My financial journey has been a bit of a windy road. I wish I could tell you I was a Boglehead, and that’s why I invested in the market broadly, but the truth is a lot less sophisticated than that. I invested in the market as a whole because I was basically unconscious financially. When I joined the military, one of the drill instructors told us we needed to sign up for the TSP (basically a government savings account) and that was about as far as I thought about it. It was a wistful time in my life. At least I was told I needed to invest something somewhere. A lot of people wait until they’re 50 and then realize, “Oh, shit, I can’t retire.” There’s nothing wrong with market-wide diversification, but if you get a hunch on the next big thing, sometimes it’s helpful to use a scalpel rather than a hammer.
When I was in high school, I remember watching videos about how the Federal Reserve was basically this giant Ponzi scheme- how our money printing was a sham and how we’re entering a debt spiral. The money printing process is certainly not intuitive. In retrospect, I think that’s partly what the system relies on. If a system is complex enough, obfuscated with enough bureaucracy, and enforced with enough violence, people pretty much accept it as the word of God. After Ron Paul’s failed presidential run, I had more or less forgotten about the convoluted inner workings of how fiat money works and how we’re all getting scammed until I hit college. Then I had a mandatory class in macroeconomics that spilled the beans all over again. Except this time I had a few years of calculus and a little bit more world experience under my belt.
I looked forward to sitting in the funky-colored chairs with the little foldout desk inside the sloped-floor lecture hall. Pencil in hand, I embraced the reprieve from my engineering classes. There was still math in econ class, but the math was a lot less rigorous with the class as a whole being memorization (regurgitation) based. Every once in a while, though, I’d be hit with a jerk of realization that nobody seems to know how this shit actually works. I don’t mean just the professor. I don’t mean how supply and demand curves work, or how price floors & ceilings can affect systems, but rather that, sometimes, sovereign market makers don’t really know what they’re doing.
There’s a hidden problem in controlling the supply of currency. Inflation incentivizes people to spend their money on something. Every moment when you store your life’s value into an inflating currency is a moment that represents value lost. You’d be better off putting the money into something that can at least maintain a flat trajectory. In theory, sovereign governments are actually in a prime position to provide this service. If the dollar is backed by the US Government, and USG decides its dollar is the day-to-day currency within its own borders and with its partnerships, the dollar could represent a portion of the value of everything that falls within its domain. Said another way, one dollar could represent the valuation of the United States as a network divided by the total number of dollars.
The problem with this in practice is that nothing maintains a flat trajectory while also maintaining useable liquidity. The USG wants to fund social programs, fight COVID-19, and feed the war machine. The USG uses the dollar as a means to extract value from itself and redirect it into new causes. When the Fed prints money, it cannot, thermodynamically, come from nothing. They cannot make value on their own whim. They are not King Midas. The value must come in the form of a redistribution, and the effects of this redistribution of value cannot be understated.
I’m not going to get into the USG’s ability to direct its money machine at problems, and how efficient or inefficient the arrangement is in all practicality. Instead, I’ve framed the problem in this manner because it’s what introduced me to cryptocurrency, and Bitcoin in particular.
Bitcoin’s detractors would argue against its usefulness as a day-to-day currency. They’d say it’s too volatile, and that’s going to be correct for the foreseeable future. Bitcoin’s value does not come from acting as a day-to-day currency, though. It comes from its ability to store value with respect to its network. If you buy one Bitcoin today, you are buying one twenty-one millionth of the Bitcoin network forever. While systems are seldom perfectly secure, you can take steps to make your wallet impractically hard to attack. The ledger is immutable, so the code can’t be rewritten. Bitcoin is going to become a unique, world-wide financial protocol, and there doesn’t seem to be much anyone can do about it.
Bitcoin is a virus released into the financial world. I can’t remember who said that line, but it sums it up perfectly. Miners can’t afford to hang onto their Bitcoin forever, so they eventually have to capitulate and sell in order to keep the lights on. Early adopters (some) are satisfied with their stupendous gains and capitulate, as well. New Bitcoiners get eager to hop on the hype train and buy-in when we hit all time highs, and the cycle is complete. Wait, isn’t this a sort of ponzi-scheme, too? Ugh, back to square one.
Not really. It’s only a Ponzi-scheme if the party ends some day. Bitcoin doesn’t seem to be slowing down at all for the time being. TCP/IP doesn’t seem to be going away, so neither is Bitcoin. At this point, the Bitcoin network represents more opportunity as a friend than it does as an enemy. Institutional money is really starting to pour into Bitcoin. China giving up its hash power has been the biggest blow Bitcoin has been dealt, and that just looks like a bump on the road now. The China ban got the network’s hash power out of the country most likely to try to weaponize it. So win-win.
In time, I think we’re all going to accept the Bitcoin standard gleefully. I think there’s a lot of interesting concerns related to privacy when using a public blockchain. The USG is doing everything in its power to extend that problem to its fiat system, too, though. Services like coin mixers add some anonymity back into the network. I don’t like the idea of untraceable corruption, either, but what good is having traceable corruption if nothing gets done about it? The network has provided a lot of interesting and novel solutions, so, for the time being at least, I’m going to remain hopeful.
