I have been struggling for the last couple of months with trying to explain the phenomenon known as Bitcoin maximal-ism. Essentially it is a movement that is focusing a lot of effort primarily into advocating the support of Bitcoin as the blockchain solution at the expense of all other crypto projects. Being a pragmatist myself, I was at first very skeptical of the absolutist ideals that they seemed to advocate. However, time has a way of cutting away the flash obscuring the truth behind wisdom, and I have come to appreciate the maximalist position more recently after much consideration. This story starts and ends in exactly the same place, which is the theory and value of what we call money.
What is money?
Now, bear with me here, as I know I am bound to lose about half of you with boring economic terms reminiscent of the Econ 101 class that you took in university. I promise that it is worth it. One of the sources of confusion in crypto space which many people struggle with is that cryptocurrencies are a hybrid of the financial and economic discipline, with computer science and mathematics. Surrounding this whole thing is the concept of money, and it doesn’t help that most economists can’t agree on the exact nature of money, specifically the objective exchange-value of money. If you were to ask 10 people on the street the question “What is money?” you will inevitably get 10 different answers and 9 of them will be wrong. The truth about money and why not many people understand what it is, is no accident. Great lengths have been taken to ensure that this topic is never sufficiently taught in schools, and confusing or conflicting terminology is used in various different circles which compounds the problem. So to begin to understand what money is we need to be very meticulous about the terminology that we employ so that we can begin to unravel the overlapping layers of meaning and obfuscation. We shall start with the simple description of what money is; which is simply a medium of exchange, which can efficiently facilitate the indirect exchange of goods between parties. If Bob is a Baker, and Will a wheat farmer, Bob can certainly exchange bread for wheat with Will. But in the case where Will doesn’t want bread, and needs corn instead, and Charlie, the corn farmer doesn’t want wheat but wants bread, then Bob can exchange bread for corn with Charlie, which he can then exchange for wheat with Will. In this simple example, the corn that Bob bought from Charlie was acting as the money, which is to say it had no value to Bob aside from its use as a facilitator of indirect exchange. Indirect exchange in turn allows for efficient division of labour, so that people can specialize in baking, corn farming or shoe making, without having to learn all those skills for themselves in order to produce these products for their own consumption. Money then, is simply a medium of exchange that facilitates the indirect exchange of goods.
Types of money
There are essentially 4 different types of money which have been used over the history of human civilization. Commodity money, credit money, fiat money, and money-substitutes.
Commodity money we are all familiar with. It was the first money to be ‘invented’ by mankind. It is simple a commodity that possessed certain qualities that made it amenable to be used as a medium for exchange, this involves properties like divisibility, immutability, easily verifiable, and impossible to forge. Commodity money of antiquity, like gold and silver, were created spontaneously by the market. It is in fact the only trust-free money that can be created by the market. Nobody decreed that gold should be used. It was used, and the task of governments in the past was to just verify and regulate its authenticity through the system of standardized minting and measurements. Commodity money is created by expending work or labour in order to extract it from its natural state, and prepare it for use as a money. This effort (and the entire industry that surrounds it) acts as a natural buffer to fluctuations in supply of the commodity, and thus a damper on the exchange-value of the commodity money.
Credit money is also created by the market, and it is essentially the use of an IOU as a money. This money, however requires trust, in that every IOU comes with it a certain amount of counterparty risk. In stable and strong markets, this risk is minimal, but in developing markets where corruption or insufficient legal systems exist to properly enforce contracts, this risk can be appreciable. Credit money is characterized by the exchange of present goods for future money (or present money for future goods). Credit money is used quite prolifically in American society in the last 50 years due to the success of credit networks such as VISA and Mastercard. Credit money, being an IOU only has value so long as it is tethered to another type of money backing it. In simple terms, IOUs are claims on an actual assets somewhere else, this can be future value in the case of interest bearing bonds, or simply warehouse warrants, or gold certificates. It is important to note that before 1930s, the US dollar was a credit money, due to the nature of it being a claim to a certain amount of gold held by the national treasury, which was redeemable on demand.
