You Don’t Understand Bitcoin Because You Think Money Is Real

Apparently, bitcoin is an illusion, a mass hallucination. As insubstantial as a soap bubble, it is nothing more than numbers in cyberspace, a mirage. Bitcoin is backed only by the faith of the fools who buy it as well as the greater fools who buy it from these lesser fools. That's fair.

In addition to being an illusion, U.S. dollars are also an illusion. In addition to being a collection of numbers residing in cyberspace, they are sometimes stored in paper or coins, but although the paper and coins are material, the dollars they represent do not. There is no backing behind the U.S. dollar other than the faith of fools who accept it as payment, and the faith of other fools who agree in turn to accept it from them. In the case of dollars, at least for now, the illusion is more widespread and more strongly believed than in other cases.

The majority of our U.S. dollars, about 90 percent, have no tangible form and are purely abstract. Approximately 10 percent of the US dollar value – about $1 trillion out of a total of about $10 trillion – exists in the form of paper currency and coins, according to James Surowiecki in 2012. It appears that the number is now about $1.5 trillion out of $13.7 trillion.) Our banking system is free to create more dollars whenever the mood strikes. The money supply of M2 has expanded almost 50 times since 1959, with $13.7 trillion in the money supply as of October 2017.

A "fiat" currency is a currency that is not backed by any government. Fiat is Latin for "let there be," as in "let there be light," and "let there be lire, bolivars, dollars, and rubles as fiat denarii. Inflation has been a major result of the desire of nation-state leaders to manufacture money for centuries. In 1959, $1 had a purchasing power of $1, but now it has just under 12 cents.

Initially, the bitcoin blockchain was created to address this historical weakness, and will stop producing bitcoins after the 21 millionth is mined.

Until the end of time, thieves and charlatans will continue to attempt to game the numerous structures that are put in place to regulate and/or account for any monetary system or store of value (see: Panama Papers and Paradise Papers crooks, Bernie Cornfeld and Madoff, London Whale, LTCM and BCCI, clever and quiet thieves of Boston's Gardner Museum, 2008's financial crisis and bailouts, and Mt. Gox, the DAO, and Tether thefts). The truth is that money can and will be made and lost through any system of exchange, and that, despite appearances, there are enough people who act in good faith to prevent monetary systems from collapsing completely.

Cryptocurrencies differ radically from U.S. dollars in a few ways. The bitcoin system, for example, records transactions in an unfalsifiable ledger, not relying on bank or government authority, but on the strength of a public computer network anyone can join (theoretically, at least). The supply of bitcoins is also ultimately fixed. It is possible that the anonymity of cryptocurrency may not be quite as bulletproof as the anonymity of cash (unmarked).

It's true that making, accumulating, and keeping money is a labor of love, but if you think about it from a certain perspective, it only has symbolic value.

This shared understanding of the value of that green-tinted piece of paper, that Krugerrand, that ether token, or that pound coin, is all that matters. And it has no fixed meaning; it is subject to constant flux. In spite of all efforts to secure money, to regulate its flow by setting interest rates, or even to secure it - for example, by setting a fixed exchange rate against various assets - the “value” of all money, all stores of exchange, is unstable and abstract. All money has ever been is a fragile thread in a web of human trust, a shifting network of agreements made in and on behalf of a hive.

It is difficult for refugees to cross hostile borders unless they are forced to trade "flight capital" at a huge loss. What does that money have in common with your paycheck, a string of numbers colliding in the ether with your bank account? When you go to the market, perhaps the price of avocados or coffee goes up or down as a result of the electronic collision in your bank. What is the value of a dollar in instances of natural disasters when people must suddenly pay vastly inflated sums for a few gallons of clean water?

This fact - that ordinary money is provisional and fragile - is invariably ignored in all the common arguments against cryptocurrencies like bitcoin and the blockchain technology underpinning them. For anyone who believes that money is real, solid, or “backed by” anything other than human trust in institutions that are never sure of their stability, cryptocurrency cannot even begin to make sense to them. According to the Federal Reserve system, the U.S. dollar is backed by "the full faith and credit of the United States." But what does that really mean?

