I wrote this post back in 2017, when Bitcoin was hitting new highs daily. It was at $16,501 the day I published this post at the Speakeasy, 12/9/17, and it peaked at almost $20K less than a week later. Since then, it dropped to around $3K, rose again to a new high of almost $65K, and came back down to about $29K. But even with all that exciting action, my opinion hasn't changed. So, for the first time, I'm sharing this post publicly. Enjoy…
I know that many of you are tired of all the Bitcoin posts, because you couldn't care less about Bitcoin. I feel the same way. But in this case, Bitcoin is simply a useful foil for a more interesting discussion about money. In case you don't know what a "foil" is, it's a literary object used to contrast the difference between two things, in this case, the difference between money and not-money. So don't think of this as just another Bitcoin post. Think of it as another fantastic post about money. ;D
The Key
The question in the title is, I think, the key to the future of Bitcoin. I have spent a lot of time over the past few days learning about Bitcoin, and I have some new insights to share with you. For starters, I think I was wrong about Moldbug. In my last post, I included an email I sent to him in which I wrote, "I assume you do not see it as undergoing monetization, or do you?" I have changed my mind since then. I now think that he probably thinks it is undergoing monetization, or at least I think that he's probably changed the odds he gives it from a million to one to, perhaps, even money.
It's just a guess based on what I've learned over the past few days, both about him and about Bitcoin. But I also think he's wrong. Not because I think I'm smarter than him. I don't. I think he's way smarter than me. But I think he's biased in favor of Bitcoin, and handicapped in his understanding of money. Of course I'm biased too, but I think I have a far superior view of the money concept. He's biased because he's a computer programmer, and his handicap is that he comes from a hard money background in Austrian School economics. Incidentally, Satoshi Nakamoto was also a programmer with a hard money background in Austrian economics.
Bitcoin can be very complicated. They say it's constantly changing, and takes years of study just to understand the possibilities it presents. And while I've been aware of it for over seven years, I have only dedicated a few days of study to it, and I'm certainly no programmer. I claim only a superficial understanding of the technical side of bitcoin, but I also claim that something very simple, the question of whether or not it is money, is all you need to understand in order to know where it's going to end up.
The reason is simply that money is money, whether people understand the concept or not. The concept of money is not going to change to fit Bitcoin. Bitcoin, on the other hand, can change if it got something wrong. As you will learn, it could potentially adapt by fixing what it got wrong, in order to fit with the true, unchangeable concept of money. But that doesn't matter, because to be money, or to become money—to undergo monetization—is a very special process, not something that can be forced like shaving off the corners of a square peg in order to pound it into a round hole.
Anand says that Bitcoin is more of a store of value asset, like gold, than a medium of exchange or unit of account money. This is an understandable observation coming from someone with a Freegold background who has, with all due respect, drunk the Bitcoin Kool-Aid. And he's not alone here at the Speakeasy, he's just the main one who has spoken out. But I'm pretty sure he's wrong. And I'll give you all a chance to sip the Kool-Aid with him here in a moment, and then I'll try to pull you back from the brink. ;D
Besides, even if Anand is more right than wrong about Bitcoin's best function or purpose, he's in a tiny minority among bitcoiners. Most influential bitcoiners believe that Bitcoin is and/or will be, or will become, money in the sense of all three functions, MoE, SoV and UoA. And I think they're right insofar as it would have to become all three in order to be a long term store of value asset like Anand believes. It would have to, but it won't. It can't, because it has the money concept all wrong.
Bitcoin has a bunch of serious scalability problems, both as its price rises, and as more and more people start using it, for any function or purpose. These problems may possibly be able to be overcome, but only if Bitcoin is worth it. Only if it's truly special. And by that, I mean, only if it really is money, and not just something that a bunch of Libertarian Anarcho-Capitalists want to be money, and will try to shape into money with each hurdle it encounters. No, I think we can know today whether or not it is fit to make the journey from obvious Ponzi bubble to money, without being fatally derailed along the way.
My Gut Instinct
I had a gut instinct about Bitcoin from the beginning, and over the past few days I wanted to check that initial instinct to see if maybe I got something wrong. Because if I did get it wrong, then there's still time to get in. Yes, it's in a bubble right now. And yes, it will probably crash by 90% any day now. But this is really its third or fourth bubble, and if I'm wrong, then there could be several more on its way up to millions.
In 2011, Bitcoin rose 3,000%, and then collapsed 94%, all in one year. It went from under a dollar, to $31, and back to $2 by the end of the year. In 2013, it rose 2,000%, from $13 to $266, then collapsed 74% down to $70, followed by another 1,800% rise up to $1,242, then back down to $600, all in the same year. By 2015, it had dropped back down to $200, an 84% decline from its high.
Price at time of posting.For comparison, this year's bubble has taken it up 2,200% from its low in January. A 75% collapse would take it to $4,125, and another 3,000% bubble would take it up to $123,750 from there. Run that scenario only two more times and we're at $7M/btc, well within Moldbug's monetary standardization and F-U money range.
Buying some at $4,125 after this bubble pops and riding it up to $7M would be like buying in 2011 at $9.50 and hodling till now, at $16,500, a 175,000% increase. That makes a 5,000% Freegold reval look like peanuts, so it's worth considering if that's what's happening. It's worth considering whether my initial gut instinct was wrong, because if it was, there's an opportunity to ride it the rest of the way. It won't be a lottery ticket like riding from 90 cents up to $7M, but it's still worth looking into.