Fiat money is the money that only has value because it has been decreed to have value by the governing state or body. It has no intrinsic value, and in fact would in most cases be nothing but worthless paper if it were not for legal tender laws and the threat of imprisonment awaiting those who refuse it accept it as an instrument to extinguish any debts by other parties.
Money-substitutes are the last type of money. Though it is probably more fair to call it a subclass. It only exists when the conditions surround it such that they can be easily and readily redeemed for any of the other 3 types of money. Bank deposits and token coinage is an example of a money-substitute. Token coinage of course is used in most countries. It is called ‘token’ and not the same as commodity money because it by itself is not intrinsically money. For instance, if you were to take a quarter and melt it down to the elemental nickel/zinc, it would not have the value of 25 cents, nor would you be able to buy bubblegum with it. (the price of bubblegum being more than a quarter notwithstanding). Another common money-substitute is poker chips at a casino, and food-stamps in the US.
So what is Bitcoin?
So where does Bitcoin sit in these definitions of money? Well I know I would be in disagreement with many gold bugs and hard money advocates like Peter Schiff when I say this, but I believe Bitcoin is clearly a commodity money. Sure, it is virtual. It is by no sense ‘hard’ in the visceral or tangible sense, but it is clearly a commodity money in so far as the characteristics that economists such as Ludwig von Mises had set out to so meticulously define 80 years ago. It requires work to produce, it costs money to produce, and the mining or production industry is not directly influenced by the politics and monetary policy of the day. In fact, the only thing that should incentivize the producers is good old fashioned capitalist greed. Greed is in fact one of the most pure and predictable of incentives. It was very likely that in past centuries many environmentalists lamented at the fact that so many gold mining companies were wasting vast resources and energy in digging this yellow metal out of the ground. They may have even lobbied their governments to put restrictions on the gold mining industry “for the collective good of mankind”. “Look at all the wasted effort and energy that they expend just to ingratiate themselves”, they would have said. I tell you definitively that these people did not understand the market and the mechanisms that work within it nor the forces that naturally control the flow of supply to meet demand. (The demand for money). I digress, however, as I think you will agree that the point of Bitcoin having all the characteristics of a commodity money have been shown, and thus should therefore act exactly as one in the economy.
So why all the altcoins? To date I believe the number is in the thousands if one were to count every type of digital currency created since the advent of Bitcoin. But why do they exist? Why do perfectly logical smart people devote so much time to creating them and promoting them?
1) People are greedy
2) People do not understand money
3) People do not grasp that blockchain and Bitcoin is an experiment in money, as much as, or perhaps more than it is an innovation in technology
People are greedy
The first requires little explanation. People are motivated by greed. Ponzi schemes are great for “redistributing wealth” from people who do not possess the same information or reasoning capabilities as you may have. It is easy to mask a new altcoin in a thick blanket of rhetoric singing praises of “equality of opportunity”, “common good” or “freeing the people from oppression”; you know, socialistic sounding marketing phrases that any reasonable, even-tempered bipedal on the planet would agree to. Start a coin, premine it, or create a fixed supply of money which only you control, and enjoy all the benefits of the central bank, which is to say you use the same mechanism of wealth distribution used for centuries, except with you at the top of the pyramid instead of the government.
