Bitcoin and the Technological Evolution of the Financial System

We live in hyper­bit­coiniza­tion, a process basically repricing the world in Bitcoin. This is because Bitcoin is much better than gold as a store of value. For many of the same reasons that people like holding gold, I think it’s a reason­able propo­si­tion that Bitcoin will wind up being valued at least as highly as gold.

Imagining the Future

It’s hard to convince others of this because most people have a hard time imagining a world they don’t currently live in. They can’t envision how the future will be different from today. They can’t picture the impact of new technolo­gies. They dismiss them or write them off as bubbles or Ponzi schemes.

Look at other techno­log­ical changes. In the early 1900s, every­body used horses. Your options for trans­porta­tion were a horse, a horse, and wagon, or a carriage. And within a decade or so, we were using mostly cars for trans­porta­tion with very few horses. In my life, we’ve seen typewriters disap­pear and get replaced by computers. Calcu­la­tors came around, and slide rules disap­peared. We evolved from using film to digital pictures. Technology evolves. It’s hard for people to under­stand how quickly these things can take place.

Credit: Kaye

We used to use gold and precious metals as our only money. They have signif­i­cant drawbacks, though. Gold has a funda­mental security flaw: It’s heavy and hard to carry around. And you can only do business with gold with face-to-face trans­ac­tions. Also, there are issues with its exten­si­bility; it’s very diffi­cult to conduct small trans­ac­tions with gold.

So how did we solve these issues?

We created banks as a techno­log­ical solution to the problems with precious metals. Once you had banks, you could deposit your gold with that bank, and that banker could say, “This person is good for this money.” That made it easier for you to conduct business. 

“We created banks as a techno­log­ical solution to the problems that existed with precious metals.”

More recently, stock certifi­cates came along as a techno­log­ical solution to problems with investing. They made trading a much smoother process. So we see that the finan­cial system also benefits from techno­log­ical evolution.

Money As a Simple Machine

We don’t think much about the money we use. People think, “I use money all the time. Why do I need to think about it?” 

But there are certain simple machines we use all the time that we don’t think about either. The wheel’s a straightforward machine. We use it all the time, but we never think about it. It’s the same with pulleys, levers, screws, wedges, the inclined plane, etc. Money is an essen­tial simple machine that gets ignored too. It’s core to our human existence. 

Related link: Shelling Out: The Origins of Money by Nick Szabo

However, the money we use today is funda­men­tally flawed. Here’s a thought exercise: Decide on a sum that seems signif­i­cant to you (you can decide whether it’s $10,000, $10 million, or something else).

If you had to hold that amount of money for 20 years in just one asset, which would you choose?

Cash?

Treasury bills?

Money market fund?

Gold?

Stocks?

Real estate?

The one loser that people would not want to own is cash. We may not know how the other assets will perform. Still, if we hold cash for an extremely long period, it will become worth less over that period.

“The money we use today is funda­men­tally flawed.”

People don’t under­stand that dollars lose value. This reduc­tion in purchasing power is due to infla­tion. Bitcoin cannot be inflated. Bitcoin’s fixed supply and infla­tion resis­tance make it a superior store of value.

Ideally, money would be a riskless asset that doesn’t deteri­o­rate over time. It ought to be the thing you can hold for a long period without spending it on a consump­tion item or investing it in something like real estate. The great thing about money is it gives us option­ality. So it’d be great if you could hold your money in a riskless way while maintaining that optionality.

Choosing the Best Ladder

Money may not be physical, but it’s still good, and people judge it by certain quali­ties. An analogy to consider: a workman’s ladder. What are the quali­ties which might cause a worker to choose one ladder versus another?

Height, weight, strength, durability, design, materials, etc. People choose a ladder based on those quali­ties, and if 1,000 workmen all choose the same ladder, they make that decision based on the quali­ties of that ladder and how well it fits their needs.