So that's what I did, and why I'm writing this post. SPOILER ALERT: I'm sticking with my initial gut instinct, and I'm going to try to explain why. To me, it's binary. It's either/or. Either it monetizes, or it disappears. I can't really see a middle ground. Either Bitcoin is money, or it's not. So let's get started. :D
An Unholy Alliance
Since I first really looked into Bitcoin back in 2011, I have been saying that its fatal flaw is that it was invented to solve a problem that simply doesn't exist, except in the minds of certain types of people. That non-existent "problem" is, basically, banks and fiat currency, or paper money, or "easy money" controlled by banks and governments.
The financial crisis and bailout of the banks in 2008 validated this idea of banks being a "problem" in the minds of the types of people I'm talking about. The anti-bank bias runs much deeper than just 2008, of course, but that year gave them validation, and purpose.
The "problem" of fiat currency, paper money and easy money, is only a problem for savers, and only if they save in that easy money. Other than that, it's not a problem at all—in fact it's a good thing. It's not a problem for investors, because they profit from risk. It's not a problem for traders, because they profit from volatility. It's not a problem for speculators, because they profit from bubbles. It's not a problem for debtors, because they want easy money. And it's certainly not a problem for governments, because they like the flexibility and control it gives them.
So as you struggle with the idea that fiat currency, paper money and easy money are not a problem, but are actually a good thing, even for us savers, recall Ari's powerful words: "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world... We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."
2008 brought together the anti-bank segment of the political left (as identified in the Occupy Wall Street movement) and the hard money segment of the political right (the gold bugs), in a kind of rare, unholy alliance. This unholy alliance, in my opinion, is personified in Max Keiser, who, I'm proud to say, once called me a dick (after one of my silver posts). :D
2008 also gave birth to Bitcoin. Bitcoin.org was registered in August of 2008. The white paper was released in October. And in January of 2009, the bitcoin network was launched when Satoshi Nakamoto mined the first block on the chain, known as the genesis block. In that first block, he embedded a permanent "Easter egg", a single line of text that refers to bank bailouts.
It's no coincidence, IMO, that Max Keiser was more into silver than gold, and has now switched to Bitcoin. The anti-bank contingent with only a cursory crossover into the precious metals sphere prefers silver over gold, not only because silver offers more volatility and leverage, but because the central banks only have gold, not silver. So silver is seen as the bankster-busting precious metal. Max Keiser is the also the one who started the whole "Buy Silver-Crash JP Morgan" nonsense.
Bitcoin, too, is all about getting rid of the banks. That's not to say it's an activist movement like "Buy Silver-Crash JP Morgan" was, but more of a passive belief that it's inevitable. It's inevitable that Bitcoin will change the world, just like the Internet did 25 years ago. People said the Internet would never catch on, that it was only good for distributing pornography, but it did catch on, and it changed the world.
In a similar way, they say, Bitcoin is like the Internet, only for money. In other words, it's an analogy: Bitcoin is the internet of money. And like the Internet, the world of money is never going to look the same. In 10 or 20 years, they say, there will be no more banks. There will be no more central banks. Children born today will never use paper money, never have a bank account. Their phone will be their own personal bank. And it's already a done deal. Like the Internet, it has already been unleashed on the world, so you can fight it or join it, but either way it's coming. Unstoppable. Inevitable.
Andreas Antonopoulos
If you don't know this name, and I first heard of him only a few days ago, he's a 45 year old computer scientist who got into Bitcoin in 2012, and has since become its top evangelist. And he's very convincing. He travels around the world giving talks, and they say he has converted more people to Bitcoin than anyone else. They say he once converted a staunch anti-bitcoin bankster into a pro-bitcoin promoter in a single sitting.
He has written a technical book for Bitcoin programmers, titled Mastering Bitcoin, has another one coming soon on Ethereum, and has a non-technical book titled The Internet of Money, which is a collection of sermons he has given.
He's very good on the concept of money. He calls it a language we use to communicate relative values, which sounds an awful lot like the pure concept of money. I want to you watch this short video. It's a talk he gave just a couple of weeks ago in Sweden. It's 18 minutes long, but trust me, it goes by quickly. He's that good. And I'll bet he converts a few of you, at least until you read the rest of this post. ;D
After the video, I'll give you links to a few more videos I watched which I found very compelling. If you can spare the time, watch more. He really does address almost all of the common criticisms quite brilliantly. Then, after you become a Bitcoin convert, allow me to deprogram you at the bottom. ;D
In the description under that video, which is on his own Youtube channel, he lists a bunch of others. I watched them all, and I added the times so you know what you're in for. If you've got 3 hours to spare, I recommend watching them all, and then you'll really be a convert. Otherwise, just watch whatever titles appeal to you. I watched The Stories We Tell About Money first. ;D
Introduction to Bitcoin – 37 min.
The Stories We Tell About Money – 47 min.
Money as a System-of-Control – 17 min.
Delivering Liberty, At Scale – 30 min.
Bitcoin: Where the Laws of Mathematics Prevail – 23 min.
Decentralization and the Architecture of Trust – 22 min.
