Sovereign Violence and Legitimacy of Law

“Yes, [we will not find a solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years. Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own.”

–Satoshi Nakamoto

This is one of the few political comments that we are offered from Satoshi. This is a reference to Micheal Foucault’s interview on power and sovereignty found in Truth and Power:

The monarchy presented itself as a referee, a power capable of putting an end to war, violence and pillage and saying no to these struggles and private feuds. It made itself acceptable by allocating itself a juridical and negative function, albeit one whose limits it naturally began at once to overstep. Sovereign, law and prohibition formed a system of representation of power which was extended during the subsequent era by the theories of right: political theory has never ceased to be obsessed with the person of the sovereign. Such theories still continue today to busy themselves with the problem of sovereignty. What we need, however, is a political philosophy that isn’t erected around the problem of sovereignty, nor therefore around the problems of law and prohibition. We need to cut off the King’s head: in political theory that has still to be done.

Sovereignty, Legitimacy and How Violence Connects Them

The fundamental issue at hand is one of sovereignty–who has the supreme right of rule? Today, governments around the globe have anointed themselves with the supreme right to rule over almost every aspect of life. This is not because of their majesty or our consanguinity, but simply from their monopolization on violence, and the legal framework they use to justify it. There has been a long, and precipitous train of abuses that has created the world as it is today, and considerable injustice that has forced us to ask such questions.

We first must questions where this Right comes from. This Right is not only a historical residue impressed upon us from the evolution of society from feudalism, but also an ideological perspective that is reinforced incessantly throughout our lives. When we reduce this power down to how it operates on an individual and organizational levels, we can see beyond the garb of officialdom, legitimacy, and righteousness that it purports to be, for the crude, barbaric machine that it really is: violence organized under the banner of the state.

This action was legal for the police to carry out–no violence came to the officer for doing this.

Violence is the basis of power that governments use to project their legitimacy into the world. This is done through explicit means, such as police, military, prisons, laws, and regulations; but also through discreet means such as education, religion, bureaucracy, and especially elections. The discreet channels of what is seen as ‘correct’ or ‘legitimate’ is the most powerful form of controlling the conversations of ‘what is violence’ and who is entitled to it. This creates the context for which violence can be used, and thus justified. The utilization of violence to enforce the status quo (i.e. the law) is justified by the ideological discipline that demands authority to be respected, and obeyed for no reason other than that ‘authority should be respected, and obeyed’.

The fact that we are allowed to vote for one of two representatives that invariably represent the same corporate interest of the status quo, is part of the greater dialog that has us believe the legitimacy of such violence. We are told that we have ‘democratic power’ and that if we can just elect the right person (despite having no sort of electoral process for the police or army), that we will be able to solve our political woes. The truth of the matter is distinctly different.

There are people in this world that can initiate violence against others within explicit legal means with no form of recourse. We are subjects underneath the law and subject to it, and we have masters that are outside and above the law; which ironically calls itself the ‘law enforcement’.

It is the threat of this systematized violence in all capacities (legal, economic, personal) that governments base their power from. It is under this banner of legitimacy via legal violence that all governments have operated through all of history. That might shall make right, and as the official judicial decision, that is final. This is the legal bases of the laws of the state, and this is why they can command your death–because they have the power to do so.

Sadly, there simply has never been any other way to politically organize with the exception of sporadic, unsustainable revolutions that fold back into the same power structure that rely on violence. As revolutionary chaos grows, it harnesses the apparatuses of power for itself, and becomes the Specter of the State, legitimizing its own violence and corruption.

This is the theory of the sovereign–how political institutions create power over one another–it is done from the point of a sword, again, and again; through all of history.

This is the revolutionary struggle for sovereignty. As Foucault pointed out, so long as we are still grappling with this central issue in political theology of enshrining the power of life and violence one over another into a legal system, be it in the form of a senator, minister, police officer, judge or king; there will still be the problem of the great negative forms of power. Masters of all institutions seek to be good masters; but first and foremost, they seek to be masters. There is an alliance among the aristocrats that they all believe there is good reason for them to be masters over the world, and to hold power over all.

Sovereignty as we know it can only exist at the bequeathment from something or someone; or violently take from those same powers through revolution. Once entered into the subject of sovereignty, there is an immediate glaring flaw that a political body must offer sovereignty, or it must be taken by force. This force is what we seek to avoid in the first place, and what has locked humanity into a permanent struggle for power against and over itself–homos lupus homnium. For all of human history, this concept has battled between its two poles: one of accepting the sovereignty offered from another, or to fight that offering to take it for oneself. Violence and physical force are the tools used for the sovereign struggle to establish who is master, and who is slave.

Political History of Sovereignty

The most recent political revolutions of the late 16th century shifted the power by delegitimizing the divine right of kings, and enumerating that power into republican councils. Although there was resemblances of change within the structure of power, what really occurred was a shattering; a mutation of the system and a fracturing of power among many actors. Sovereignty was stripped from kings, and that power was divided among the various ideological structures and repressive state apparatuses that make the modern state.

Power is no longer centralized within one body (The King), but is fractured into the government bureaucracy itself as a corporate body. Power, legality, legitimacy, sovereignty, the party as aristocracy, and state-sanctioned violence as a means to execute the law, are all part of this same political-government structure. However, these forces are no longer vested in the one body of the monarchy, but a new body of people outside the law itself. The decree of Divine Right that was once used to inflict the rule by Kings, is today being used to inflict the Rule of the State, but this time under the title of civil liberties.

Invariable, man finds himself under the bludgeon, chain, and whip, happy to oblige, for he no longer has one master, but many! And this time they are for the good of civil liberties! He fails to recognize that the defenders of civil liberties seek to protect their own rights first and foremost at the expense of his flesh.

Violence is the means that compliance with unjust laws are explicitly extorted upon the populous. It is not the justice or majesty of contemporary legal systems that enforces the law; but ruthless, uncaring, violence. It is within the hidden manipulations of what is normal and appropriate that we also find apologists who demand to be ruled as a subjects, not people.

If people are to liberate themselves from such an insidious and total system of rule, it must be upon their own merits to help themselves. People must arm themselves with knowledge, and a willingness to think critically to create a new, and better world. Using the internet, bitcoin, and strong crypto we can create a better world, and establish new laws from within the internet to help save us from global environmental catastrophe that is coming.

Cryptography and Self-Legitimacy

Digital currencies retreats from the theology of sovereignty via violence through creating a new mode of sovereignty. Intangible and non-physical, this new form of power is created through a destituent form of power, one that withdraws and refuses to cooperate with any form of violence.

Legitimacy within cryptography is created from knowable and provably unbreakable secrets that can only exist the digital realm or mathematics. It cares not for what occurs in the physical world, but only that of which it can experience in the digital world: provable mathematics and the sacrament of the private key.

Legitimacy no longer comes from an authority within the current political or economic system, but creates its legitimacy through explicitly existing outside of any states control and the violence they enshrine.

The concept of sovereign is flipped on its head. No longer does legitimacy need to come from state institutions that are empowered via violence, but through provable mathematical systems that are not part of the violence power structure. This creates a new economy system with No God, and No Masters.

No longer do we need to pay for the privilege of our freedom to exchange with one another, or be extorted by the Gods of Government, or their Masters of Capitalism. Bitcoin re-invents money into what it once was, and was always suppose to be–a network of legal and economic exchange for all people everywhere.

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Next: The Legal Politics of Money

The Absolute Value of Crypto

Secrets have a value. How much, it is hard to say, perhaps invaluable would be a more apt description. Invaluable because a secret can mean the difference between life and death; that which can lead to victory or defeat in war. Secrets have an absolute economic value as well because it can truly mean the difference between life and death. Cryptography understands that the security of communication is essentially to life and death, and there is real value to both privacy and secrecy.

Bitcoin and other digital currencies are built on top of strong cryptography for this reason. This cryptography is strong enough to be considered unbreakable at this point in time, and most likely for the next several decades. Due to the mathematically assured, provable secrecy that bitcoin is built on top of, bitcoin creates additional value outside of the energy spent mining bitcoins by creating a cryptographically strong system of digital exchange. The ability to exchange through strong cryptography, and the secrecy it affords is part of what creates the economic value of bitcoin.

