In his final treatise on economics, titled “The Denationalization of Money” Fredrick Von Hayek wrote about his idea of what a world with ‘Free Money’ would look like. He believe that money that if money was independent of nation-states (like BTC) that it could fundamentally change the world for the better, and liberate people from the oppression and tyranny of the monopoly on money. He based these ideas off of some of the principals of Silvio Gesell–radical economist and anarchist. His principals were the bases of the ‘Worgl Miracle’ which essentially reversed the depression in the town of Wörgl, Austria in the 1930s. One of the concepts that Hayek wrote of based on these theories was the ‘Swiss ducat’ theory of how to operate a free-money bank in a fiat currency system. This is about the possible function of how a bank like this could work in the bitcoin economy.

This is not a bank for bitcoin, but a competitive economic mode that facilitates the purchasing power of different currencies and leverages them against one another using free-market principals. Essentially, these are bitcoins and alt-coins. They forces free-market functions on to the economy by allowing one currency to hedge against one another (BTC/LTC), and digital currencies against fiat currencies using their deflationary properties to their advantage.

How?

As the bank what I do is I sell shares, or ‘bits’ as I like to call them, at their current market value. So today, you come in and buy a share for $120–the market price of what bitcoin is trading at today. In exchange I offer you an IOU for 1 BTC, and you will pay this loan back over the course of however long you choose–here is the kicker–you pay back the loan in dollars at the amount that you paid for the IOU with 1% in USD.

What this does it it offers the same possibility as buying a home back in the 1980s. For example, my mother paid $68,000 for our family home in 1982–today it is worth $425,000. Now, if we are looking at only purchasing power we’ll see that the the house should only be worth $178,000. It is worth more because of the additional intrinsic value of the property, along with the limited, finite supply of property in this desired area.

The intrinsic value of real estate is defined as the net present value of all future net cash flows which are foregone by buying a piece of real estate instead of renting it in perpetuity. These cash flows would include rent, inflation, maintenance and property taxes
BTC is a more extreme case of this because unlike property, we can know the exact number of BTC in circulation, and how many more bitcoins will be added to the economy and when. We can use these facts to leverage Bitcoin’s future purchasing power against its purchasing power today.

The reason this can work is because of BTC deflationary effect of having a predictable, fixed supply, but has limitless economic capacity. When we look at the value over time for bitcoin, one can see that the long time span one looks at the more likely it is that bitcoins value will gain against fiat currencies. This is because of the fundamental functions of both Bitcoin and fiat currencies. Bitcoin has a fixed 21 million coins EVER. Fiat currencies can guarantee that over time, they will expand the money supply, mean that there will be MORE dollars at a later date no matter what. Currently the Fed has announced their plans to devalue the dollar by 33% over the next 20 years . Due to these facts, the longer of a time span that we look across, the more likely we are to see bitcoin gaining value against all fiat currencies.

Bitcoin’s USD value will increase as long as there is growth in the BTC economy outpaces the supply–and that supply is fix. We know that only 25 new coins can enter into circulation every 10 minutes. We also know what the approximate market value of those 25 new coins will be when they are introduced into the economy.

The purpose of the bank–to assume the risk for holding the assets that are Bitcoins. Furthermore, through watching the blockchain, the volume of transaction, and the velocity of transaction over time, and historic gains and losses over time, along with the knowledge of how many coins are in circulation, how many coins will be added in the future, means that we can have pretty good projections about whether the value of BTC is going to go up or down based on its real economic value, and not just speculation.

So how does it work?

You come in and we sell you an IOU for one bitcoin. This ‘bit’ is $120–the market value of bitcoin today. Over time, you repay that loan to me. For the sake of this, let us say $10 a month. So when May 2014 rolls around, you have paid off your IOU for the Bit, I give you your bitcoin in return. The difference is now that bitcoin is worth $500–which you paid $120 for one year ago. And the way that the bank profits is through assuming the risk of holding BTC in case the price ever does go down, and for whatever gains are taken, the bank will take 1%. So we get 0.01 of your bitcoin for holding it (our profit), and you win for taking out the IOU because your $120 IOU is now worth $495.

Furthermore, if upon the completion of the payment, or hell, even partial payment, one could ‘refinance’ their loan with The Bank. So because the bank is holding the BTC, we can refinance at the market value at the time of refinancing. So if you have paid 50% off of your IOU (so 6 months have passed–it’s DEC 2013) and now the value of BTC is say, $240. One could refi, and now as the bank I give you $240, and the 12 month cycle starts all over again. One is using the equity in their bitcoin and its deflationary nature to hedge against fiat inflation, and the lost of purchasing power of the dollar.

More importantly, is that we can build applications that create these financial instruments for automated, program-oriented banking. Similar to Bitcoin’s protocols, that means that no one can cheat at banking! If you lock yourself into a 12-month CD, the program application is what locks you in—not a person. The program can also have you pay a penalty to exit the deal, if you choose to do so, or other functions. And this is just one of many examples; there is a whole world of financial instruments that we can build that function off of programs that both yield profit and ensures security, safety, and most importantly, no one can cheat at it! This works because it functions on the same trust as bitcoin–trust in the programming and protocols that ensure no one is cheating at, or rigging the system for their gains and others losses through corruption.

These are simply my own thoughts and ideas, and I could be wrong about some of this. But please, tell me your thoughts on this and if my logic is correct. Because if I’m right, we are in for a radical new way of doing finance and commerce.

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Next: The Revolution of Bitcoin Banking