September 20, 2020

Bitcoin Monetary Applicability

The phenomenon of Bitcoin to the world ten years ago, as a new financial system, aroused keen interest in the field of monetary economy. After a century of fully nationalized money-making systems and about five decades of the state standard of unchangeable paper money, the battle for a stable currency seemed long lost. The return to gold, even in the circles of Austrian thinkers and free market thinkers, became an increasingly less practical approach, and it seemed that there was nothing left but to wait for the inevitable collapse of the modern monetary system, which we, perhaps, have approached several times [1] . The struggle in the intellectual arena also seems to have ended both from an academic point of view and from the point of view of the general public. With very few exceptions, such as in the case of Friedrich Hayek, most prominent publicly recognized economists were followers of the Keynesian monetary approach. Therefore, they supported monetary nationalism [2] and the introduction of paper money as legal tender, both a cost-effective alternative to gold, and funds for state financing and “fine tuning” of the national economy.

While social and scientific struggle forstable money could be declared lost, the development of new technologies led to the opening of new borders, and the search for a digital alternative to money began. A small unorganized group consisting mainly of individual computer scientists and cryptographers, called Cypherpunks ("Cryptographic Banks"), began to explore new possibilities of computer networks and cryptography in order to make people more free, which included attempts to create open digital money. Thanks to the pioneering work of David Chaum (DigiCash) on digital payments and various other follow-up research and practical initiatives, especially Adam Back (HashCash), Wei Dai (b-money), Nick Szabo (Nick Szabo) (BitGold) and Hal Finney (RPOW), such attempts to introduce digital money began to accumulate. These efforts, although they were interesting in their merits, still could not either create a working system or gain sufficient strength to have any significant impact on financial issues.

The introduction of Bitcoin, around the end of 2008,perhaps the most important turning point in money matters since 1971, when the Bretton Woods system collapsed, which led us to the immutable paper standard today. Although not immediately, the growth of Bitcoin as a new form of money began to accelerate. Now, about ten years after its creation, it regularly makes headlines and is even discussed in the US Congress. Bitcoin's wild success attracted a lot of attention to the field of the monetary economy and revived the lost battle for stable money.

At first, Bitcoin received only negligible attention and an exceptionally skeptical reaction from both sides, who considered it to be nothing more than a bubble or a passing trend.

However, over time and every year, growthBitcoin accelerated, it began to receive some attention, gaining its intellectual allies and rivals. Of all economic schools, the Bitcoin phenomenon seemed to fit only under the theory of the Austrian school. There, he is still still being discussed with great enthusiasm among his many supporters and skeptics.

On the other hand, within the restBitcoin's economic schools are still seen mostly as a bubble, “market irrationality,” or a trend that is about to collapse. The incompatibility of Bitcoin as money, not backed up by government power, with their economic theories in general and their ideas in the field of the monetary economy in particular, completely hid from them the simple possibility of the emergence of new money like Bitcoin. Despite the relatively small (but growing) support and strong opposition from the academic community, Bitcoin has continuously developed and established its currency status as more economically significant than many national currencies [3].

Figure 1. Bitcoin's market capitalization compared to national currencies and precious metals.

At the moment, it has already become clear that Bitcoincan no longer be ignored, but should be carefully studied and investigated. It seems that an understanding of his nature can reveal both the reasons for his success and the approximate expectation of what awaits him in the future. In the previous two articles [4] I set out some basics of understanding the economics of money, their nature and essence from the point of view of the Austrian school. We started by studying the nature of money as the best-selling product that imposes the lowest economic costs on its holders for future exchanges. Then we continued to study various factors affecting the feasibility (market attractiveness) of goods, and, therefore, the likelihood of their appearance as money on the market [5]. In this article, we use this knowledge and apply it to Bitcoin, exploring it from the point of view of the monetary economy.

The monetary properties of Bitcoin

General monetary properties affecting suitabilitygoods for use as money, such as its divisibility, portability and durability, are usually inherent in the physical composition of the goods. The physical limitations caused by this over the years greatly influenced the specific nature of money. For example, the physical restriction of dividing gold into small enough denominations for use in low-value transactions prevented its (physical) use in many transactions, forcing people to resort to less valuable metals such as silver and copper, and later to money certificates.

The emergence of Bitcoin as the first digital formof money has allowed us to circumvent these “physical” limitations of money and scale them to the almost limitless limits of the digital realm. In order to understand how Bitcoin allows us this improvement in monetary properties, a basic understanding of how it works and how Bitcoin is presented in digital form is required. Bitcoin, in its “primary” form, is software that automates the achievement of consensus on the ownership (conditions under which it is allowed to spend) of Bitcoin units. In other words, Bitcoin in such a rough form is a list of expendable amounts and conditions for their spending.

Since Bitcoin, unlike previous onesmonetary assets, based not on physical ownership, but on an agreement on the terms of its spending, we should divide the discussion of its limitations into two levels of consensus. The first, commonly referred to as on-chain, is the level of global consensus we just described. It is the ultimate source of truth for determining ownership of Bitcoin units. By nature, being mandatory for all participants, the level of global consensus is relatively rigid and restrictive. Thus, this gives us a somewhat moderate degree of improvement in terms of monetary properties. For example, the divisibility of Bitcoin here is represented by one “Satoshi,” which is equivalent to one hundred millionth of Bitcoin. The division process itself requires a change in the spending conditions assigned to the associated units, that is, they must be "spent" to divide.

It should be noted that, despite the limitationunit size, it can be scaled, if necessary, by changing the mechanism of global consensus. Such changes, although extremely difficult and expensive, are nonetheless feasible and provide us with a certain level of improvement of the asset itself as new needs arise over time [6]. The ability to change the technical monetary properties of an asset is an unprecedented opportunity introduced by Bitcoin, and already gives it a significant advantage over its predecessors.

