Bitcoin Is Neutral, Politically Agnostic, Fundamentally Non-Aligned
There is nothing in bitcoin the software, the network and the asset that preconditions it and its users to espouse “left” vs “right” politics, or progressive vs conservative, individualistic vs collectivistic positions. There is nothing in it necessarily leading to free markets vs planned economies or anarchic vs statist ways to shape social interactions.
Based on its energy and mathematical foundations, bitcoin can be used effectively, i.e., consistently with the internal logic of each such orientation, and successfully in accordance with the underlying values of such different ideas and practices, regardless of people’s attempts to pigeonhole bitcoin under any particular ideological flag.
These points might be obvious to some, but I think there are enough people identifying bitcoin with very specific ideologies, that it might still be worth considering the issue.
Bitcoin is neutral, politically agnostic, fundamentally non-aligned.
To the extent we tend to see bitcoin’s decentralized structure as more conducive to free-market, dog-eat-dog types of societies as opposed to mutualistic cultures, neither is a reflection of bitcoin’s intrinsic thrust, but the projection of our own hopes, fears and general cultural imprint onto bitcoin.
Bitcoin is neutral in the same way as mathematics is neutral, or in the same way that energy is the fabric of the universe and mathematics is its language.
There is nothing intrinsically moral or immoral, left or right, in mathematics or energy, they just are. Morality & Co. are human, ethical, political categories that depend on people’s evolving sensibilities, but that can’t change the underlying neutrality of energy as the base-layer of the universe or the neutrality of the mathematical language we use to describe it.
The only positions bitcoin subscribes to are universally accepted scientific principles, which to the best of our collective knowledge hold true, at least at non-elementary particle scales, i.e., from the atomic level up, regardless of ethical and political considerations. Such principles provide the boundaries wherein unpredictable individual behaviours and emergent social dynamics are contained, i.e., “normalized” within a range of outcomes that, as diverse and unexpected as they might be, are still consistent with those principles — at least up until a new scientific paradigm contradicts previous knowledge.
Bitcoin is somewhat similar to calculus, i.e., an ingenious way to square a circle. It’s a way to use infinite approximations in the more intuitive realm of straight lines and angular objects to guide us through the more chaotic realm of curved lines and round objects — fitting the round peg of a messy society in the square hole of nature and scientific principles. Or the other way around, if one prefers to associate nature and science with roundness and society with angles from a visual or metaphorical standpoint. Either way, even if created in a very specific historical context, bitcoin might be what comes closest right now to a timeless, well-rounded, workable synthesis of science and society.
In this sense, it’s only natural that bitcoin’s neutrality should be based on the neutrality of energy and mathematics. Bitcoin is neutral because its building blocks — energy and mathematics — are neutral.
All bitcoin does is lay out very few rules, deprived of individual human influence in their functioning, and based on fundamental and long-standing science. Bitcoin’s elegant simplicity manifests itself through the role of energy, described by the laws of thermodynamics, and through the role of mathematics, written in cryptographic form into the building codes of its governance, social consensus and network security structure.
Bitcoin acknowledges that energy is the fabric of the universe by simply and explicitly using energy as the unforgeable, cryptographically secured proof required to create a consensus-building mechanism in society, rewarding people participating in the system with a native digital token — that’s all bitcoin does. Anything else, any moral judgment, ethical concern, material effect we ascribe to bitcoin doesn’t derive from bitcoin per se, it has nothing to do with it, and everything to do with our own preferences and biases.
As Castle Island Ventures’ general partner Nic Carter has argued, criticizing bitcoin because it uses too much energy, whatever “too much” might mean, has more to do with whether one thinks bitcoin is ultimately worthy of any energy consumption at all, which is a human “value” judgement, than with bitcoin’s intrinsic energy intensity. But criticizing bitcoin because in itself uses a lot of energy for its proof-of-work consensus mechanism is just as nonsensical as criticizing physics because energy is the fabric of the universe, or criticizing our own bodies because they need to be nourished with water and food multiple times a day to live, or criticizing God because whatever God entity one believes in could have come up with a less wasteful, more clever system to run its ship — sorry, go file a complaint with your God.
What we think and feel in this case is irrelevant, energy lives on regardless, and mathematics also lives on regardless, as something that would always be there to be discovered or re-discovered in whatever form even if we humans were wiped off the Earth. Bitcoin aims to replicate the universality and neutrality of energy and math by incarnating their principles in the way it works. Denying or distorting the quintessential equivalence between the principles of energy, mathematics and bitcoin is misguided virtue-signalling at best, as instead of channelling signal it channels noise.
