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The Slow But Inevitable Rise Of Bitcoin

Summary

  • The current monetary system is inherently flawed, and Bitcoin provides a solution to this.
  • It is high time the power of money fell back into the hands of its users. It's time to decentralize money once again.
  • Democratizing money is a must if we want to create a fair, equitable, and free society, and Bitcoin is the way to do it.

Thesis Summary

The rise of Bitcoin (BTC-USD) is inevitable. Not only because of all the advantages that its technology provides but because the current fiat-based monetary system is flawed. At its most simple, we must return to a form of money that is decentralized, like gold was in its heyday. Bitcoin and blockchain technology will bring about this change.

Democratizing money is a must if we want to create a fair, equitable, and free society.

Bitcoin is as old as time

Bitcoin is over 10,000 years old because Bitcoin is money, and that’s when we first began to use this nifty tool. The invention of money is what made trade possible. Furthermore, it made savings possible and therefore made Capitalism possible. Capital is, after all, a form of savings, though that truth has been deeply buried under a pile of debt. (Thank you Federal Reserve).

Investors focus a lot on the technological aspects of Bitcoin. These are probably more interesting to most people, but I find that a lot more can be learned by understanding what Bitcoin is, rather than what it does or doesn’t. Bitcoin is money. Or is it? Even now, investment experts and economists argue about this “simple” point. (It isn’t).

What is money? How does currency appear, gain acceptance, evolve? What is its purpose?

I would say that money first began as a “spontaneous market occurrence”. To trade more efficiently, a good was chosen to act as a measure of value between all other things. A common denominator, if you will. This is a messy and complex process. People don’t just wake up one day and all agree to use seashells as money. It is a matter of trial and error, and it’s also important to remember that anything can be money.

Money has three main uses. To act as a unit of measure, to store wealth, and to transfer wealth. To do this effectively, it must possess certain characteristics. To act as a unit of measure, it must be stable in value. To store wealth, it must withstand the test of time. And to transfer wealth, it must be easy to divide and transport.

The matter of storing and transferring wealth we could call a physical property. Having a stable value though is however immaterial, and arguably arbitrary. Value is subjective. Each person values things differently and what each person values is also conditioned by their environment. This is why seashells and cattle were once used as money, and why cigarettes are famously used as currency in prisons.

In the beginning, each society had its money. But as the world became smaller, it made sense for everyone to use the same money. International trade flourished on the back of gold and silver, two precious metals that still hold a place in our monetary systems, (Central Banks hold them) but have lost their role as the world’s standard unit of value. We can see why if we think about the characteristics of these precious metals, particularly gold.

Gold is malleable and durable, making it practical for transacting and storing wealth. Gold also has a value, which is quite stable. Though it has mostly been used for decorative purposes, people and civilizations around the world have valued gold. It is the fact that it has little practical use, and it is not consumed in any process which makes its price so stable. With around 80% of all gold in existence already mined, there is no risk of a shortage or excess supply. And demand for gold is rather elastic since it’s not essential.

Gold was the world currency for many years, and as recently as 1971. Gold is still money, though we do not use it in our daily life.

Bitcoin shares a lot of similarities with gold, probably not by accident. The supply of Bitcoin mimics that of gold, with also around 80% of all Bitcoin in existence already mined. It is a lot more practical than gold, at least in today’s world. Bitcoin can be transferred around the world with ease, and it can also be divided into infinitesimally small units in order to represent smaller amounts of wealth.

Like gold, and most things, Bitcoin has a value, but it is purely subjective. Some believe that this is “speculation” since the value of Bitcoin is not grounded on anything. But this could be said of anything. Fiat currencies are not supported by real goods, though arguably they do have governments behind them. In any case, nothing is stopping us from choosing Bitcoin as money and developing a functioning market economy around it. Just like prison inmates can do the same with cigarettes.

Having said that, Bitcoin offers a lot more advantages. The cryptocurrency can be used within the whole blockchain environment to create dApps and improve our lives in ways we can’t yet imagine.

It's about control

The big issue though isn’t Bitcoin versus Gold, but rather Bitcoin versus the current fiat system. The point I was making above is that gold and Bitcoin share many similarities which make them good forms of money. I’ve talked about this in terms of value, stability, and practicality, but perhaps the biggest thing that makes both Bitcoin and Gold special, and sets them apart from fiat currencies, is that they are decentralized.

The word decentralization is actually thrown around quite often when people talk about cryptocurrencies, but Bitcoin was not the first form of decentralized currency. I would argue that gold and silver, back in their heyday, were also decentralized. Anyone was free to “create” money by mining gold and minting it. In some places, minting was a service provided by the state, even considered a right. No one controlled the “gold in circulation”, rather the amount of gold was the cumulative result of individuals taking their gold to the mint (adding supply) or hoarding gold (removing supply). Gold was chosen as money, originally, in a decentralized way. It was not a coordinated effort by a state or government.

Fiat currencies, like the dollar, on the other hand, are enforced by governments. They are legal tender by law, not by spontaneous choice. The unbacked dollar was covertly unleashed against the world as recently as 1971 when Nixon “closed the gold window”, which equates to saying that the United States would no longer comply with its obligation of converting dollars to gold at the established exchange.

This makes the dollar a centralized currency, together with all the problems that come with it. Centralized systems are more prone to corruption. They are also less secure and can be more inefficient, as they stifle creativity. Ultimately though, we could boil it down to a matter of principle. Why should money be controlled by a few when we are all using it?

At the end of the day, the issue of decentralization is what’s at stake. The world needs a reliable and decentralized source of money. Just like gold empowered change and progress for the last millennia, so too will Bitcoin for the coming thousand years.