The second, called off-chain (off-chain),uses the nature of Bitcoin both as a consensus-based digital asset and as programmable software, allowing interacting parties to create a “subsection” of Bitcoin consensus and complete transactions in this subsection using various mechanisms. If we consider Bitcoin's portability as an example, then, while it can be undeniably cheaply and easily be moved between physical locations, the transfer of actual ownership (changing spending conditions) of Bitcoin at the onchain level is somewhat limited, allowing about 600,000 final calculations ( transfer of ownership) per day. However, since transactions are usually concluded between cooperating entities wishing to complete the transaction, the off-chain level allows them to use various designs to achieve consensus. Thus, this allows them to scale the transaction throughput to almost infinite limits of the physical movement of electronic data. There are many options for such designs, many of which are currently under research and development, each of which offers completely different compromises for the subjects of the transaction. Vivid examples are the Lightning Network [7], which offers untrusted and instant transactions, mainly with some liquidity restrictions, and sidechains, such as Liquid, which offers benefits such as high-speed and confidential transactions and the issue of assets under the control of a federation of trusted entities that manage a consensus subsection for their customers.

In conclusion, the analysis of monetary attributesBitcoin, we see how the transition of a monetary asset from the physical to the digital sphere allows us to achieve not only unprecedented improvements, but also a high level of flexibility in the monetary properties of the asset. Thus, we can conclude that Bitcoin, in terms of its “innate” properties, is unprecedentedly superior to all its predecessors. With that in mind, it seems that Bitcoin deserves further study of its suitability as money. Thus, we will continue with what is probably the most controversial and innovative aspect of Bitcoin - its production and offer.

Bitcoin Production

Before Bitcoin appeared, the task of producing digital money on the market seemed almost impossible from the point of view of the authors of the monetary economy.

Prof. Jörg Guido Hülsmann (Prof. Jörg Guido Hülsmann), an Austrian economist specializing in monetary economics, expressed this widespread belief in one of his books. He states that “an economic product that is fully defined in terms of bits and bytes is unlikely to ever be spontaneously produced in the free market” [8]. Coincidentally, he published this in October 2008, two months after the first article on Bitcoin was published, and about three months before the first bitcoins appeared.

Bitcoin's invention really requiredfinding a solution to a problem that was not solved at that time - the ability to create a digital deficit with a controlled proposal (solution to the “double spending problem” / "double spending problem"), regardless of the trusted entity. The creator of Bitcoin solved this problem by introducing a mechanism that is now commonly called the “Nakamoto consensus” [9] - which is the solution to the problem under discussion. The main idea is open competition between computers in finding a solution to a mathematical problem. This task is similar to a lottery in the sense that the only known way to find a solution is by random guessing, and the chance to find a solution remains unchanged for each assumption. This process requires computational power, which is mainly limited by the availability of energy for computers. Adam Back originally proposed a similar process as part of the HashCash system in 1997. Bitcoin works similarly to this proposed mechanism, but the critical point where Bitcoin excels it is the ability to set a strict production schedule for new units.

Bitcoin achieves this using peer to peera consensus network (of which we spoke above), to ensure compliance with and verification of monetary rules and schedules, as well as automatic periodic adjustment of the computational work necessary for the production of new units, which regulates the complexity of tasks and, therefore, the production speed in accordance with the schedule.

Unlike previous monetary assets, suchlike gold, silver and seashells, which were based on certain physical limitations and shortages of their production, as well as in contrast to the existing paper money system, which relies on a reliable issuer (central bank) to make money, Bitcoin relies on a purely mathematical system for its production. This feature allows you to objectively and universally verify the reliability of a Bitcoin unit and ensures fair and open competition in its production. Anyone can freely participate (and stop participating) in this competition, consuming computing power, having a probable chance to produce Bitcoin, which is directly proportional to the calculations.

Money production and external factors

Historically, the production of the substance of money has always beenIt was expensive, both from a direct and indirect point of view. For example, cattle, which was used as money in many nomadic societies, was expensive for growing (“production”) and led to some completely unexpected side costs, mainly because of the great need for pasture necessary for raising it [10]. Take gold as another example. It is also very expensive to produce, since the gold mining process requires the processing of many tons of soil just to get a small amount of this precious metal. The collateral costs of gold mining are also very unpleasant due to the possible military seizure of gold mines and the dangerous and sometimes forced labor, which confronts us with many economic and ethical problems.

Marco Polo was perhaps the first to introduceto the Western world, it would seem, an impressive concept of paper money, which he observed in China [11]. Since he made this discovery, the appetite of rulers, bankers, and intellectuals for easy money has constantly grown. The first European experiment with light paper money took place in 1661, when the Swedish central bank Stockholms Banco began issuing banknotes. This practice led to the bankruptcy of the bank only three years later, but it seems that this failure only increased the desire for new experiments on the part of rulers and bankers. As for the intelligentsia, the desire to make money production more “efficient” was obvious from the very beginning of the development of political economy. The idea really finds support among early economists such as Adam Smith and John Lowe, who considered the use of precious metals as an inefficient process [12]. They, along with many other economists, especially of our time, sought to reduce the cost of money production, which means to make it more efficient by replacing the substance of money with such cheap alternatives as paper. They believed that such an alternative monetary system could function in the same way as the precious metals system, with only a much lower share of production costs. This difference between production costs and the “face value” of money is just what we can call “easy” money, which we must distinguish from “hard” money. Thus, from this superficial point of view, the difference is that easy money incurs insignificant costs for its production, while hard money is expensive to produce.

The problem of easy money and the reason why suchtheir theoretical supporters, like David Ricardo, opposed the implementation of this concept [13] - these are external factors, hidden costs and risks that it entails. It is well known and generally accepted that truly easy money could never appear on the free market. This is due to the fact that for any product market participants will be ready to increase production and its costs up to the point where it will no longer be profitable to increase production. This means that if we tried to establish an easy money system in the free market, then market participants would start producing it in such quantities that the cost of each currency unit was approximately equal to the costs of its production, canceling the supposed "efficiency" of easy money. Thus, all attempts to introduce a system of easy money required the state to grant a monopoly privilege on the production of money to a specific entity, usually known as the central bank. Since market participants were legally deprived of the opportunity to participate in the production of money, proponents of easy money believed that they could successfully reduce the cost of producing money to the simple cost of printing paper banknotes.