Blank Spaces and Narratives
What is up for grabs is something else. It’s not whether bitcoin is worthy of any energy expenditure at all — more and more people think it is, at a rate of adoption that is at least the same as that of the Internet at the same stage of development — if not more. And even if the number of people who thought bitcoin is worth any energy were minuscule, it wouldn’t matter, as energy worthiness, like beauty, lies in the eyes of the beholder. What is up for grab is what we are going to do with bitcoin, the type of world we want to build with it. What I’m arguing is that the network consensus and built-in governance proposed by bitcoin through energy and mathematics can be turned by participants in different directions. Which directions depend very much on collective narratives and individual inclinations.
Bitcoin’s built-in incentives and consensus rules are aimed at its own survival as a monetary, technological, governance structure, as argued by bitcoiner and software engineer Gigi in his vision of bitcoin as a living organism. But bitcoin’s structure doesn’t necessarily tell us what to do as a society. Bitcoin’s code doesn’t provide an algorithm for navigating through complex social-ethical issues. That’s still a very human, messy, sticky, highly imperfect endeavour, where all we can hope for is striking the best-possible trade-offs among options that will inevitably optimize some aspects and sacrifice others, making some people better off and some worse off. There will always be winners and losers. Bitcoin doesn’t provide a magic formula that will inevitably make everybody a winner, at least for the foreseeable future.
As far as bitcoin is concerned, very different courses of human actions are equally feasible.
As a society, we can either decide that some people find themselves in incredible hardships — not necessarily through any fault of their own, but for accidents of history, birth-place, social class, etc. — and provide a balancing system of relief, or blame them for their misfortunes and leave them at their own destiny. Bitcoin doesn’t tell us what to do. Whether one is a bitcoin maximalist, minimalist, middle-of-the-road shit-coin dabbler or a full-blown fiat money proponent, I tend to think that nobody has the high ground forever. Hard money is not a foolproof substitute for hard choices. Wicked problems like climate change, the culture wars, the Middle East conflict, income inequality have a way to make us fall from our high ideological, moral horse. Everybody will be compromised, everything will be a compromise, one way or another, at least to some extent, in this messy world. We cannot optimize for every need. But what bitcoin does is provide a more solid ground for our choices, the hospitable base-layer we land on when we inevitably fall from our high horses or, paraphrasing Ribbonfarm’s Venkatesh Rao, a sort of enlarged “a-moral dry ground” that can be more effective than any limited-view, ideology-dripping, morality-soaked high ground. Bitcoin provides a durable, reliable blank page that competing narratives vie for.
It’s universally accepted that humans are self-contained individuals and social beings at the same time. The interplay between these two rather opposite yet equally foundational ways of being has produced all sorts of possible manners to organize individual behaviours and social dynamics into many constellations, along the continuum between isolation and inclusion, hermits and mass societies. What I’m trying to argue here is that bitcoin can accommodate the same multiple dimensions not only along the individual/social continuum, but also along the “communist/capitalist” political-economic spectrum, or “collectivistic/anarchic” spectrum, or whatever other spectrum one wants to choose.
We collectively carry on our shoulders the tension between our individual and social dimensions in the form of a rich, complicated, inescapable, social, biological, cultural baggage. We dump it more or less lightly onto whatever individual action and social dynamic we are involved in, with each involvement contributing in turn new, incremental pushes and pulls to our constantly readjusting individual/social balance. We feel an inescapable need to make sense of this mess. And so, out of this individual/relational magma, narratives emerge, converge, intersect, diverge, condense and solidify, until slow, tectonic social movements or new cultural or natural “explosions” produce new cultural lava, new social, economical and individual landscapes.
Although the interplay between individuals and society can potentially reset their mutual balance at any turn, such balance tends to remain fairly stable for long stretches of time within defined socio-economic systems. This means that while, on one hand, we can’t help but dump our baggage onto individual actions and social dynamics, on the other hand, different socio-economic systems are often ideally suited to accommodate only a limited set of people’s individual baggage, with the rest fitting in less and less well. The peculiar thing I’m trying to highlight here is that bitcoin doesn’t mind being treated as a dumping ground for all sorts of different baggage. It seems capable to accommodate several different shapes and sizes of baggage.
