I am a practicing lawyer in California, and one of my passions is cryptocurrency and its underlying blockchain technology.
I have an entrepreneurial alliance with another lawyer from my parents’ generation who no longer practices. He holds an Economics degree from a leading institution and turned down a Ph.D. program to focus on his law degree.
His first Econ professor promised to save aspiring lawyers a lot of time— “There is only one law; it is always followed, it is always obeyed. That is the law of supply and demand. The rest, my friends, is politics.” More on that later…
To do their jobs, economists employ mirages like “holding everything else constant, the effect of x is y”. It is a useful tool, because it is the only rational way to analyze the effect of x, but it is a mirage because it is impossible to hold everything else constant. Other economic factors are always changing as well.
For example, conomists still have not solved the “Technology Productivity Paradox” where they cannot find any evidence for productivity gains from technology investments. This can even cause negative productivity according to their figures. Yet no one can doubt the incredible progress and benefits from tech investments all around us.
It can be argued that since economists have no measure for technology investments, their models are seriously flawed and therefore their monetary policies are completely wrong and heading toward disaster. Their only answer lately has been more debt — which isn’t working to squash the deflation.
Deflation is a wonderful way to spread the technological wealth of society. The broader the application of technologies across industries, the more deflation we will have, and the benefits are distributed globally.
For the last ten years, Bitcoin maximalists often cite the programmed scarcity and finite supply of the coins as the key to its inevitable world dominance as “money” and its ultimate skyrocketed price “to the moon”.
For any economy in equilibrium and holding everything else constant (there it is again!), a finite and/or scarce money supply would be a disaster. As the economy grows, and/or gains by becoming more efficient, or technology advances, the same amount of money chases the added growth, and the only way for equilibrium to be restored is for the general level of prices to fall. Deflation, followed by contraction, recession, and depression likely result. This has happened in some third-world countries where there is no further money available because of central economic monetary mismanagement.
That realization is what led to Milton Friedman’s “Chicago School” of Monetarism in the 60’s and 70’s, which advocated a small but steady increase in the money supply to account for growth, but small enough so as not to trigger inflation of general price levels.
If Bitcoin enthusiasts expect it be the “world money” like fiat money, it ain’t going to happen. Nor does it need to, because more “money” is easily created in the form of another cryptocurrency. In fact, that is what is happening as you read this.
On the other hand, Bitcoin’s scarcity and finite supply helps its price supports in relation to other forms of exchange like fiat currency. It is a critical factor there.
But is it then just a speculative asset, or is it really money? It certainly for now is a store of value and a means of exchange.
Money is primarily a means of exchange by which you may secure value in modern times. It has been backed primarily by the power, and full faith and credit of the government who has by fiat declared it to be money. Money’s power in this regard requires the acceptance of all those within the economic system to recognize it as money and the means of exchange.
Consensus in the form of acceptance of the means of exchange might mean inherent value, or it might mean no inherent value, but there must be a consensus, or you do not have money. In the dark ages, people were not hoarding the gold coins that had been around for almost 1000 years, they were seeking to acquire farmland because of its inherent value to produce food. Like other economic factors, consensus is dynamic rather than static.
Inherent value commodities such as precious metals have disappeared from money long ago, and slowly over time in different stages. Modern fractional banking controlled by central government has obliviated them.
Bitcoin’s inherent value has been secrecy, privacy, liberty, convenience, and to some extent, novelty. Much of its inherent value has dissipated as the rest of the world has caught up. Yet crypto’s acceptance as a mean of exchange is likely just in its beginning stages.
In America, there is “full employment”, yet interest rates, the traditional price of money, remain at historical lows that most domestic economists thought they would never see in their lifetime. That should be a super-stimulus, but it is not. Middle class people with one or two jobs cannot even pay their rent or mortgage, much less save to stimulate investment. Changing accredited status rules will not help.
It makes no sense unless you consider governments’ endless military spending, the monopolies and oligarchies that control business and distribute resources inefficiently, banks and financial organizations that dictate economic conditions, and the wealth class that has appropriated most of the world’s economic resources to themselves.
In fact, the only market where there may be free competition anymore is the creation of currency, thanks to the blockchain!