The dollar is slowly dying

The rise of Bitcoin and cryptocurrency are, in my humble opinion, inevitable. As much because of the advantages of a decentralized system, as because of the inherent flaws of today’s centralized fiat systems which, quite inevitably, will implode upon themselves regardless.

Every fiat currency in existence has eventually ended up with a value of zero, and this time will be no different. Admittedly, it could take years for this to unfold, but it is undeniable that the dollar is a broken system, and this point is ill-suited to serve as the world’s reserve currency.

First off, the US dollar has become politicized, something which can only happen due to its centralized nature. The dollar is a financial and economic weapon, and it is used as such. Countries that refuse to use the dollar can be shunned and pressured into using it. When financial markets are in trouble, the full power of the Fed’s printing press is put into action. Over the last few years, we have seen very unconventional policies, such as TARP and QE become regular things.

One could argue that these actions by the Fed are necessary. Having a stable financial system is important. But has the Fed even helped in this? Historical evidence would suggest otherwise, and many solid arguments defend that excessive credit and moral hazard contribute towards creating unsustainable bubbles. Even if you do believe this is necessary, it seems rather undemocratic that such a vast power can be used in a virtually unchecked and arbitrary way. The most logical way of understanding this is that, inevitably, this power will be used for the benefit of those few who control it, at the detriment of all the other currency holders.

Another issue with the dollar system is that it can also have unintended effects on other countries. Since all trade is settled in dollars, the change in the value of the dollar versus local currencies can have grave impacts on an economy. We have seen this happen repeatedly with emerging market debt markets. These countries can suffer a lot when the value of the dollar rises since they have dollar-denominated debts. In a more general sense though, the world regime of fiat currencies creates a perfect breeding ground for mercantilism, currency wars, and overall instability. The lack of a widespread unit of value doesn’t benefit anyone.

Lastly, the dollar’s demise seems inevitable, given how it requires the United States to run a perpetual trade deficit with the rest of the world.

Source: TradingEconomics

Above we can see there has been a continued trend of higher deficits, starting notably around the 1970s, when the gold standard was fully abandoned. This is because the world needs dollars to trade. The counterpart of the dollar is the treasury, and this is what most world banks and governments hold in their balance sheet. On the surface, this might sound like an ideal scenario. The US just has to keep printing money and receive goods in return. However, this can’t go on forever and, more importantly, this perpetual trade deficit destroys domestic manufacturing and production chains, which get replaced by foreign ones. This puts the USA in a very precarious situation, something which even Washington is waking up to now.

Ultimately, I don’t blame the US or the dollar for our flawed monetary and financial systems. The system itself is flawed. We need to return to a decentralized form of money, beyond the powers of any nation. This is what Bitcoin will do.

Bitcoin: A weapon for change

Detractors of Bitcoin often argue that, even though it has the potential to be a revolutionary technology, the powers that be won’t allow Bitcoin to become the standard of value around the world. While it is true that a lot of people and institutions will fight hard against it, the rise of Bitcoin is inevitable.

For starters, I have already explained above why the current system is doomed. There won’t be much anyone can do to stop this, and when it fails, something will have to take its place. But the most important issue is that Bitcoin, and other cryptocurrencies, offer incredible benefits to everyone that uses the currency. Rich and poor alike will be able to benefit from this transition, and, ultimately, the number of people who stand to gain from Bitcoin will largely outnumber those who profiteer from the current system.

Bitcoin, like gold, is not controlled by anyone, and its decentralized nature solves many of the problems that the current system has. Since it is decentralized, Bitcoin cannot be controlled by a few, which means there is no real risk of it becoming a political or economic weapon. On top of that, if everyone used Bitcoin as the standard of value like they did gold one hundred years ago, there would be no place for mercantilism, currency speculation, manipulation, and overall currency wars.

Like with gold, any country could subscribe to the Bitcoin system knowing full well that there is no risk of being hijacked by rivals, or having to deal with monetary policy changes in the reserve currency, Bitcoin. And of course, it solves the problem of the perpetual trade deficit, since there is no one behind the currency having to provide it.

But the benefits of Bitcoin, and blockchain technology in general, can go well beyond fixing the inherent problems of today’s monetary system. Bitcoin has the power to create a cohesive world market, unite finance around the globe, empower those in the poorest regions, and ultimately create a financial/monetary system that is more robust, secure, and efficient.

I would go as far as to say that democratizing money is a must if we want to create a fair, equitable, and free society.

Lastly, I’ll address the other big criticism of Bitcoin, which is that it requires the internet and electricity to function. It’s not inconceivable that this scenario might happen. But what seems more likely to you; that in 100 years there will be no internet, or that even the most remote parts of the world will have decent access to this technology? I’d vote for the latter. Even with these limitations, Bitcoin is still superior to the current banking system, which also requires electricity and the internet to work. If anything, I’d say Bitcoin can deliver a much less energy-consuming and internet-dependent system than today’s banking system.

Final Thoughts

Though it seems farfetched, a world based around Bitcoin is in the cards. How will this work exactly? Ultimately, this would mean that transactions would be settled in Bitcoin, and therefore everything would be valued in Bitcoin. Like with gold, this doesn’t mean that only Bitcoin is used. Other cryptocurrencies could appear to facilitate transactions. Each country could also have its currency, pegged or even not pegged to Bitcoin.

In fact, anyone would be free to issue a currency, but the standard of value will be Bitcoin. This system combines the best of the stability of having a world currency, with the decentralization and freedom that blockchain provides. No one will be forced to use Bitcoin, and there will be many alternatives out there. But, like gold, I believe Bitcoin will come to be recognized as the standard of value around the world. I know there are still limitations to transaction speeds and other issues, but I have to assume that these will be but temporary hurdles.

In conclusion, the rise of Bitcoin is inevitable.

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