In Bitcoin We Trust?
On May 26, 1626, the Dutch government purchased Manhattan Island from the local natives for animal skins valued at 60 guilders, or $24.00, so the legend goes. As with any myth, the details of the story are subordinate to the lesson: inflation is a bitch. But actually, it’s worse: inflation is a subtle vehicle for the retroactive imposition of slave labor.
The apparent function of currency is to effectuate fair exchange more efficiently in a complex economy. An economy is a network comprised of the collective energy of its participants, and its currency allows for people to trade energy in precise forms and amounts. Currency streamlines transactions, allowing participants to explore novel ways of manifesting energy. It is a catalyst for innovation.
In a world without currency, people would be forced to create and maintain entire networks of contacts to meet basic needs. Would Sally become a marine biologist if she had to find prospective clients who could provide the goods or services she needs at any given time? No. She would become a farmer. So would everyone else. We can see why if we imagine Sally studies ectodermal cells in crossota norvegica jellyfish and also her toaster breaks. Sally needs a new toaster. She must now find a toaster manufacturer to provide her with a toaster. She finds Timmy the toaster manufacturer and asks if he would provide her with a toaster in exchange for jellyfish facts. Timmy declines because he doesn’t give a fuck about jellyfish. Sally starves.
Sally’s tragic end came about because she lives in a society without money. Money is a medium of exchange which allows people to store in a general form energy expended toward a particular end. Here the particular end is completing research. If Sally lived in a world with money, she could have stored inside of the money energy she spent finding fish facts just like storing liquid inside of a vase. In modern societies, governments legitimize money so that their citizens can confidently store their energy across time. A government’s brand of money is its currency. A currency promotes stability by creating a system of expectations, just like a constitution. If Sally and Timmy both accept US dollars, Sally can give him a few bucks for the toaster and live to see another day.
But why bucks and not buck skins? Because the US backs bucks, and not buck skins, and not tulips, and not Bitcoin. Governments have incentive to provide a currency to obtain the stability conferred by its acceptance among the populace. If nobody believes in the legitimacy of the constitution, it means nothing. If nobody believes in the legitimacy of a currency, it means nothing. So, in order to facilitate trade between Sally and Timmy, the government must get each of them along with the rest of the populace to trust in its currency. In doing so, it creates a network. Sally can throw away her pitifully bare rolodex of potential clients because everyone is using the US dollar network. The inevitable result is that the citizenry refines its collective energy into narrower applications thereby fostering a market wherein increasingly complex goals will be achieved and enjoyed. No need for each one of us to be a farmer with a prehistoric side-gig to barter with: we got the dollar.
Unfortunately, governments around the world including the US have had a problem with this whole “trust” thing as of late, and so now we have Bitcoin too. Bitcoin is a form of currency that belongs to a new form of money utilizing blockchain. This new money is all about trust. When energy is represented by Bitcoin, the representations are written on digital stone and linked to a chain of stones previously written upon. The chain never breaks or degrades; it only grows, like a historical text written in permanent ink. The technology is so cool that many people have made a shit-ton of useless networks utilizing it. But Bitcoin is thus far the definitive blockchain currency because it is completely decentralized and finite in potential supply. It offers maximum integrity in a world where corruption reigns. When you pour your energy into the Bitcoin vase, you inscribe a representation upon an immutable block of digital information claiming to the universe “here is my energy, let it be recorded for all eternity that I placed it in this position in digital space at this moment with my authority as a sovereign individual,” it never goes away. It can’t be counterfeited, it can’t be hidden, it can’t be duplicated, it can’t be divided. You are free to remove your energy from the blockchain, or otherwise relocate it in digital space, and when you do, a new immutable block of digital information is formed which records the movement.
In contrast, when a currency is printed by the central authority and inflation results, the increased supply of the currency devalues it, and a portion of the energy that was stored inside of it is vacuumed up and stored into whichever assets inflate in response to the increased money supply. This warped effect goes exponential when the Fed decides to print trillions of dollars and also use those dollars to purchase junk assets in order to artificially increase demand and keep prices high so that wealthy investors do not suffer the consequences of placing trust in those who do not deserve it. The irony is that by protecting stock market investors, the United States government has created an environment where people no longer trust its currency. As Ray Dalio famously puts it, “cash is trash.” The liquid in the dollar vase is always slowly evaporating. You can bet your bottom quarter on that.
