In the previous post we were finally able to introduce the concept of solid money and we were able to give insights that allow us to better understand the concept. What makes a commodity to be considered money? Are there better forms of money than others? What influence does each type of money have on our society? How is the predominant form of money chosen? I hope you are already able to answer these questions. And with all I’ve said I definitely don’t mean that FIAT currencies are going to disappear, since trying to predict the future is not my goal. What I do want to emphasize is the importance of the birth of Bitcoin as an alternative currency, the birth of something unprecedented, with better intrinsic characteristics to fulfill the function of money, accessible to everyone and without any control/authority or any restrictions/censorships. Now let’s take a closer look at what it means to have a solid currensy of this caliber.
With Bitcoin, we have for the first time a technology that works better as money. With Bitcoin nobody can steal your wealth, neither through inflation nor directly through account blocking, freezing transfers or making you pay disproportionate commissions. You can have complete confidence that its offer will always remain at 21 million, something impossible with FIAT coins, and we repeat: the most important thing in a merchandise that is used as money is the confidence we have in it being able to keep value over time.
AN UNJUSTIFIED FINANCIAL SYSTEM
Surely the reason why we have an exorbitantly large financial system is due to the devaluation of FIAT currencies. We are required to create diversified portfolios, not to increase our wealth, but simply to avoid being “robbed”. We have to find ways to keep the value out of what we use as “money” since it does not fulfill its function correctly, which is actually crazy. And if that wasn’t enough, this tends to increase inequalities, since it is usually the poorest who retain their wealth in money and not in financial assets. Formerly there was a Jewish proverb that said: you keep 1/3 of your value in money, the other 1/3 in land and the other 1/3 in your business. This is no longer applicable today because the state has come to control and corrupt money. Nowadays we have FIAT money (not backed by anything at all) with an infinite supply which will tend to have a value near 0 over time, because of pure mathematics.
EVOLUTIONARY PROCESSES OF MONEY FORMS
Bitcoin is also unique because it breaks the normal pattern that forms of money have always had. Everything that has ever been considered money has gone through a natural process of loss of value. Let’s take a look at it:
Unlike any other form of money, in Bitcoin, its monetary supply cannot be increased more than what is included in the protocol, no other currency has managed to fulfill its value storage function in such an optimal way. This not only allows unprecedented confidence in the currency as a store of value, but it turns Bitcoin into a kind of black hole: there will always be someone who will be profitable to feed it, and therefore, it is almost illusory or ironic to think that it is going to disappear or to stop growing in value. Think about it, if Bitcoin suddenly dropped a lot in price and many miners stopped offering security to the network because it is no longer profitable for them, the difficulty would decrease and new miners would enter in search of profitability. This would make the network more secure, and will again promote its use and adoption, increasing the demand and its price. It is like a virtuous cycle, extremely difficult and unprovable to break.
It must also be taken into account that all forms of money before occupying this position have gone through an evolutionary process. We cannot label Bitcoin as useless because nobody accepts it, as this is not its priority function currently. Basing this evolution on gold, it first was a collectible item, then it became a reserve value, then a medium of exchange, and finally a unit of account. Commercial adoption of Bitcoin is sure to come later; now the priority is to turn the network into a form of secure reserve value, since we are surely between the stage of collectible asset and reserve value. One step at a time.
For Bitcoin to become a medium of exchange, the number of people who use Bitcoin must multiply, and with it, its price. This will make Bitcoin less volatile and much more valuable, and believe me, nobody wants to repeat the story of Laszlo Hanyecz who became famous after buying 2 pizzas for 10,000 BTC years ago, an amount that today would be equivalent to 55,000,000€. As I’ve said, as Bitcoin matures, it will also tend to be less volatile, which is actually a very frequent excuse to criticize it, although again, little justified. Not only because the trend of this volatility has been without a doubt extremely positive (it has been the best performing asset of the last decade), but also, if you think about it, this volatility is actually what we want for Bitcoin. An asset will never go from having $1 of capitalization to having Trillions of dollars without being volatile.
BITCOIN AS DIGITAL GOLD
There is usually a tendency to equate or compare Bitcoin as “digital gold”, which I consider to be a way of underestimating its power. Since gold is not programmable, it is not digital, it is not accessible worldwide through the internet, it is not as non-discriminatory as Bitcoin, it is not as safe, it is not so easy to transport, it is not so scarce, it is not as censorship resistant. And it’s obviously not that decentralized either.
Bitcoin will be a global game changer if its adoption levels continue to grow. Defining it as “digital gold” is simply underestimating its power. At the moment most people have chosen “perhaps compulsorily” to trust humans to control something as important in our society as money. Bitcoin offers us the possibility to trust machines and mathematics to adopt a more solid, fairer, and with less friction monetary policy. Maybe it won’t be Bitcoin, but we will surely see cryptocurrencies adopted globally. They are simply a form of money technologically superior to any other that we have ever had. And the truth is it is hard for me to believe that if a non-state currency is really imposed, it won’t be Bitcoin, since it is practically impossible to overcome its level of decentralization in governance and its security; that is why most altcoins seek to offer innovative solutions and incorporations, since they are aware they can’t fight Bitcoin regarding these two characteristics. And by decentralization, I mean the ability, or inability, of a group of individuals to manipulate any aspect of the network.