"Bitcoin is this strange being. It really is. It violates everything we think we know about money, and it forces us to consider whether we actually understood money in the first place."
A brilliant opening, and then he goes on to point out that no one understands money because money is not taught in school, and then he wows us with what sounds like an erudite explanation of the standard understanding of money. That's from The Stories We Tell About Money.
Had I not, myself, spent so much time and effort on the concept of money, with all credit of course going to FOA and Gold Trail III, I could imagine myself being awed to the point of conversion. But alas, I have spent a lot of time and effort on this concept. And while I don't really want to call him a sophist, I will at least point out that he's Greek (where the art of sophistry originated, ICYDK). ;D
He even talks about the debtors and the savers (here), and how debtors want a money that becomes "worth less," so that they can repay less. If you are a saver, he says, you want the money to be worth more, so that you can earn more on it. And this, he says, creates a conflict of interests between the savers and the debtors, especially since the governments, who are the biggest debtors of all, have the power to depreciate the money through printing. Through this process, he says, they transfer wealth from savers to debtors. I listened to this twice, and I can't shake the feeling that he read my Debtors and Savers post.
Then again, maybe he didn't, because he says the solution to the problem is hard money. Hard currency. Bitcoin. Which he says has a fixed, diminishing, geometrically-reducing supply, that cannot be modified no matter how much you try, because the more you try to extract value from it, the harder it gets. He then says there's only one thing in the world that shares those same characteristics, and that's gold. Except, he says, you can't email gold. But you can email bitcoin. And suddenly, he says, "you notice that this thing may have a bigger impact than any of us participating in it could even imagine." (Or not.)
"This is not an investment opportunity. It is not a get rich quick scheme. It's a technology," he says. It's a technology that has radical disruptive implications for the world at large. Children born today will not drive cars, and will not know a world that has banks, or paper money. Bitcoin will bring money to the "unbanked" and the "underbanked", 6 billion of the world's population, he says, that is cut off from the… well, let's just say, doesn't have full access to the $IMFS. The third world nobodies, who have no access to Wall Street banks, can finally have their own money, on a cell phone no less. How on earth did they ever get by without Bitcoin?
So let's start there. This is one of his main theses for the broad adoption of Bitcoin, that it will finally bring money to the 6 billion "unbanked and underbanked" in the world. He says the banks won't give them accounts, because they don't have proper ID, basically. But with Bitcoin, they'll have their own bank, right on their cell phone, and banks will eventually disappear altogether as a result. Well, that is kind of what he's saying.
I don't know about you, but it sounds a little condescending to me that he thinks they will prefer bitcoin over whatever they're already using as a medium of exchange. And giving them access is not the same thing as giving them money, or purchasing power to be more precise. It almost sounds like he's saying that bitcoin will bring them more purchasing power. Perhaps he does mean that. Because Bitcoin is deflationary, perhaps he thinks it will always increase in value over time, in which case it becomes more of a store of value than a medium of exchange.
In fact, he says this. He says that during the adoption process, it will swing back and forth from being more of a store of value to being more of a medium of exchange, and over time it will gradually acquire the unit of account characteristic as well, as people start to think of prices in bitcoin terms. Eventually, he says, it will have all three functions of money, MoE, SoV and UoA, without the fourth, which he says is SoC or System of Control.
Today's money, he says, is issued by Kings and States, controlled by banks, and has four functions, MoE, SoV, UoA and SoC. It's how governments control their people, and each other, by being able to keep an eye on you through your transactions, and cut you off from your money if necessary. He points out how the US controls entire countries with its ability to cut them off from the SWIFT wire transfer system if they don't behave.
I think it's time to point out the obvious, that a lot of what he views as problems with money and banks, is really just a result of the $IMFS. A quick refresher: The $IMFS exists in the first place because the US came out of WWII not only victorious, but also with the only intact economy capable of helping rebuild Europe with the help of a coordinated monetary system. After that scheme first worked, then didn't, then changed, the $IMFS was supported by European central banks to ensure continuity until they could bridge the gap to the next system. The gap was bridged, but the $IMFS carried on, for reasons we all know. (For more, read From Bretton Woods to Freegold - An Epic Road Traveled)
Bitcoin doesn't seem to have this historical perspective, or any for that matter, but rather, quite simply, sees banks and money and problems, and proposes to do away with the banks and the problems by creating a new kind of money. The problem is, it just doesn't work that way in the real world.
I also see a touch of the techno-arrogance we see so often coming out of Silicon Valley. It's the utopian fetish of a generation with a technical advantage over those that came before it, but which has little historical perspective, and known no existence other than inside the fishbowl. As FOA said, they have never had that "loss of currency 'Experience'," yet they propose to fix the world's problems with a new kind of money.
Don't get me wrong, though. I'm not suggesting that resistance is needed. Resistance is unnecessary. I'm simply trying to explain why it's not going to work out the way Andreas Antonopoulos thinks it will. He says resistance is futile. I say it's unnecessary. He says that if "they" shut down Bitcoin, any 14-year-old with a copy of his book can start it up again, and again, and again. The cat is already out of the bag, and it's not going back in. All I'm saying is, look, that's not a cat. You can call it a cat all you want, but that won't make it a cat.
