Article by Milosz Matuschek, first published on “Freischwebende Intelligenz”.
When Michael Ende wrote his novel “Momo”, which is much more than a children’s book, he had given a lot of thought to alternative monetary systems. The writer knew that the question of the monetary system shapes and changes culture. Money is made by people, so it is also in the hands of people to rethink and change money. And thus give the world a new face. This is what Bitcoin is all about at its core: giving the world a new face. And we are on this threshold right now. Now.
What is Bitcoin actually?
If you are just starting to get to grips with Bitcoin, you are in for a particularly enriching experience: Namely, the realization that the wealth opened up by Bitcoin is not material, but spiritual and intellectual in nature. Bitcoin is capable of breaking down the boundaries of thought, opening up new channels of reality and paving the way for social transformation. On the other hand, those who stick primarily to the price curves may overlook precisely this transformative power in the daily ups and downs.
So what is Bitcoin? A cryptocurrency? Yes, but not only, because forms of money that make use of encryption technology existed before and still exist today in many cases parallel to Bitcoin. Bitcoin’s currency function is just one of many facets. It is perhaps not even the most exciting and practicable.
Rather, Bitcoin is a multidimensional phenomenon, like an onion with several layers. But it is unique in its own way and has so far only been copied many times but never equaled. In short: there is Bitcoin and then there is nothing for a long time.
There are at least two ways to approach Bitcoin. Of course, you can try to understand Bitcoin by a) reading the famous white paper by the anonymous initiator “Satoshi Nakamato”, a kind of revolutionary instruction manual for nerds. Or b) following the extremely poor reporting in the mainstream media, where you mainly learn that the price has just fallen again (mostly that) or has just risen (they somehow don’t like to report that).
So let’s try a third, somewhat less confusing alternative: let’s approach Bitcoin in an unconventional way, namely using phenomena that we already know.
A language
Money is like language and language is like money. Money is a means of communication about values that has grown from below, not imposed from above. “Caesar non supra grammaticos”, the emperor is not above language, was already known in ancient Rome. The fact that money is based on a convention was demonstrated by the economist Carl Menger at the end of the 19th century in his book “The origin of Money”. According to this, money can be anything that is designated as such by agreement.
However, the idea remained in people’s minds that money, because it was linked to power, had to be a kind of state brand. Like an anthem or a flag. The monetary system thus represents a blind spot in the history of human emancipation. People got rid of emperors, churches and ideologies, but when it came to the question of money production, they said to themselves: we don’t know anything about that, let’s leave it to a banking monopoly and the governments. With fatal consequences. The fiat money system ended up biting itself in the tail.
The price of this timidity: a bloated financial sector, fiscal excesses, costly wars, hyperinflations, currency reforms, creeping or abrupt expropriations. No state paper currency has survived in the long term. The bullshit filter of history shows: Governments are the worst possible currency managers. Fiat currencies are dinosaurs that were never allowed to die and have been kept alive again and again in cloned form. But Bitcoin is the approaching meteorite.
Because the question that Bitcoin raises is: what if money, like language, can be decoupled from the state in such a way that no one person can corrupt the process? It would be an act of rebellion, of disobedience against the current monetary system, for sure. It would also be an act of enlightenment. The exit from a monetary immaturity that is self-inflicted because it has never been questioned. Bitcoin is a cross between virtual numismatics and Esperanto. But an Esperanto that is spoken millions of times over.
As in language, cacophony or linguistic confusion is a hindrance to communication. Once a standard has been found, it is maintained. The Internet still runs on the old TCP/IP protocol. Changing standards is rare. Bitcoin, as the first functioning alternative to the fiat money system, has become its own standard. Bitcoin is now probably too big and too important to be seriously threatened by a competitor. Bitcoin has moved beyond the so-called focal point or Schelling point.
An organism
Bitcoin is like an organism, comparable to a life form that is particularly resilient, reproduces, interacts, nourishes itself and is designed for a long lifespan, like a fungus. Fungi are one of the oldest life forms on our planet. And they are extremely resilient, otherwise they would not have survived for 1 billion years. Fungi are networks of communication. They play an important role in nature in the decomposition of dead materials.
https://www.youtube.com/watch?v=uTgDQ56Su38
Bitcoin feeds on decaying, modernizing fiat currencies that are ultimately doomed. With each participant, the network becomes stronger, more practicable, more resilient. According to Metcalfe’s law from network theory, the benefit of a communication system increases proportionally with the number of participants. Bitcoin is growing rapidly.
