“woman wearing white dress shirt” by Icons8 team on Unsplash

Bitcoin is just the mirror image of fiat… only worse.

A nickel ain’t worth a dime anymore. — Yogi Berra

“photo of dollar coins and banknotes” by Mathieu Turle on Unsplash

Bitcoin has undergone massive deflation since 2010 when 10,000 Bitcoins were used to buy a couple of pizzas. Today, the same coins would buy over $60 million, and at one stage almost $200 million (Dec 2017).

Imagine if instead of deflation, inflation had resulted in $60 million in 2010 being worth only $47 today. What an outcry there’d be!

Inflation transfers wealth from the holders of money to the holders of assets.

Deflation transfers wealth from the holders of assets to the holders of money.

Bitcoin is designed to be exponentially deflationary, as the number of units is essentially limited to 21 million coins, while demand for currency is in the hundreds of trillions of dollars globally.

Ideally, money should not be subject to inflation or deflation, though a small amount of inflation (a few percent pa) is not a major problem, as most people spend their money soon after receiving it, while investors aim to get more than inflation.

A stable unit of account is required to measure profit and loss. It is also required for people to budget their expenses.

On both accounts, Bitcoin is totally unworkable.

That’s not to say that the current system is perfect. Plainly it is not.

Plainly we need a stable currency that does not rely on the survival of any specific organization (bank).

Plainly, Bitcoin is not the answer.

Bitcoiners seem to think that money alone ought to provide wealth: hodl it and get rich.

If we are to create a new paradigm that creates real wealth (food, shelter, clothing, energy, transport, communications, knowledge, etc) we need to see money for what it is: ‘information’ pure and simple.

The purpose of money is to ‘measure value’, not ‘have value’.

Units of money are no different to inches. How could we ever trade anything that was purchased in inches (eg a length of timber) if the length of an inch changed all the time?

Bitcoiners often equate ‘exchange rates’ between fiat currencies as analogous to prices on crypto exchanges. They are not.

Despite forex speculation, the rates between currencies ultimately reflect the relative worth of the underlying economies (based on their relative natural, built, human, technological and organizational resources).

Crypto has no such ‘backing’. It is all speculation based on the rise in unit values driven by demand for the units themselves!

What we need is a crypto unit that is ‘stable’ in relation to the worlds resources (given it is accepted globally)

For this, it is imperative that the number of such units increase in line with the growth in quantity of those resources… without changing ‘purchasing power’.

That is, the ‘purchasing power’ of one unit (what it can buy in terms of ‘real resources’) needs to be relatively stable over time.

When a person exchanges real goods and services for money, neither are ‘getting more value than they are giving’.

Only one person (the seller) is giving ‘real value’ (in terms of the goods or services sold).

The buyer is giving nothing of ‘real value’ in return. All they are giving to the seller is a ‘record of the value provided by the seller’ (this record, we call money).

Under current social conventions, all members of society accept that the seller has provided the value recorded on the token (money). That is, in the absence of evidence to the contrary, we accept money has not been stolen or acquired unlawfully; that the person presenting it has earned it, or lawfully borrowed or been given it.

Under these circumstances, it is accepted that the seller can take back out of the community (via any member offering goods or services), the same amount of value they originally contributed (when they sold their own goods or services).

The amounts of value being bought and sold are deemed fair where there is competition between many buyers and many sellers who have the same knowledge and power. In this case, ‘the market’ decides ‘fair value’, as no seller will sell for less than they could get from another buyer, and no buyer will pay more than they could buy from another seller.

After spending the money, the seller and society will be square. The seller will have got back what they put in (based on ‘fair market prices’ for all goods and services).

The seller will have spent money acquiring and transforming inputs (labour, capital, energy, materials, etc) into the finished good or service.

So long as all transactions are measured using a standard monetary unit that retains its purchasing power, the difference between the sell price and costs will represent the actual value added by the seller to the inputs through the transformation process. This ‘value added’ is the profit. In the case of retail, this may simply mean having the good in the right place at the right time.

The seller gives the buyer actual value in the form of goods or services that the buyer wants, when and where they want them.

The seller gets no more nor less than a ‘record of the value provided’.

Unless and until the crypto community understands the nature and role of money, there is little hope that it will deliver a system that improves on what we have.

However, I am optimistic that it will :)

As for creating a ‘stable crypto’, one way to do this is for each Central Bank to issue a national crytpo currency that is held on a distributed global ledger that would transcend national borders.

Once issued, the crypto could not be arbitrarily frozen. Nor could it be lost due to the failure of any organization, or group of organizations.

However, it would be subject to law.

While people living in authoritarian or failed states may not like their law, every community needs some form of governance to manage disagreements and to rectify criminal activity.

Where a court agrees to confiscate crypto funds, a majority of the ‘nodes’ managing the global network would be able to freeze the funds, reverse transactions and remit the money as directed.

Like any crypto, it would also be subject to tax.

The Central Bank can then issue as much national crypto as needed to keep the purchasing power relatively stable within the country. As more is needed to represent more transactions, the Central Bank simply creates and issues it.

There is two ways this can be done:

  1. an equal amount to everyone as a Universal Basic Income.
    As this is paid to everyone equally, there would be no need to repay it
  2. people borrow and repay it.
    In this case, the borrowed money gives the borrower the ability to consume resources they have not earned. By working and/or investing, they can earn the money to repay the loan. Once repaid, they and society would be square, they will have put back in what they took out when they first spent the proceeds of the loan.

The amount issued as a UBI could be set objectively to achieve the Central Banks twin aims of low inflation and low unemployment. A full explanation of how this would work is covered in this post: If the ‘idle rich’ can have money without working, why not the rest of us?

The process of issuing and managing loans could be done by commercial banks and similar organizations as agent for the Central Bank. Those organizations would assess borrowers and approve loans and pursue defaulters, earning interest on the loans as now.

In return for operating this service, the banks would remain liable for defaults, keeping them honest.

As the money would not be on the banks books (it would be in the global ledger), if any bank lent unwisely resulting in heavy losses, they could be allowed to fail without any impacts on the financial system. The only losers would be the defaulting borrowers (who would be pursued by the banks administrator), the banks officers and employees who would lose their jobs, and the bank’s shareholders… as in any failed business.

If inflation starts to kick in, a simple flat % tax can be levied on all spending (which effectively increases the price of all goods and services, damping demand, reducing inflationary pressures).

The money raised in tax would be kept on the Central Banks balance sheet until it needs to be re-circulated.

This process of issuing and money and taxing spending ensures the amount of resources that any unit of crypto can buy (its purchasing power) remains relatively constant over time, allowing business to accurately account profit and loss, and everyone else to budget expenses against income, while keeping inflation and unemployment low.

To grow wealth, people would have to invest in real businesses delivering real goods and services. If the value of the goods and services is greater than the cost of their inputs, wealth will naturally accrue.



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