The interesting thing for me here is that, so far, anti-establishment, marginal, libertarian, hyper-individualistic, uber free-market, conservative narratives have tended to assign a positive value to bitcoin, turning the bitcoin dumping ground into a worksite, where new tools and materials are being stockpiled, new work methods and new constructions are being experimented with, with a willingness to see what new landscapes they may lead to. This has to do with the groups who first adopted bitcoin. On the contrary, a mainstream narrative from more established segments, from socially oriented, economically enfranchised, State-trusting, environmentally conscious groups have for the most part assigned a negative value to bitcoin, pouring their distaste onto it, discounting it as a chaotic garbage dump — a dangerous source of pollution to be cleaned up and possibly closed down.
But if bitcoin really is neutral in a similar way to energy or mathematics, it should be able to contain indistinctly all such social magma, in a fairly unbiased way. If this is the case, it’s the State-trusting, more enfranchised, liberal, social-democratic groups that might want to reconsider their assessment of bitcoin, so as not to leave a potentially very powerful key to the future in the narrative and ideological hands of their political adversaries, who will use it to promote and pay for the realization of their own vision of reality.
Let me try to imagine how the same, few rules set by bitcoin might help successfully sustain opposite narratives and socio-economic structures.
It’s worth noting at the outset that bitcoin as a technology is an open software on an open platform, and that both as a network and a monetary asset bitcoin is completely open. Anybody is free to use and change bitcoin’s software code according to their own desires for their own purposes — something that has already happened numerous times. It’s also worth noting that, once bitcoin rules have been written into software code, the subsequent application of such rules is not dependant on human discretion, at least until a vast majority of participants agrees to change them.
The present configuration of bitcoin has the most participants out of all crypto assets, thanks to its first-mover advantage and its network effects, which have created and solidified very strong economic and social incentives for people to adopt it.
Very briefly, bitcoin’s core rules are:
· a fixed, total issuance of 21 million coins to be minted, i.e., “mined” by 2140;
· a pre-programmed rate of issuance, which halves roughly every four years, until the 21 million coin ceiling is reached;
· a proof-of-work mechanism to mine each coin, which represents the reward miners get when they are able to add a valid block to the bitcoin blockchain thanks to their computational work, whose energy expenditure represents a powerful energy-moat securing the whole network;
· a difficulty-adjustment mechanism of the proof-of-work system so that it will always take about 10 minutes on average to mine a block and mint a new coin, no matter how many miners or how much computing power are working at any given time to create a block;
· a cryptographically secure system to claim ownership of the coins, transfer them and prevent double-spending the same coin.
Before I try and imagine a few possible scenarios where bitcoin’s core rules could serve very different socio-economic-political systems, I should note that political systems have many nuances and even when they fall within the same tradition they are never exactly the same. At a very basic level, the fundamental questions a political-social-economic system must answer are roughly the following:
· Who and what are the repository of power?
· How is power allocated and who has the right to allocate that power, i.e., who has the right to be an active participant in the political process?
· Who gets to decide what to produce and in what quantities?
· How should goods and services be produced? That is, by whom, with what resources and technologies, and according to which logic or criteria?
· Who owns the means of production?
· Are the benefits of the goods and services being produced going mainly to the owners of the means of production or are they going to be distributed more broadly among individuals and groups in society? And through what means and according to which criteria would they be distributed?
These questions are not enough, though. They may even be the wrong questions to ask, at least in part, as they tend to look at reality from the rear-view mirror of history. Other more present and forward-looking questions we need to ask have to do with the digitalization of everything. Beside who owns the means of production, for instance, the most pressing question must be who owns the data we individually and collectively produce at an ever-increasing pace at every turn of our lives — personal data, financial data, health data and so on.
Another reality check we should account for is the fact that for a while now virtually no sociopolitical economy has existed in its purest ideological form, whatever that might be. Whatever their official claims, all regimes are a hybrid of very different ideologies, from China to the United States. The last ideological outposts have also changed. Albania stopped being a socialist dream in its own mind in the 1990s, Cuba is opening up its socialist institutions to some market forces. Even North Korea is a flawed example of ideological purity, as its formal integrity comes at unacceptable human and economic costs for its citizens.
