In Could Central Banks Dump Gold In Favor Of Bitcoin? at Zero Hedge the article leads with this graph (below) and this question: Is the Bank of Japan printing this much money (with no underlying value or safeguard of further inflationary depletion of value) any more trustworthy than Bitcoin?
It’s a damn good question.
ZeroHedge.com has been the entry level curriculum for my understanding of cryptocurrency and reminded me of another article that showed how the US Federal Reseve System was no better. But it also pointed out that unlike nearly all central banks – Bitcoin isn’t built on debt.
Crypto-currency is not debt
Crypto-currency is built on mathematics, open source, consensus and decentralization. These attributes combine to give us a monetary system with defining characteristics which set it apart from the current, fiat based model:
It’s Inelastic because as we all know there are only a set amount of coins that will ever be created. This is in stark contrast to the supply of money in fiat terms. As somebody jokingly tweeted the chart I included from Part 1 “Wow look at that bitcoin price! Oh wait, that’s the chart of the money supply”?—?more on this below.
This inelasticity makes Bitcoin and any other similarly constructed crypto-currency….
A deflationary currency is closey related to being inelastic, but we need to look specifically at the deflationary aspects of Bitcoin because conventional economic thought is that “deflation is bad”, and it is?—?if you’re using debt for money.
The reason why is because debt-based money, enabled by fractional reserve banking allows monetary units to “exist in two places at once”, so to speak. When I first started thinking about and researching all this economics and history stuff, it was in the immediate aftermath of the crashing of the dot com bubble. It was then when I realized that I had no understanding of economics, or finance and ultimately, money. So I began a “deep dive” into these matters which continues to this day.
One of the first books I read about it was Ferdinand Lips “Gold Wars”. Lips, Swiss banker, and expert on the Classical Gold Standard was reputed to have been the cryptic and anonymous “Friend of Another (FOA)” financial and gold markets commentator of the late 90’s (foreshadowing of Satoshi Nakamoto?).
When I pulled out my copy of the book recently I found I had scribbled the following into the back cover after I had finished reading it:
“Gold, like every other ‘normal’ thing cannot be in two places at once. Fiat money, however, is credit, redeemable into nothing, that is simultaneously counted as ‘money’ by multiple parties?—?this works as long as the bubble is growing?—?but can’t work if it starts to contract. If N parties hold the same ‘fiat’ and one suddenly uses it to retire debt, N-1 parties have the carpet pulled from underneath them. Because under a paper fiat money system, reducing debt (either by paying it off or defaulting) reduces the money supply”
My understanding of this today, is that Bitcoin is inelastic and thus deflationary. It has no counter-party risk (but there is consensus risk, but fiat has it as well), and it solves “the double-spend problem”. Fiat money, by contrast is one big double spend problem. The defining characteristic of inflationary debt-based money is mathematically and cryptographically eliminated under crypto-currency.
Read the rest of that article here.