On Cryptoassets
Several problems currently exist within the United States financial system and global economic landscape that are significant enough to mention before entering into the discussion of cryptoassets and Bitcoin. Of these problems, the most destructive and threatening is the inflation of the money supply. As a consequence of the termination of gold convertibility (initially in 1914 and entirely in 1971) the flow of US Dollars has been radically increased relative to its stock and this inflation has been largely controlled by politicians and central bankers. The agency problem of a monetary system manipulated by bureaucrats facing reelection pressure and seeking only to satisfy the short-term desires of their voters has allowed for the perpetual debasement of the US Dollar with no effective form of accountability. This inflation has been supplemented with the misuse of fractional reserve banking. As banks overextend credit markets beyond sustainable risk profiles, there are no ensuing consequences for their misjudgments because their incentive structures have been mis-calibrated by centralized actors. While the fractional reserve system is not inherently destructive, the problem comes with increased government intervention. Interventionist policies such as quantitative easing and interest rate management have perpetuated this problem and caused a plethora of economic consequences including the incessant growth in prices, massive amounts of debt, and the growing division between economic classes.
Austrian Economist Ludwig von Mises argued in his defense of sound money that money which is collateralized by an underlying asset such as gold guards against inflation and hyperinflation by keeping the government accountable in its monetary practices. Under such a system, the amount of money printed, would be constrained to the amount of gold mined. Mises’ staunch defense of sound money and the gold standard was solely in order to protect the economic rights of citizens, mitigating inflationary practices brought on by an untethered monetary system. In The Theory of Money and Credit Mises stated, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights”.
It is my firm opinion that any discussion pertaining to cryptocurrencies, specifically Bitcoin, must be done under the lens of monetary history, the notion of sound money, and the disastrous consequences of rampant inflation. Bitcoin has introduced an organic market solution to traditional fiat monetary systems. Much like gold, Bitcoin contains the same “intrinsic properties” of sound money: scarcity, divisibility, portability, durability, recognizability, and fungibility. However, Bitcoin has additional advantages compared to gold due to its decentralized and digital components. Gold’s physical clumsiness led to a chokehold of reserves in centralized vaults, allowing governments to confiscate the majority of its supply and issue certificates on a fractional reserve basis. Bitcoin by contrast can be transmitted across borders on a permissionless basis in mere seconds. Digital asset custody can be performed securely on a user autonomous level with relative ease.
Bitcoin’s greatest feature is its highly deterministic inflation schedule. With inflation algorithmically embedded into the source code at a limited and constant rate, no one person or entity can debase the purchasing power of holders for their own aims. Furthermore, Bitcoin utilizes difficulty adjustment retargeting, which keeps the inflation schedule pegged in constant time intervals regardless of the computational resources being expended to the mining process. This procedure cannot be said for any other form of commodity extraction and allows for a completely predictable monetary policy. My appreciation for cryptocurrency ultimately stems from its ability to replace expensive, corruptible bureaucracies with computational integrity and mathematical certainty.
Many cryptocurrency projects, ICO’s, hard-forks, and borderline scams have come into existence since Bitcoin’s inception, and I believe almost all of them to be substantially inferior to Bitcoin. Thus, a large portion of this paper has been dedicated to expounding upon my admiration for the Bitcoin protocol and its potential to reshape global economic systems for the better. In an effort to tip the scale back in favor of personal economic freedom for the common citizen, Satoshi Nakamoto created a network capable of running independently from any governing party, he then stepped away from this creation and remained anonymous, allowing it to run on its own and revealing the resilience of his creation and his own altruism. This ‘immaculate conception’ is another fundamental facet to Bitcoin, and one which separates it from the thousands of other cryptoassets.
By removing himself from his invention, Satoshi ensured that the Bitcoin network would remain resolute, withstanding the test of time; this is a feature, not a bug. The same cannot be said for the many other tokens which have lived and died during Bitcoin’s ten-year lifespan. These coins are run by presidents, teams of developers, marketers, and sometimes spawn armies of twitter bots. It is often the case that a few individuals possess the ability to alter the protocols of these networks and compromise the monetary policy of the token with merely a few lines of code. While I am not bearish on every single token aside from Bitcoin, I do hold to the thesis that many coins in the space are incredibly overvalued, with limited propositions for value, and could stand to suffer significant price corrections. Furthermore, many tokens sacrifice security, governance, decentralization, and sound money fundamentals in an effort to appear more user-friendly and scalable; the reality is that many of these ‘features’ they advertise can be achieved through 2nd layer applications (i.e. the Lightning Network) and sidechains on the Bitcoin Network. Nevertheless, I am bullish on a network backbone/smart contract based system such as Ethereum to accrue value in the space, and there several other projects which show promise such as: Dharma (applicable use of high-volume crypto debt markets), Decred (implementation of autonomous governance), 0x (decentralized peer-to-peer exchange), and Zcash (privacy token with zero-knowledge proof implementation).
While cryptoassets remain an emerging asset class with an uncertain future, the growing number of scalable applications and layer two technologies on the Bitcoin network contribute to its continued dominance in the space. The year-long bear market which still grips the crypto world has given developers, investors, and traders the time to humbly build, consolidate, and introspectively evaluate the space and their place within it. The continued downward price pressure has been problematic for many ICO companies and their ‘products’, this is a necessary step in the development of the industry. The turbulent nature of these markets has provided investors with years of market experience on the harsh lessons of bear markets. Despite this continued selling pressure which may continue through Q1 of 2019, I remain bullish long term on the value potential and revolutionary technology at work within the Bitcoin protocol.
The distributed nature of Bitcoin’s monetary policy provides a trust-free flow of transparent, unalterable, information. Well-designed blockchain systems like Bitcoin have the capability to completely transform all value transactions, not simply those related to finance. While the current fiat system of continual debasement stands on the precipice of a serious economic event, Bitcoin provides the ‘sound money’ foundation for a revolution back to fundamental Austrian economics.
