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Hey Crooked "Cantillionaires", Read THIS!

By Michael @ CryptoEQ | CryptoEQ | 5 Feb 2021

What’s Wrong with my Current Money?

It's worth discussing just how new and flimsy the whole idea of “money backed by the government’s word” really is. Historically, most currencies were pegged to scarce physical commodities such as gold or silver, but today, fiat money is backed by neither anything physical nor scarce. Since it is not linked to any physical reserves (or based on math like in the case of Bitcoin), fiat is subject to man-made manipulation, experimentation, and adulteration. One of the biggest risks fiat faces is becoming worthless due to hyperinflation, a scenario that has played out time and again in history. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.

Below lists some of the limitations of fiat money:

  1. Fiat monies (government-issued money) can and do outright fail.
  2. Fiat monies are not flawless.
    1. They possess bad store of value (SoV) properties - The U.S. dollar is designed to lose 2%+ of its purchasing power every year, i.e. you lose 2% of your money just by holding it. Inflation is the reason we are forced to find other ways to invest our money (real estate and stock market) just to offset this designed loss! 
    2. They are government-controlled meaning they are confiscatable, censorable, and do not provide you with full autonomy on how to spend it.
    3. They enable very little privacy for the user and are easily surveilled. Money is one way in which governments control and oppress citizens.
    4. Due to its dependence on intermediaries and middlemen, they are subjected to high transaction fees (remittances) and storing costs (bank fees and inflation).
    5. Fiat money enables the Cantillon Effect whereby the first people to receive the newly created money (banks) see their incomes and purchasing power rise relative to those further down the money-printing line. Think about a game of Monopoly wherein you were secretly gifted an extra $1,000,000. You would be at an extraordinary advantage due to the extra purchasing power, but also before the rest of the players could price your new money into the overall pot. 
  3. Fiat is trust in governments and humans, Bitcoin is trust in math and cryptography.
  4. The current economic system is designed to only work if the citizens constantly spend and the overall debt increases with time (high time preference vs. low time).
  5. Fiat money supply is infinite and those that create the money benefit the most (seigniorage).
  6. You do not have full control nor access to your money in a bank when storing it in a bank.

At its core, money’s primary function is to preserve the product of a person’s time and labor (value to the economy) so that they may spend it at the time of their choosing and in the manner they so choose. It is the way in which communities coordinate their time, skills, and efforts. This preservation of easily transferable, widely-accepted human capital across time allows for a more efficient use of capital (investment) and the specialization of members of a community (one person can be a butcher, the other a scientist, etc.). This enabled the small communities of the past to more effectively coordinate their work, efficiently price their time and value, and become a more successful and scalable economy. 

A money that is successful in accomplishing this generally contains certain characteristics. These traits are highlighted below and compared across the different types of money used in recent history.

Traits of money

 Comparing the traits of what makes a good money across different current forms.

You may be reading this and thinking “That’s all well and good, but my U.S. dollars work just fine, thank you very much.” And you are right to think that. The U.S. exists in an extremely privileged position of being the “world’s reserve currency.” This was decided back in 1944 after 44 allied nations agreed to maintain a strict global currency exchange rate by backing its currency to gold reserves. At this point in history, the U.S. was in a position of power post-WWII and just so happened to control 2/3rds of the world’s gold supply making it and the dollar incredibly powerful. However, in 1971 the U.S. terminated this agreement when it decreed that U.S. dollars would no longer be backed by gold. In less than 30 years, the U.S. went from signing a global coordination agreement with 43 other countries to unilaterally reneging on the agreement essentially ensuring that the future of all currencies would be backed by nothing, but the government’s word (fiat). You see the irony here? The government broke their word in less than 30 years and then issued a currency based on their word.

So, now, for all the incredible privileges people in America receive thanks to the dollar’s status as the default global currency, money is a delicate house of cards built only upon the ability of the government(s) to keep the wheels turning and everyone afloat. All this is done by constantly printing new money out of thin air that decreases the purchasing power of all money already in circulation (inflation), in order to buy other financial assets with said new money (quantitative easing), all while continuing to rack up debt with no intention or ability to ever pay it back. Meanwhile, nearly every bank is built so that they lend out more money than they actually have (Figure 4), making it impossible for even 1/3rd of customers to reclaim their funds if they wanted. 