This value comes from the commodity that bitcoin is made from. Just as gold’s secondary values comes from its fungibility; the proof-of-secrecy function of bitcoin gives each unit their fungibility, which in turn creates secondary value. The provable mathematical security of bitcoin means the system is totally secure from legalized theft. No state, banker, or military general can steal your securely stored bitcoin; no matter how powerful they may be, or how many guns they have pointed at you.

A Very Short History of Crypto and War

Cesar’s Shift Cipher

Even before Julius Cesar first used his simple shift cipher for encoding his messages; ciphers, and stenography were wide used to conceal information throughout ancient history. These tactics of hiding information and keeping that information secret, or Crypto, developed as a tactic for war, and has had a large role within power struggles throughout the centuries.

As Napolian Bonaparte said, “The secret to war lies in communication.”

Over several millenia the developments of stenography and shift ciphers got better and better, as they were used for diplomatic and military purposes. A major advancement in the field occurred when poly-alphabetic ciphers, such as Vigenère cipher in 1553. Several centuries later the developments of cryptography were culminated in Kerchoff’s “La Cryptographie Militaire” in 1883, which are now surmised in Kerchoff’s principals. This was a scientific manifesto on the military application of cryptography, and how to understand the security of cryptosystems and breaking them. Of these principals that Kerchoff established was the need to make the system based upon mathematical principals, and the supremacy of keeping the secret key secret, as if you do not, the system will be know by your adversary.

Just as in war you have an enemy, in crypto there is an adversary–an opponent that is seeking to compromise your system, and break it of its secrecy. If your secrecy is compromised, and if the secrecy of this communication is based upon life and death, you will die. This value of secrecy is absolute, and nation-state’s wars against one another accelerated the improvement of cryptography at a startling rate. This arms race in crypto ran parallel to the arms race for nuclear weapons in the 20th century, and was just as pivotal to its outcome.

The Mechanization of Cryptography for Advanced Warfare

Enigma Machine

The mechanization of ciphers with the rotor machines were developed in the early 20th century. It was the first true attempt to apply a more robust computational principals to ciphering with machines. The mechanization of ciphering reached its apex during WWII with the German enigma machine. In order for the Allies to break the encryption of the enigma, they had Alan Turing develop The Bombe. This was one of the first computers ever created in order to crack the code of the German enigma machines. These ciphers had become so complex, they now needed computers to help with the complex mathematical calculations to crack their code.

Like the wars that the empires throughout the ages have fought; at first their tools were rudimentary and crude, but developed with sophistication, technology, and scientific precision over the ages to what they are today. States now command weapons of mass destruction that can wipe out millions of people in a moment, and they use this as a token of power within the realpolitik of statecraft against other states.

This is called brinkmanship–the art of pushing dangerous scenarios for favorable outcomes on ones own terms. It is within this same vein of power that the tools of cryptography were developed as a means of war. We must ask ourselves: why has this technology been so zealously guarded, with so much human energy expended upon it?

Privacy and Secrets as Power

It is because within the realm of secrecy and privacy that people can organize independently, and outsmart stronger, more powerful enemies. Encryption is a weapon for the weak against the powerful, and a way for individuals to be given a mathematical assurance against the invasions of privacy, both for personal documents, and communications. It is a mode of mathematically assured protection. One needs not to trust people with money or secrets any longer. Now they only need to trust the code upon which their secrets are hidden. That code is only mathematical, and is binary in nature.

From being built on top of this mathematical encryption technology that cryptocurrencies create a true use-value. Proof-of-secrecy creates both fungible, and security. These features, paired with the limited number of bitcoins, and computational and electrical energy that goes into creating bitcoin units, creates the total concept that gives bitcoin, and other digital currencies, their value. Bitcoin and other digital currencies give rise to a new mode of sovereign economic power. It is this economic force that over the coming decades will deconstruct, and depose of the old concepts of money, value, banking, exchange, protection, and finally the state itself.

The Digital Sovereign

Digital currencies are the economic power that will become the bases for a new way of organizing. This new form of power will create new social, economic, and political organizations which together will create a new superstructure of power I call the digital sovereign. Echoed in the sentiments of the declaration of independence of cyberspace, this is the process of creating a world that all may enter without privilege or prejudice accorded by race, economic power, military force, or station of birth. The digital sovereign is the space in which the civilization of the Mind will make itself victorious over the world of flesh and steel.

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Next: Bitcoin and The Internet as Ideological Apparatuses

Bitcoin and The Internet as Ideological Apparatuses

Bitcoin is not about money–it’s about power. Bitcoin is a political force, technological ideal, and mode of economic independence for the internet itself. Using Louis Althusser’s concepts of ideology and ideological state apparatuses from, “On the Reproduction of Capitalism” we can analyze bitcoin and the internet as as anti-state ideological apparatus.

Here is an excellent introduction to Althusser’s concepts and an explanation of what exactly is ideology, ideological apparatuses(IA), and repressive state apparatuses (RSA) are. In his work, Althusser offers a powerful way of understanding the organizations of capitalism. He shows how various ideological apparatuses operate in conjunction with repressive state apparatuses to create, organize, reinforce, and reproduce the conditions of society today to serve the current capitalist paradigm through the state.

For our purposes we can apply this same logic to understand where the internet fits into the capitalist society. From this we will see how paired with the power of bitcoin, and other digital currencies may develop.

The Internet as an Anti-State Ideological Apparatus

The Internet is a new territory, and today is controlled by States for the use of capitalism; but they are quickly loosing control. This occurred by design as the internet grew from the small U.S. government project it once was; and developed into the global world wide web it is today. Today they internet rivals G7 states in terms of its population, GDP, and most importantly its ideological norms.

Though there are many internet cultural groups today, the original ‘internet culture’ would be the cypherpunks. From the cypherpunks came publications like, “Security without Identification: Transaction Systems to Make Big Brother Obsolete” wrote in 1985. Even before the world wide web existed, the anti-state principals of the digital movement were already entrenching themselves.

Those involved in the cypherpunk movement would later go on to write the declaration of independence of cyberspace, and would help advance the internet at every new crossroads it came to. This early vanguard of the internet operated on tenacious, uncompromising principals of freedom of information, communication, and the right to privacy. These ideas imbued themselves into the internet and became an ideological backbone that allows for the open web to function.

The Internet is antithetical to the State.In this realm people can create new identities that could not exist within the physical realm.We given the right to developed our voices and identities free from the constraints of the panoptic police state. Our physical bodies no longer constrain our ideals; we have moved beyond being mere sinew and flesh and into the Noosphere. Here exist a mode of communication where we are stripped of our human bodies and become only the political body of the words and information that we convey here. Our names, national identities, religions, educations, and every other form of inscription that we are subjugated within contemporary society are secondary within the internet.

The identities that we are allowed to created for ourselves on the internet, unmolested by the forceful ideology of the various state apparatuses and under the guise of anonymity; we become more than mere objects to be subjugated to the desires of a capitalist society. We are allowed an entire universe where we can choose who to become, and to seek out the information we desire to know. Everything that defines us as subjects, and the territory of physical space that we occupy becomes secondary. Our physical bodies cannot exist within this medium; nor is it definitive of who we are in this space–we are truly free here. These are the murmurs of the new class consciousness that is forming inside of the internet itself, and it cannot be stopped.

Althusser believed that the education was the most powerful ideological apparatus that there was. Education as an institution is a tool exclusively owned by the ruling classes explicitly to control the dialog of what is knowledge and what is education. The so-called fields of factual hard sciences focus their narrow pursuits in the name of capitalism, to the same degree that fields like history, economics, and political science seek to justify the capitalist world we live in. What is considered ‘education’ becomes part of a great dialog that is no longer about facts, critical think skills, and self-empowerment; but learning obedience as truth.

This has profound and far-reaching ramifications when we consider that scientific knowledge is the bases of power in a advance technological capitalist society such as ours. With unrestricted, unfettered access to information, along with the assurance of what one is search for and coming to understand is private; one is freed from the ideological chains of the system that controls every aspect of lives. Here it is possible to develop one’s own truth without the taint of capitalism– we can form truths of the world from our own standpoint without fear from of the panoptic police state watching us.

Education as Ideological Entrenchment of Capitalism

Do as I say, because as I say is correct

The internet stands in direct contrast to the educational establishment and its ideology. The education establishment is reliant on authoritarian knowledge official, state-sanctions communication channels (teachers, libraries, degree programs, etc.). Whereas the internet is antithetical to that. There are no minders or masters to deem what is appropriate ‘knowledge’–only facts that present themselves for what they are.