People do not understand money
The second point deals with the fact that most people don’t understand what money is, and there for do not really understand what it takes to create a money. I have previously explained what money is and the types of money that exist. In order for a thing to be a money, it must clearly fit into one of these categories. Anything less would be equivalent to Monopoly(TM) money. It may be money-like, but it is not a money. This point is where we lose a lot of smart minds wasting their time working on POS (Proof of Stake) systems which aims to either “solve” the distribution issue of Bitcoin or the mining energy expenditure issue. The fact that I use the word “solve” in quotes belies my opinion on the matter. They are not problems. As I have explained in the previous example of gold, complaining that Bitcoin mining firms will ‘go berserk’ if left to its own devices and spend half the world’s energy supply in mining is ludicrous and only serves to illustrate to the astute reader that the speaker does not understand economics. For even the most devote Keynesian would admit that the free market will find the correct price such that a given activity is profitable. Miners who expend capital to increase the supply of Bitcoin when the demand for it stays the same or does not increase the same amount will soon find themselves losing money, and at some point they will stop their mining activity. There is no need for a “government” to step in to regulate the market**. Ever. The market is self-regulating by the forces of greed vs fear alone. As for the question of fair distribution, I ask what is “fair”? Is a old panhandler who found gold in the rivers of California and subsequently made a fortune by fishing the nuggets out of a river doing anything unfair or unconstitutional? Would we rather see a law passed that forced all gold miners who profited from the gold rush to relinquish a portion of their gains to the public? (Yes!, I suppose, if you are a communist) The problem with trying to hand tailor a distribution of money is that you need to control a fixed supply. A fixed supply virtual asset which is created from nothing and distributed to people, has no value, no more than monopoly money has value. Sure there may be some token value created by a few people buying it on the promise of future gains, but in truth it is no more valuable than money printed by Parker Bros. This is because any POS coin is in fact, a fiat money. Or rather, a bad attempt at creating a fiat money. Fiat money only works when you can force people to attribute value to it, and use it. If you hold no such power, you may as well be handing out orange $200 bills as people pass “GO”.
Bitcoin is an innovation in money, more so than technology
This is the crux of it. The issue is that most computer geeks think that Bitcoin is an innovation in technology. Accordingly, they see iterative improvements on it as a positive thing, like how cell phone technology improved over time with different companies contributing innovations to the craft over the years. I cannot remember how many times I have heard developers defend the idea that innovating with different blockchain implementations can only be a net good thing. “Look at how Apple improved upon Microsoft” they would say, or “look how TCP/IP improved upon frame relay networks!” they would shout. I say this: these people are categorically misunderstanding what the essence of Bitcoin is. It is not so much a technology innovation as it is an innovation in money. Let that fact brew in your mind for a couple of seconds. Bitcoin is an innovation in money. Money has not seen any real innovation since that fateful day almost 100 years ago at Jekyll Island when the industrialists and bankers got together and designed the Federal Reserve system in order to “solve” what they saw as a problem with the elasticity of money. Bitcoin created a new sub-category of commodity money: /money/commodity money/digital. Due to the nature of Bitcoin being a money innovation, and the fact that commodity money has a very particular way in which it can come to be accepted as a money (the mining or work process in extracting and preparing the commodity for use) this essentially means that a lot of technologists are wasting their efforts in trying to build better versions of it because they only see it for its technological implementation. If they only realized what many of us with financial backgrounds have realized, which is that Bitcoin is a new money, then they would be more likely to better spend their efforts building technology on top of this new money network, instead of trying to build their own version of it.
The Cultural Divide
What the crypto space now is suffering from is a divide; a divide in mindset, background and thinking. It is into this gulf that all altcoins find their existence. On one side you will find the computer scientists, the mathematicians, the nerds. On the other you will find the economists and the financiers. Neither side respects the other enough to actually consider listening to what the other side is saying. You have folks like Peter Schiff saying that Bitcoin is geek money and isn’t real money. You have Bitcoiners saying that economists and bankers are dinosaurs and this new digital technology will disrupt and break all the rules of the old regime. Both are wrong. Both are right. Both are too blinded by their own arrogance to realize this.
So geeks, computer scientists, developers everywhere. Please stop wasting your time on self-gratifying Ponzi schemes, POS currency systems and other lessor coins and help contribute to making Bitcoin better. It’s an open source code base. Use your brain power for good. Support the only internet money. Trust me, I’ve sat on both sides of the fence being an engineer working at big bank trading floors for over 14 years, the race is over and Bitcoin has won. Time to fight the real war, which is the separation of money from the state. Let’s all help make this experiment in new money work.
Next time, I will explore the reasons why there can only be one digital commodity money in world, and why that money is Bitcoin.
** The only time a market should/may be restricted is when it is a question of morality or human decency, and even then, some atheist, anarchists would disagree on that point. The debate of which is beyond the scope of this topic.
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