Bitcoin is not money. But it is kind of like a commodity that could potentially be used as a currency. In this way it is like gold… or silver, or iron, or zinc, or copper… but it doesn't have any industrial uses, at least not yet, so I suppose it's most like gold in that regard.
So, one of the arguments is that a commodity with currency-like similarities to gold can just become money, practically overnight. You'll hear people say that Bitcoin is a commodity money, meaning that it is like gold and silver (in their understanding of money), but that statement is not true. It takes a long time and a long process for something to become money, and the Great Bitcoin Bubble (GBB for short) just simply doesn't qualify.
It is obvious that gold holds a special place in the history of money, currency and tradeable wealth over thousands of years, and we so often run down the litany of properties "that make gold money." It's fungible, durable, divisible, portable, recognizable, limited in supply… you know the list. But doing that is basically like doing a postmortem on the tournament of history, an after-the-fact analysis to understand why the winner won. Recreating those properties is simply not sufficient to create another winner.
I've written about the tournament effect before. It basically says that there's an unpredictable element, call it luck, in winning a tournament. And history is like a bunch of tournaments. If it was simply the best properties that determined the winners, then Betamax would have won over VHS.
Now, understand that Bitcoin was specifically designed to have gold-like properties, based on the designer's belief that gold-like properties make good money. It was designed to be in limited supply in the end, and to be mined, and to get harder to mine as more and more gets mined, and to be divisible down to 2.1 quadrillion units once all of the bitcoins have been mined. In dollar terms, that's like dividing 21 trillion dollars down to the penny. $21T in pennies would be the same quantity as all of the "satoshis" (the smallest unit of bitcoin) in existence, once all of the bitcoins have been mined, 123 years from now.
Here's where I will remind you that money is essentially credit. But gold has been used as base money in the past, which means it was used as both cash and, simultaneously, the unit of account for credit money. So, in that sense, it was in fact a global currency, and as it was held in monetary reserve around the world, it was the global reserve currency of the time. I want to give bitcoiners as much credit as possible here, so I will assume that this is what they see bitcoin becoming when they say it is money. Once, in all of the videos above, he does say that Bitcoin will become the "reserve currency" for a bunch of other currencies, here.
Furthermore, I'm not even going to make the argument that being base money was not the best use of gold, because like the litany of properties, that is really just a postmortem conclusion, and a prediction for the future. Instead, I'm saying that, although it is theoretically possible for Bitcoin to monetize in the sense of becoming stateless base money, a form of cash, and a global reserve currency, to use the Queen's English, it just ain't gonna happen dude. ;D
Andreas Antonopoulos says that money, at its essence, is the communication of value. He says that Bitcoin is the decentralized communication of value, i.e., decentralized money. But the truth is, it's more like a monetary base than money per se, which are two different things. When gold was the monetary base, what made it money was the unit of account function, that we thought of and communicated the relative value of other things in terms of a specific weight of gold. That's what made it money.
So, the key to Bitcoin actually becoming money, even base money which is a derivative of it being money first and foremost, is that we start knowing values in bitcoin, and communicating them to each other in those terms. That seems like a catch-22 to me, because how can we possibly think about relative values, let alone communicate them, in bitcoin terms when its own price is so volatile, changing minute by minute? We can't. It needs to stabilize first, which it will do when it becomes money, but it can't become money until we start thinking in and communicating value in bitcoin. See the catch-22?
It's not just about things being sold for bitcoin. Nothing is actually priced in bitcoin. Things that are sold for bitcoin are priced in dollars or some other currency, and the bitcoin price is a derivative of the item's dollar price and bitcoin's dollar price. Can you imagine something being priced in bitcoin? Take gold. Right now, the price of an ounce of gold in bitcoin at APMEX is BTC 0.08, or 8/100ths of a bitcoin.
Imagine what would happen if they left the price fixed in Bitcoin. As the price of Bitcoin rose relative to gold, no one would buy gold with bitcoin anymore. In fact, they might try to buy bitcoin from APMEX with their gold. It would be cheaper than buying bitcoin with dollars. And if the price of Bitcoin plunged below its current price relative to gold, then it would be cheaper to buy gold with bitcoin than with dollars. Either way APMEX would eventually go bankrupt if they tried to honor that price long enough.
Gold's probably a bad example, because it's a commodity too, and its price is constantly changing. But the point is that bitcoin is just another commodity, not money. I can buy gold with silver at APMEX as well, and vice versa. Alpaca socks might be a better example. Alpaca socks used to cost 50 bitcoin for a single pair. You can see here. Imagine if they kept the price at 50btc. They certainly wouldn't be sold out, they'd be out of business.
Again, the point is that bitcoin enthusiasts with businesses accepting bitcoin for their goods and services does nothing toward turning Bitcoin into money. It's simply a gimmick.
Regression Theorem
This is how something becomes money—very gradually, and in a long-running chain of connections to previous monies. I have written about Mises' regression theorem in many posts, and it basically tells us that we accept a currency because we think in terms of it, we remember in terms of it, because we did yesterday, and the day before that. From my 2011 post, The Return to Honest Money:
If you would like, you can think of my "two monies" concept as "the recurring duality of money" because it will recur throughout this post as we deconstruct the money concept. What we'll find is that even with many potential monies in play, we'll always naturally end up with two that attain "monetary status" in different time-related roles through the forces of regression, the network effect, game theory's focal point and a dash of legal tender dictate.