Credit: Dave Dugdale

Yet we don’t think of money this way since it’s just been dictated to us. We don’t see the process of how money became money. But like the ladder, money also has certain quali­ties as a good. Based on our obser­va­tions and judgments, we decide to use a certain currency. Money is also a tool. It’s become so much a part of us that we don’t think about it that way.

So let’s examine the quali­ties we’d want in ideal money; it would be scarce, impos­sible to repli­cate, reusable, portable, highly divis­ible, easy to secure, and easily trans­actable (even at a distance). All that sounds a lot like Bitcoin. To go back to our analogy, Bitcoin is the ladder we want.

“Over time, everyone will end up buying Bitcoin because of its outstanding quali­ties. And the more people come to under­stand this, the more they will want to hold it.” 

A Conservative Investment

I think of Bitcoin as a conser­v­a­tive invest­ment because it’s so superior to gold. The value of it should wind up at least equal to gold’s value. Different types of people will pay succes­sively higher prices for it, though; skeptics will overcome their objec­tions first, then the cynics, and then the haters. And the haters will end up paying the highest price. In the end, Bitcoin will wind up being adopted as the world’s one and only money.

Some skeptics argue, “The govern­ment is going to stop the use of Bitcoin.” 

And the govern­ment could certainly be an imped­i­ment since it could make purchasing Bitcoin diffi­cult. But think about when the internet first came around. There were those who opposed it back then, but banning it clearly would have been a bad idea. Instead, laws were passed to make it easier to use the internet and conduct online trans­ac­tions in a more trust­worthy and business-friendly way. 

If, instead of passing those laws, a country had just banned the internet, it would have suffered in compe­ti­tion with other nations. The same will be true for Bitcoin. The disin­ter­me­di­a­tion that Bitcoin has on the finan­cial system will happen regard­less of whether certain countries actively oppose it. Any govern­ment that tries to ban it will wind up in a disad­van­taged position.

“Any govern­ment that tries to ban it will wind up in a disad­van­taged position.”

Bitcoin as Gold 2.0

“As a thought exper­i­ment, imagine there was a base metal, a scarce gold but with the following proper­ties: a boring gray in color. It was not a good conductor of electricity. It was not partic­u­larly strong, was not ductile, or easily malleable either. It was not useful for any practical or ornamental purpose…

But it had one special magical property. It could be trans­ported over a commu­ni­ca­tions channel. If it somehow acquired any value for whatever reason, then anyone wanting to transfer wealth over a long distance could buy some, transmit it, and have the recip­ient sell it. Maybe you could get an initial value circu­larly, as you’ve suggested by people foreseeing its poten­tial useful­ness and exchange. I would definitely want some.”

 — Satoshi Nakamoto 

I agree with Satoshi. I think of Bitcoin as being Gold 2.0 or digital gold. The payment technology aspect of it is still in its relatively early stages. Still, its value as a scarce item, which you can hold, easily secure, and use to transmit value, is undeni­able. Saifedean Ammous, who wrote the Bitcoin Standard, talks about the idea that the most impor­tant trades we do are the trades we do with our future selves. Bitcoin’s value is clear whether you’re passing wealth along to a future gener­a­tion or just passing wealth along to your future self.

So, in the next decade, even if Bitcoin can’t be used to buy coffee, there’s more than enough value there that you should buy some for yourself. And then, as other people come to recog­nize the quali­ties inherent to Bitcoin, you can sell off little pieces of it as its value increases.

Related link: The Bitcoin Standard: The Decen­tral­ized Alter­na­tive to Central Banking by Saifedean Ammous

People who buy Bitcoin are putting their own personal skin in the game. These people under­stand all the quali­ties mentioned earlier and that Bitcoin is money you can hold outside of the finan­cial system. It’s money you control yourself (if you control your private keys). It’s money that, essen­tially, cannot be taken from you.

As people come to under­stand the proper­ties of Bitcoin, they will want to own some. I think you’ll see Bitcoin reach a value that is unimag­in­able. I think most people can’t imagine Bitcoin being valued at half a million dollars in 10 years. My guess is it’ll be a lot higher than that.