However, such an almost intrusive look of theseeconomists on direct and very noticeable costs of money production did not allow them to discern the many hidden costs of easy money. The first, and probably most obvious concern that Ricardo expressed was the risk of abuse of the system. From numerous scenarios of hyperinflation to less visible moral dangers [14], the easy money trap brought various risks and was repeatedly abused by those who had the opportunity to take advantage of this. This problem alone should clear up the easy money trap. Efficiency of easy money is low in comparison with the fatal risks and moral damage that they cause. However, there are two more aspects in which the fallacy of cheap money is discovered.

The second aspect that we can consider isthese are the actual costs of operating such a system. With bloated bureaucratic structures typical of all state institutions, and with hundreds of thousands of central bank employees, it is hardly disputed that the supposedly “cheap” and efficient paper money system is really more effective today than hard money [15]. In this regard, it should also be noted that gold mining for monetary purposes is still ongoing to a large extent. Thus, these additional costs of the cheap money system are mainly in addition to the costs of the previous system of hard money, and not instead of them. The problem becomes even worse when we understand the important fact that, although regulation has excluded market participants from direct money production as such, they will still spend as much resources as is still beneficial for forecasting and influencing the policies of central banks. Supporters of easy money obviously did not take into account the willingness of market participants to continue to maximize the benefits of money production, and the jobs of many analysts, economic forecasters and lobbyists are the result of this indirect inefficiency of easy money.

The third and most important issue thatcause easy money - this is the manipulation of the market process. The market uses money as a tool for allocating resources, while money holders direct the market in accordance with their needs and requirements. However, when using easy money, their producer (central bank) has the right to unduly influence the distribution of resources. In fact, we can say that he practically takes control of the market, since he can cheaply create money for himself in order to direct resources at his discretion. Thus, in an economy with easy money, authority to allocate resources transfers from the market to those who control the central bank. This distortion of the market gradually puts the entire economy in an indirect centralized planning mode. In combination with the moral dangers associated with the production of cheap money, this process is accelerated even more, which entails the devastating consequences of centralized economic planning, veiled under the guise of market phenomena.

As we can see, easy money does not reduce spending onmoney production and do not make them more efficient in any sense. The only function they perform is to directly reduce the explicit costs of producing money, while disproportionately increasing the hidden, implicit ones. Two main conclusions can be drawn from this analysis. The first and more obvious: easy money is not only ineffective, but can also be destructive due to risks and external factors. Secondly, it should be noted that we should strive to ensure that the process of money production is obvious and transparent in order to minimize such risks and unexpected external effects.

When you look at Bitcoin, it immediately catches your eyeone of its great features is the production process. The most significant and expensive part of Bitcoin production, as discussed above, is the process of converting energy into electricity and converting it into computing power. Although all types of production require the use of energy, most other processes require its use by very indirect methods and, more importantly, in very specific places. For example, the production of gold requires both considerable human labor and many complex types of machines, but more importantly, it requires miners to use them in certain places (gold mines). Thus, gold not only causes many difficulties for its production process, but also forces people to mine it only in certain places. Bitcoin production, on the other hand, allows any person anywhere in the world [16], where there is an unoccupied source of energy, to use it for the production of Bitcoin. This unique Bitcoin production process has three main advantages, which we will discuss here.

Firstly, it makes competition for productionmoney more fair and open than ever, eliminating many spatial restrictions and providing a truly effective process of market competition. Secondly, by making the production process so simple and straightforward, Bitcoin reduces the hidden costs and externalities associated with the money production process. This reduction of external factors makes the system much more stable as a whole and allows us to better understand the consequences of its use. Thirdly, the production of Bitcoins, eliminating territorial restrictions, allows the use of energy sources that were previously unsuitable for use due to such restrictions. Ruthless competition in the production of Bitcoins forces its producers (often called miners) to minimize their costs in order to be more efficient than their competitors. This competition requires them to constantly search for the most efficient energy production process, which will minimize the subsequent cost, and both theoretically and in practice it seems that this most efficient source should be found in renewable energy sources. Energy naturally available from these sources, such as sunlight, water, wind, and many others, is much cheaper than traditional sources, since it is abundant and mostly not used. Although transportation costs for such energy limit its applicability for many everyday purposes, the production of bitcoins does not have such territorial restrictions. Thus, the production of bitcoins contributes to profitable financing and the development of renewable energy sources and stimulates progress in the field of energy production [17]. Therefore, it is not surprising that most of the energy used to produce Bitcoins comes from renewable sources [18], making the production of bitcoins perhaps one of the cleanest sectors of the economy.

To summarize, we can say that for reasonsAs discussed above, the production of bitcoin seems to be the most desirable process for the production of money of all possible. The fact that it is hard money, combined with their simple and transparent production process, open and direct competition and seemingly positive external effects, makes it significantly superior to any of its predecessors. The second important consideration, which is usually related to the process of making money, is the question of their proposal, and this is our next topic for discussion.

Bitcoin offer

Due to the fact that Bitcoin is foundedOn software assets, its offer, unlike previous natural money [19], is under the complete control of Bitcoin users. This is essentially the most important part of its consensus rules, and it is limited to approximately 21 million units of Bitcoin. This is commonly referred to as the “monetary policy” of Bitcoin and is supported by the economic activities of each member of the Bitcoin network. The decentralization of Bitcoin as a peer-to-peer network means that there is no central entity authorized to dictate Bitcoin's monetary policy. Although it is theoretically possible to change this policy, such a change in practice does not seem likely or even possible, therefore it is not considered in the framework of this article.