[…]
The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.
[…]
Mises' regression theorem… connects modern money to… emergent money through our time-value memory and expectations of a money's ability to store value. And what I hope to show you is that the natural progression toward Freegold… is consistent with… Mises' regression theorem, while the difficult regression back to [hard money] is not.
[…]
So, basically… Mises' Regression theorem explains the long-running connection of modern money to its ancient origins. Regression kinda gets a "bad" money "in the door" and then human memory and expectations provide inertia.
[…]
It is because we think in dollars, or pesos, or rubles that we continue using those units as the primary media of exchange. It is human inertia that keeps them working. You can no more easily switch to a different unit, like a Bitcoin for example, than you could switch America to the metric system (like they tried in the 70s) or get an entire people to switch languages.
[…]
Murray Rothbard: Money, however, is desired not for its own sake, but precisely because it already functions as money… Hayek should be free to issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance and acceptance are two very different matters. No one will accept new currency tickets, as they well might new postal organizations or new computers. These names will not be chosen as currencies precisely because they have not been used as money, or for any other purpose, before.
One crucial problem with the Hayekian ducat, then, is that no one will take it. New names on tickets cannot hope to compete with dollars or pounds which originated as units of weight of gold or silver and have now been used for centuries on the market as the currency unit, the medium of exchange, and the instrument of monetary calculation and reckoning.
[…]
FOA: It wasn't going to happen, no matter what, short of nuclear war. All we had to do was look around and see how people the world over were attached to using fiat currencies. The economic system itself was morphing into new ground as world trade learned to function very efficiently with fiat digital settlement. And that's something the 70s crowd said could never happen. That was how many years ago?
…Even the third world didn't want to hear it. They figured that any return to a hard money system would harken back to a time they remembered well. These guys suffered during the early century and no one was going to tell them that the gold standard wasn't the fault. The US is today, and was then, robbing them blind, but the situation seemed, to them, that this new dollar standard was building them up…
When it came to using fiat money in our modern era, it made little difference what various inflation rates were in countries around the world; 50%, 100% 1,000%,,,,,, they went right on playing with the same pesos. There have been countless third world examples of this dynamic, if only we look around. Mike, look at what happened in Russia after they fell,,,, the Ruble stayed in use and function with 6,000% inflation. My god they still use it now.
[…]
If you're still with me, I hope you are starting to see some of the problems with all of the various "hard money" propositions. Even competing currency ideas like e-gold or GoldGrams are unlikely to be adopted according to Mises' Regression theorem:
Timothy D. Terrell on Regression and new currency viability: ...If the digital currency plan requires people to trade and quote prices in terms of something other than the widely used dollar, yen, mark, euro, or other established currency, Mises’s regression theorem would imply that the plan is doomed. Well before e-money became possible, Rothbard addressed this problem:What will work is a plan that simply facilitates the exchange of already-recognized currencies...
Even the variant on Hayek whereby private citizens or firms issue gold coins denominated in grams or ounces would not work, and this is true even though the dollar and other fiat currencies originated centuries ago as names of units of weight of gold or silver. Americans have been used to using and reckoning in "dollars" for two centuries, and they will cling to the dollar for the foreseeable future. They will simply not shift away from the dollar to the gold ounce or gram as a currency unit.[4]
This kinda throws a wrench in the whole competing currencies idea to which the hard money crowd has somewhat retreated. Just like Mexico still uses the peso and Russia the ruble, we'll likely be thinking in terms of dollars long after it collapses.
The great flaw in this whole anti-fiat currency, anti-bank fantasy is not just that it's wrong, it’s useless, because it is never going to bear fruit. Banks and fiat are not going away anytime soon, no matter how high the GBB goes.
Disintermediation
Disintermediation, or the removal of banks as middlemen, even for long distance transactions among total strangers, is often touted by Andreas Antonopoulos as Bitcoin’s greatest claim to fame. But the whole idea of decentralized, disintermediated, peer-to-peer money transactions over long distances, IMO, was just a bad idea from the start.[1] It reminds me of my “three spheres of trade” in Money or Wealth.
It was the emergence of centralized international intermediation by banking families like the Medicis during the Renaissance that expanded the money concept from the local to the distant. Even modern Hawala systems use intermediaries. Understanding the money concept helps us see through the faulty reasoning behind decentralized, disintermediated cryptocurrencies. It’s not so much the crypto part, it’s the decentralized, disintermediated part that will be their downfall. They’re just a fad, because they don’t make monetary sense.
For many of you (hello Toolmaker! ;D), I'm sure this goes against your Libertarian ideals and sensibilities. I probably sound like an evil banker just for saying it, but try stepping back from your ideals, just for the purpose of seeing a concept. As Ari said, we live in an imperfect world, and one of the hardest things about understanding Freegold is accepting what the real world has to offer, and adjusting our own thinking to that reality, rather than hoping that the world will change to accommodate our preferred reality.
Here's a refresher on my "three spheres of trade":
Building upon FOA, I tend to think of three spheres of trade in which the ancients would have engaged each other. The three could be described as distant, local, and "among trusted acquaintances" or what we could call "super-local". As FOA explained, gold was best suited for distant trade, and, therefore, gold was always "On the Road," a phrase he used 15 times in Gold Trail 3.
