Money, Bitcoin and Time: Part 3 of 3

In the ancient story of money a new chapter is being written…
The Simple Truth about Time: Time is the ultimate resource. Its absolute scarcity bounds the entirety our stories, both as individuals and societies. With economics, we strive to use it more effectively. As the destroyer of all things and the healer of all wounds, it is the grand paradox of nature.

The Ultimate Resource [1]

Scarcity is the starting point of all economics. It is commonly believed that natural resources are inherently scarce, which is true in a sense, as there is only so much gold within the Earth, for instance. However, this finite quantity of gold in the Earth is still too large for humans to even measure and in no way constitutes an actual limit to the amount we can conceivably mine. We have literally ‘just scratched the surface’, as our mining efforts haven’t even taken us half way into the Earth’s crust, its thinnest and outermost layer. Driven by need, humans have always found a way to explore farther and dig deeper to uncover ever-more natural resources. Therefore, the actual practical limit to the quantity of any natural resource is always and only the amount of human time, effort and ingenuity devoted to its production. For human beings then, the only truly scarce resource is time.

Frozen Time [1]

As more humans exist, there is more human time to direct towards the extraction and production of natural resources. As we have learned, productive output per unit of human time (productivity) can be amplified by leveraging technological solutions to problems (tools). In economics, a tool or technology is considered to be both:

Time Arbitrage [2,13,14]

Innovations of this magnitude are virtually impossible to predict; however, they do follow a familiar adoption pattern. The book titled ‘Diffusion of Innovations’ lays out a framework that seeks to explain how, why and at what rate new ideas and technologies spread. Diffusion is the process by which an innovation is communicated and adopted by participants in a social system over time. There are four main elements that influence the spread of the new idea:

As telecommunication networks have become more advanced and ubiquitous, the user adoption rates of new innovations have accelerated dramatically.

Lindy Effect [4,11]

Things in this world fall into one of two general categories: perishable and nonperishable. The distinction between the perishable (humans, single items) and the nonperishable is that the latter does not have a natural, unavoidable expiration date. The perishable is typically physical in nature, meaning it is subject to physical degradation, whereas the nonperishable is typically informational in nature. A single car is perishable, but the automobile as a technology has survived for a century and can be reasonably expected to persist for at least another one. An individual man will die, but his genes (which are digital) can be passed on for innumerable generations. This heuristic from Nassim Taleb, known as the Lindy Effect, can be summarized as follows:

Hard monetary technologies become more trusted over time as they offer peace of mind to their users.

Future of Regulation [1,4,5,15]

There is a good reason why the gold standard was forcibly ended and no good store of value has yet risen to fill the void. To preserve seigniorage profits governments must enforce an inflationary monetary policy. Otherwise, if a sound store of value existed that was accessible to its citizenry, their business model would be jeopardized as people would exit depreciating fiat currencies to shield their wealth from further confiscation. As Alan Greenspan, former Chairman of the Federal Reserve (the central bank of the United States) said in 1966:

Like the proven model of BitTorrent, Bitcoin sports a decentralized architecture that makes it highly resistant to external attack and censorship.

“This is one of the crazy things about this concept because money and speech turned out to be the same thing — money, information and math — they’re the same thing. In a Bitcoin world, I can literally write down my Bitcoin address and keys on a piece of paper and put it in a safety deposit box. It’s basically in cold storage, I could even put it in my head. I can memorize the key phrases and I could cross national borders with $1 billion in my brain. It’s a very powerful but literally mind bending concept in that sense.”

The First amendment of the United States Constitution guarantees that all Americans have the power to exercise their right to publish and distribute anything they like, without restriction or prior restraint — which includes software code like that which constitutes Bitcoin. Established legal precedent in the United States explicitly protects software code under the First Amendment. Consider the case of PGP:

“The Federal Reserve simply does not have the authority to supervise or regulate Bitcoin in any way.”

So, Bitcoin can’t be shut down, is virtually immune to regulation and leverages economic incentives to grow relentlessly. Its very existence is a game changer for almost everyone in this world, especially central banks who now face an existential threat to their business model.

The Long Game [1,4,16]

Money is how we keep score in the game of life. Game theory explores how rational people make strategic decisions in different scenarios. It is based in purely mathematical terms and has applications in any domain where people must choose whether to cooperate or compete with each other. The standard game analyzed by game theory is the Prisoner’s Dilemma:

Game theory shows us that adversaries will often behave contrary to their mutual best interests.
The game theoretic properties of the monetization process encourage people to converge on a singular money.