But would the US government ever voluntarily relinquish control to any other currency? Can it be that corrupt? Or does it have nothing to fear? In war, people do not care about who deserves what, an immutable energy ledger is not valuable, and people forcefully take things without regard to previous agreements. If you are competing to purchase bread, you are going to value the currency accepted by those backed by your government, because it will be easier to exchange it for bread. It does not matter that El Salvador and Starbucks accepts Bitcoin. Both will stop accepting it when recession hits and the pie starts shrinking for the first time since the great one. Inflation is a vector, so it flows into specific assets. It won’t flow in Bitcoin when war wages, even if it rages cold. Inflation will be found in oil and uranium, corn and wheat, not digital tokens. It doesn’t matter who earned what when winner takes all. When Bitcoin craters and businesses stop accepting it out of fiduciary duty if nothing else, and when there are food shortages and people realize you can’t eat Bitcoin, it will collapse. The US doesn’t need to care about it.
In the meantime, people are openly creating public holding companies leveraged to Bitcoin and raking in salaries and capital gains denominated in US dollars generated by belief in the success of the world’s first and already doomed honest currency. And when it collapses, they can just file for bankruptcy. Apparently, this is fine. It won’t matter if thousands of indentured students commit suicide or withdraw into self-induced opiate comas because their “investment” built on utopian dreams fails.
Why would we print so much in a frozen economy? What is the advantage to forcing liquid into the market’s deepest crevasses? Why saturate meme stocks and digital art with the life blood of every person dead or alive who has touched the US economy? Who wins when inflation runs rampant around the world? To what extent has the US gained leverage using inflation? Is inflation keeping this war cold for the west? If so, it currently serves as the modern draft in today’s global capital wars, but maybe we should be thankful, because it’s better to deal with a bitch than to deal with hell.
But could it all just be corruption? The Fed just turns on the firehose, but Congress structures the irrigation system. Why did all the liquidity flow into the pockets of CEOs? Why did we outsource all of our infrastructure to global competitors?
The Fed has turned off the printer for now, and rates are going up, but the poor will lose again, because complexity is always regressive. If rates go high enough, it will be prohibitively expensive to borrow money, even for the rich. But those who cashed out of the market closer to the top with their algorithm-powered hedge funds will be able to bypass interest rates altogether by buying in cash. And the technology driving cash-out efficiency is perfectly regressive too: every peak and trough is an iteration wherein the rich outplay the poor. And when the trough is here to stay for a while, the rich will rent out their cash-bought property to the ever-increasing masses of those who own nothing, shut out of the system for failure to qualify.
If we print again later this year, and money flows back into the general market, the US will be immensely pressured to make Bitcoin illegal to avoid capital flight in response to further devaluation. Bitcoin whales will probably have bought their mansions in New Zealand before that happens because they can afford early notice. Maybe this latest crash is a fair enough warning to speculators, but speculators are often desperate people and if Bitcoin is going to become illegal at some point in the future, it should be as soon as possible to protect more people from being hurt. Hopefully before the Fed prints again, Congress can create incentive systems to funnel capital into the coffers of productive companies that can create infrastructure now that we must rely more on ourselves.
Meanwhile Russia sits upon a well of the most valuable resource for war and industry finding customers in ambitious and developing countries. The US can’t undercut Russia’s prices and is already suffering from its own shortages since it outsourced its infrastructure to the East long ago.
Bitcoin probably is the currency of a better world, but we are still stuck in this one. That said, if this recession ends up being a flash-crash followed by infinite QE, you can bet your bottom penny I’ll be buying Bitcoin.
Full disclosure: I own 0.001 Bitcoins (~ $20.00) on Robinhood because if I didn’t, I would not have the right to call myself a millennial. Maybe it will be worth approximately one Manhattan Island in 400 years.