There have been many economic epochs, but we like to think of them broadly as (1) fueled by access to natural resources of the earth (many, many centuries), then (2) fueled by collective capital and financial resources, and technology advances, leading to and encompassing the industrial revolution (just a few centuries), and the future will be (3) fueled by access to computing resources.
Cryptocurrency in some form will likely be the primary monetary exchange of access to those computing resources.
Big government and big business will not surrender their positions easily. Central Banks are planning digital currencies (CBDC’s), Facebook and other centralized corporate behemoths are planning corporate cryptocurrencies, versus the decentralized platforms that created the current cryptocurrencies, whose networks are expanding.
Remember the politics part?
The worldwide financial crisis in 2008, brought about largely by a loosely-knit cabal of the Fed, big banking organizations, Wall Street operatives, and the political interests who represent them; was papered over in the last 10 years by untold trillions of government dollars in bank bailouts, easy money for centralized organizations like other too-big-to-fail businesses, money supply increases ostensibly meant to stave off deflationary spiral, and tax cuts which primarily enabled corporate stock buy-backs.
Markets volatility, like income inequality, seems to have soared to all-time highs. Does that sound like a sustainable economic model to you?
We appear to be headed for another major economic crisis or crash of some type. Someone or something like Putin Worldwide Enterprises, or a super-authoritarian government, might be the inevitable result if we do not change economic fundamentals. This time, the decentralization of economic power afforded by cryptocurrencies founded in blockchain-based networks might give us a chance at real economic evolution. The decentralized finance (DeFi) revolution occurring in blockchain as you read this is testament to that evolution.
We can all thank bitcoiners for that. Bitcoin did not really take off until enough individuals stood up for the propositions that your government did not have the right to spy on you and your economic life, nor could it delegate to government-licensed banks the right or obligation to spy on you and your economic life.
As for the law, supply and demand, I know that the supply curve for Bitcoin is inelastic, meaning the quantity supplied will not vary much if any with price. I know the supply curve will not shift because it has been pre-programmed mainly as a function of finiteness and time. Demand, however, is a different story. The quantity demanded is responsive to price, meaning more quantity is demanded as price goes down, and vice-versa. The demand curve itself, shifts wildly in both directions, both contractionary and expansionary, depending upon psychology and preferences about the future of the cryptocurrency and its blockchain. That is why its price is so volatile; it’s a speculative asset at this point with some of the properties of “money”.
The complicating factor of course is the potentially almost infinite supply of “altcoins” in the form of other cryptocurrencies, whose respective markets likely depend upon the general popularity of its adoption as an asset or currency, and the value or usefulness of its particular blockchain. The ability to run “smart contracts” is probably just the beginning, as projects such as Chainlink begin to aggregate and interoperate.
Bitcoin will likely continue to lead the way for the foreseeable future, but there are certainly no guarantees it will continue to dominate as it has forever, or even for the next few years. It may become the symbolic leader of a movement if the movement grows big enough, and that may be enough to secure its position for a long, long time.
I’m not qualified to conclude whether Bitcoin is “money”, or where its price is going, but I do not believe it is irresponsible to say decentralized cryptocurrency is here to stay, as much as government or big business would prefer to have it all to themselves.
We will need to change the way we think about “money” in this future economy.
Stephen King, the writer, said about my associate’s generation, the baby boomers— “We had a chance to change the world, but instead, we chose The Home Shopping Network.” Let us hope succeeding generations do not fall into the same trap.
For now, I look forward to a future accelerated by technology-fueled deflation that ends up being the key to an abundant and egalitarian future where we all share in its gains.
See you on the Blockchain!
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Thank you for reading. I hope I could have been educational as I endeavor to provide my knowledge as a free public service. Please note that all the materials and information on this blog are general analyses made available for the public’s general informational purposes only. These analyses are not in any way intended to serve as specific legal advice to be applied in your particular situation. Although I am an attorney, absent a signed retention and engagement letter, I am not your attorney. There are no exceptions to this rule. Moreover, you shall not rely on the information I am providing you, as it is only for your general knowledge and educational purposes, since this information would likely change based on any additional facts. Thus the transmission and receipt of information on this blog by anyone does not form or constitute an attorney-client relationship. My knowledge of laws is limited to California. Anyone receiving any information on this blog should not act upon the information provided without first obtaining the services of professional legal counsel licensed in their respective jurisdiction. Best of luck.