A technology
The good thing about technologies is that they do not negotiate. A technology is either better, in which case it will prevail, or it will not. But if it prevails, it does so in a brute force manner. It simply makes the old look old. An exodus begins, first sparsely as an experiment by a few, then by “early adopters”, and finally by popularization in the mainstream. The breakthrough of a technology initially looks like a small wave and only at the end does it become apparent that it is actually a tsunami that buries everything old and leaves no stone unturned.
Technology brings paradigm shifts from time to time. That is why Bitcoin cannot be adequately described in the currency category. The automobile made even the fastest horse look slow. The cell phone made phone booths look like relics from the Stone Age. Bitcoin is superior to fiat money in every respect. Technological revolutions know no pardon, no turning back. The Lindy effect roughly states that a technology that survives ten years will also survive the next ten years. Bitcoin was launched in 2009 and will soon be entering puberty, with all the ups and downs that come with human development.
In technology, we talk about Gartner hype cycles. The adoption of a new technology does not take place in a linear fashion, but rather in a series of sharply fluctuating curves. Bitcoin is a technological change whose acceptance comes with a price tag that can be tracked every second. Since the beginning, Bitcoin has been in a constant price discovery mode.
A new asset class
All central bank currencies in the world are fiat currencies, i.e. not backed by anything other than the promise of politicians that they are stable and trustworthy. In fact, the money supply is being increased in an inflationary manner, the value of money is constantly falling, and the political target is a 2% loss of purchasing power per year. In plain language, this means that the money you earn today will buy 40% less in 20 years’ time. At least. Actual money devaluation is way higher. Call it a form of expropriation if you like. So the money we use has something of an expiry date. It is getting worse. It has a leak in terms of purchasing power, in terms of value.
Bitcoin plugs this leak by performing the opposite function. The quantity of Bitcoin is mathematically limited to 21 million Bitcoin from the outset. These bitcoins are created in the network through the mining process. This is an energy-intensive process that makes the network particularly secure and for which a miner receives a reward in the form of Bitcoin. Initially, it was 50 Bitcoin every ten minutes for the miner who correctly calculated the cryptographic code (hash) for the next block. Now it is only 6.25 Bitcoin. In 2024, this figure halved again and so on. Bitcoin is therefore a deflationary asset class.
Bitcoin is designed to eventually become harder money than gold, of which only a certain amount can be created each year. This also makes Bitcoin a very “inelastic” asset class, which means that you cannot produce more of it if demand increases, as is possible to a limited extent with gold. As the supply remains the same, an increase in demand is sometimes reflected in explosive price increases.
More and more companies are currently buying Bitcoin in order to invest their cash reserves to preserve purchasing power. The company Microstrategy holds several billion dollars in Bitcoin, and Tesla also bought Bitcoin worth 1.5 billion a few months ago. El Salvador has declared Bitcoin the national currency and bought Bitcoin. Other countries want to follow suit. At this point, you don’t have to be an investment genius to understand that a “land run” is imminent.
A currency
Bitcoin combines all the functions of currencies (unit of account, medium of exchange, store of value), but has significantly increased its purchasing power compared to fiat currencies. Bitcoin can be used as a currency, even in everyday life, even if the Bitcoin blockchain is not primarily designed to process a large number of transactions. However, this can be compensated for by low-cost, parallel systems such as the Lightning Network.
Whether Bitcoin will also establish itself as a means of payment in everyday life or remain primarily an effective store of value that is ultimately superior to gold is currently an open, intensively debated question. Since the exchange of Bitcoin into possibly more practical forms of payment, even a crypto prepaid card, is a matter of seconds, the question of whether Bitcoin is suitable as a currency is ultimately irrelevant for its mainstream acceptance.
Also, why pay with an asset that appreciates in value? According to Gresham’s law, which goes back to an ancient parable, bad money is spent and good money is hoarded. This means that the volatility of Bitcoin is ultimately more of a bugbear for Bitcoin opponents. Bitcoin can also be exchanged for a more stable form of currency shortly before the act of purchase.