This implies that ‘education’–or the acquisition of knowledge via the internet–is something that must be done autodidactically. One must disseminate information for oneself, and to compare and contrast sources to discover the difference between what is ideology, and what is fact. This can only be done alone, and using one’s own faculties.

The Internet is an endless well of information for those who seek it. There are no minders or masters to approve of fact which establish themselves by the truth of their being, rather than the sanction from official sources. This destroys the ideological monopoly that education institutes have on the source for knowledge, which can call the paradigm of classic education institutes, and their relationship with capitalism. The impact of this is not unlike the Protestant Reformation challenging what was the authoritative source for knowledge.

Through the domination and monopolization of ‘what is knowledge’ vis-a-vis educational institutions, there is a wicked contortion of knowledge. Knowledge is no longer fact, but idology. This is reinforced repeatedly incessantly to such an extent that one becomes confused between what they know to be true for themselves, and what one has simply been told so much, that one believe that to be true.

Money as an Ideological Apparatus

So how does this all relate to bitcoin and money? Money as a concept is deeply, deeply embedded into us as a ideology and religion. Due to the constant bombardment of misinformation about how money works, from all ideological state apparatuses (media, school, work, etc.); money becomes a very complex and convoluted topic. Due to all of these various influences, money ends up taking on its own mystical weight, and becomes a powerful ideological component of the current economy paradigm.

Through the education system we are taught that governments are good, and the world works the way it does for good reason. We learn from this system that economist can explain why the economy functions as it does, and why we all must work hard to take home our day’s pay. Included in this ideology is the notion that our noble business leaders, who lift the world upon their shoulders, are entitled to a king’s share of the wealth for directing his firm to make a profit; even if this is at the expense of many.

This ideology serves to alienate and divorce economics from its original purpose as part of philosophy. Today almost all economist are exclusively modern monetary theorist who are heavily relent upon complex mathematical modules to explain economics. Any economist who does not accept the concept of seigniorage as fact, are simply disposed of as not being ‘real’ economist. From the get-go, we are taught to believe in the righteousness the economic system and to not question it on a fundamental level.

This is how government are able to control the money supply and keep huge portions of the globe under the despotism of poverty without anyone blinking. We have been taught to believe that capitalism in its current form, backed by the state, is the only way to organize the economically and politically. We have been told that money functions perfectly being controlled by bankers and the state, despite all factual evidence against it.

Bitcoin as an Anti-State Liberative Apparatus

Due to the influence of the internet, and the way that people use it to discover information for themselves; there is an autonomous space for an non-state money to exist. Bitcoin is the antithesis of both repressive state apparatuses and ideological apparatuses.

The main purpose of bitcoin is to act as the central bank of the internet. Like the Internet, bitcoin is distributed, decentralized, and ran by a protocol which allows for communication anywhere in the world. Its first and primary economic loyalty is to the internet itself–no internet, no bitcoin. Its secondary function is one that represents the ideology of the internet itself.

Digital currencies are revolutionary because they were built with revolutionary ideology at their core. Bitcoin is money built for the internet, and the internet alone. There were plenty of other digital monies that came before bitcoin, they died because they did not have the capacity to stand against the state. Bitcoin was built on top of strong crypto because Satoshi knew that if any money for the internet were to truly gain traction, it would become the implicit enemy of any and all states.

What I find the most fascinating about this ideological function of bitcoin, is that it uses the logical exploit of capitalism, and how capitalism holds the sanctity of itself (capital) above all else (or as Marx put it, the valorization of value) to turn capitalism against the state. Through removing money from the hands of the repressive state apparatus of banking, bitcoin makes money more effective than it has ever been.

Bitcoin can do this not because of the powerful ideological argument it offers, but because of its economic efficiency over other moneys. Bitcoin and other digital currenices have the capacity to take on all of the economic roles that the states, and can do it for a fraction of the cost.

As we catapult into this brave new world, we will find that other ideological apparatuses will slowly change their perspective about bitcoin. This will not be because there will be some radical awakening to understand money; but rather the reproductive purposes of capitalism will fulfill the role that Althusser predicted it would. The capitalist paradigm will shift from that of being in alliance with the state, to being in conflict with the state. And this will be because the state itself will become inefficient to the service of capitalism via the internet, and thus can be disposed of like everything else that does not serve capitalism.

As bitcoin gains more economic power, it will also gain political, and ideological power. It will utilize this base of power to pull back the veil of corruption and expose the powers that be for the banality that they are. Another world is being build where the State is not allowed, nor any of the ideological apparatuses that serve it.

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Next: The Magic of Money, The Science of Bitcoin

The Magic of Money, The Science of Bitcoin

The greatest barrier to bitcoin adoption today is the mysticism and magic that surrounds money and wealth. Due to this mystical perspective of money, many people do not understand the scientific functions of money as an economic mode of exchange. However, when we can come to understand bitcoin and money from a scientific perspective, we can pull back the curtain of Oz and see the little man for what he is.

The Mysticism of Money

I use the words magic and mysticism very specifically. When I say mysticism, I am not talking about true fairy-tale like mystical forces, but the human perception of the legitimacy of the unknown. The unsaid agreements that run and dictate larger forces within our society that one does not understand, but one accepts at face value. It is here that we find the sacrifice of knowledge-sovereignty in exchange for mystical comfort–there is strength to be found in ignorance.

Magic is the application of psychological obfuscation to obscure what the truth is. The application of ‘magic’ creates a mystical story around whatever the target does not understand. This creates the false reflection of truth through offering ‘what is’ as a justification for how it should be. This article in Time Magazine’s blog speaking about the dangers of bitcoin is an example of this.

This article speak of how the most recent report from the consumer financial protection bureau warns that bitcoin is, “Vulnerability to hackers, limited security, excessive costs and scams…Virtual currencies are not backed by any government or central bank, and at this point consumers are stepping into the Wild West when they engage in the market.” However, what Time fails to understand that this is the whole point of bitcoin.

Bitcoin seeks to ensure that West stays wild. It seeks to take money completely out of the hands of governments and regulators due to the fact they cannot be trusted with the economic prosperity of all. This propaganda piece from Time made to scare people into continuing to trust their governments with their money and economic prosperity, despite the mountain of evidence that we should not.

However it is not enough alone to simply use propaganda and lies to create a mysticism–violence, control, and intimidation must also be an implicit facts of how ‘The Story’ is forged. This is part of what creates the ideological paradigm that money must be control by governments, or terrible thing will happen! This story is perpetuated by making money into something that only ‘experts’ can understand, as it is just too complicated, risky, and difficult for the common man to understand.

The Science of Bitcoin

Bitcoin is a financial system that is based upon scientific logic. This logic is derived from the mathematical bases and protocol upon which bitcoin is built. Those who use bitcoin understand that the known, limited supply of bitcoin, is part of what creates the value of bitcoin in the first place. Bitcoiners don’t want backdoors built into the protocol, or allow for the suits in banking or government to have any kind of access to their money–that’s the whole point of bitcoin! There is substantial evidence that these bankers and regulators want to be good masters, but they seek to be our masters. There is ample evidence of the long train of abuses that clearly shows what they want to do with that power, and it is not to protect the average citizen.

The myth of money is animated behind the belief that the ruling establishment is pushing that people cannot, and should not have control of their own money. There is not a strong analytically case for this, but half-truths, fear-mongering, and an obscuring of what is true to attempt to herd people away from trying to achieve true economic independence for oneself. Whereas bitcoin and other digital currencies make the argument for why their are powerful modes of exchange and storage of wealth through strong, scientific whitepapers. The virtue of the value of digital currencies come from what they are, and what they are alone–not from the authoritarian systems that ask us to trust them without any reassurances.

The science of bitcoin comes from its mathematical bases, and that anyone can review the code that build it. Bitcoin creates an argument for itself; you can see and understand how it is ‘unhackable’ when stored and used correctly, and see how the cryptography behind bitcoin keeps everything private. You can see how much the fees are for using bitcoin with the knowledge that there no other sort of hidden fees, random fund seizures, or someone who will deny you access to your own money when you need it. Digital currencies can be used anywhere on the planet (and in space as well), and can cross boarders with no hassles or declaration forms to be filled out. Bitcoin is simply better money than fiat simply by what it is.