THE ACCESSIBILITY OF BITCOIN
We must also remember that Bitcoin is public. It does not ask for permission or discriminate anybody, it is inclusive by nature. Today, more than half of the world doesn’t have access to the financial system, and therefore it is very difficult for them to prosper. Bitcoin changes this. It gives the opportunity to anyone in the world, only having internet access, to be able to accumulate their wealth in a solid currency, which doesn’t depend on a government, which tends to maintain its value and which can be accepted by everyone. How can people who live in poor areas such as Africa opt for an improvement in their quality of life, if the only way to save the value that they generate with their time and effort is in state currencies, which are corrupt most of the times, that lose value due to inflation and that are often worthless outside the country? They are destined to live in poverty. Bitcoin does not solve the world by far, but it gives each of us an opportunity to be able to safely store our wealth. The same opportunity for every human alive. Anywhere in the world. Without a single prejudice.
BITCOIN: SCALABILITY AND ROBUSTNESS
Some think that Bitcoin will never be scalable enough to be adopted globally, as they compare it to Visa, capable of doing 50,000 TXS. But just comparing Bitcoin today to Visa shows a non-understanding of Bitcoin. Visa is rather a third or fourth layer of the dollar system (Dollar — Central Bank — Commercial Banks — Visa / Paypal), and therefore it must be compared with future technological layers that will be developed on top of Bitcoin, such as the Lightning Network case. And those will have much more potential than Visa or its competitors today.
Bitcoin Layer 1 is for high-value transactions that need a lot of security. If we compare it with gold, a payment in gold between Central Banks can cost millions and take months if not years to complete. It is there where we see a competitive advantage. Those who see this robustness and little elasticity of Bitcoin as a disadvantage show that they have too low of a time preference and clearly symptoms of impatience, without understanding that Bitcoin is a project of 30 years or more. Something that is used as money has to prioritize trust and security, therefore network changes must be slow and very deliberate. Instant transactions without limits, the possibility of executing Smart Contracts creating a business logic, and more applications will arrive, but in second or third layers. We cannot and won’t prioritize these innovations leaving aside the most important of Bitcoin, its robustness and its security.
Against this idea many currencies have been born, faster and more flexible to innovate, but which have abandoned the most important characteristic, the base layer: security and trust. In fact, I think that most coins are good for Bitcoin, as they show that those 21 million tokens will always have more value than any other token on any other blockchain.
BREAKING SOME MYTHS
To finish, I would like to break two myths against the total maximum supply of Bitcoin. The first one is the idea that the miners may one day (when the last bitcoin is mined) jointly decide that they want to increase the money supply in order to continue to receive rewards for their work in the network. Even a lot of no coiners will try to defend this position, it is simply impossible, because the miners alone do not have the power to choose the future of Bitcoin. In fact, it was demonstrated with the Segwit case, and also that time when the miners (with the support of many exchanges and wealthy people on the network) wanted to increase the size of the blocks. Never happened. It was clearly shown that the nodes and users are who can determine the future of the network, who can decide what code, transactions and completed blocks they want to accept. In the case of Segwit (an update that allowed increasing the number of transactions in a block without changing its size) the nodes announced that from that moment on they would not accept any block that did not have Segwit incorporated. The miners saw that overnight all their productive activity could disappear if they did not accept the requirements of the nodes. In addition, we must recover the concept of Game Theory: everyone has different interests, (nodes, developers, users, miners) and none can impose their conditions, since they are usually contradictory in terms of the benefit generated to each group. This makes Bitcoin a solid network, robust and very difficult to change.
Then we have the second conspiracy, that comes to say that new currencies can always be created and, … that’s it. Let’s review this idea. Does the devaluation of the currency of Zimbabwe or Venezuela affect the dollar? No. In fact it only shows that Dollar is more valuable compared to the others. As already discussed, forks and altcoins help Bitcoin prove that it is much more robust and secure. Although this does not preclude the existence of other blockchains with other monetary systems. In fact, we’ve always had various forms of reserve value, depending on their usefulness. Gold was used to hold large quantities of value, but for smaller and daily payments either silver or bronze was used. It should also be taken into account that these new forms of programmable money not only allow the creation of monetary policies, but also business logic and wealth distribution, so it is difficult to believe that there will be only one. Of course, I have the belief that it is difficult for any of them to accumulate as much value as Bitcoin will, and has already done.
I also have to say that I clearly have an optimistic view of what is to come regarding the world of cryptocurrencies. The most important thing for me is the unprecedented ability for everyone to have, in the first place, a solid currency that we can trust and which is free from manipulations. And, in the second place, a type of smart money that can it be programmable, and that, through Smart Contracts, business logics can be created to exploit and evolve the current economy and finances to a secure, decentralized but scalable digital world, and above all, accessible to everyone. A wonderful future awaits us, I am convinced of that
And with this optimistic outlook we come to the end of our journey to understand Bitcoin. There’s just one more post to read. See you there!
Descubre más artículos en el Criptoblog sobre...