Bitcoin's policy contrasts sharply withthe dominant policy of central banks today. From the very beginning, these institutions have been pursuing a policy of constant increase in the money supply. Such an expansion policy is generally justified as necessary for the “common good," because it supposedly allows the government and its "highly qualified" economists to promote economic growth, reduce unemployment and fight the business cycle - a task they have failed miserably over the past hundred years during which these problems seem to have only worsened [20]. In current discussions, the monetary policy of Bitcoin is usually considered by the majority to be quite radical. Many critics of Bitcoin argue that the lack of a flexible monetary policy, that is, a policy that can be changed in accordance with the anticipated needs of the emerging circumstances, prevents Bitcoin from ever getting significant distribution.

However, the point of view about the need or evenThe need for flexible policies began to receive significant support only in the last hundred years. Therefore, it is relatively new compared to the thousands or perhaps tens of thousands of years of the existence of money [21]. Moreover, upon closer examination, the modern experiment with flexible monetary policy, conducted and managed by central banks, could not achieve any of the goals that were set [22]. The list of these unfulfilled promises from our central bankers includes the inability to tame the business cycle, the inability to maintain a consistently low unemployment rate and the complete inability to maintain the value of money and the general price level [23].

Figure 2. Purchasing power of the US dollar (1913–2013). During this period, the US dollar has lost at least 95% of its purchasing power.

Justification of a flexible monetary policy,which many today take for granted as a necessity, is completely unconvincing in terms of its real merits and results. Moreover, her completely indisputable failures before this modern attempt are not even mentioned [24]. Moreover, this statement becomes even weaker if we take into account more than 50 economic collapses caused by hyperinflation only in the last century, which could not have occurred if it were not for the existence of an elastic monetary policy [25,26].

Full criticism of the ailments of modern centralbanks and the errors on which their theories are based is beyond the scope of this article. An interested reader may find links to such works in footnotes [27]. For our current goals, we will focus on the most notable arguments about why an elastic monetary policy is undesirable and why Bitcoin's limited supply is its advantage over its predecessors. Let's start by exploring the idea of ​​“need” for a flexible monetary policy. As mentioned above, in light of the experience of its past failures and in considering the impressive success of the gold standard that prevailed during the La Belle Époque era and ended around the time the Federal Reserve was created, there seems to be no empirical basis for the actual “need” »Flexible monetary policy. However, despite the lack of evidence of such a need, someone may object, saying that such a policy as a whole would be desirable. Therefore, now we will move on to a further study of this issue.

In our previous discussion of easy money,which, in principle, are money with such a flexible monetary policy, we have already formulated some of their diseases. These include serious moral hazard and the potential danger of abuse and destruction of the system. Now we will omit these voiced problems and focus on yet another, more general argument against this type of policy, which concerns the epistemological errors of such centralized planning of money and credit proposals [28].

Let's assume that those in chargemonetary policy, managed to withstand all the temptations of abuse of it and are doing everything possible to help the economy. They have at their disposal huge amounts of data and information on supposedly relevant indicators. Their task is to use all this knowledge and experience to adjust prices and encourage people to make economic decisions in accordance with what they (the central planning team) think will have the most positive impact on the economy. In other words, they use their influence on the supply of money and loans in the economy to regulate price behavior and unemployment. The task of these central planners is to predict the impact of a possible monetary policy on the parameters that they would like to adjust (CPI, unemployment, etc.) and follow their most “optimal” option.

However, this means that they need more than justto predict the consequences of their actions, but also any reactions to them, and, consequently, any further reactions to these consequences. All attempts to predict and model the most optimal monetary policy, even assuming that such an optimal policy exists, will fail due to the very nature of the economy, which is a collection of individuals acting and, most importantly, reacting, trying to provide for themselves . The actions and reactions of people themselves are largely unpredictable, and attempts to predict the consequences of such reactions to changes, and subsequent reactions to changes caused by these previous reactions, are simply ridiculous [29].

Inability of central banks to make forecastsfor economics, it becomes even more apparent when we consider the limited data that they may possess. In the sphere of social phenomena in general and economic phenomena in particular, the result largely depends on all human actions involved in the process of their formation. While we know how to measure certain parameters with high accuracy, we cannot measure many other data related to the economic activities of individuals. Hayek explained this limitation of knowledge by the example of prices and wages, saying: “These prices and wages will be set under the influence of the specific information that each of the participants in the market process possesses - the sum of facts that together cannot be known to any scientific observer, not to any other individual brain [30]. ”The lack of access to so many important facts made most economists completely ignore their significance, repeating Hayek’s words:“ they [economists] are happy to continue ydumyvat that only those factors they can measure, is the only significant [31]. "Central banks, as we have seen, inevitably begin their task with a very incomplete picture of the past and present. Thus, their efforts to predict economic results are doomed to failure from the very beginning, because even if they had the proper methods for obtaining forecasts based on data, they cannot take into account all the data that affect human actions, and, as we have seen, each individual action can potentially have a devastating effect on the entire process.

The only forecast I can withthe confidence to do is that central banks, while continuing to intervene in the supply of money and loans, will continue to cause unexpected behavioral reactions, and as a result they will hopelessly fool themselves with their forecasting efforts - I put Bitcoin on this accurate forecast.

As long as monetary policyelastic, we are guaranteed to suffer from such epistemic errors and failures in forecasting, and economic crises will inevitably follow. The economy is an interdependent system, and any artificial intervention will lead to unexpected side effects, the impact of which will be further exacerbated by further intervention. For over a hundred years, economists have been trying to plan the money supply, and with each intervention a new crisis began. Then maybe now is the right time to confront this failure, to recognize that the economy is too complex for forecasting by the central planner, and to allow individuals to make their own decisions to form a complete picture of their actions [32].