To Pull Back the Curtain

The con is up. The once ever-so-powerful wizardry that created and legitimized the banking, financial, and money systems can now be seen for the trickery that it is. The internet has given us the access to the information that lets us to tear down the curtain and see the wizard for who he is. As the false prophet flails and panics to put the curtain of obstruction and mysticism back up, we will find that his tale no longer holds the power it once did. We those behind the curtain for the criminal they are, and the way that they do it; now it is just a matter of time before people see these powerful institutions for the criminals that they are as well.

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Next: Antifragile Bitcoin

Gresham’s Law and Bitcoin

Over the last few years there have been a number of papers and blog post on Gresham’s law and bitcoin. Most of these have rudely proclaimed that bitcoin will die because of Gresham’s law–ironically, it will be fiat currencies that will die because of that law, not bitcoin. This is because the real value of fiat money is always going to be lower than the real utility value of bitcoin. As the illusion of fiat money is exposed for what it is, the value of bitcoin compared to it will continue to go higher, and higher.

Gresham’s Law, Real and Nominal Values

Gresham’s law dictates that bad money will drive out the good due. This is due to the fact that ‘bad money’ is overvalued so you want to use it; while good money is undervalued, so you want to save it. Thus, consumers will get more bang for the buck using the inferior money, and will benefit from hoarding the superior money.

Let me elaborate in an example using a $100 bill and a 1oz Gold Double Eagle $20 coin. In terms of the recognition of value, the $100 has a higher nominal value than the $20 coin. However, one would be an idiot to spend the $20 gold coin on $20 worth of goods, as the gold coin’s commodity value worth well over $1000. This is why we don’t see $20 gold coins floating around–people have ‘horde’ them up so those coins are no longer in the money supply.

This is what is meant by the saying of Gresham’s law: bad money drives out the good. Please see difference my post The Legal Politics of Money for more details on the difference between nominal value (valor impositus) and real commodity value (bonitas intrinseca).

In contemporary society, we have a hard time understanding that ‘money’ is really just a catch-all term for ‘object of exchange value.’ Really anything can be money–gold, bushel of wheat, salt, seashells, etc.–what is important about money is that it is an equal and standard measure. Because governments have historically fix fiat money’s value to something (in the case of the 1oz gold coin, it was $20, as that was the rate that the FED honored from 1913 to 1933–1oz of gold was = $20) it creates two values: real and nominal.

This means ALL money has two values–a real commodity value, and a nominal value. The commodity value is the worth of the object that the money is made of; such as the gold the coin is made from, or the paper that a dollar bill is printed on, or the electrical energy that is spent on mining bitcoins. This commodity value will always be independent of the nominal money value of money.

Historically, governments always ‘pegged’ the nominal value of government money to the commodity value of gold or silver. Today however, because dollars are not pegged to anything and are free-floating, the value of dollars are decided by the market alone; just like bitcoin. Dollars today are only and explicitly nominal values–as the paper they are printed on is just that–paper that has no commodity value other than being legal tender. People can assess those two values (nominal vs. commodity) against one another and decide for themselves what is more advantageous. That which is seen as ‘bad money’ is spent, and the ‘good money’ is saved for a later date when its value has increased. The ‘demand’ for money is called liquidity preference, as the demand of each monetary unit and it total value is also affected by how liquid it is, and how willing people are to accept it.

In short:

$20 double eagle gold coin; nominal value = $20

$100 bill; nominal value = $100

These are the values that these monies have because of the nominal, set values by the government.

$20 double eagle gold coin; real commodity value = around $1200 because of the 1oz of gold it contains

$100 bill; real commodity value = Around $0.13 per bill to produced because it is just fancy cotton.

Money has two independent values : the nominal value, or the set price that the government will value that money at; and the real commodity value–the price that money has because of its own intrinsic commodity value. This is why dimes made before 1964 have vanish from the supply–as the silver they are made out of is worth at least $1, thus it becomes a better option to spend zinc dimes (post-1964) that are worthless than $0.10 per coin, vs. spending dimes that are worth more than $0.10.

The Value of Fiat Money

Fiat money by definition has no intrinsic value. The only the value that fiat money has is the threat of legal force if someone refuses it. This is why the value of fiat money is directly tied to the legitimacy of the governments that issue those currencies. Right now, we are seeing a collapse of the Argentina peso (again), which is due to the government’s refusal to pay it debts. This in turn has lead to a crisis in confidence of the monetary stability of the peso, which has caused for a self-fulfilling prophecy of people and investors fleeing the peso.

As people dump the peso for other options (mostly dollars due to exorbitant privilege), the value of the peso goes into free fall because there is far too much supply and not enough demand. This causes for the value of the peso to plummet, and people want to get rid of their peso as fast as possible for something that can hold value. This can be commodities, cars, property, foreign currency, or anything that can help them store value and not quickly evaporate under the 56% inflation they are currently facing. As this process builds, one of two things happens:

1. The value of the peso collapse far enough for supply and demand to meet, and the value will start to stabilize, abated after losing a signification amount of it’s value.

2. The peso is continually dumped, the value will go into almost total free fall, and hyperinflation will ensue.

It is important to understand that hyperinflation is linked to a dramatic rise in the velocity of money, as people are trying to transact with that money almost immediately, as people want to get what their money is worth, and not lose 50% of their purchasing power. Furthermore, this problem then tends to be exacerbated by government printing more money to try to deal with price increases, which further expands the money supply of a market that is already oversupplied with a money no one wants. For more details on how hyperinflation and velocity of money operate together, please see this page.

Working Towards the True Value of Bitcoin

When we look at bitcoin from the lens of Gresham’s Law it is rather impossible to determine if bitcoin is overvalued or undervalued; as by definition, whatever the market price is today is the real value. Due to bitcoin’s total elasticity, the value of bitcoin can theoretically fluctuate from millions of dollars in a matter of minutes, with little changing in the market other than perception. If we look closely, there are several indicators which we can use to see if bitcoin is undervalued or overvalued. Some of these indicators are the transaction volume, the cost of bitcoin mining, the number of market participants, and the bitcoin day’s destroyed metric.

The transaction volume can act as an indicator of the equilibrium of the bitcoin market. We can assume that generally if the value of bitcoin is overvalued, more people will spend their bitcoin than fiat; wheras if bitcoin is undervalued, people would rather spend fiat than bitcoin. However, both miners, and bitcoin based business both need to sell bitcoin for fiat to pay their bills–which in the case of the price dropping precipitously, these buisness would need to dump even more bitcoin, which would accelerate the drop in price. This can lead to dynamic disequilibrium, which is essentially when the market has lost its collective mind, and the euphoria or panic of the digital herd dictates the market and creates a self-fulfilling prophecy that is totally unrelated to the commodity value of bitcoin. What can be seen in any situation of disequilibrium is the velocity of bitcoin is much higher than the norm.

Velocity Adjustment of Bitcoin

If bitcoin is undervalued, than transaction volume will continue to drop, tightening the money supply until equilibrium price has been met. If bitcoin is overvalued, then the supply cannot meet the demand, and the price will rise until equilibrium is met.

The value of bitcoin pulled between the social value of the network at the current time (short-term), verses the total electrical expenditure that has been spent to create the bitcoin supply today (long-term). This creates a moving target for what the ‘true value’ of bitcoin is. The higher the velocity compared to the historic gross average velocity of bitcoin, the greater the chance of bitcoin’s price being in disequilibrium. The lower the velocity compared to the historic norm, greater the equilibrium there is.

The fixed supply of bitcoin ensures that the only way to adjust the monetary value of bitcoin is through exchange. When the price is undervalued or overvalued, the transaction ratio compared to the norm will be much greater.

Conclusion

When comparing digital currencies and fiat currencies directly against one another, it is quite clear that digital currencies are very undervalued at this time. There is a clear limit on the number of bitcoins that can be forged, they are backed by the real electrical energy that is expended on bitcoin mining, and there is a huge amounts of VC capital going into building the bitcoin ecosystem. This is no different from the expenditures that go into mining operations for gold, silver, platinum, or fossil fuels. Furthermore, bitcoin and other digital currencies are digital natives, living in the realm of the internet; which is the largest and fastest growing economy in the world. Goverments and their fiat money will always be interlopers in the transglobal internet. Chained to the states they are from, with the slow, inefficent, and backwards idea that state-based fiat money work will in a transglobal economy, they will succumb to the creative destruction of bitcoin. When looking back on 2015 from the vantage point of 2025, it will seem laughable that digital currencies didn’t immediately usurp fiat money. We simply need to look to the history of the failure of fiat currencies to understand that it is not a question of if they will fail, but when.