The U.S. Treasury will have to redeem one dollar for you if you take it there and ask for it to be redeemed. It could be one dollar, or four quarters, if you want.

In the cryptocurrency market, monetary crises have already precipitated a number of spikes in countries with unstable governments, including Greece, Venezuela, and Spain. The price of bitcoin shot up when the Cypriot government cut its citizens’ bank deposits by nearly 7 percent in response to the country’s 2013 banking crisis. At that point, many southern Europeans with debt-ridden governments thought bitcoin might provide a more reliable home for their money than the Cypriot banks could. It must have been a wonder for Spaniards, would their own banks be next?

Bitcoin was still a gleam in its mysterious inventor's eye so long before our existing financial institutions were deeply flawed and permanently corruptible. “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks,” said Satoshi Nakamoto in the so-called genesis block that began bitcoin's history. The Bitcoin project was built explicitly to provide a secure digital means of exchange on which a better alternative to our existing banking systems could be founded; it was a politically motivated project from day one.

Bitcoin is a cryptocurrency based on the theory that the records created by a distributed computer network can be tamperproof, so they can theoretically guarantee the integrity of a currency better than governments do. This theory has been partially proven by the blockchain system on which bitcoin is based so far, despite some substantial bumps in the road. There have been millions of bitcoins stolen since 2009, but the decentralized ledger that governs bitcoin has remained stable and incorruptible.

A fine drama of greed and corruption set during the 1920's, The Treasure of Sierra Madre, illustrates the many thefts and ripoffs that took place in the early days of bitcoin. Despite the fact that the prospect of instantaneous wealth, almost within reach, can drive people crazy, the value of gold does not cease to exist despite the propensity of greed to create crime and insanity.

A caveat to this story is that bitcoin's incorruptibility was maintained not simply because of its distributed design, not only because of its clever cryptographic safeguards, but because of the good faith and good sense of the individual developers who guided it through its wobbly-legged infancy. The project might have been lost if not for Gavin Andresen’s sangfroid, who was effectively Bitcoin’s only steward during many of its early moments of crisis. As bitcoin's system is still struggling with forks and growing pains, it is being put to the test. As of right now (this is just my opinion), the relative untrustworthiness of bitcoin's core developers, who are considered by many to be planning for their own advantage, is causing lasting damage not only to bitcoin, but also to blockchain technology in general.

In addition, cryptocurrency speculators were at risk of getting fleeced, early on, since (1) it was difficult to secure cryptocurrency, and (2) it was difficult to develop safe ways to move ordinary money into and out of cryptocurrency. Disasters like the theft of 800,000 bitcoins from Mt. Gox in 2014 tarnished the entire cryptocurrency ecosystem. As with the Bangladesh central bank losing $63 million to the Federal Reserve Bank of New York last year, the public perception was that bitcoin itself had been hacked while it was actually the largest exchange that had been hacked.

There is no such thing as saying "bitcoin is a fraud" because bad actors have scammed people, or that the financial services industry is a fraud because Jamie Dimon's company is crooked. It was known that bitcoin was used to buy and sell drugs on the dark web. If you are against hundred-dollar bills on that account because they contain cocaine, please send me your surplus. Does its use in criminal transactions undermine its legitimacy? In reality, money is intrinsically tainted.

The blockchain technology that guarantees bitcoin transactions is going to merge with other systems soon enough, since its value is incalculable. Blockchain-based businesses have already attracted significant investment from Wall Street to Sand Hill Road. It is possible to program blockchain technology to provide us with incorruptible information everywhere humans need to know for sure whether or not something really happened. It doesn’t matter how many defects Satoshi Nakamoto launched in 2009 — and there are still plenty — he proved that there is actually a way to record human transactions in a foolproof manner, entirely independent of government or bank authorities. That’s the only way you can go.

There is always the possibility that the battle for stability in a currency will be lost, as human nature is such that some will cheat or game a transaction wherever there is a chance. Even the limited and precarious stability we have in developed countries requires vigilance and work on the part of countless principled people, and there is never certainty. We will never stop fighting to preserve the illusion that money exists, and we won't be able to.

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