I’m underlying the hybrid nature of regimes to suggest that the ideological distance separating them might be smaller and less consequential in practical terms than political theory would suggest. If opposite ideologies are more compatible in real life than we might think, and if different regimes must inevitably adapt to the laws of thermodynamics, it might be easier to conceive how not-so-different regimes could all wrap their heads around bitcoin.
If energy is the independent variable and bitcoin is a decently faithful representation of energy in the realm of money, dependent variables such as governance, modes of production and other features of seemingly opposite regimes could all adapt to bitcoin.
Pure Bitcoin and Pure Traditional Ideologies
But even allowing for more real-life flexibility and compatibility of opposite ideological traits, to see if bitcoin’s rules can adapt to different socio-economic systems, one should also try and check at a purely theoretical level the compatibility of bitcoin’s traits against the foundational principles of different systems. In other words, we have to take the answers that each socio-economic system ideally gives to the questions above and see if and to what extent bitcoin’s rules can fit each answer, at least in principle.
If bitcoin’s framework provides the tools to answer those questions in a way that is consistent with a system’s core values, we will have a preliminary indication that bitcoin can really be a neutral base-layer, capable of sustaining many different socio-economic-political systems. Or perhaps more realistically, if bitcoin’s same principles simply don’t contradict different systems’ core values, we will have a useful indication about its neutrality, its capacity to blend in, as it’s probably easier to spot what stands out as incompatible than to find all the possible ways in which different values can be compatible with bitcoin.
Although the proof is always in the pudding, I think there is little doubt that, at least in principle, bitcoin could work well enough for communities organized around a digitally native type of governance, using crypto-digital rails for many of their transactions and interactions. After all, that is part of bitcoin’s very raison d’être. Bitcoin is eminently capable of answering effectively questions of data ownership because that is exactly one of the reasons it was created for in the first place. One may not like the particular configuration of the answer, but there should be little doubt bitcoin is compatible with a digitally native structure of society — I mean, is the Pope Catholic or what?
But even if embryonic forms of communities organized around digital infrastructures could be a natural fit for bitcoin, it would be mostly futile discussing possible future forms of digitally native sociopolitical systems, as they could be so many, with endless different shades, that I would most likely miss the mark. So, it might be more useful in this phase, still very much tied to legacy regimes, to see how bitcoin might theoretically fit within more traditional types of sociopolitical economic systems, which will arguably still exercise their influence in the foreseeable future.
Traditional socio-economic-political systems would not function in exactly the same way as in the past if they adopted bitcoin. But I would argue that just as we’ve had wildly different socio-economic-political systems under the same fundamental laws of thermodynamics and mathematics in history, we can keep having very different regimes built on top of bitcoin’s neutral base-layer.
Different political systems will try and bend the laws of thermodynamics to their advantage to better fit their outlook on life. That can even seem to work for a while. But they cannot contradict or deny them for too long. To remain viable at least in the medium term, different regimes must find ways to reconcile their ideologies with fundamental physical laws. And just as they must adapt to the laws of thermodynamics, I suspect they could adapt to bitcoin’s neutral, foundational characteristics, while also retaining their own values.
Having set a possible path of exploration for future studies, answering each of the above questions in the context of bitcoin’s rules, with a thorough analysis of how compatible and consistent bitcoin’s rules are with different systems’ core values is beyond the scope and length of this article. But, even so, I’ll try to sketch the neutrality thesis I’m exploring with some broad strokes.
As mentioned in a previous article, an example of how even opposite monetary systems share neutral, foundational characteristics can be drawn through a comparison between Modern Monetary Theory (MMT) and hard money. The idea here is that all forms of money, under any monetary theory, trace back their value to using energy, and lots of it — none excluded, one way or another.
Money wouldn’t be money otherwise. It wouldn’t carry any value if energy derived from social consensus, intrinsic traits, work done to create it and the work it allows were not distilled into it. Its embedded energy and energy-harnessing potential are the only reason we are willing to accept money as payment and store of value.
The viability of money rests on the balance between the amount of energy ensuring its existence (energy in) and the amount of resources, goods and services that money can pay for over a set period of time (energy out), before hitting an operational wall our capabilities cannot climb or an inflation wall of high demand and low supply that is equally insurmountable. This inflation wall is actually an energy wall, which Modern Monetary Theory tends to see as a ceiling that should cap our spending and hard money proponents as a floor on which additional spending decisions should be based.