The issues of the financial crisis of 2008 were never addressed, which has made the entire financial economy today into one huge moral hazard. This empire of paper will topple soon, and it is refreshing to know that in that process, we will be able to take back our financial power, and strike at the very heart of state-capitalism.

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Next: The Transaction Cost of Bitcoin

Bitcoin and The History of Money

To understand Bitcoin, we need to also understand the history of money. This is a long and complex topic that has changed dramatically over the last 400 years, and has a total history of more than 3000 years. In order to understand both money, and bitcoin, we need to understand that there are two distinct functions that money has, that are independent of each other, but both influences money’s value: the payment function of money, and its storage of value function.

Both of these features have important functions for money, but it is important to understand how each one of these affect money differently. I cover this in more detail in what is the intrinsic value of bitcoin, and bitcoin as commodity money.

The best way to think of it is that bitcoin is a threat to both common storage of value; such as precious metals like gold and silver, but it is also a threat to normal fiat money because of the bitcoin payment network. These two features of bitcoin create one type of money that is superior to both precious metals and fiat currencies. To understand why bitcoin works as money, we need to understand the history of money over the last century.

The History of Banking

To understand banking, we need to know what is a mode of exchange, how did it come about, and why it was needed in addition to a storage of value.

A mode of exchange is just that, a mode in which you can engage in the exchange of one good for another. Before modern money, this could be anything that was commonly exchanged, and the value was well understood by the general public. Throughout history, this has been everything including bushels of wheat, tobacco, land, etc. As long as both parties understood the value of what was being exchanged and chose to accept it, it could function as a mode of exchange.

As gold became the common standard for exchange during the mercantilism era, there became substantial risk in carrying large amounts of precious metals. Instead of carrying around a brick of gold, people could carry around notes that were redeemable at banks for the same amount of gold as the note. This is how banking has been practiced for most of its existence. It has only been in the last century that fiat paper money with no convertibility to a commodity has become the norm.

It is substantially important to understand that fiat money came about to represent an actual storage of value to make real payments. The only reason fiat money ever did come about is because it was a technological innovation that was fiat money. To be able to spend the value of gold, but carry it around in a lighter paper form what a huge technological development that fundamentally changed how exchange was preformed. This allowed for people to continue commerce in the same ways as before, but now with their wealth from the threat of theft.

Ironically, the creation of banking notes that can be redeemed for a storage of value also created the needed framework for the current system of fractional reserve banking that all states use today. This created a kind of banking system where banks no longer operated on how much money they have available, but they operate on only a fraction of the total they should have available. Banks use this system to cheat their profits by using the multiplier effect to multiply their profits–and their losses. These losses can become so substantial that it can destroy the entire banking system and economy. This is what happened during the Great Depression, and more recently during the 2008 meltdown.

The Bretton Woods Era

near the end of WWII, the allies came together in secret meeting in Bretton Woods to negotiate how the new global economy would be built. Keynes wanted an International Clearing Union which would use a fair international banking currency based off of trade deficits called the Bancor. This became the official position of the UK when negotiating at the BW conference.

Keynes’ idea was rejected (despite its popularity), and instead the dollar was to replace the international currency unit, which today gives the U.S. a special power in international finance call exorbitant privilege. To do this, $35 was set as the redeemable price for one ounce of gold (almost twice what it was worth when it was seized from U.S. Citizens back in 1933), and what would become the IMF was setup. Keynes understood the huge issues this would create in international monetary system, and offered incredible insight to how this would play out 20 years later.

This system would have worked, if the U.S. was not cheating on their balance of payments. From 1945 to 1971 more and more U.S. dollars started circulating around the globe because the U.S. was importing more than they were exporting–creating a negative balance of payments. In fact, so many dollars were exported like this that the U.S. could not cover all of the outstanding gold that the dollars represented. The French were suspicious of this in the 1960s and started to repatriate their gold, which led to Nixon shock. In 1969, Nixon announced that the dollar was no longer convertible to gold, and created a 10% tariff to protect american industries from the shock of this. $35 was no longer worth an ounce of gold–it was worth nothing.

Nixon Shock

In order to make sure that the dollar did not enter into a death spiral of hyperinflation, Nixon as put in place tariffs, wage freezes, and a fixed exchange rate until he figured out what to do to give the dollar value. In 1973, Henry Kissinger struck a deal with the Saudi King. In exchange for arming and supporting the Saudis and their brutality domestically, they would agree to sell oil in only U.S. Dollars. This created the ‘petrodollar‘ which propped up the value of the dollar now that it was no longer exchangeable. So from 1973 on, the dollar was no longer worth gold, but oil.

Nearly thirty years later we can see the evidence of how decoupling the dollar from gold has shattered faith in the global monetary system and the dollar. This had huge consequences for the purchasing power of the dollar and everyone who used it. Below is a chart of the purchasing power of the dollar since 1970–today the dollar of 1970 can only purchase $0.18 of goods today–it lost more than 4/5th of its purchasing power in just 45 years.

The Theft of The World

Now that money was no longer tied to the actual value of commodities and is free-floating, it became possible for the theft of the productive capacity of not just entire nations, but the world itself through the monopolization of money by state governments. Slowly over decades, inflation simply caused for the slipping purchasing power of not only the dollar, but all fiat currencies. This was done so slowly and deliberately that few could understand what Keynes had warned people of so many years before:

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

–JMK, The Economic Consequences of the Peace (1919)

Today the inflation that we face is not due to new gold being introduced to the fractional-reserve banking system, but from the value of the dollar simply decreasing. Today there are more dollars in the world today than yesterday due to quantitative easing (i.e. making more dollars). The decrease in the purchasing power of the dollar is a direct loss to you and everyone using the dollar; and a direct gain for the government and banks who benefit from the creation of new dollars. We have been told that these are good men, and that they will use monetary policy to create price stability and keeping unemployment low, but the facts show something much different and much more insidious.

Failure of Gold as a Storage of Wealth

Gold has been used as a storage of wealth for millennia because of the total fungible nature of gold. However, what happened from the start of the 20th century, to the end of WWII, was a consolidation of gold in the hands of the State through legal confiscation and violence. By 1973, almost all gold was in the hands of the state through force and theft.

This was done in two distinct ways. There was state-to-state confiscation of gold and precious metals, such as the reparations from WWI and imperialism. This concentrated gold in the global north in the hands of a small number of elite bankers and business magnates. The other way was through the war that governments carried out against the private wealth of their own citizens.

This can be seen throughout the world with the restrictive legislation from states around the globe; such as Executive Order 6102, The Australian Banking Act 1959, and the Indian Gold (Control) Act 1968. Instead of protecting citizens from the tyranny of wealth seizures, holding gold actually made people a target for the state. Through this violent seizure of wealth, governments essentially gained an oligopoly on gold. This allowed for governments and their allies in banking to manipulate the price of gold through holding or dumping; but more importunately, they have rendered gold meaningless as a source of payment and storage of value. Today, almost no one will take your gold or silver as payment, despite the fact it truly is worth more than paper money.

The Need for Protection From The State

It should be obvious that the greatest threat to ones personal wealth is not some foreign or personal aggressor, but the State itself. This puts us in a predicament because the State is the owner of the means of exchange, and the arbitrator of all legality. Through controlling the means of exchange, the State can manipulate the value of the dollar on a large scale for its own benefit (such as quantitative easing or unlimited funding for war), while also being the gatekeeper of the finance system. The greatest issue with this is that even if you find a suitable alternative means of exchange (like bitcoin), the state can still call it illegal, and bring violence to you and your family for not complying.

If one is to control a large portion of wealth, it can only be done with the explicit approval of the State. At any time they can choose to seized you wealth, and you can go to prison. The accumulation of large amounts of wealth becomes impossible without the approval of the State in modern society. If the State does not approve of it, they will call it ‘money laundering’ and treat you as a criminal. This means that it is impossible for someone to be against the state, while still being able to control their wealth. This helps explain why the state is so active in financial oppression against its own citizens, while allowing for out right crimes to be preformed by some of the largest banks in the world, and letting police execute its citizens.

