A fun and very interesting side tracked post. The thing I’m most thankful about Bitcoin is that it really brought me and many of us to think about what money is? And to think about economy and to see how messed up the world is.
What is then money? It is certainly a collective hallucination because it doesn’t really exist. However it has a function, it is the social contract over which we keep the accounting of what each one of us has received from society and how much we owe to it. You need a society for money to function, on a desert Island, no matter your dollars, gold or Bitcoin, you are miserably poor and you only get what you can build/make yourself.
We instantiate the function of money over a “technology” and we have tried many. Seashells, stones, glass, metals, accounting. What matters is to keep the accounting fair, because we humans have a sense of fairness. If it is fair we go along, if it ain’t we go mad. Money metals worked very well as they kept human greed in control. Accounting and our fiat system requires massive regulators and it still gets out of control, there is always some group that has privileged access to manufacturing money without engaging on the fair trade with society.
The true reality of society, is that it doesn’t benefit from money manufacturing. Gold miners add no value to society by bringing more gold, what they do is skew the accounting as there are now more currency units pursuing the same amount of goods and services in society. They create inflation, thankfully natures keeps them in check as getting gold is hard, and that is why it became a good monetary metal. Our current fiat system is flawed in that we have a system where making new money has no cost, and so it is made, thus inflation is rampant and life gets really expensive, because you can’t keep up with the money manufacturer. Society wins when people offer goods and services and trade them for money. Innovation in productivity brings more goods and services increasing supply and thus bringing prices down. That innovation is rewarded as it captures a bigger market share due to lower prices and high supply, and the rewarded new rich person gets to spend their money in society however they prefer.
Fixed supply has nothing to do with economics, neither does inflation, they are the rules of the game. However, every engineer knows that dealing with a closed system is a lot easier. If the money supply is fixed it is a lot easier to make for yourself a mental model of the share of the wealth and when to consider yourself paid. Second best is constant loss/gain, you just build your frame of reference around that. We have a system where the loss is not constant and the “input source” of money is unfair, the game is rigged. There is a narrow group of actors that, at will, increase the money supply without any opportunity cost. A gold miner may fail in his pursuit, a central bank will always create more money risk free, and so they do. The market is “slow” to price things in, we can adjust to gold supply increase, we have a really hard time adjusting to deliberate/spontaneous/uncertain change.
What Bitcoin did, is to open up the possibility to choose again a new system. It becomes a personal vote which brings full opportunity cost back to the game. Making Bitcoin always costs, loaning it has risk. Cardano is another system. Creating ADA was free for some insiders, making more is not possible, loaning it has risk. You choose the game you want to play. In both cases the game might not be fair, but it is clear. Choose your opponent, choose your battles.
Bitcoin’s store of value story is horrible. It means you currently cannot measure the value of anything and instead of willing to transact, you want to store value. That is why gold doesn’t “perform” on booming economy. That is not a great outlook for society, but it is where we are, and we might very well need it to bring back some sanity to our world. We need to go to world where people actually produce things. Where you recognize that having food and a roof over your head is way more valuable than your money, gold or Bitcoin. We really don’t want money, we want what money can buy, and the more money there is the less you can buy with it. Money is a collective hallucination, it is completely useless until you spend it. Yet we focus so much on Money instead of creating value for society.