MMT and other chartalist approaches argue money’s value descends from the State by decree to pay taxes, allow credit and settle debts. MMTers argue high debt doesn’t matter as long as it’s repayable in nominal terms thanks to a country’s ability to create its own money — what’s colloquially referred to as “money printing”.
On the other hand, fiscally conservative, hard money proponents argue money derives from private commodities by their scarcity, intrinsic value and usefulness to streamline barter and make commerce easier. They argue high debt matters in the first place because it weighs on our capacity to fuel future growth, leading to the debasement of money through inflation, which is the main tool governments use to reduce debt.
When MMT says the only limit to deficit spending and money creation is set by the resources we can deploy before hitting a wall of high demand and low supply, it’s saying at some point there is not enough energy going in that we can transform in the energy outputs we’d like, i.e., there is no free lunch.
Under either theory, sooner or later, our wealth and debt potentials are set by the amount of energy we are able to harness with the resources available over a set period of time — ultimately set for MMTers or set to begin with for hard-money proponents.
Whatever money one embraces, if we trace back their functioning to first principles, gold, bitcoin and fiat currencies all hinge their worth on the inescapable fact that sometime along their different value chains they must incorporate energy in their existential profile. Despite representing radically different visions, all of them subscribe to the school of hard-energy knocks, all of them fall within the no-free lunch camp. It’s just a matter of when we perceive that reality presents us with its energy bill, not if — energy rules money.
The amount of energy, expressed by the laws of thermodynamics, directly or indirectly needed to create, extract or produce something always is and will always remain a good gauge for the value of that thing.
As the laws of thermodynamic and mathematics don’t change to accommodate the ideological peculiarities of different regimes, it’s always different regimes and different monetary theories that, one way or another, must adapt to the laws of physics when countries go from feudalism to nation-states, from monarchy to democracy, from communism to capitalism, or from the gold standard to fiat money, generating many different variations on their underlying socio-economic-political themes.
Just as I argued it might be more useful to look at bitcoin in the context of purer forms of traditional regimes, it might also be more useful to use the same approach at bitcoin’s end, i.e., to look at traditional regimes in the context of a pure bitcoin standard. In other words, to explore if and to what extent different regimes might be compatible with bitcoin, it’s probably more revealing to imagine how they could function under a full bitcoin standard, in order to eliminate as much as possible the softening effects of traditional monetary systems.
Some of these examples, especially the one I’m going to explore — communism — may look at first sight paradoxical, even absurd, like fitting a round peg in a square hole, and yet, I would argue that at closer inspection their mechanics are not internally or mutually contradictory, but could be fairly snug.
Communism and bitcoin
I’m going to focus on communism because it’s the socio-political-economic system that might seem more at odds with bitcoin. If communism turned out to be compatible with bitcoin, other, less centralized, less dogmatic political forms might probably be compatible as well.
Among the core values of communism that could contradict the basic principles of bitcoin, the absence and condemnation of private property, together with the centralized, state-sanctioned planning of the economy are probably the main ones.
Bitcoin is fundamentally open and accessible as a software, a network and an asset. Its monetary governance is built into its code and it functions automatically. Its use is permissionless, it doesn’t require a central authority or planning. But do these bitcoin features fundamentally prevent communism from adopting bitcoin? Is there a world where communism might go hand in hand with bitcoin?
Let’s see a few ways in which bitcoin’s principles and structure could be compatible, or at least not fundamentally incompatible, with communism.
Bitcoin doesn’t have any gatekeeper for entry, it’s open, ecumenical, universalistic in its reach and availability. But communism wouldn’t necessarily disagree with bitcoin’s thrust for openness. Communism has also a universalistic claim. Within the parameters of its own logic, it doesn’t need to be “open” in a liberal sense because by definition it already espouses a philosophy of maximum inclusion — a common nature and destiny embracing everyone within a non-hierarchical social structure. Based on how it poses itself ideologically and ontologically, as far as communism is concerned, it doesn’t need to open up, because everybody is considered already in.
One can conceive of openness as the one bitcoin proposes only in contrast with closeness and exclusion. From communism’s point of view, though, it’s previous sociopolitical systems that were closed, exclusionary, where agricultural fields were fenced off, access to the means of production restricted by capital availability and the possibility of a good life precluded to many by a rigid class structure. Communism doesn’t need to be open in a liberal sense of the word because, within its own logic, it already is, because its very raison d’être is opening up the possibility of a good life to all — where “a good life” has to do more with covering necessities like health, education, work, leisure, old-age support, etc. than satisfying all possible human desires and inclinations.
