For bitcoin enthusiasts, one of the most compelling aspects of cryptocurrency is its ability to bypass fiat money systems that dilute the value of cash holdings through inflation.
It’s not as complicated as it sounds. Put simply, central banks grease the wheels of their economies by continually printing new money. A higher money supply makes it easier for companies to spend and repay their debt. But there’s a catch: for every new dollar you add to the spending pool, the purchasing power of each individual dollar decreases proportionately.
Again, it’s simpler than it looks: changing the money supply doesn’t magically create wealth or value. If your economy is a nursery and your money supply is pencils, then doubling the number of pencils in the room doesn’t make kids richer. They all have twice as many pencils as before, so they all double the number they offer when swapping toys, books, etc. In real terms, nothing has changed because the new money supply is evenly distributed among everyone in the nursery.
Where the going gets tough – and where bitcoiners have rightly identified the need for a different, fairer system – this is what happens when sourcing and distributing are not equally?
Central bankers say this is not a problem, as they argue that all the money eventually flows to the man in the street – whether through stimulus checks or higher wages or bigger pension funds or whatever route they suggest. In practice, of course, we know this just doesn’t reflect reality.
In the real world, billionaires have been by far the biggest winners in printing money in the age of covid. They took their higher money supply (including large sums of borrowed money, which is cheaper and easier to obtain when interest rates are low) and injected it into asset classes. anti-inflation such as the stock market, real estate, collectibles and so on. The middle classes have done the same, but on a smaller scale: build up their savings during lockdowns linked to the covid, then allocate a good part of these funds to assets that have appreciated well in value.
Now consider the poor and the working classes. The little bonus money they received during the pandemic was either spent on survival or stagnated. Unable to move up the property ladder, they can neither profit from rising house prices nor begin to build equity by replacing rent (the money that goes into someone’s pot. ‘other) by mortgage payments (the money that goes into theirs). Stock markets can, technically, be within their reach, but with a profound handicap due to high transaction costs and a limited understanding of investment strategies (the kind of know-how that the rich just pay someone else to care).
This imbalance translates into one thing: inequality.
If you are rich, you can take more money and use it to your advantage. If you are poor you really cannot. You are stuck with the cash you have in the new economy. And, as we know, the value of these holdings is actively diluted by inflation. The more money we print, the poorer we get.
Interest rates, of course, could save the day – if central banks wanted to them to. When the interest rate exceeds the rate of inflation, each of us can increase the value of our money simply by putting it into a savings account. Corn decision-makers don’t want thatbecause pretty much the only thing holding back the global economy right now is easy access to debt. As soon as the interest rate paid by borrowers rises, the fragile foundations of our economic recovery in the age of covid will crumble. Businesses and homeowners who gorge themselves on cheap loans will suddenly be unable to repay. Waves of bankruptcies and foreclosures will cripple the global economy.
It’s no wonder central bankers – none of whom are working class, by the way – prefer the easy option of hammering the poor. âIt might not be perfect,â they rationalize, âbut everything seems to be stable and everyone I know is doing pretty well! This, in a nutshell, tells you why central banks are the main driver of wealth inequality.
So what to do? Well, as long as central bankers and politicians are in the driver’s seat, there really is no way to change the direction of this economic journey. Those in power will always promote policies that advance their own personal interests, and they will do whatever is necessary to delay a global economic crash – even one that, in the long run, would likely be good for society because it would precipitate structural reforms. to the current broken system.
If there is a solution, it would have to be an alternative monetary system that resists both inflation and central bank manipulation.
No prize for stating the obvious out there: civilization has aspired to have such a system for millennia. The problem is, it’s never been easier to build a monetary network that isn’t backed by anyone and yet protects everyone’s interests so convincingly that ordinary people will entrust their savings to it. Never, that is, until 2009, when the launch of the bitcoin currency network gave the world its first taste of decentralized blockchain technology.
The boring bit
Convincing readers of the technical benefits of blockchain is a bit like convincing overweight people of the health benefits of dieting. The proof is in the pudding, so to speak. And the average person on the street doesn’t want to become an expert in food science – the âhowâ or âwhyâ a given diet works – any more than they do in computer programming.
That said, you can’t understand the genius behind bitcoin without having at least a basic understanding of the revolutionary nature of blockchain technology – so there you go.
Confidence is everything. I have already alluded to the fact that creating a monetary system from scratch is practically impossible because money is only of value if enough people to believe he has value. The simplest way to foster this belief is to have a government commit to upholding – or safeguarding – its value (think of that “promise to pay bearer on demand” that you see on banknotes. Bank). Another, more tenuous, way is to offer a universally attractive asset that has a fixed supply. Gold ticks this box well: it is aesthetically attractive; it cannot be forged due to its unique density; and it can’t be crafted by anyone, so there will never be as much gold on the planet as the planet already has (shiny asteroids notwithstanding).
Then again, gold is a pain in the ass. It’s heavy, so it’s a burden to carry and transfer. It is not easily divisible, so it is difficult to pay specific amounts with it. Few people do their weekly shopping with gold. But what if you could create a digital version gold that weighs nothing, travels at the speed of light and is divisible at the smallest fraction of value. Great. Also impossible. Until 2009.
If you only understand one thing about blockchain technology, let it be this: For the first time in history, blockchains are providing us with truly immutable data.
This means that the information they contain cannot be changed. Already. It takes time to understand how they get there: this is due to the decentralized nature of the ledger, which lists all transactions ever made on the blockchain and is secured by 1) the number of existing copies (full nodes, all of which are cross-checked relative to each other); 2) the process by which new data is written (cryptographic encryption); and 3) network energy consumption (the hashrate, which makes it impossible to control – or change the course – of the encryption process). Maybe I lost you there. But the end result is not hard to grasp. Once you have immutable data, you have the ability to create standalone digital currency.
By ensuring that Bitcoin’s transaction history can never be changed, humanity has created a digital asset that meets five of the criteria of money: it is durable, portable, rare, divisible, and fungible (interchangeable ). The final criteria – people’s acceptability or willingness to conceive of bitcoin as real money – will be determined not by its technical characteristics but by humanity’s attitude towards it. In the increasingly digital age, the outlook is bright.
Critics of Bitcoin – and there are many; typically middle-class elderly people who have become very wealthy from the status quo – cite a different definition of money: that it must be adopted by society as a medium of exchange; a unit of account; and a store of value.
Bitcoin is failing on all fronts, they say, because too few people use it on a daily basis and the price is too volatile to measure or store value. Maybe today. But it also reached a market cap of $ 1,000 billion in just 12 years. Isn’t that progress fast enough?
And what about the dollar and other fiat currencies? Are they practical means of exchange beyond international borders? Do they give us stable and predictable prices year after year? More importantly, are they a store of value in times of high inflation? If you’ve ever complained about the rising cost of living, you already know the answer.