This explicitly displays that the State has the power to stop these criminals today, and yet they choose not to do so. This is because the government is in bed with these organizations. Politicians receive ‘donations‘ from these companies and former CEOs are given elite, secure jobs from the government later down the line in exchange for this. These companies have bought laws and protection for themselves at the direct expense of other citizens through the corruption of the legal, and political system. It should be clear and obvious for all to see: we cannot recover this system of government, economics, and finance, and we must reject the system as a whole.

Now that we have bitcoin, we can actual do that. Once we reject the money of the State, and their crony capitalist bankers, the value of their fiat money will collapse. The State will no longer be able to pay for their wars, bloated salaries, or mechanisms of fear and terrorism. There will be a great unwinding and no one will accept their shitty paper money anymore.

Conclusion

The State over the course of the last hundred years has pulled off one of the greatest stunts ever: getting people to believe that paper is worth more than real commodities. Through the slow theft of gold for paper, people have been robbed of their ability to have independent wealth. Wealth today can only be acquired at the good will of the State because the State monopolizes the legal authority for how you can get money. The State, and their banker allies siphon off as much value as they can from the productive capacity of normal, hard-working people through devaluing fiat money through quantitative easing and interest.

From the end of gold standard in 1933, to all of the usurpation that brought us to where we are today, it should be clear that governments cannot be trusted with our wealth. Bitcoin and digital currencies offers people a chance to have a financial system that does not empower the State, or elite banks, but protection us from them.

Bitcoin is a global payment system, and storage of wealth that allows for a new system of finance and economics to be built. One based upon the principals of mathematics, privacy, and provability. A new system where we are not punished for saving and protecting our wealth, but rewarded. A system that understands, respects, and protects people’s right to privacy, and their right to conduct commerce with anyone in the world, no matter what State has their bootheel on their back, demanding a portion of their wealth.

Change is coming, and it will be radical, and it will change the world for the better.

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Next: The Absolute Value of Crypto

The Economic Functions of Bitcoin

The economic functions of the bitcoin network causes it to behave like a central bank. This has a few effects: bitcoins (the payment unit) behave like stock due to the fixed, known supply of units being subject to open market operations. What happens when the market price of bitcoin changes is the velocity of bitcoin falls into disequilibrium until a new equilibrium is found. This is why the transaction volume of bitcoin its extraordinarily high during the bubble cycle, both on the way up, and on the way down. From this observation we can see the velocity of bitcoin also serves as the price finding mechanism for the immediate price of bitcoin. Before we dive in deeper, lets first take a look at how bitcoin acts as a private bank in the digital world.

Bitcoin: The Private Bank for The Digital World

If bitcoin was a private bank it would have the following maxim as its monetary policy:

Whomever secures the Network shall be reward 50 bitcoin with each new block. This amount shall decrease by 1/2 every 210,000 blocks until it cannot be halved any longer.

This is the issuance of bit-coins, the currency unit, is made from the electrical energy spent mining bitcoins. We can see the monetary inflation schedule for bitcoin below. The supply of bitcoins is 100% totally fixed–the only way that new coins can be created is through solving a specific block, and the reward for that is drops every 4 years.

bitcoin supply growth over time

In order to have a money system that needs no central authority, Satoshi made bitcoin based upon rules that are fixed and secured by the mining process. This allows for a system where all bitcoin units are known at all times, thus making the double spend problem solved.

If bitcoin is a central bank, it would have to solve the impossible trinity problem that all central banks face (except the U.S. but that is a different story). Bitcoin accomplished this by creating a computer program with an independent monetary policy that humans cannot interfere with. The block reward, how the competition for the block reward is done, and the fixed supply of units are all parts of the bitcoin program that cannot be changed.

Anyone with a bitcoin address can use bitcoin, and it is impossible to know who is controlling each address, so bitcoin must be freely exchangeable. This means that the ‘sacrifice’ that bitcoin has made in terms of the impossible trinity is that it has no fixed exchange rate–the market must find an exchange rate based upon bitcoin’s perceived value, and the number of units available to the market. This free flow of capital from any sources is what allows for bitcoin to have been worthless just a few years ago, and why it could be worth $10,000s per coin one day. The free flow of capital is what creates the total elasticity that bitcoin experiences.

Bitcoin and Deflation

When economist have called bitcoin deflationary they are referring to its economic property of rising in value over time. This is due to the restricted supply of bitcoins while there is increasing demand for them. This is similar to how if you had bought Apple stock in 1980 during its IPO you would have paid $22 per share. Due to the restricted supply of Apple stock and the increase in demand, today it is valued at $520 per share–and that is after 3 splits.

You could say that Apple stock “deflated” in value.

This occurred while the supply of the stock (# of shares) of Apple increased–it inflated. On three different occasions Apple had their stock split increasing the total number of Apple stocks there were. Again, this is due to the dramatic increase in demand for the stock. This is the kind of deflation that Bitcoin is experiencing overall, despite the volatile ride bitcoin has had over the last few year.

Why Deflation Supposedly Bad

Deflation is bad according to modern monetary theorist who charade as economist because contemporary economies are based upon debt. Fractional reserve banking and debt cannot exist without one another, so when deflation happens, it happens to debt as well. This means the real value of debt becomes harder to service, which means defaults, and bankruptcy will increase. In 1931, Irving Fisher presented his theory on debt-deflation, which explains this process in greater detail.

This kind of deflation does not happen with bitcoin. There is no need to service ‘debt-bitcoin’ with bitcoin, so debt deflation does not happen. If this were true, we would see a similar collapse in the velocity of bitcoin during deflationary episodes, but in fact we see the opposite. The velocity of bitcoin increases correlatively to the price change of bitcoin in the short-term.

The Price of bitcoin

The price of bitcoin is derived from the total utility of the bitcoin network. In otherwords, bitcoin’s value is specifically tied to how many people are in the network, how useful the network is, and what the perceived value of bitcoin is. This is similar to how Twitter and Facebook have created social value that has translated into real economic value; which is reflected in the stock price of both of these companies. Without their userbases, each one of these networks would be worthless. All networks have a hidden utility that translates into direct economic value.

The value of bitcoin is based in part off of this network abstraction. In order for price discovery to happen individuals need to use their subjective preference to decide how much each bitcoin is worth, and how much the network itself is worth. This is how the general, long-term price levels for bitcoin are discovered.

The short-term price is discovered according to network externality, such as exchange failures, or political issues. An example would be how bitcoin is ‘more expensive’ in Argentina because of the high rate of inflation that the peso is experiencing. Another would be the dramatic drop in price, and then recovery after the Silk Road was shut down. These network externalities, unlike fiat money, causes for great volititly in the price because there is no goverment to fix the price of bitcoin; only the market. The price of bitcoin reponds to these events through change, which causes for the velocity of bitcoin to increase until a new equilibrium is found.

The Velocity of Bitcoin

Due to the fixed supply of bitcoin, the only way that the price can be adjusted is in one way: through exchange and transaction. This is why during the most volatile times of bitcoin, we see a higher transaction volume. This applies to both increases as well as decreases in the price. Due to the fixed supply of bitcoin, the only way someone can acquire bitcoins is to mine them, or to buy them. Thus if the price of bitcoin is to increase or decrease in ANY WAY, an exchange or transaction must take place for that value to be accounted into the market.

Conclusion

Bitcoin’s deflation is similar to a technology stock where individuals are making real gains though holding a risky asset while it grows. Because bitcoin has a fixed monetary supply that cannot be manipulated, the price of each bitcoin is determined through supply and demand mechanisms. This is reflected in the increase of the velocity of bitcoin. If bitcoin were facing true currency deflation, we would not see the velocity of money decrease.

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Next: Gresham’s Law and Bitcoin

Why I’m bullish on Alt-coins

Did you know that bitcoin is not the only digital currency? There is also litecoin (LTC), Namecoin (NMC), and Peercoin (PPC) among dozens of others. Some believe that these coins do little outside of what bitcoin has already done, so why should they have any value at all?

For the same reason that bitcoin has value:

These are all sound forms of money

Free markets and currency competition

Despite the fact that the altcoins are much less known and much less disseminate than bitcoin they still have all of the same fundamental features that bitcoin has that makes it good money, and good storage of value. More important than any of the additional features that altcoins offer is they compete with bitcoin on a free market. This is what Austrian economist Friedrich von Hayek spoke of in his final treatise on money, “The Denationalization of Money.” He believe that in a world of free money currencies would be forced to compete with one another (similar to on the forex market) and the superior currencies would win out over less efficient currencies through free market mechanisms. What I took away from this is that there must be currency competition to compare and contrast currencies against one another, and to help mitigate against any disasters one currency could have, and also ensure that there is not a monopoly on digital currencies.