To date, we have dispelled all fears.Bitcoin’s relatively inelastic monetary policies have proven to be superior to elastic policies. However, someone might argue that a static inflation rate, for example, 2% per year, could still be a viable option instead of a strictly limited limit [33].

Although it’s probably true that Bitcoin can stillwork well even without a strictly limited supply; such inflation seems undesirable and even harmful. Monetary inflation, although not necessarily harmful in itself, has highly nonlinear and complex effects, the impact of which, as we have seen, cannot be fully predicted. The desire of some to mess around with such a complex system that they don’t understand or, even worse, believe that they understand, is at best not harmful, but can easily become destructive. In addition, if we investigate more deeply, it turns out that there is no justification for expansionary policies in the first place.

When we understand the nature of money itself and itsappearance on the market, such inflation seems very undesirable. Money appears because of their ability to reduce exchange costs, and an important reason for this is their ability to maintain their value over time. It is well known that an increase in the money supply reduces the cost of each unit, its purchasing power and, thus, increases the cost of its use in deferred transactions. Thus, inflationary policies can hinder the adoption of Bitcoin, making it less useful for transactions, and will not give us any benefit [34]. On the contrary, a policy leading to inflation can reduce the accuracy of economic calculations, as well as reduce cash savings and stimulate spending, which we have already proved in an earlier article as undesirable.

In this part, we covered the basics of the process.Bitcoin production and its monetary policy. We discussed the idea of ​​making money and its external effects, as well as how Bitcoin has the preferred manufacturing process of all as solid money. We investigated the trap of easy money, or rather, the trap of having an elastic monetary policy, and showed how Bitcoin managed to avoid such problems.

Finally, we also saw how actual the toughThe policy adopted as a Bitcoin rule, with its finite, limited supply on the market, serves as its advantage and stimulates appropriate economic initiatives for saving and capital accumulation, as well as being a reliable measure for economic calculations.

So far, we have explored the “innate”characteristics of Bitcoin, and so far have come to very positive conclusions. We will continue to delve into Bitcoin's monetary rationale, moving on to studying the external factors affecting the essence of money, and consider them from the point of view of Bitcoin.

Adopting Bitcoin Legislation

In one of the previous articles, we highlighted three importantexternal factors affecting the adoption of monetary substance: legislation, society structure and epistemological considerations. Now we will look at each of these factors and try to understand how they affect Bitcoin as money, starting with the legislative aspect.

Even a superficial investigation of the terminationthe use of precious metals as a single monetary substance will show us what the influence of the legislative bodies led to this. With the initial monopoly status granted to gold over other precious metals in most countries, and its further transfer under the control of central banks, the legislative authorities influenced the specific choice of metallic money. Thanks to this centralization of power, they were subsequently able to effectively withdraw accumulations in gold (Decree 6102) [35], preventing any of their everyday use. The last connection between our money and gold was finally broken by Decree 11615 [36], issued by President Nixon in 1971. This order completed the long process of transitioning from metallic money to an incorrigible paper standard. This last example shows us how powerful the influence of civil authorities on our choice of money can be, and with the modern system of sovereign currencies, these authorities do not seem to like the challenge Bitcoin has made.

Although Bitcoin's legal problems seemincredibly complex, that’s exactly what it was designed for. From the very beginning, Bitcoin was created in the spirit of freedom and liberties of cipher banks, using cryptography to achieve liberation from oppression. These problems, in the first place, became the reason for the creation of Bitcoin. For more than half a century, we have been living under the oppression of a fiat paper monetary system, and any attempt to introduce a competing system has been thwarted [37]. On the contrary, Bitcoin was created with all these past failures in mind and is designed to survive such threats. As its creator explained:

“Many automatically discounte-currency due to the large number of projects that have failed in this area since the 1990s. I hope it is obvious to everyone that the collapse of those systems was solely due to their centralized nature. I think this is the first time we are trying to create a decentralized, trust-free system. ”[38]

Bitcoin Production and Service Processvery open and provides material incentives to participants corresponding to the real demand for the use of Bitcoin by paying transaction fees [39]. The Bitcoin storage mechanism using private key cryptography makes it resistant to confiscation attempts. Together with the requirement to keep verification costs extremely low, we see how all these design decisions are aimed at ensuring that Bitcoin survives and even flourishes wherever there is economic and financial oppression.

This “Resistant to Legislation” NatureBitcoin is so strong and reliable that one US congressman, Patrick McHenry, even went so far as to call Bitcoin "The Unstoppable Force." Continuing that “We [the government] should not try to restrain this innovation; governments cannot stop this innovation, and those who have tried have already failed [40]. " Although there are many other lawmakers who do not share this point of view, this bold statement underscores Bitcoin’s idea and the mission of those whom it has gathered under its banners. We may not yet know if Bitcoin can really resist the legal challenges and government pressure that it is likely to face, but one thing is clear - that Bitcoin is our best attempt. This legal resistance of Bitcoin is probably its most significant improvement over previous hard cash and this is its real advantage [41].

Now, assuming that governments understandall the difficulty with stopping Bitcoin, there is a possibility that they will decide to use it because of the financial incentives that it provides. Despite the fact that they excluded the use of gold as money from our daily lives, governments, mainly through their central banks, still massively accumulate it in growing quantities, having at their disposal approximately 17% of the total overground gold reserves [42 ]. When Bitcoin becomes significant enough, there is a chance that governments will buy it as a golden alternative, putting it into circulation for their international currency transactions, or as a hedging tool for “saving value” [43]. Another option for the government to monetize the success of Bitcoin is through direct or indirect participation in its mining, as they control many of the richest sources of energy production. Such mining operations will benefit both states as an additional source of income and will help Bitcoin, the mining process of which is very energy-intensive, to ensure the security of its network. Although such actions on behalf of governments appear unlikely in the short or medium term, this option remains highly likely in the long term.