The Event Horizon [1,4,16]

Hyperinflation is a particular type of demonetization, unique to government fiat money, that did not exist under the gold standard. Hyperinflation occurs when a government produces new monetary units at an accelerating pace to finance expenditures or service debt burdens, which pushes the value of its currency down at the same accelerating rate. The value of a hyperinflating currency collapses against the most liquid goods available to the society first (like gold or the US dollar) and then, depending on relative availability, against real goods such as real estate and commodities. This sequence is caused by individual’s attempting to maximize their exchange optionality as they escape their failing currency and prepare to navigate highly uncertain economic conditions. When hyperinflation intensifies, currencies begin falling against perishable goods. It is common to see grocery stores completely emptied out in societies suffering from the late stages of hyperinflation. Eventually, the society will either devolve to a barter economy or adopt a new medium of exchange, as we saw in Zimbabwe when its failing dollar was ultimately replaced by the US dollar. This process is arduous as the replacement currency is often scarce as foreign banking institutions are either reluctant to or restricted from providing liquidity.

Reverse Bank Run [1,4,5]

Although it is still considered magic internet money by most people today, its continued existence and appreciation will attract more attention from high-net-worth individuals, institutional investors and then, possibly, central banks. As we have learned, central banks still rely on gold as a means of final settlement, as it was (before Bitcoin) the only monetary medium entirely free of counterparty risk (cash money). However, transporting and securing gold is an extremely expensive process fraught with operational risk. These costs and risks are the reason final settlements between banks occur very infrequently.

A Path to Prosperity [1–16]

Making predictions is risky business, wrong answers are innumerable, and the right answer is singular. Accurate predictions are rare. By weaving together historical knowledge and awareness of current trends, one can develop a perspective on what technological innovations are possible. The biggest mistakes people make when making such predictions are:

1. Bitcoin is first perceived as an internet toy for cryptographers (Minority Rule — Step 1)

2. Its rapid price increase makes a small group of people rich, engages free market fanatics and brings media attention. Its hyper-volatile price presents itself early (Hodlers of Last Resort — Layer 1).

3. The media, financial and tech establishments — having failed to buy Bitcoin early and benefit from its meteoric rise — denounce it as a Ponzi scheme, the MySpace of Cryptocurrencies and the greatest bubble of all time (Streisand Effect).

4. A large number of scammers jump onto the Bitcoin hype-train and create their own cryptocurrencies claiming to be superior though lacking critical qualities including decentralization, security and immutable governance. Bitcoin’s serendipitous first mover advantage, multi-sided network effects and its brand awareness fueled by the Nakamoto creation myth preserves its market dominant position.

5. Retail investors, venture capitalists and hedge funds — lacking understanding of monetary economics and applying inappropriate valuation models — invest into other cryptocurrencies, creating more noise and confusion as the prices of these altcoins increase at a rate higher than Bitcoin.

6. Well-connected venture capitalists and hedge funds are given discounts on the investments only to then dump much of what they bought onto retail investors.

7. Given their high correlation to Bitcoin and lacking utility, the world watches as the bear markets continue to wipe out more and more alternative cryptoassets as most fail to deliver any useful product, although some succeed in other market spaces. Features that are proven in the market by other cryptoassets are subsumed by Bitcoin (Decentralized Network Archetype). Bitcoin price volatility persists but annual low prices continue to ascend relentlessly (Holders of Last Resort — Layer 2).

8. Trust in Bitcoin increases over time (Lindy Effect) and its market price continues its upward yet volatile trajectory (Fractal Wave Patterns).

9. People, burned in the altcoin craze, witness and learn about Bitcoin’s undisputed superiority across all monetary characteristics, especially its hardness (Holders of Last Resort — Layer 3).

10. On the eve of and during the next bull markets, Bitcoin’s absolute scarcity and antifragile characteristics exacerbate investor FOMO (Game Theoretic Positive Feedback Loop). Some investors are inevitably caught in the subsequent Bitcoin price crash (Fractal Wave Pattern)(Hodlers of Last Resort — Layer 4).

11. Hyperinflating fiat currencies are further contributing to the adoption of Bitcoin as it becomes the only means of preserving wealth for many people, making Bitcoin a legitimate store of value. Governments scramble to try and enforce capital controls and create propaganda against Bitcoin, just like they did to gold in the 20th century. Capital controls prove to be impotent and the propaganda against Bitcoin incites internet and media narratives that regard it as a tool for freedom (Antifragility). Government dissent highlights the need for Bitcoin in the first place (Streisand Effect).

