The Bitcoin Before The Horse

As the best known non-fiat online crypto-currency, Bitcoin is more frequently portrayed as the magic potion of a thriving new economy. Not so fast, say I, as Bitcoin will aim to make the world flat again.

About one year ago was the first time I was asked about Bitcoin by one of the many financiers reading my blogs and representing an investor consortium with large stakes at play. We exchanged emails to summarize my stance of not having any interest in promoting Bitcoin’s fledgling popularity.

As the best known non-fiat online crypto-currency, Bitcoin is getting a bit more play these days and more frequently portrayed as the magic potion of a thriving new economy.

Let me clarify for a broader audience what I wrote then and why I am sticking to my previously stated opinion.

Innovation in money is good

First, let me make abundantly clear that the way we exchange money is due for a significant overhaul. The United States is far behind other countries globally, as I witnessed when I came over from Europe (some 20 years ago), never having written a single check before.

The distribution of money is now in the midst of a reinvention, albeit using the existing banking systems with their old and distrustful money-making schemes at its stubborn foundation. Jack Dorsey’s Square reinvented how any business can receive money and just recently launched a new way how anyone can send money by email. To which competitor PayPal and others undoubtedly will soon up the ante. All well and good until the participating banks decide those innovations erode their bottom-line or worse their existence.

But the distribution of money will be the least of Bitcoin’s problems since its denomination is established electronically, with the internet as its primary (yet not exclusive) and most natural distribution mechanism.

Or is it? Hold that thought.

Pros or cons

The birth of Bitcoin finds willing doulas quickly when we in the U.S., as the purveyor of the dollar as the worldwide currency, mess up economically. No shortage of countries is waiting to take our throne.

Precisely the reason why I focus on the reinvention of the meaning and execution of our economics that will evaporate the urge for the world to want to take our hard-earned bravery and merit too easily for granted.

Some of the inquisitor’s arguments of the benefits of Bitcoin appear compelling on the surface:

  1. No possibility of “printing money”
  2. Control taken out of one and all politicians’ hands, no hidden taxation
  3. Elimination of toxic financial instruments
  4. Trading benefits and reduction of trading costs

Let me counter each argument more in-depth:

Re #1: Printing money

Printing paper currency over organic growth dilutes the value of money. Yet, it is a widely accepted government practice, as long as the propensity to recuperate value from the projected economic upside remains high. Not dissimilar to when a company issues more stock, such carefully applied dilution is used to flatten out the undesired aberrations of the shaky status quo felt in every country.

However, any currency’s value is determined by a much more important factor than its sheer amount outstanding; the trust beholden to that denomination globally, locally, and interpersonally.

The metastasis of our two centuries nonrenewable economic disease has impregnated our global financial systems underneath. It is the main reason I question – not our ability to produce – but our financial systems’ merit to steer and yield from production significant socioeconomic value. Printing money without such plausible belief will result in infinite and uncontrollable dilution.

However, the type of currency, Bitcoin, or dollar has little effect on the loss of trust caused by nonrenewable economics. Our ability to print money is, at best, a Tylenol to our cancerous disease. Not a cure.

Re #2: Control

Not sure about other countries, but the control of the U.S. dollar is not directly in the hands of a single politician, neither by either democrats or republicans. Simplified, it is controlled by many commissions, each with their own (global) advisors, that advise the Federal Reserve on what course to take. The Fed executes on those recommendations within the guard rails of its pre-assigned privileges and makes recommendations to the President and Congress when amendments to those powers are needed.

The problem you allude to is perhaps best assigned to the failings of a “blind” democracy; a democracy without a meritocracy. Less than 30% of the U.S. population votes, which means most politicians manage to disenfranchise some 85% of the people they claim to represent. Hence their decision-making on any subject should indeed be questioned (yet sadly by the powers we have given them, cannot be ignored).

While Bitcoin aims to value our merit globally, local governments will price on citizens’ shared responsibilities that affect the value and exposure of their merit. Socialism is an effective deterrent to the discovery of said merit.

The Euro is the “perfect” example of an unnatural equalization formed by the fallacies of a “blind” democracy and an accurate projection of comparable ill-fate looming by a large scale adoption of Bitcoin.

Re #3: Toxicity

Ten levels of embedded diversification of risk in asset management are not caused by the type of currency involved, as witnessed by how our formula of asset management is feverishly (even still today) copied and deployed in multiple currencies worldwide. As we have explained many times on this blog before, the avoidance of risk in finance perpetuated by nonrenewable economics has created a uniformity of risk that masks the discovery and critical path of outlier success.

Not the type of currency, and thus not Bitcoin, will deflate the excessive and toxic financial instruments the avoidance of risk has created, only the dutiful deployment of economic principles instilled by a meritocracy can.

Re #4: Benefits

Maybe for particular products or services, but as long as governments control borders, embargoes, and trade agreements for non-currency related reasons (like political and humanitarian reasons), few will escape the cost and time borne by those restrictions.

So no, Bitcoin will not eradicate the need for governments to protect its countries’ sovereignty, thus controlling what comes in and what goes out. Thus Bitcoin will have limited or no impact on a reduction of trading costs.

The cart before the horse

Bitcoin is an exciting innovation because it aims to support a meritocracy, a cause that I support wholeheartedly. It is doomed because it ignores the complexities of meritocracy’s relativity and fails to provide a smooth transition from the many vastly different “blind” democracies of our world.

The world cannot be guided by a single and flat mold under which every human being will operate. Believe me; many have tried. Forcibly at times. Instead, the merit that best describes us is relative to our evolution, and certainly not with money as merit’s only reward.

The confidence in a currency can only come from the economics of monetary policy that deploys trust. And that means we need first to fix our financial systems’ outdated economics before we can trust the currency we pick as its deserved representation.

Hence, Bitcoin is the proverbial cart before the horse.

From the frying pan

Now, release that thought about the distribution of Bitcoin through technology.

Having spent 30 years in technology, I believe wholeheartedly in the power of technology innovation. In the same way, water is the necessary ingredient for the preparation of many an elegant dish.

But I have seen the vast majority of technology entrepreneurs, egged on by eager yet inexperienced investors rigged by Silicon Valley’s echo chamber, ignore the foundational economics that drives meaningful socioeconomic value and integrity.

So, while it is tempting to take the powers of governance away from the politicians who have already disenfranchised most of us, I would not recommend putting those powers in the hands of rookie technologists blessed with even greater economic ignorance and vulnerable to hackers hidden in a dark room somewhere.

The business of technology innovation is economically not mature enough yet to be entrusted with our economic kingdoms’ keys. But it will keep trying.

Instead, I prefer to know who we should hold accountable for the economic illiteracy that determines a currency’s value.

The fate of Bitcoin

The adoption of Bitcoin will be resisted by many countries that protect their sovereignty staunchly and by nations pushing modern economic systems that increasingly adopt an appreciation of our differences over our commonalities.

A single measure of merit spanning the globe is as bad as having no merit at all. The real composition and value of human merit are relative, multidimensional, and in the eye of the beholder.

And Bitcoin, deploying non-discretionary trust, will make the world flat again.

Let’s lead the world by example with new rigors of excellence we first and successfully apply to ourselves.

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