Social Globalization and Bitcoin

The second significant external factor that wedesignated, is the predominant social structure, with the modern one tending to globalization and international cooperation. Understanding the needs of such a transition in society is very important in determining what kind of money should serve such a society. Today's society is rapidly moving towards urbanization, and most of the world's population lives in cities [44]. The role that the Internet plays in our daily lives is also becoming increasingly important. With more than 4 billion Internet users [45], the effect this technology has on society appears to be superior to most previous inventions in terms of coverage and impact.


Although society is more interconnected than ever, the worldIt is in a serious state of monetary disintegration (disunity) at a level unprecedented for hundreds of years. If in the past most currencies were simply different weights of precious metals, and therefore almost universally accepted in trade, today we have hundreds of incompatible paper currencies that destroy the world market and damage the global division of labor. In the current conditions, any interstate social cooperation requires currency exchange. This imposes additional costs, complicating and distorting economic calculations, and requires more relying on financial institutions. To this issue, we can add the problem of settlement of transactions. Due to the costs and regulations associated with moving currencies across national borders, such calculations are very expensive and require a centralized process through several intermediaries.

With the transformation of society into a globalinterconnected with the ever-growing number of electronic transactions carried out around the world, the need for money that is natural for the digital environment is becoming increasingly strong and widespread. Settlement of payments with strangers, not trusting financial intermediaries or central banks issuing currencies, is currently an impractical process. In addition, such a process simply cannot be implemented with any monetary system that we have ever had before Bitcoin. Being a fully electronic product, Bitcoin allows you to make payments anywhere in the world, without the need for a trusted payment processing. It does not require expensive international physical shipments and is easy to store and use from anywhere with minimal cost. Looking at the current structure of society, it seems that there is a real need for trust-free, initially digital money, and this will probably contribute to the adoption of Bitcoin as a “decentralized alternative to the Central Bank [46]”.

Understanding Bitcoin - An Epistemic Barrier to Bitcoin Acceptance

Our last consideration we needdiscuss, before we can complete this study, concerns the third noticeable external factor affecting the essence of money, an epistemic one. Unlike previous money, such as gold, furs or cattle, Bitcoin has no “practical” use, except in monetary quality. In this, it is similar to collectible money, such as wampums and various sea shells, and also to current paper money. In a more traditional, though not precise, economic sense, it does not have “intrinsic value”. The debate about whether such an intrinsic value is necessary, or rather, whether it exists at all, is beyond the scope of this study and is inappropriate here [47].

What is important for us to understand epistemicThe obstacles for Bitcoin are that due to the lack of such widespread practical use and, unlike the (possibly) natural beauty of sea shells or the legislative advancement of fiat paper money, there is nothing that contributes to the use of Bitcoin, thereby, its initial accumulation, in addition to its monetary use. Thus, we can say that there are only two forces that contribute to the adoption of Bitcoin, “economic” and “epistemic”, without any “indirect utility” that plays a role. What I call here the economic power of Bitcoin is what we have discussed so far, and it refers to the economic incentives for using Bitcoin and the benefits it provides over traditional systems.

The second, “epistemic” force applies to ourunderstanding money in general, and Bitcoin in particular, as well as using existing knowledge in making economic decisions. That is, the more we understand money, its origin and nature, the better our decisions in this regard will be. The epistemic power that I am discussing here is the motivation for using Bitcoin, which does not come from the direct and immediate (or expected to be immediately available) benefits of Bitcoin, but from what is expected to ultimately come from Bitcoin's understanding and its advantages. While at the very beginning of Bitcoin, I believe that most of its holders participated solely because of an epistemic motive, I think that today economic power is what seduces most people to come, but epistemics is what motivates them to stay. This process mainly manifests itself during the “supply shocks” (halves) of Bitcoin, after which we have so far witnessed a sharp increase in the price of Bitcoin. This increase in price (economic factor) draws mass attention to Bitcoin, but after the hype fades, what still interests many is the understanding of Bitcoin and its vision (epistemic factor). However, the true adoption of Bitcoin is likely to happen only when the economic power of Bitcoin is so great that it will make the epistemic (understanding of Bitcoin) unnecessary for people to use it as part of their daily lives.

This last topic, which I consider the mostimportant in the article, because unlike others, this is the only topic in which I see Bitcoin at a very disadvantage. If for gold, its well-established history of millennia of use as money, as a rule, is a sufficient substitute for understanding why it works so well, then Bitcoin is deprived of such luxury. On the other hand, fiat paper money, whose “settled history” is awash with setbacks and economic collapses, manages to circumvent this epistemic problem by providing direct funding for the academic faculty of economics, as well as acting as their most important employment option. Fiat money provided such scholars with a highly respected, influential and highly paid job, and they, in turn, created an epistemological base for such a monetary system and confirmed it with their “credentials”. In contrast, Bitcoin, being hard money, does not have a budget to create such a “scientific base” for itself and does not provide economists with such influential jobs, but basically replaces their current achievements. Therefore, it is not surprising that very little has been written in favor of Bitcoin, especially in academic circles, as mentioned above.

Without sufficient resources to understand money andBitcoin, the only factor contributing to its adoption would be economic. Even if it alone is enough, it certainly will not work well enough, and the transition to Bitcoin may seem unlikely before the modern system collapses on its own, which makes the transition extremely unpleasant and unnecessary. However, the more resources there are for understanding Bitcoin, and the better people understand Bitcoin's rationale, the faster they will act to accept it, and therefore, the sooner and smoother the transition to its use will occur.

Today, after more than a century of existenceAt the Central Bank, the general understanding of money is completely distorted, and even more so incorrect in most scientific discussions, where they still think that they can “tune” the economy with their complex mathematical models and inflation targets. The last crisis of 2008 shook confidence in the current system, and rightly so, but most of the alternatives offered to the public for understanding money only exacerbated the mistakes of the modern system. Statements such as “the state can make whatever it wants with conventional money” or “money is just a common illusion” are now very common even among many Bitcoin supporters, and this only shows how extensive the work is to clarify Bitcoin and money. The meaning and purpose of this article is to show how important it is to explain money to others in general, and Bitcoin in particular, in order to succeed as the most peaceful revolution [49].