Conceptually, if not historically, communism attempted to give voice to the sum total of people through a capillary system of representation that was intended to be much more wide-reaching and inclusive than previous ones. It aimed to build consensus from the bottom up. People’s contribution to the system was measured in terms of the work they could do. Karl Marx’s version of money was supposed to be a system of labour certificates, whereby people were rewarded according to the number of hours spent in production. It was a soft, misguided version of “proof-of-work”, but it still aimed to link value to work and its usefulness for the survival of the system.
All these traits are not particularly at odds with bitcoin’s consensus-building philosophy for a distributed, horizontally organized community — even if in terms of execution communism’s capillaries all led to a centralized beating heart, while bitcoin’s heart remains distributed. According to researcher Brett Scott:
To those with a more left-wing libertarian impulse…cryptocurrency is interesting because it has features that potentially allow for non-hierarchal self-organization and peer-to-peer collaboration within a communitarian network structure.
In a 2016 paper, University of Susses researchers Steve Huckle and Martin White have actually used Marx’s labour theory of value to find the fair price in bitcoin of a Nissan Leaf car, equating energy and work to quantify the amount of “labour” going into the lifecycle of that particular model.
Just as historical communist regimes pursued and obtained control of most forms of property and means of production within their borders, they could at least aspire to control bitcoin mining equipment, validating nodes and other key infrastructure within their borders. We know that would be very difficult to accomplish, and that the very idea of borders in a digital, cryptographic age is almost hopelessly quaint, but the point here is not that it’s difficult, but that in itself it wouldn’t contradict communism’s founding principles.
Of course, this would betray and contradict bitcoin’s spirit. If a single entity were to acquire complete or almost complete control of the total hash power and validating nodes for a protracted period of time, it could indeed rewrite the blockchain, it could push through changes in the code, blow off the 21-million coin cap and all sorts of other disruptions. The game theory, the competing hard forks in the blockchain and the whole set of countermeasures this situation would trigger on the part of the dissident bitcoin community have been played out and dissected already in many articles. It’s the ultimate fight many bitcoiners would love to see unfold to prove bitcoin’s radical resilience as a decentralized system.
But what I want to stress here is that this type of existential threat for bitcoin has no intrinsic cause-effect determined by communism as a political system. The same threat could come from any other autocratic type of regime or electoral democracy. It’s not because communism espouses communal property or central economic planning that it would want to do necessarily away with bitcoin as a way to base economic and monetary transactions on scientifically sound, universally accepted, neutral energy laws. It was actually a cornerstone of Marxism-Leninism and a point of pride over a long time for communism to describe itself as “scientific communism” — if it adopted bitcoin, communism would probably have its best shot at being scientific.
Centrally planned and managed mining would be less efficient than it could be otherwise — in the same way as central planning by historical communist regimes was. Transactions might be included in each block based not only on fees, but other centrally planned criteria to prioritize certain social-political goals. Mining rewards and fees would all go to the State, which would use them, as any other public or private entity would, to fund its objectives, whichever they might be. The whole system might be less cost-effective, but it could still work well enough for long periods of time — just like different historical iterations of communism have in real life under different monetary frameworks.
I underline these aspects not to make an apology of communism, or any other ideology, but to stress that even a very dogmatic, closed-in, bent-on-itself, rigid, bureaucratic, slow-moving, uncompromising system like communism, within its own value system could coexist with bitcoin, which is itself a very rigid, slow-moving, consensus-based protocol.
Follow the Money (Base)
Communism and all other socio-economic-political systems would need to reframe their relationship with some aspects of money, to coexist with bitcoin. One main change would be going from a very flexible monetary base to a rigid monetary base. The other main adjustment any sort of State would have to make in a bitcoin standard is the impossibility to control the money supply.
Historically, what comes closer to bitcoin’s neutrality is the gold standard, except for the fact that gold’s supply is not fixed, nor there was a durable political consensus to keep the gold-dollar peg fixed, let alone to stop digging gold and keep the physical supply fixed.
Assuming we would ever get to a point where bitcoin has replaced the dollar as the world trade and reserve currency, or gold or oil as the world’s reserve assets, such changes would imply a process, during which bitcoin progressively assumes these roles while sharing its reserve status with the dollar or other currencies and assets.