12. Investors and high net-worth individuals are convinced to allocate a small portion of their assets into Bitcoin to capture further growth, hedge against inflation and increase the risk adjusted returns of their traditional portfolios (Minority Rule — Step 2)

13. Increases in demand for Bitcoin necessarily involve a reduction in demand for fiat currencies, causing even higher inflation rates (Gresham’s Law). At great expense and effort, governments messily issue their own cryptocurrencies but fail to relinquish control over monetary policy, which makes them uncompetitive against Bitcoin (Market-Driven Natural Selection). Governments covertly attempt to attack the Bitcoin network, which only strengthens it (Antifragility). Media coverage about Bitcoin shifts towards its use as hard money (Skin in the Game) and its importance for prosperity (Hodlers of Last Resort — Layer 5).

14. Activists share the message that soft money creates social inequality (Soul in the Game) by disproportionately taxing the poorest via inflation (Cantillon Effect). This message spreads fast in a world of ever-more crashing fiat currencies and people rush to exit their local currencies for the safety of Bitcoin, triggering the first hyperbitcoinization events (Hodlers of Last Resort — Layer 6). Bitcoin mining hardware becomes commoditized and many citizens join mining pools (Decentralized Network Archetype)(Skin in the Game).

15. Central banks, in an attempt to adapt to the new conditions and hedge going concern risks, quietly start to accumulate Bitcoin as a reserve asset, consistent with their gold strategy. A former central bank employee leaks a confidential strategy document regarding Bitcoin (Soul in the Game) which triggers other central banks to begin purchasing Bitcoin, causing its price and perceived legitimacy to increase at an accelerating rate (Game Theoretic Positive Feedback Loop)(Final Fractal Wave Pattern)(Hodlers of Last Resort — Layer 7).

16. Bitcoin’s market capitalization reaches tens of trillions in US Dollar terms. Bitcoin’s volatility subsides as both its market capitalization and liquidity are larger than ever (Mature Hard Money).

17. Early Bitcoin investors are now sitting on significant unrealized gains and are willing to part with some of their Bitcoin to pay for their purchases. With its purchasing power stabilized, the opportunity cost of transacting with Bitcoin is diminished and its use as a Medium of Exchange increases.

18. With the world more digitized than ever before, people increasingly demand to be paid in Bitcoin now that it has proven to be a good store of value given its disinflationary, and later deflationary, monetary policy (Schelling Point)(Hodlers of Last Resort — Layer 8).

19. With the addition of highly performant transaction layers, Bitcoin’s use as a Medium of Exchange becomes a widespread. Bitcoin, functioning as the core of a new innovation wave called the TrustNet, is christened as a momentous innovation.

20. As more consumers and merchants become accustomed to transacting in Bitcoin, it gradually becomes used as a Unit of Account.

21. Due to the emergence of a superior, uninflatable monetary standard, people increasingly store their wealth in Bitcoin rather than fiat currencies (Minority Rule — Step 3)(Hodlers of Last Resort — Layer 9).

22. Central bank monopolies on money are described by historians as a relic of the past. Bitcoin is regarded as the catalytic innovation behind the separation of money and state. A free market for money is now the defining feature of free market capitalism (Nash Equilibrium).

This path to full global money will take Bitcoin through many stages:

Time Will Tell

All time beyond the present is unknown. All predictions should always be taken with a grain of salt. The future is uncertain, and the end can always be near. Anyone who claims they can tell you what is going to happen in the future is wrong. All we can do is study the patterns of the past and use them as our map to navigate the ever-advancing territory of the future.

Bitcoin accepted here: 3CiBznmvP2jXVSPR9bUWZwSNtbe9ubp36M

Synthesized Works & Further Reading

[1] The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous (a masterful work on which much of this essay is based)

Freedom Maximalist. Bitcoin is Honest Money — stack sats here: http://bit.ly/2THg4Jg Links To All My Work: http://bit.ly/3fG91KV YouTube: http://bit.ly/321Lzm0

Freedom Maximalist. Bitcoin is Honest Money — stack sats here: http://bit.ly/2THg4Jg Links To All My Work: http://bit.ly/3fG91KV YouTube: http://bit.ly/321Lzm0