Conclusions - the emergence of Bitcoin

The last ten years have been some of the mostinteresting to observe in terms of monetary economics. During this period, we witnessed the first money product, which was invented (invented) and not opened by the free market, and the amazingly fast process of its monetization. What began as a seemingly just another ill-fated offer from the Cypherpunks mailing list [50] has turned into a fully functioning money system that actively serves millions of people around the world. In this article, we examined the general factors that influence the attractiveness of money, therefore, their adoption in the market, and examined how Bitcoin is doing compared to its predecessors. Now, to complete the full cycle of Bitcoin analysis, we will briefly consider the process of its appearance from the very beginning to its possible development in the future.

When Bitcoin just started, and duringthe first few months of its existence, it had no price, and transactions with it were carried out mainly for software testing. The moment “from zero to one” for Bitcoin came when its first exchange rate was published in October 2009, that is, it first acquired value for the exchange. Soon after, the small first Bitcoin users began exchanging it, giving it an initial price, and thus breathed life into the system. Since they were willing to spend the money to bring Bitcoin to life, while almost no one knew what Bitcoin would be, they must have been motivated by the very vision of Bitcoin's potential. Thus, Bitcoin’s appeal began not because it was a “useful” tool, not thanks to a government decree, but because of the voluntary actions of its early followers, who appreciated the possibility of creating a new monetary system more than the money they owed spend in order to realize the ghostly potential of Bitcoin [51].

Moving on, note that, whileBitcoin had some exchange value, the number of possible exchanges available to it was quite small, since the demand for it, as a medium of exchange, was just beginning to take shape. This means that initially people had to wait a significant amount of time compared to traditional paper money in order to exchange it. That is, they had to hold him so that he would spread. Here lies the main reason that the containment of Bitcoin and its limited offer were and still are critical to its success. Without a tough inelastic policy, the uncertainty that would accompany Bitcoin’s containment due to the risk of monetary inflation and subsequent depreciation would be too high and prevent it from seeing any meaningful spread.

Bitcoin's monetary strength is whatallows people to confidently own it, knowing that their wealth does not dissolve. In addition, its limited supply means that with the growth of its distribution, Bitcoin will certainly become more valuable without experiencing the negative impact of inflation, which would reduce its cost. Thus, Bitcoin's limited supply in itself is a strong economic incentive for its adoption and has been used by those who understand its superiority as a monetary asset and thus expect that demand for it will increase over time. Satoshi himself perfectly understood this, writing:

“Instead of changing the sentence,fix the price at one level, the offer is predetermined, thereby changing the value. As the number of users grows, the value of each coin increases. It has the potential for positive feedback; as the number of users increases, the value increases. ”[52]

Today, Bitcoin is circulating with muchfaster than in the past, and it has much more room for exchange. However, Bitcoin has a long way to go to become a widely used monetary system. The monetization process, like all other phenomena of social cooperation, is a non-linear process that accelerates and benefits from each additional use. Thus, it is not expected that the speed of Bitcoin's circulation and its daily use will become significant in the very near future, but should accelerate in the long run. Looking at the progress made thus far, there is every reason to believe that Bitcoin will be able to achieve such a “critical mass” that is necessary to achieve sufficient acceleration of growth and turning into generally accepted money around the world.

Bitcoin is currently growing the mostsignificantly in two areas. The first is the Internet, where it has a "home advantage", the second - in countries that do not even have minimal economic freedom. In the latter case, in countries such as Turkey, Iran and Argentina, we can see how Bitcoin provides some degree of immediate relief from the economic oppression imposed on those who live there. The tighter the control over capital, and the higher the inflation rate, the more significant the advantage of using Bitcoin as an alternative that is resistant to government actions. Therefore, although we cannot know with certainty how Bitcoin will grow, it seems likely that the emergence of Bitcoin as money will continue to a large extent in economically oppressed countries, whose citizens need Bitcoin to protect their wealth the most, and will continue to grow. most significant where economic crises arise. It seems that at this stage, bitcoin is a free market product that most effectively demonstrates its value proposition in the absence of free markets. Authoritarian attempts to limit it only contribute to its use, and therefore it seems that Bitcoin really deserves to be called "anti-fragile" money.


[1]: The crises of the 1980s and 2008 are vivid examples of such collapses that seem to easily turn into a disaster for the system.
[2]: Friedrich A. Hayek (Friedrich A. Hayek): “By monetary nationalism I mean the doctrine that a country's share in the world money supply should not be determined by the same principles and the same mechanism as those that determine the relative amounts of money in its various regions or places.” - “ Monetary Nationalism and International Stability ”(1937), page 4.
[3]: See both sources - the graph below and further relevant metrics presented by Crypto-Voices here.
[4]: The Nature of Money and The Substance of Money.
[5]: The principles of our money analysis come from the work of Carl Menger. Mostly from his Principles of Economics (1871), chapter VIII, and On the Origins of Money (1892).
[6]: Such changes, although difficult to coordinate and difficult to implement, were previously made to the Bitcoin protocol after sufficient consensus was reached. See BIP16 (P2SH) and BIP141 (Segregated Witness) for striking examples of such changes that improved Bitcoin's monetary properties by adding consensus rules to the protocol. The method is known as soft-fork.
[7]: Refer to the following website for a detailed list of resources for more information on the Lightning Network:
[8]: Jörg Guido Hülsmann, “The Ethics of Money Production” (2008).
[9]: For a more complete definition of the problem and solution presented in the Nakamoto Consensus, see Bitcoin whitepaper.
[10]: See Bezant Denier's article for a historical study of these external factors:
[eleven]: Thomas Wright, “The Travels of Marco Polo, the Venetian” (1854), especially page 168. See also this short thread for a quick overview of Marco Polo's notes on paper money, and this blog post for a deeper understanding.
[12]: For some paper money reflections by these authors, see Jörg Guido Hülsmann, The Ethics of Money Production (2008), pages 79–81, Robert Minton, John Law: The Father of Paper Money "(1975).
[13]: See David Ricardo, “The High Price of Bullion, a Proof of the Depreciation of Bank Notes“ (1810)
[14]: An economic perspective on moral hazard, see Jörg Guido Hülsmann, The Political Economy of Moral Hazard (2006).
[15]: See Milton Friedman, “The Resource Cost of Irredeemable Paper Money” (1986).
[16]: With the existence of various data transfer mechanisms, a striking example of which is the Bitcoin satellite launched by Blockstream, there are practically no obstacles to participating in the Bitcoin mining process from anywhere in the world.