Bitcoin has the first to market advantage, which means many, many more people accept bitcoin than litecoin today, and more accept litecoin that peercoin. This is significant advantage bitcoin has over altcoins is because it is hard to convince people to use an alternative currency–particularly one that people cannot hold. But what about getting people using bitcoin to use altcoins? That seems like a much easier jump to make than from not using digital currencies to using altcoins.

So if bitcoin becomes successful (which it already is) there is little reason why altcoins would not also become successful. The biggest barrier today is simply getting more people to accept altcoins–and the more people that accept bitcoin, the more potential people there are that may accept altcoins. And because they also have fixed supplies, the more people that use altcoins, the more likely the price will increase. That seems to be what happened with the most recent spike in LTC volume when the price went over $9. This seems to have been caused by the influx of Chinese digital currency users that also caused for the recent rally on bitcoin.

Pushing Altcoins

With Altcoins being just as efficient as bitcoin in terms of their moneyness, there is a huge opportunity for someone to create a digital currency bank using one of these altcoins. The biggest advantage that one would have in do this would be market making, after purchasing a large supply of the available coins. Through offering support, and more importantly, having a sales team that shows businesses the direct advantages from using digital currencies, a company like this could do very well. The biggest question is will someone see this in any of the altcoins? Time will tell us.

Catastrophe Insurance

Another reason that altcoins are could be successful is the possibility that the bitcoin network could somehow become compromised or enter into a full panic of confidence. If that were to happen, altcoins–being the quickest way to convert bitcoin to another currency, outside of selling directly for cash–would be the quickest alternative to flee to. One could also think of litecoin, and other altcoins as being a tool to diversify one’s digital currency holdings as well, to hedge against any sort of catastrophic disaster to bitcoin. The future is impossible to tell, and the more digital currencies there are in the world, the less likely it is that digital currencies on a whole will fail or be compromised.

In conclusion, I believe that altcoins will be successful because the technology is just as good as bitcoin, with a few significant improvements over bitcoin in some ways. Altcoins help strengthen the total digital currency network through offering competition between currencies, which helps create efficient, powerful currencies according to consumer preference.

Bitcoin’s Creative Destruction

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation-if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”

–Joseph Schumpeter in Capitalism, Socialism and Democracy

The process of creative destruction can be thought of as the evolution of efficiency within the markets. This can take many, many different forms with the core premise being to create new profit through innovation–with innovation being the keyword. Creative destruction is the wedge that divides the entrepreneurs from the capitalist.

Creative destruction generally presents itself as a technologically achievement that creates a greater total utility from the new product or process over the old. It can also take place as non-technical innovation, such as the worker assembly line processes pioneered by Ford, or the development of the just-in-time production strategy. These new innovations ‘destroy’ the older models through direct competition, not through using any sort of oppressive apparatuses of the law or monopolism. Disruption tends to be the contemporary word for it.

Creative destruction causes for a total increase in the utility of what is being accomplished–it is making it better. This question of ‘better’ or ‘more efficient’ is decided by free and fair markets though the greater returns that one receives. Thus, the most efficient actor or technology within a market, if not suppressed, should take the largest market share over time due the the fact that it is more efficient that all other options within the market.

Bitcoin is More Efficient On a Micro, Macro, and International Level

The creative destruction that will come from bitcoin is nothing short of earth-shattering. Bitcoin is more efficient on a macroeconomic, microeconomic, and international level. In almost every way it is better money than money itself.

Macroeconomic

As I explained in The Transaction Cost of bitcoin, when you look at bitcoin as a whole monetary system, it is always going to be more efficient than fiat currencies. This is because of a number of mechanisms that bitcoin uses to automatically establish and manage its own monetary system. The needed laws, legislation, and regulation that are needed for any fiat monetary system are handled automatically by the bitcoin protocol itself–Bitcoin users do not need to pay for the legal support of the system itself. Whereas, because of the nature of fiat monetary system, the users of these systems must bear the cost of the legal and enforcement mechanism of that fiat money system, and that is very, very expensive.

How much do fiat money systems cost?

This is a difficult question to ask because the monetary system is implicitly part of the state, and the state is implicitly funded through taxation and seigniorage, which make is difficult to separate one from another. One cost that we can look at is counter-fitting, which costs between 200 to 250 billion dollars per year. The counter-fitting cost with bitcoin is $0.

These sort of savings are simply too dramatic to be ignored for long, and can help business dramatically reduce the cost they they incur from supporting a monetary system that is inefficient and subject to counter-fitting risks. This is not to include other indirect cost such as the actual printing, distributing, transporting, and securing of fiat money. When you compare the transaction cost between bitcoin and fiat money systems Bitcoin will always have a lower transaction cost because it does not need to pay for the legal and enforcement mechanisms that fiat systems must pay for in order for them to function.

Microeconomic

Once upon a time, storing your money within a bank to offer you the security of knowing that your money was safe and secure. In addition to helping one secure their money, banks also found the opportunity to make the use of money sitting in their vaults through allowing easier access to the funds through services like checks, debit cards, and credit cards. As these services evolved, the banking system started taking more and more ‘convenience fees’ for access your very own money! But what is one to do when all banks are part of the greater monopoly that makes up the various national money systems? Until now, nothing–but now because bitcoin challenges this monopoly, and it is much more efficient than this monopoly, it is going to break this monopoly. The fiat money system just cannot compete–it’s too slow, too prone to fraud, and there are too many fees. This is in addition to inflation that has proven itself time and time again to destroy the savings of all the general public. When one see all of the benefits that bitcoin offers and understands how it works, there simply is no good reason to keep using fiat–it’s just shitty money.

When you compare the amounts that one spends on banking fees, from either a consumer or a merchant perspective, to that of using bitcoin, we again see that using the fiat banking system is much, much more expensive because one is paying people to do what bitcoin does automatically. This is why services like CoinBase can offer 0% processing fee for the first $1,000,000 of transactions–because bitcoin is just that much more efficient. If any non-bitcoin services offered this kind of deal, they would be bankrupt within the month. They just cannot afford to do it because of how expensive it is to move around fiat money. Bitcoin will always have a lower transaction cost than using the banking system because it does not need to pay all of the mechanisms and fees to move around money–that is part of the bitcoin program.

Internationally

The world is globalizing at an incredible rate, and is poised to continue to grow in that direction. Since 1995 there has been a dramatic growth in international trade by all countries except for industrialized one (who lost a portion of the international market to developing nations). This indicates that trade is starting to spread more evenly between all nations, instead of the industrialized nations taking up such a large potion of international trade. It is in the field of international trade that bitcoin offers some of its most powerful benefits.

Because bitcoin exist ‘in between’ national boundaries, it is not subject to many of the restrictions that fiat capital is subject to. This means that people and business that are working across boarders can choose to use bitcoin, and avoid national taxes, capital controls, and the intense oversight that is forced onto people and business from governments. Furthermore, when using bitcoin one does not need to deal with changing currencies consistently, and the associated fees and taxes that come with that.

Innovation vs. Crony Capitalism

Bitcoin is clearly a superior currency to its fiat counterparts. This is because Satoshi took all of the best features of both the internet and money and imbued them into one to create the first digital currency: Bitcoin. Bitcoin automates most of the processes that governments, laws, and the banks preform to maintain the money system. This means that the users of bitcoin do not have financially support the very large cost of maintaining a fiat monetary system. The innovative way that bitcoin secures money, protects identity, and allows for transfer to anyone with a internet connection is much more efficient than any monetary system today. With bitcoin, your money belongs to you, and you are the only one with control over it. Hands-down, this makes bitcoin win the economic argument by being more efficient, quicker, and secure.

But the economic argument has nothing to do with what we are talking about though…. because money is NOT about money.

It’s about politics.

Bitcoin is a massive threat to those that are already in political power and the special interest groups that pay them. We are at this interesting crossroads where we all know that bitcoin cannot be stopped, yet it clearly threatens the current financial and governmental infrastructure. What fascinates me about this is that it forces states into a prisoner’s dilemma against one another that they cannot win. The countries that have a clear, succinct, and friendly policy towards bitcoin first shall be the one to win the most economic benefits of bitcoin, and the ones that fail to do so shall lose the most. This is on top of the fact that bitcoin is superior to every country’s fiat money–there simply is no way fiat currencies can ever win over bitcoin. States will have to acknowledge and accept digital currencies as real legal tender, or they will have to suffer the consequences of using a money that is more expensive to use, subject to inflation, can be seized at any point in time, and is forced to pay taxes on it, and is subject to banking fees. At the end of the day, bitcoin is just better money, and it will take over the financial system because of that.