Fractional Reserve BankingFractional reserve banking is the new norm but makes it no less dangerous.

If the situation gets too bad (2007-2008 financial crisis), they can receive bailouts from the newly printed government money under the guise that a failure would be catastrophic to the people. The current system is designed to incentivize banks to play fast and loose with money they do not have because they can spread the losses out to the citizens in the form of a bailout. Bitcoin emerged shortly after the 2008 financial crisis in 2009 from a general distrust of the legacy financial system and the central banks’ ability to manipulate the monetary policy. Bitcoin’s innovation is its simplicity, predictability, and transparency.  It has achieved finite digital scarcity while being easy to divide, transfer, and verify.

M2 MoneyM2 money supply is having its "hockey stick" moment.

If you’re part of the small majority that is swayed by the above information and have decided that fiat currencies are not foolproof and can fail AND have decided that you’d like to own some gold in order to hedge against U.S. dollar and governmental monetary experiments, then good for you! However, you should realize that even owning gold does not mean you are outside the grasp of the fiat regime. If times are hard enough, the government could outlaw owning gold like they did in 1933. You read that right. The U.S. government forcibly mandated that all citizens give up their gold under the threat of violence and jail time. Even those that were smart enough to see the country’s own fiscal mistakes were punished and forced back into the system.

But so how does bitcoin help? Bitcoin is an open-to-anyone, provably-scarce, incorruptible, trust-minimized, uninflatable, self-sovereign, borderless, new asset in which to store wealth. It is a new 21st-century digital version of the soundest money history has ever seen. Often times,  bitcoin is compared to or advertised by the media as competing with the payment processor company Visa in facilitating global payments. This is a misunderstanding by the media and an egregious insult to Bitcoin’s ultimate value. Rather, bitcoin is competing with the USD, euro, and gold as sound money. 

When discussing the “performance” of the Bitcoin blockchain, one must take into account the time, trust, and costs involved in a transaction. Bitcoin is, after all, trying to create a trust-less P2P transaction with a truly digital, bearer-instrument. So how does it accomplish this? 

Performance is measured in 2 ways:

  • Throughput: The number of transactions the system can process per second.
  • Latency: The time it takes for a transaction to be processed.

Trust can be measured along a spectrum but here we’ll divide it into two parts again. 

  • Low Trust: Bitcoin users have the ability to run node software to independently compute the latest state and verify that all rules in the system were followed. Each user can check, at any time, that there has been no fraud, no cheating, no rule changes, etc. 
  • Low Cost: If the node software is expensive to operate, individuals will rely on trusted third parties to verify the state. 

While Bitcoin’s actual throughput and latency are meager when compared to Visa, its settlement times measures quite favorably to ACTUAL bank settlement times using SWIFT (days) or when compared to remittance payments (days or weeks). Where Bitcoin truly outperforms is in trust and cost. There is no counter-party risk associated with Bitcoin. No bank freezes, banking limits, transaction censorship, fractional reserve lending, or bank insolvency risk. A Bitcoin transactions give each participant the highest amount of settlement assurances possible. Each transaction has the world’s most powerful supercomputer network attesting to the legitimacy of the transaction. And all of this security comes by running a node on an average laptop device. 

Furthermore, Bitcoin’s real value comes from its role of decentralized currency issuer and censorship-resistant final settlement. Therefore, the more apt comparison would be between bitcoin and the U.S. Federal Reserve for a sound base currency and not Visa, transactional speed or throughput. It is no surprise, then, that cryptocurrency adoption is catching on in countries where the governments and their monetary policy and fiat are failing.

Crypto AdoptionBitcoin and cryptocurrencies are growing in the countries that need it most.

What is easier to own, transact in, and transport: $100,000 in heavy solid gold bars or a digital currency like bitcoin that lives on the internet? Bitcoin is similar to gold in many ways: sound/hard money with a predictable supply, low to near-zero inflation, and a great store of value over a long period of time. Bitcoin also possesses many traits that make it superior to gold in today’s economy: digital, highly divisible, easily transported, instantly transact-able including across the world, trustless, and no bank or vault needed to store it.

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Michael @ CryptoEQ
Michael @ CryptoEQ

I am a Co-Founder and Lead Analyst at CryptoEQ. Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.


Gain the market insights you need to grow your cryptocurrency portfolio. Our team's supportive and interactive approach helps you refine your crypto investing and trading strategies.

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