[17]: See this article by Daniel Wingen) about the production process of Bitcoin and how it can positively affect the environment and sustainable energy production.
[18]: See mining analysis from CoinShares for more details: See also this 2-part post on their blog: -explanation-of-price-hashrate-bitcoin-mining-network-dynamics-f820d6218bdf
[19]: Jörg Guido Hülsmann: “Natural money can be called any kind of money that is used by interacting persons on a voluntary basis.” - “The Ethics of Money Production” (2008), page 24.
[twenty]: A good example of this miserable incompetence can be seen in the two quotes from former US Federal Reserve Chairman Janet Yellen, who said in 2017 that: “I would say that another financial crisis will never happen again. Maybe you shouldn’t go this far, but I really don’t think so. I believe that we are now much more secure. And I hope that in any case during our life this will not happen anymore. ”
And in less than a year she expressed quiteanother opinion, saying that “I’m not sure that we are moving in the right direction. There are still a lot of holes, and here the deregulation process has happened. That is why I am worried that we may get a new financial crisis. ”
[21]: For the history of money, see Nick Szabo, Shelling Out (2002)
[22] See the article by Mark Hendrickson (Mark Hendrickson) of the 100-year failure of the Federal Reserve System to achieve any of its goals..

[23]: During the existence of the Federal Reserve, the US dollar has lost at least 95% of its purchasing power.
[24]: See, for example, Chinese Yuan in the 13th century, Appropriations in France, and Continental Dollar in America.
[25]: Here you will find a list of 58 landslides caused by hyperinflation in the last century.
[26]: Although a case of hyperinflation was recorded during the Roman Empire, which used metal money, this does not contradict what is said here, since the guilt in such cases is still attributed to the serious depreciation of money by governments of that time, which equates to their “monetary policy”, in modern terms

[27]: For such criticism see: Jesús Huerta de Soto - “Money, Bank Credit, and Economic Cycles” (2006), Jörg Guido Hülsmann - “The Ethics of Money Production” (2008), Friedrich A. Hayek - “Denationalization of Money: The Argument Refined” ( 1990), Murray N. Rothbard - “What Has Government Done to Our Money?” (1963).
[28]: For brilliant criticism of this, see Friedrich A. Hayek, The Pretence of Knowledge (1974).
[29]: A corresponding consideration of the errors in using predictions and models in complex areas in general and in economics in particular can be found in the works of Nassim N. Taleb.
[30]: Friedrich A. Hayek, “The Pretence of Knowledge” (1974).
[31]: Friedrich A. Hayek, “The Pretence of Knowledge” (1974).
[32]: For this, see Friedrich A. Hayek, “The Use of Knowledge in Society” (1945).
[33]: Although today Bitcoin does have monetary inflation, this is just a temporary phase, which distributes original possession bitcoins, and, as we have seen, is in accordance with well-defined schedule. Therefore, one can ignore this initial inflation and discuss Bitcoin's long-term, ongoing policy, which is based on an invariable proposal.
[34]: For a complete critique of inflationary monetary policy, see Ludwig von Mises, “The Theory of Money and Credit” (1912), chapter VII, part 3 — Inflationism.
[35]: Executive Decree 6102, issued by President Franklin D. Roosevelt on April 5, 1933, prohibited the "accumulation" of gold and effectively ordered the confiscation of most private gold reserves.

[36]: Executive Decree 11615, issued by President Richard Nixon on August 15, 1971 as part of the so-called “Nixon Shock,” abolished the convertibility of the US dollar to gold.

[37]: Great examples were e-gold, closed in 2008, and Liberty Reserve, closed in 2013.
[38]: Satoshi Nakamoto in response to a comment on the P2P Foundation Forum.
[39]: For how transaction fees help Bitcoin defend itself against the state, see this post by Eric Voskuil).
[41]: In order to be effective, this legal resistance had to be accompanied by a sufficient improvement in monetary properties to prevent centralized risks of owning it. See this article from The Bitcoin Observer for a more complete explanation of this.

[43]: The following article, “The Bullish Case for Bitcoin” by Vijay Boyapati, sets out in more detail the possibility of such a scenario.

[46]: Saifedean Ammous, “The Bitcoin Standard: The Decentralized Alternative to Central Banking” (2018)
[47]: For this topic regarding Bitcoin, see Conner Brown, “Bitcoin Has No Intrinsic Value - and That’s Great.”
[48]: In this article, “Shelling Out: The Origins of Money »Nick Szabo suggests the possibility that our natural attraction to collectibles that we attribute to“ beauty ”is not just“ random, ”but an instinct developed from their usefulness as primitive money .

[49]: See Nic Carter, “A Most Peaceful Revolution”.
[50]: Apart from Hal Finney, most of the reactions Satoshi originally received were very skeptical. See. The original discussion on The Cryptography Mailing List.
[51]: See this beautiful short post from Ross Ulbricht), called "Bitcoin Equals Freedom."
[52]: Satoshi Nakamoto in response to a comment on a P2P Foundation forum.