn’t see Uber and Kodak didn’t see the digital camera, the same institutions that currently roll the dice and are so deeply embedded in the fiat system don’t see the solution that is right in front of their eyes. Or better to say, they are turning a blind eye because the new system would pulverise their power. And frankly speaking, the switch to a bitcoin standard isn’t that easy. The more of us ‘normal’ people dive into it, the easier the change will be. I don’t believe that there is a room full of evil government people who deliberately decide to steal from the poor and give to the rich. It is much more that they too are trapped in a system that they don’t know the way out of.
Let’s look at the 5 properties of money for Bitcoin:
1. Durability: How durable is Bitcoin over time?
It’s hard to tell as Bitcoin is only 13 years old, but we can say for certain that it’s been declared dead over 400 times by the most powerful governments and institutions but it’s still here. Bitcoin’s code is infinitely durable. Unless all computers on the planet are destroyed it’s going to exist. Even in this highly unlikely scenario the code that determines Bitcoin will still be able to live in hard copy and could be revived once computers come back. Given that computers are fundamentally valuable in today’s digital age I think this is a highly unlikely scenario.
2. Divisibility: Into how many smaller parts can we divide Bitcoin?
Bitcoin is divisible into infinitesimally small units down to 8 zeros or 100 millionths of its part. If or when we are on a bitcoin standard this part of the code can be changed to be even further divisible in case we need it.
3. Recognisability: How easily is Bitcoin recognisable and protected against counterfeit?
Bitcoin is a trustless decentralized peer-to-peer protocol in which all participants agree that the specific code that defines Bitcoin is the only code that is accepted. Everyone can run a bitcoin node for a couple of hundred dollars which carries every transaction that has ever been made on the bitcoin network. Therefore, every market participant can verify its authenticity with very little effort. Furthermore, every member of the network, especially miners are incentivised to only accept the correct code. There is no need for a trusted third-party that verifies its authenticity, which means Bitcoin is better protected than any previous form of money.
4. Portability: How portable is Bitcoin across space?
We can send a billion dollars worth of Bitcoin without the need for any trusted third party within a few minutes up to an hour across the entire globe. There is nothing more portable than bitcoin.
5. Scarcity: How scarce is Bitcoin?
Bitcoin has a limited 21million supply and nobody can change that. Bitcoin is the scarcest asset in the world. It is mined through the consumption of energy called hashing. With Bitcoin, the transactions from the network participants are taken as an input and run through a hashing algorithm (SHA-256) which gives an output of a fixed length. Miners verify transactions authenticity in the network and receive a block reward in return. Every 210,000 blocks, which equates to roughly every 4 years this reward halves, meaning the supply of newly mined Bitcoin shrinks over time and eventually will go down to 0 by the time the last bitcoin is mined in 2140. From then on miners will stop mining new Bitcoin and solely earn transaction fees paid by the network participants to transfer their Bitcoin. The block reward started with 50 BTC. At the time of this writing, the block reward is 6.25 BTC per verified block. Bitcoin is the one and only asset in the world that is 100% capped and can’t be oversupplied.
Bitcoin is mined through proof of work. In that process, energy is consumed to solve highly complex mathematical equations called hashing. Miners make cost intense investments in form of electricity and hardware. They seek out the cheapest forms of energy and are incentivised to stick to the rules of the network. If they participate in any fraudulent activity the network would reject their transaction blocks and they would not be rewarded with newly mined Bitcoin or transaction fees, which make up the block reward. The underlying system is called game theory. We incentivise every participant in the network to follow the rules and have skin in the game so if they try and cheat, they inevitably cheat themselves. They are financially incentivised to act in the best interest of everyone else on the bitcoin protocol. I’m not going into the energy debate because it is inherently subjective based on whether one sees value in the Bitcoin protocol.
One of the problems with everything valuable in the world, and most certainly money, is that once it rises in value it is overproduced. Right now, money is oversupplied because its value needs to be kept low as the ever-increasing amount of debt couldn’t be served if the value of the money increases. The United States will soon be in a position where the debt serving costs will exceed the annual tax revenue of the state. Imagine having to borrow money just to pay the interest of your existing debt. It’s beyond imaginable and no country has ever survived a situation like that. Silver is a great example when it comes to overproducing a good that increases in value. When its price rose higher in the past it has been overproduced several times because more and more people mined it in search of increasing profits. As soon as the oversupply reaches a tipping point it devalues all silver in the world because it’s plentifully available and therefore less valuable. Satoshi Nakamoto came up with a brilliant solution to this problem. The difficulty adjustment is what many consider the greatest feature of Bitcoin. It measures how difficult it is to mine a Bitcoin block. Roughly every 2 weeks the difficulty to mine blocks adjusts. When blocks are slow, the difficulty adjusts downwards so blocks start clearing faster. When blocks are fast, the difficulty adjusts upwards so blocks start clearing slower. Simply said, whenever there are too many miners mining bitcoin it gets harder to mine it so that blocks continue clearing every 10 minutes and no oversupply can happen. The same counts vice versa. Whenever the hashing power decreases, which usually means fewer miners are mining Bitcoin, it gets easier to mine it so that blocks continue clearing every 10 minutes.
Nietzsche said that enlightenment has eliminated the possibility of the existence of God. In his terms, the death of God makes the fundamental blocks of our society tumble. With bitcoin, we might have found a form of enlightenment that provides a moral compass within a time-appropriate technology to store our time and energy. Jordan Peterson explains how during the cold war, in which the system of the western capitalistic world, guided by the moral compass of the bible, competed with the opposing communist system, initially guided by rational thought. “From each according to their ability to each according to their needs”; that is a great theoretical moral framework for what turned out to be the most immoral system. It ended in the famine and death of tens if not hundreds of million people. We are facing a problem that operates at the base layer of our society. One of the fundamental goals of our civilisations is to assure a peaceful way of exchanging goods and enriching EVERYONE’s life. If goods and services don’t cross borders soldiers will.
Bitcoin uses energy to create value to advance human civilisation. It is thus far the only actual solution to our money problems and therefore worth pursuing. I urge everyone to become educated and dollar cost average (Buy whenever you have some money left over) into Bitcoin.
Bitcoin's core message is, “Verify, don’t trust.” No one can stop an idea whose time has come. We can’t be silenced so we have to go out there and share this information. I am just a simple pleb owning a little Bitcoin. I truly believe that we all must understand why we need a trustless monetary network that empowers individual rights and freedom. Bitcoin is inevitable.
The purpose of this article was to give everyone a good understanding of why many of us believe Bitcoin is possibly the only solution to a magnitude order of problems that we are currently facing as a civilisation. Many points only scratched the surface and deserve dozens of additional pages of writing to go into the depth of Bitcoin. You don’t have to be overly smart or know every little detail of the Bitcoin protocol to participate in it and create wealth for you and your loved ones. Everyone can understand Bitcoin with 20 hours of focused studying. There are millions of brilliant people who devoted their time to provide information about every nuance of it. Take advantage and educate yourself.
“The world suffers a lot. Not because of the violence of bad people, but because of the silence of good people.” -Napoleon
Maurice Vince