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Next: The Creative Destruction of Bitcoin

The Transaction Cost of Bitcoin

Bitcoin and other cryptocurrencies have create a new monetary system that relies privacy and pseudonymity to conduct economic transactions, rather than governmental laws and regulations. This monetary structure has several distinct advantages over fiat money that makes cryptocurrencies fundamentally superior to all fiat money.

The current economic paradigm using fiat money creates a system in which transaction costs shall always be higher than those found within the bitcoin ecosystem. This is due to the costs that are associated with the creation, maintenance, and enforcement of laws within the fiat currency system that allows it to function. The privacy and anonymity functions of bitcoin allows for it to function as a money system, while not needing to pay for the legal structure, or enforcement cost of normal money systems.

What Creates Transaction Cost?

According to Ron Coase, who originally theorize about transaction costs in his work the Theory of the Firm, there are three types of transaction cost:

1) Search and information cost

2) Bargaining and decision cost

3) Policing and enforcement cost

These are features that all transactions have and are built into the cost of the transaction. For example you want to buy a loaf of bread, first you need to know where to buy bread (search and information cost). Then you need to decided what a reasonable cost is, and to see if you can get bread at that cost (bargaining and decision cost). And finally you need something to pay for that loaf of bread (policing and enforcement).

Now all three of the above features are ‘cost’ that are associated with any kind of exchange; legal or illegal. The largest key difference with illegal transactions is that third type of transaction cost (policing and enforcement) is replaced with evasion and extralegal cost.

Evasion cost substitutes the policing and enforcement cost. So if one wanted to avoid paying $25,000 in taxes, they could pay a lawyer $10,000 to save $25,000 in taxes. So part of the $25,000 is going towards paying the policing and enforcement cost, where as $10,000 is the alternative evasion cost that one can pay to assure they get away with their full $25,000. So if one pays the evasion cost of $10,000, they will save $15,000 in total.

This $15,000 is a special type of profit because it is derived directly from NOT paying the full transaction cost. This is called risk profit and is only experienced when one takes on evasion cost, or the cost of doing illegal business.

All transactions consists of the three above associated cost. What crypto-currencies offer is a fundamentally different paradigm for how to deal with legal and enforcement cost. Instead of needing violence to enforce the rules of the money system (like fiat money), bitcoin embeds ‘the legal system’ directly in cryptography, merging law and mathematics. This allows for an economy to be built directly on top of the non-aggression principal. Cryptocurrencies have no policing and enforcement cost whatsoever, which shall always create a lower transaction cost.

The Law and what it offers

Today, the law is what offers us financial protection within our current economic system. This is why you can challenge or dispute transactions that you do not recognize on your credit card or debit card. This is also why the Department of Homeland Security can seize your banking accounts and all of your money without notice. Both of these situations arise because of the laws that govern the current economic system. Though laws offer a distinct way of protecting actors within their economic system, and are sometimes of great necessity, it can also be at great expense to the general populous, and to the determent of the economy on a whole. Police stole more goods than all burglaries combine in 2014–if you haven’t already, it might be time to rethink the majesty of the law, and what it means to be governed.

Detriments of the Law

Utilizing laws as a bases to create an economy system has two distinct detriments: The cost that is needed to create and enforce laws, and biases of those involved in the legal system.

When we look at the cost of legal economic enforcement, we must look at all aspects of the law and the expenses associated with them. Breaking down these cost is almost impossible when we look at the breadth of lawsuits, permitting procedures, various licensing, taxation, and various government entities that are funded through taxation. These cost are rolled into all economic transactions that one does within a fiat economy, as the burden of police and enforcement cost are forced on to the consumer, producer, and the sum total of society. Thus, through simply having laws that must be enforced, the transaction cost associated with that money will increase.

Legal bias

Another hidden expense that comes from a economic legal system is the inherent bias that those involved within the legal and political system are going to have towards themselves. Or in another word, corruption.

Those who are closes to the centers of power are the ones that will benefit the most from the law, or the corruption of the laws. This is why the most profitable investment that can be made is lobbying. This is also why no criminal charges have been brought to those responsible for the 2008 financial crisis, no charges for the NSA spying scandal, and why the average congressperson is a millionaire. This is because of the corruption of the legal framework that they operate within and control, and the way that they allow for the corruption of the legal system to favor themselves and their cronies.

The corruption of our legal system is not an error, but occurs by design. Those who are closest to the centers of power are also the ones with the most agency within this system. They have varying degrees of control within the legal system that correlates with how close to the center of power they are. Thus, the closer to the center of power, the higher degree of agency they have within this legal system, which creates the conditions for manipulation and corruption of the legal system. This creates a two-tiered legal system in which those who are closer to the center of power shall have more economic opportunity than those more removed from it.

Over the last century, the corruption of the legal, economic, and political system has resulted in the economic state we are in today: a broken political system that is beholden to the interest of bankers, oligarchs, capitalist, and members of the legal system before all others. This not only is unethical and morally reprehensible, it is also very, very expensive.

Free Markets and Their Functions

People enter into economic agreements because they are just that: agreements. These are natural transactions that occur because of our own subjective interests for ourselves. This is why we enter into social contracts in the first place; because we freely and naturally agree with the stipulations of the contract and proactively make the choice to be part of the contract. A transaction like this does not need anyone to enforce anything–both parties are willingly entering into a transaction because they both are getting something they desire from the transaction. Both actors have utilized free-choice to choose to enter into this agreement. This is the natural state of economic affairs, and there is no actual need for policing and enforcement cost in transactions that are entered into within free agreements. Thus, for voluntary agreements, there is not need to pay for policing and enforcement cost, which in turns creates a lower total transaction cost within a monetary system.

With bitcoin, people are making exchanges via the internet where there is no need for a legal enforcer to ensure that transactions are conducted fairly–that is what the bitcoin software does. Because of this feature–where bitcoin can allow for private individuals to preform economic transactions without needing a centralized enforcer–means that bitcoin does not have to pay policing and enforcement cost. This means that if we are to look at the economic cost of transactions within a monetary system, fiat currencies will always have a higher total transaction cost because of the need to pay for a policing and enforcement cost.

Conclusion

When observing any contemporary economy system we can see that there are three types of transaction cost: search and information cost, bargaining and decision cost, policing and enforcement cost. Because bitcoin uses software to create a secure form of money, there is no policing and enforcement cost that are associated with bitcoin. This means that when we look at the total transaction cost across an economy, an economy using bitcoin (or another digital currency) will always have a lower transaction cost than a fiat economy that must pay for policing and enforcement cost.

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Next: Bitcoin and Liquidity Preference

Menu

Sovereignty, Legitimacy and How Violence Connects Them

Political History of Sovereignty

Cryptography and Self-Legitimacy

A Very Short History of Crypto and War

The Mechanization of Cryptography for Advanced Warfare

Privacy and Secrets as Power

The Digital Sovereign

The Internet as an Anti-State Ideological Apparatus

Education as Ideological Entrenchment of Capitalism

Money as an Ideological Apparatus

Bitcoin as an Anti-State Liberative Apparatus

The Mysticism of Money

The Science of Bitcoin

To Pull Back the Curtain

Gresham’s Law, Real and Nominal Values

The Value of Fiat Money

Working Towards the True Value of Bitcoin

Velocity Adjustment of Bitcoin

Conclusion

The History of Banking

The Bretton Woods Era

Nixon Shock

The Theft of The World

Failure of Gold as a Storage of Wealth

The Need for Protection From The State

Conclusion

Bitcoin: The Private Bank for The Digital World

Bitcoin and Deflation

Why Deflation Supposedly Bad

The Price of bitcoin

The Velocity of Bitcoin

Conclusion

Bitcoin is More Efficient On a Micro, Macro, and International Level

Macroeconomic

How much do fiat money systems cost?

Microeconomic

Internationally

Innovation vs. Crony Capitalism

It’s about politics.

What Creates Transaction Cost?

The Law and what it offers

Detriments of the Law

Legal bias

Free Markets and Their Functions