Digital Property

If you had to summarise what technology has done since the turn of the millenia a good answer would be that it has dematerialised our world.

Napster dematerialised music in 1999, ushering the iPod in 2001. Google dematerialised libraries, Amazon retail stores, Youtube video stores.

But in all these cases they delivered a 10x improvement too. Napster made music costless, Apple made music mobile. Google gave you a thousand personal librarians. Amazon increased choice and removed counterparty risk. Youtube showed you the best producers everywhere, not just the ones in the video store.

With everything that could be digitalized having been so, recent technologies started taking things the government had a legal monopoly on. The best example of this is Uber taxi which successfully competed against a government regulated industry.

Bitcoin

What is the next plank to fall? Banks, right?

We hear all the time that cryptocurrencies like bitcoin stand to replace the banking sector, creating a new world where people are their own bank and use decentralised financial technology to lend to oneanother.

Replacing the bank isn’t quite what it seems, however.

To make a bank an order of magnitude better – as Amazon did to shops – you would address a 10x pain point. At the moment this is inflation, which forces people to withdraw their money from banks and put into risky assets like stocks and real estate. People widely accept this state of affairs, in the same way poor taxi service was accepted before the advent of Uber. But it may not have to be this way.

Did you know?

25% of all dollars were created in the last 18 months.

Any serious challenger bank would therefore look to restore the value storing property of their money to make their customers’ lives easier.

Minting a new currency is illegal, however. And it would be much more consequential than Uber taxi. The state’s primary means of control is its monopoly over the currency. It’s no accident that conquerors throughout history introduced their own currency, and today’s leaders would be impotent without central banks.

So if currencies do come to be replaced, it will not be the work of a Google or Amazon.

A divine conception?

This is why supporters of bitcoin believe it is so profound.

Bitcoin benefited from a rare divine conception: it was created by an unknown entity who held onto less than 5% of its supply. These starting conditions are as important as the technology itself, because they shield it from being made illegal.

There’s no one you can prosecute, and from a regulatory perspective bitcoin is a commodity rather than a security.

I’m sure that in 20 years there will either be very large transaction volume or no volume.

Satoshi Nakamoto, 2009

If bitcoin succeeds it could tear up the existing playbook and permenantly change societal power dynamics. It goes far beyond the scope of Amazon or Uber’s dematerialization.

David vs Goliath

When you threaten a government to this extent, it is reasonable to expect a fight of biblical proportions. This is because bitcoin a) threatens government to an unlimited extent and b) can only be countered by grossly infringing civil liberties and stopping capital flows.

That begs the question, are we headed either for a world with a great deal less freedom, or a world with much reduced government?

The gravity of losing monetary authority is not lost on countries like China, who have swifly banned it. For western politcians the question is something like, ‘do we sacrifice ourselves for our values?’. You wouldn’t expect our dynastic leaders to answer ‘yes’.

But politicians may not have a choice. As globalization makes capital flight easier and easier, you would have to ban travel to ban bitcoin. Whilst some countries already do this to protect currency reserves, it is hard to imagine western governments following suit.

Instead they will probably tax Bitcoin, but again they will be limited by the threat of capital flight. It is increasingly the case that people will only pay high taxes if the jurisdiction is worth the price.

You may or may not think jurisdictions will compete to attract large holders of bitcoiners. But a coordinated ban of it is not any more plaisuble than a coordinated response to climate change.

This is why it is difficult to escape a profound conclusion about the changes that bitcoin will bring.

Not so fast

This is not to say it has to be bitcoin and not some other cryptocurrency, although bitcoin’s special starting conditions should be remembered. We are running a 12 year experiment, and the landscape could change as the social media landscape changed before Facebook’s ascent.

Likewise a black swan event could destroy the network, and depending on how you define black swan, many in power regard bitcoin as a threat rather than an opportunity.

And many ordinary people have no desire for the old system to be changed, not matter how much you preach to them that we need new money.

Whereas Uber was instantly obvious, and accessible with a free download, governments can and will do a lot to slow bitcoin adoption.

A balanced approach would be to own some bitcoin as a ‘call option’ on the future. We may have come to a point where it is as reckless for an informed person to own no bitcoin, as it is for them to only own bitcoin.