This transition might happen very slowly, or perhaps quite abruptly in the case of a systemic collapse of the collective trust underpinning the dollar and the Breton Woods system. As unlikely as that might be, it could happen if unsustainable sovereign debts were topped off by an irreversible crisis of confidence in States’ capacity to honour not only long term liabilities, but also short term commitments. A fiat-to-bitcoin transition might also happen in a “gradually, then suddenly” kind of way. Either way, during this phase, a fixed money supply would only be limited to bitcoin, and different socio-political-economic regimes would maintain a certain flexibility and control over their overall money supply, based on their capacity to influence the other reserve currencies and assets.
Gold was supposed to provide a fixed, or at least a relatively stable, monetary base. But as commerce developed over the centuries, gold could not be used directly and effectively as a trading currency — too bulky, heavy, unpractical, hard to verify, etc. So the gold standard came along, where more practical banknotes were supposed to be pegged to gold and be a faithful, redeemable, nominal representation of gold. But once broken the direct, physical link between gold and money, rulers and banks around the world diluted the gold “content” of each note more and more, until in the 1970s the United States officially abandoned the gold standard.
Even if central banks around the world continue storing gold in their vaults, the monetary base of countries is now detached from any fixed base-layer — it can grow (and theoretically contract) freely, almost at will. The monetary base managed by central banks is further diluted and enlarged by the so-called “euro-dollar” system, which is outside the control of central banks.
The euro-dollar system takes away from central banks’ capacity to control the overall pull of money, but central banks maintain control of the official levers of monetary policies, which give them the director’s chair in building a narrative around their policies, with the reasonable expectation that their narratives will become self-fulfilling prophecies, even if they can’t control the totality of money.
In a pure bitcoin system, bitcoin would arguably change the monetary base to a fixed base-layer, potentially taking away at least a big chunk of the monetary and narrative leeway central banks have had so far. I say “potentially” because I’m not entirely sure that even bitcoin’s ironclad principles could not be distorted for periods of time into some kind of fractional reserve scheme, or derivative scheme, or leveraged scheme with the aim of “enhancing” what’s supposed to be a fixed, pure, unincumbered pool of pristine capital into something less stable.
Be that as it may, changing the monetary base according to a pure bitcoin standard means taking away monetary policies and narratives from central banks’ hands. It also means that fiscal policy would become the main instrument in governments’ toolboxes to do what until now they accomplished with fiscal policy and monetary policy.
A Simpler System?
Nobody knows if and when bitcoin might become the dominant reserve currency or one of a few reserve assets. But, as explored more in detail in a previous article, to the extent that bitcoin and renewable energy can gradually fuse into one neutral reserve ecosystem, with both bitcoin and renewables untied to any particular “issuer”, this twin monetary-energy system might provide the basis for a gradual switch from a debt-based to an equity-based monetary system — possibly simpler, more transparent and more stable. The following might be some of its traits:
· the currency doesn’t need to be pegged to a hard-to-find resource like gold to be sound, as the currency is intrinsically sound by virtue of its finiteness and its other attributes;
· the reserve asset can keep appreciating and retaining its allure even if interest rates go down to zero, in the case of economic downturns or external shocks, as the asset’s value is tied to the theoretically unlimited productive potential of freely available, zero-marginal cost energy and network effects. This is unlike Treasuries, which have a hard time appreciating and retaining their appeal if interest rates fall to zero, since the reserve asset is disconnected from any intrinsic productive potential. As treasuries are a form of debt, if yields decrease to zero or go negative, their potential for further appreciation cannot be counted on.
· the reserve asset doesn’t need to be wrapped as a different package from the currency to offer a future yield, as with the dollar and Treasuries. The currency itself is the reserve asset, which doesn’t’ need to offer a yield as it’s nobody else’s liability, with a tendency to be deflationary, i.e., to appreciate in terms of purchasing power. And if it does offer a yield, it’s because it’s more similar to equity capital, with no fear of dilution and suited for investments, than debt capital that can be used for either unproductive consumption or investment;
· the economic incentives, social contract and network effects making the currency and the reserve asset valuable don’t need a separate governance structure as with fiat money, treasury departments and central banks, which remain politically exposed and malleable.