Credit would have been mostly used on a "super-local" basis, or "among trusted acquaintances," and other media of exchange, other forms of tradable wealth, would have been used "locally", like at the town marketplace. Credit is scalable, both in quantity and duration, or length of time required for clearing, and it would have been scaled in proportion to the level of trust between trading counterparties.
As an example of the "super-local", I like to imagine a bar like Cheers in ancient times, where everyone knows your name and, therefore, everyone drinks on credit. Everyone runs a bar tab. The bar tab is a handy device because it is generally one-way credit. The bar owner extends credit to all of his patrons each night, and they settle up on a regular basis rather than having to barter for each and every drink. It's merely a convenient device for a mental exercise.
The point of this exercise is many-fold. It is to understand how money (credit) and barter (settled or completed trades) coexisted at the same time, not that money emerged from barter. It is to retrain your brain to be able to separate the money concept from barter, even where gold coins or other tradable wealth items were traded. And it is to be able to visualize the process, over time, whereby gold became the focal point tradable wealth item.
In order to run a super-local credit system, you need a unit of account. It could be anything. It could even be different for each patron. Perhaps our ancient bartender simply kept track of the number of drinks for each patron, and then settled up later depending on their trade. Or perhaps he kept track using each patron's trade. Like the egg farmer owes so many eggs. Or perhaps he used some other unit of account, like pieces of silver or gold. It doesn't really matter, and it could have varied from bar to bar, and community to community.
Over time, of course, a standard unit of account would be easier and would therefore spread from town to town until everyone used the same unit of account. Perhaps it was pieces of silver. One of FOA's points was that it is more common to find hoards of silver coins in ancient digs than gold. That's because, as FOA said, silver would have been a common item of trade, and it would make for a good unit of account in ancient credit.
In terms of local (but not super-local) trade, barter would be the order of the day. You can imagine a bustling marketplace where trade consists of haggling over relative values and goods on offer. Over time, gold and silver would emerge as good media of exchange, but still that would not entail the money concept as explained by FOA. Eventually a system of scrip would emerge, as in Fekete's 'Fairy' Tale (found in this post), and in that case, the scrip would represent the expansion of the money concept from the super-local sphere into the local sphere.
A scrip system is a system of short-term credit amongst a limited group of relative strangers. The scrip itself becomes a medium of exchange, but only for the limited scope of the fair itself. The clearing of the scrip would entail the return from the monetary plane to the physical, from money back to barter. You don't want to go home carrying a credit slip from a stranger. You want to go home carrying either a good or a tradable wealth item.
Beyond the super-local and local was distant trade. This was where gold was used. As FOA explained, a very small amount of gold in the world carried a tremendous value in antiquity because of the way it was used.
"All throughout these early times, prior to BC and into some AD, people didn't see these gold coins as we think of money today. These various gold coins had tremendous value, but they were just gold pieces. They were wealth for trade like everything else was.. That's simple logic, I know, but the vessel of oil, for instance was just as tradable as a gold coin. In fact, within most of the medium sizes city states of that era, barter of like goods was just as good or better than gold coin. One's life was better if he owned wealth he used."
Gold's highest value in antiquity was to be, as FOA would say, "On the Road." Imagine you are a trader in antiquity, heading out to distant lands in search of fine silk or whatever it is you are after. You will need to bring something of value with you to trade for those things you hope to obtain. So, whatever wealth you have before you hit the road, you will want to trade it for the item that carries the greatest value in the smallest package and lightest weight. That was gold.
If a stranger rolls into your town wanting to obtain a cart full of your fine oil or furs, you will engage him in barter, not credit, because he is an out-of-town stranger. He will offer you gold and you will take it. You will take it because you know how valuable gold is to "on the road" traders, and you know that when the next one leaves your town he will trade all of his wealth items for gold, because that's what you take on the road. That's what gives gold its tremendous value—the way it is used.
There were a number of points that FOA was making in Gold Trail 3:
1. Gold was not money, in fact it was practically the antithesis of money in ancient times. If you understand that money was credit, and that credit was used proportionately at the local and super-local levels, gold was the tradable wealth item used where money (credit) couldn't be used, over long distances between strangers.
2. Gold had a far higher value in ancient times than we tend to imagine. Too high, in fact, to be used as "savings" by normal people. Too high to be hoarded! Lifetimes were shorter, wealth scarcer, and he who underconsumed to save for later would save, as FOA said, "wealth he used."
"Humans of that period didn't live all that long a time span. Even though some accounts prove otherwise, the majority of life went by rather quickly. If you were a regular part of society in general, your wealth was what you had and consumed during those short days. There were no banks or investment houses and the average person's return on a wealth unit was his length of use and its quality of life enhancement. More to the point, this logic made these guys spenders of gold, rather than savers! If you had gained gold in trade, for your services or goods supplied, you had no reason to save it. There was no other money that needed to be hedged against value loss…
For longer savings, even for those of above average means that had all they wanted, people tended to spend their most valuable gold coins first, while saving the least valuable (bronze, silver, iron) for emergencies and later use. To us, today this sounds strange, but place yourself in that time. It was better to build your most useful and needed store of things while times were good."