A system of accounting
Bitcoin is a payment network and an asset class. Or to put it another way: an asset class that has its own uncensorable distribution channel, the blockchain. Gold, on the other hand, is like a train that relies on the tracks of others to get from A to B. The Bitcoin network is therefore a booking system on the internet whose bookings cannot be reversed or changed retroactively, as only users communicate with users on this network. There is no guardian of the blockchain or any central authority. The transactions are grouped together in blocks and attached to each other using cryptographic means, creating a block chain or blockchain.
At first glance, the idea of a booking system sounds boring. However, it is probably the most overlooked revolution that Bitcoin has initiated. Because before Bitcoin, there were only two other forms of bookkeeping: first, simple bookkeeping, in which only one entity (the king, ruler, an authority?) kept a ledger of debts and could enter or remove debtors at will. Thousands of years later, double-entry bookkeeping followed, in which two parties kept records of transactions. This dates back to the Renaissance and enabled the rise of Venice as a global trading power, to which the Medici cleverly linked their banking system.
500 years later, Bitcoin is now the evolution of bookkeeping in a threefold form. Each participant keeps a record of which transaction takes place from where to where, for example from participant A to B. In addition, the transaction can be traced by anyone in the blockchain accounting system, even if not under a clear name. Pseudonymized addresses that can be assigned to individuals communicate. One look at the blockchain is enough to ensure that there is always consensus and clarity about the asset situation in the network. The booking system is more than just an account book. It is also a machine of truth.
A cult
Money, faith and religion are related. Gold has been worshipped for thousands of years, and the dance around the golden calf is perhaps inseparable from the sober side of money as an everyday object. Money has something messianic about it, it saves, even if only from the burden of debt, which in the context of religion is not far removed from the forgiveness of sins.
Questions of money are always about questions of real value. This perhaps almost inevitably gives rise to a “pure doctrine” as opposed to alternative doctrines. The history of alchemy is a good example of this: one figure in whom many disciplines culminated was Isaac Newton. He was an alchemist and at the same time one of the first scientists of the modern age. At times, he even acted as the guardian of the currency in England, presided over the English mint and brought counterfeiters to the scaffold. Bitcoin also uses the narrative of the promise of salvation to spread as an idea in people’s minds. There is now a well-branched Bitcoin propaganda network in the form of memes and pictures.
An idea whose time has come
How should we weigh these seven elements? Is Bitcoin a tech cult with digital fake gold, a new edition of alchemy, as many central bankers or critics would like it to be? Or is it actually a technological advancement of the idea of money with potentially epochal effects on the entire financial system? Somewhere in the matrix of these seven elements, perhaps the truth is hidden.
What Bitcoin is certainly not is a universal savior. Bitcoin is a vehicle for change, but it relies on the cooperation of the network’s participants. Anyone who believes that far-reaching changes in the financial system and society will occur automatically just because a few people speculate with cryptos is likely to be mistaken. Bitcoin is certainly not perfect either. However, the ideas behind Bitcoin, such as decentralization, consensus building, the incentive system for network-friendly behavior in mining and much more can serve as positive role models for other areas that should also be reformed. However, Bitcoin is neither a perpetual motion machine for quick riches nor a jack-of-all-trades.
Anyone looking for a perfect investment that is easy to use, moral in every respect, environmentally friendly, mindful and fair will find little in this world that will satisfy them, whether it’s farmland, gold or, oh yes, the ever so environmentally friendly “petro-dollar”. Yes, mining Bitcoin is energy-intensive, but a large part of it is now obtained from renewable energy sources and Bitcoin is still less energy-intensive than the banking system. Yes, the price is volatile and will remain so for a long time, but that is probably still better than sitting on safely decaying government money.
Let’s not kid ourselves: Bitcoin will still face some resistance from the established financial system and central banks. But Bitcoin is fighting its way into the consciousness of mankind, because there are not many alternatives if you want to protect your purchasing power from the central banks’ weapon of mass destruction and their expansion of the money supply.
Bitcoin is an idea whose time has come. And according to the writer Victor Hugo, not even an army can stop it. Conversely, however, Bitcoin could stop armies, because once Bitcoin has established itself, states could no longer rely on the money printing press to finance cost-intensive wars.
That would be the best function that Bitcoin could have.
Almost too good to be true.
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