· The hard-work foundations, i.e., the energy underpinnings of the monetary system, don’t need an external crutch, like oil with petrodollars, as renewable energy would be incorporated in the first place in bitcoin as an integral part of the money and it could be priced in that currency;
· The fixed monetary underpinnings of the renewable energy system don’t need to promote inflation and overconsumption to sustain economic growth, like dollars with oil and the “fiat economy”.
· Interest rates would reflect market dynamics more directly, with central banks becoming more similar to any other large player in the bond market, in the sense that central banks would no longer have the role of arbiters with the ability to suppress or increase interest rates at will with new issuances and retirements of sovereign, “risk-free” bonds.
· Central banks would still lend, but they would not necessarily be lenders of last resort through the creation of new money anymore — not beyond the 21-million bitcoin asset pool anyway, as their lending would be denominated in bitcoin.
· In terms of lending, governments could offer bitcoin denominated treasuries paying different yields and with different maturities, reflecting their own confidence and ability to steer their respective economies toward more or less profitable and sustainable activities.
· Central banks might be able to act as buyers of last resort, to the extent that their tax-raising capabilities and bitcoin denominated assets allow them to buy other distressed assets. Central banks buying bitcoin denominated debt would increase bitcoin’s deflationary dynamic.
· Unless fractional reserves creep back into the system, central banks would not be able to create new money by selling new sovereign debt.
· For the purpose of this discussion, the assumption is also that a bitcoin standard, if it took hold, would eventually absorb and retire the euro-dollar system, leaving bitcoin as the main or only reserve currency and risk-free asset.
All the things I envisioned above would represent a monumental paradigm shift and I’m not arguing it would be easy, smooth or even entirely possible. But what’s difficult here is not trying to fit bitcoin into opposite ideological frames, as bitcoin’s basic principles can lay with very different bedfellows. The difficulty is posed by bitcoin’s proposal to replace what unites opposite ideologies into a monolithic fraternity — State control of money.
Control of money, in its pure and raw form, though, has very little to do with different ideologies and regimes. It has everything to do with the exercise of power for whatever ideological end one might subscribe to. Bitcoin takes away some of the State’s power over money creation and narratives, under whatever political regime, and puts it back, in the form of money as an expression of energy, where it ultimately belongs to — a more neutral, universal, impersonal physical-quantitative-mathematical base layer.
Science, the laws of energy, mathematics are foundational. But narratives are important too. Detractors discounting bitcoin leave any positive, constructive narrative around bitcoin in the hands of bitcoin supporters, whoever they might be. Detractors do this at their own risk, a risk they are likely underestimating. From a risk-management point of view, refusing any exposure and going against the upward trend in bitcoin monetary adoption is folly. From a socio-political strategy point of view, it’s equally foolish to let one’s competitors run away with positive bitcoin narratives, which will be used to perfectly suit one side’s objectives against other sides’ needs.
Although more conservative, free-market, libertarian narratives have staked a legitimate claim to bitcoin-land, narratives are not firmly set around partisan lines. Not yet at least, as demonstrated by the bi-partisan response to the controversial bitcoin provisions of the recent U.S. infrastructure bill. Thankfully, there are still many narratives around the world, rooted in very different local circumstances. But once narratives are more set and entrenched in some of the major countries, it’s going to be harder to change them, to convince people who were hurt by the very real consequences of one type of narrative that bitcoin’s base-layer can help them advance their own vision. These people will tend to see bitcoin as the “enemy”, not the power structures which used its properties for their own ends.
In laying out its rules, bitcoin does open up new ways to organize human interactions in a decentralized way, or in a less centralized way, but decentralization in and of itself expresses a geographical/structural arrangement more than an ideological one. I can see decentralized autonomous organizations, or decentralized communities united under a shared vision and a common governance architecture serving equally effectively either libertarian or collectivistic values or any other opposite set of values. This poses opportunities and challenges for traditional ways to organize society, both from the “left” and the “right”, progressives and conservatives, anarchic and statist, etc.
Something else might come up in the future to provide an even more accurate incarnation and reflection of the universe’s foundational principles within the fabric of society, but bitcoin is now the truest and most widespread embodiment of universal laws in money, economics and society. It promises to be an effective way to reconcile at least in part the imperfections of human life with the deterministic accuracy of nature within a single, multipurpose, emerging paradigm.
It’s up to us to explore bitcoin’s functioning both in principle and in real life, and ascertain its applications as a fundamentally neutral base layer, on which to build many different versions of reality.