3. A much smaller quantity of gold existed (and sufficed) in antiquity than we tend to imagine.
"It's becoming more and more apparent that average people of that time quickly traded (spent) their gold for something useful of value, for both them and their family. They didn't have the excess we know today. In modern nomenclature; this logic dictates that a much smaller amount of gold money circulated and circulated faster than many supposed. All forms of jewlery and art objects were in the same situation."
This last point was, I think, what sparked the discussion about ancient gold in Gold Trail 3 in the first place. Just prior, at the end of Gold Trail 2, the subject of vast hoards of "black gold" had come up in the discussion forum, and this was how FOA chose to address it.
My point in revisiting this discussion here is that gold's true value comes from the way it is used, which is not necessarily the way it is described by the hard money/gold bug camp.
Now jump ahead, in your mind, from antiquity to the Renaissance period, and think about the differences. Witness the emergence of international banking families and the beginnings of an international monetary system. Yes, coins, both gold and otherwise, were a big part of the system's development. But as we earlier witnessed the expansion of the money concept from the super-local to the local with the use of scrip at the fair, here we can see the expansion from the local to the distant with the addition of international clearing organizations in the form of these big "evil" banking families.
A busy scene in a 15th century Medici bank.Also remember that, in terms of FOA's pure money concept, it was the numbers stamped on the coins, and not the metal itself, that was money. The fact that gold was used in this way was probably an essential step, or at least a helpful one, in the expansion of the money concept from super-local to local to distant. But, as FOA said, it was not the best use of gold:
"To understand gold we must understand money in its purest form; apart from its manmade convoluted function of being something you save. Money in its purest form is a mental association of values in trade; a concept in memory not a real item. In proper vernacular; a 1930s style US gold coin was stamped in the act of applying the money concept to a real piece of tradable wealth. Not the best way to use gold, considering our human nature."
So, in antiquity, gold was tradable wealth just as it is today. But, in antiquity it was "on the road," which is not necessary today, because we now have a functioning international monetary system enabling money to be used in distant trade. Also, today, we have the need to save for retirement, which was a little different in antiquity for the reasons FOA explained.
Let's take a quick look at gold's unique set of physical properties:
Scarcity: It's not all that scarce relative to other things, but it also doesn't grow on trees which is actually what is meant by scarcity as one of gold's properties. It takes considerable effort and luck to find it directly in nature.
Fungibility: This is what sets gold apart from, say, diamonds. An ounce of 24K gold is the same anywhere, they are mutually interchangeable, and we can specify an amount of gold without having to be specific about which actual piece of gold is being referenced.
Recognizable: Gold is easily recognizable and relatively easy to authenticate.
Divisibility: This is what sets gold apart from, say, the Mona Lisa. Gold can be divided almost infinitely without losing its value.
Portability: This is really a function of gold's high value, but it was very important in antiquity. It's a little bit circular and self-referential in that gold was portable because it was very valuable, and it was so valuable (back then) because it was so portable, because it was so valuable, because it was so portable, and so on.
Malleability: Gold is easily shaped, which is how and why it traded in many different forms, like jewelry, art and coins.
Durability: This is the big one. It's very hard to destroy gold. Easy to lose, but difficult to destroy.
It's pretty: And shiny. I imagine its shine was always more alluring than its yellow color, but that's just my personal bias. Gold has high reflectivity, but silver is even more reflective than gold.
I think these properties offer a good explanation for the beginning of gold's journey through history, but not its true value. Value comes from how we use it. To explain what I mean, let's look at which of the properties were most important to its "on the road" use in distant trade, before we had an international monetary system. I think the facts that it was both portable and recognizable were of the greatest importance. And remember that portability is a circular, self-referential property based on value. So, in essence, I think the fact that it was recognizable anywhere you traveled was probably the singular physical property that led to its highest value use, a value that was imparted on all gold, even that which wasn't "on the road," simply because it potentially could be.
Now let's think about the way gold is used by Giants today, including CBs and governments. It is being used primarily in large bar form, buried and secured out of sight in underground vaults for decades on end. Gold's beauty doesn't factor in at all, since the vast majority is hidden and unseen. It's just lying still and not circulating, so the facts that it is portable, easily recognizable and fungible hardly matter at the moment. Divisibility doesn't matter much, although some of the larger bars are being divided into smaller kilo bars and coins, and malleability only really matters to those who are making gold jewelry for the Indian wedding season. Scarcity is not a big deal since we have literally doubled the above-ground supply in the last 45 years, so I'd say the most relevant physical property today is gold's durability.
Those are just the relevant physical properties though. In antiquity it was that gold was universally recognizable. And for the Giants of the last few hundred years, it was that gold is durable, because what else matters when all you are going to do is bury it for the long haul?
It is probably true that in recent decades a massive portion of formerly-Western gold disappeared into Eastern "jewellery demand", but don't let that distract you from the point I am trying to make. That large "jewellery demand" is both an artifact of the $IMFS (from what I understand, the gold jewelry was, how shall I put it, smaller(?) 60 years ago), and evidence that "so many people worldwide [still] think of it as [store-of-value] money." My point is that gold's true value comes from its best and highest use, and jewelry is not it. Neither is currency, base money or monetary specie.
So, we have the money concept expanding, over thousands of years, from the super-local (friends and family) to the local (thanks to some form of paper scrip or paper money as a short-term credit instrument) to the distant (anywhere in the world, thanks to the emergence of international banking families). Those banking families were no more trusted or liked back then than bankers are trusted and liked today, but the system worked.
