Musings on cryptocurrencies

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Yesterday, while I was out with friends and family, I met members of another family. The other family was that of my niece's beau. He's a fine lad and they're both going to college. He is into economics and his father is in finance. My niece is studying cognitive science and somehow, they met at the same school (I still don't the story). Anyway, that afternoon I found an interesting opportunity to talk about cryptocurrency, economics and public policy with two new people.

I must say that I was surprised to hear the father mention EOS before I did. Having learned that he was involved in finance, I was the one who asked about bitcoin first, and that launched the conversation nicely. Yet he brought up EOS and mentioned that they have had issues launching it. I haven't been watching that too closely, so I had to take a pass. I was pleasantly surprised to be talking to someone who is aware of EOS.

As with all ventures of serendipity, I was able to learn a few new things and to crystallize a few new thoughts, which they seemed to appreciate when expressed. Sometimes when I talk, I wonder if people are letting me talk because they think I'm nuts and they'd rather let me run on. Other times, I see genuine appreciation for what I have to say and then I think I should run for public office. I hope it was the latter that I saw yesterday. So a few things kind of gelled for me that afternoon and I thought I'd share them with you.

First, it is becoming clear to me that I want to live in a society where there can be no enormous concentrations of power as we have here in the States. Businesses have been consolidating for the last 40 years. The greater the consolidation of business power, the greater the consolidation of power, everywhere.

This consolidation of power is painfully obvious in banks. We have one of the most powerful banks in the world in the Federal Reserve System. That kind of power makes it hard for anyone to do the work of the people. Instead, our institutions are doing the work of the money.

Bitcoin and all other cryptocurrencies, at least when done right, distribute the power to make money. Instead of conferring the power to create money out of nothing to a privileged few, cryptocurrencies are an attempt to distribute that power worldwide, everywhere. At least then, there will competition among many different currencies. And instead of having just one big nipple, I mean...spigot, where the fat cats can drink their milk, there will be many spigots. So many that no one fat cat can sit around gathering up the coins and distributing them as "loans" to everyone else while collecting interest. Cryptocurrencies turn our banking system on its head. And rightly so. I think we've had enough for this top down approach.

I am still in the process of becoming an anarchist, so forgive me for any missteps here. But what I see is that if we're going go distribute the power of civil society far and wide, we might as well start with the banks. Distributing the power to make money is the first take down of the current power structure, to return power to the hands of the people that the now powerful claim to represent.

The other thing I pointed out to my new friends (I hope they're still my new friends after listening to me talk yesterday), is that in order to make cryptocurrency useful as currency, we can't be hoping for our currency "moon" for us. Now most people, when they think of "mooning", they think of a pale ass. I'm talking about hoping and wishing for a certain currency to rise inexorably, astronomically, against the dollar. And you're going to do what with those dollars again?

First off, we're dealing with a banking system that can create money all day and all night, 24/7, and fire it at short positions on bitcoin, and any other cryptocurrencies with a futures market. Do they ever even take possession of that currency when the contract matures? Who knows? The point of the futures market seems to be to hold the prices of crypto down long enough for a few fat cats to get in cheap.

But there is something else. As my esteemed business friend says (you know who you are), "Volatility is bad for business". Assume for the moment that the futures markets have their intended effect and hold down the price of bitcoin, then the price of bitcoin (relative to fiat currencies) remains stable. That would actually make it useful as a currency.

To put this in perspective, in countries where there is hyperinflation (pick your favorite South American country), the volatility of the currency is bad for business. People can't keep up because employers don't want wages to keep up with inflation, then they can't buy the stuff they need. On the other hand, during the Great Depression here in America, we had deflation, and people were holding onto their money, waiting for prices to go down more before buying. Well, they were also holding onto their money because it was scarce.

Bitcoin, and a few other cryptocurrencies are depending on scarcity to maintain their value. If bitcoin takes over, yeah, it'll be very valuable, but also very scarce. Even if you break it down into Satoshis (one 100 millionth of a bitcoin), you're still looking at deflation.

Now there are some other currencies that have built-in inflation (Steem as an example), but even then, over time inflation will eventually run out by design and there will eventually be a fixed number of Steem. I dare say that all of the cryptocurrencies will run their course to the end by design, to arrive at some fixed amount of coins. Then deflation can set in again. Then, like during the Great Depression, people will start making money from tree bark, again.

Now that I think about, this is all the more reason to have many currencies in competition with each other. Did you know that during the 1800's, there were more than 7,000 banks issuing paper currency in America? They were not federal reserve notes, but they all used gold to back their currency, and they used a standard measure of gold to do it. I think that eventually, with practice and experience, we will develop standard practices that make cryptocurrency useful.

Oh, yeah, I almost forgot. For those who want to see their currency moon, they will have to use transaction demand to overcome speculation demand. See, right now, most people are holding on for dear life. We now have an acryonym for that, "HODL". And some genius turned that into a verb, i.e., "hodling". Most people who hold crypto are hodling. They're not using it for transactions, they're waiting for it to go up, up and up.

But if you want to beat the boys at the CBOE, you need enough transaction demand to overcome speculation demand. Right now, it is speculation demand, the short sellers, that are trying to tamp down the price of bitcoin. That may have the effect of keeping the price of bitcoin steady, and may even have the unintended effect of making bitcoin useful as a currency. You know, a medium of exchange.

Unfortunately, the slow transaction speed of bitcoin makes it more useful as a store of value. You know, like a 1909-S VDB American penny. Oh, how I used to pine for one of those. But I wouldn't use that to buy anything, now, would I?

Then there are really speedy coins like Bitshares, Steem and EOS. They settle in seconds. They have near-zero transaction costs, and no fees. And they can handle many thousands of transactions per second, with EOS claiming that they can handle 100,000 transactions per second. It is going to take that kind of transaction demand to overcome the short sellers.

But the point here is not to ride the currency to the moon. Isn't the point of cryptocurrency to replace the dollar, you know, the "coin" that serves just a few men in top hats the best? I'm thinking "Monopoly" here. The point is to actually use cryptocurrencies as a medium of exchange.

How do we know we've won? When we start denominating a bushel of corn in EOS. When we start denominating a kilowatt hour in Steem. When we start denominating a parcel of land in bitcoin. When we can go to the store and see a box of cereal denominated in the currency of our choice on a tiny OLED display.

Here is why this is so important. Cryptocurrencies run on code. The code is (almost always) open source code. That code is subject to governance by human beings. We can see what the code says and learn how the code runs. We get to decide how the money will serve us.

All forms of governance require participation to work. Money is a form of governance. Cryptocurrencies require our participation to work as intended. At the Federal Reserve, most people are not allowed to participate. But with Bitcoin, EOS, Steem, Litecoin, and even Ripple, we can participate in the process of deciding how the code should run. And if we don't like the way the code on one coin runs, we can use another and provide input on how the code for that coin should run.

Enormous concentrations of power attract corruption. Eliminate those concentrations of power, and suddenly, the merits of an idea become more important than the money and power behind it. When power is distributed, corruption has no place to hide.

This is our moment. If we truly wish to live in a society with no hierarchy, distributing the power to create money is, I think, where we should focus our energies.

Write on.