Gold never was "money" itself, but it was base money, which helped in the clearing process that allowed the expansion of the money concept from local to distant. Gold was always just a tradeable wealth item, i.e., the best barter item for long distance trade, even if as a symbolic name and weight it was used as the main unit of account, i.e., money, and hoarded by the banking families as reserves for clearing and redemption purposes.
But today it's not even needed in distant trade anymore, because today we have a functioning international monetary system, enabling true money to be used in distant trade. Today gold just sits in a vault, collecting dust (and preserving value).
Think about this…… in terms of Bitcoin being specifically designed by Satoshi Nakamoto to have gold-like properties, based on his belief (i.e., misunderstanding) that gold-like properties make good money.
In antiquity (which means a very, very long time ago), gold's most important properties were that it was open sourced, decentralized, disintermediated, neutral, borderless, censorship-resistant, unforgeable, universally recognizable, the main unit of account, rare, and most importantly, portable. All of the properties that Andreas Antonopoulos regularly espouses in favor of Bitcoin becoming gold-like money. But today, the only property that matters for gold is its durability. That, and the fact that it already won the 5,000+ year history tournament, but I guess that's part of the durability property too. Isn't it? (Oh, did I accidentally forget to include durability in Bitcoin's property list? No, I don't think so. ;D)
In Conclusion
I love using this subheading, because I always laugh to myself knowing that some of you will jump down here and only read the conclusion, or at least read it first, hoping to get the gist in a paragraph or two. Well here's the gist in one sentence: Bitcoin will not monetize because it was flawed from its inception.
It is, however, quite understandable that certain members of our Freegold community would fall for it (not mentioning any names down here in the conclusion, gotta read the whole post for that kinda juicy information ;D). It's also understandable that others might not join the cult, but might throw some good money into it, for fear of missing out, for the experience of trading a true bubble, or simply because of regret over not hodling those few bitcoins we once had, like Moldbug recommended. I had some once. I traded them in for a couple hundred bucks and a little bit of gold. Dang, I could have gotten serious money for them today! No regerts though, because I've got sound logic and unquestionable integrity instead. [2] :D
Sincerely,
FOFOA
[1] This was a comment by me in response to another comment under the post:
“But the whole idea of decentralized, disintermediated, peer-to-peer money transactions over long distances, IMO, was just a bad idea from the start.”
I’m still not sure why this is a bad idea. Now, I can see why bitcoin is not the one for that, being so inefficient and all, and if anything having more the properties of a SoV rather then a MoE. But theoretically speaking, if it could be achieved, why is it a bad idea?
Hello Joe,
Good question. I should have covered that part more.
Money is fungible credibility. To be credible, you have to be known to someone. Cash is the exception, where transactions can be anonymous. But with Bitcoin, all transactions are essentially cash transactions. Decentralized, disintermediated, peer-to-peer money is cash. As I've written recently, cash is only a subset of the effective money supply, and a small subset at that. An important subset, but small in the big picture.
"Decentralization, disintermediation and peer-to-peer" are touted as Bitcoin's claim to fame as a new kind of money, but as an idea, it misses the lion's share of what money actually is. That's why I said it was a bad idea from the start. It was a poorly conceived idea.
A real money system, credit, requires some intermediation. I think Andreas is starting to realize that. If you watch this video, he is aware that there's no way Bitcoin can scale up to be a cash system for the entire planet, and he hints at an intermediated credit system growing around it, with Bitcoin being the global monetary base used for clearing by the Bitcoin banks. It's the only way it could scale up.
But again, it's not going to make it that far unless it becomes money first, so here we see another catch-22 developing.
As for the long distance part, Andreas says that what the Internet did for communication, Bitcoin will do for money. Think about my "three spheres of trade" concept. Before intermediation, for long distance trade there was only basically barter, the trade of goods for goods, one of the goods being the tradeable wealth item gold. Call it cash if you want, but a cash trade over long distances is inefficient at best.
Centralization and intermediation through banking families brought the possibility of credit to long distance trade, an improvement on efficiency. Even today, long distance trade operates on bank-intermediated credit. Can you imagine if that went away and you had to pay in cash, even if it was digital?
I understand the appeal of dealing in cash. I understand the appeal of anonymity. And I understand the appeal of avoiding banks. But in the real world, that's simply the best system. There's a reason it's what evolved over time.
That's why I said it was a bad idea from the start. Not bad as in evil, must be resisted, but bad as in ill-conceived, not a step forward, and won't work in the end like they imagine it will.
Now, CBCCs are a slightly different story. They too would be like cash, but they would be born into their proper role as a subset of the money supply. They would be issued by a central authority, but transactions could still be peer-to-peer over long distances, like cash. The difference is that being a subset of the real money supply, which is mostly credit, they would trade at a fixed exchange rate with credit. Bitcoin, whether volatile or just deflationary, would make poor base for credit money.
Sincerely,
FOFOA
[2] Another response to a comment under the post:
"no regerts, eh? first misspelling ever, no?"
Steerpike, sometimes a typo sneaks through, but I try not to misspell words. Plus I have spellcheck, so you should always assume it was intentional first. ;D
