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1The Power of Money:
2A Case for Bitcoin
3
4By Ihsotas (Izzy) Otomakan
5
6
7
8This treatise is presented freely to all. Constructive feedback is welcome.
9
10izzyotomakan@gmail.com or on Twitter @cryptoizzy.
11
12October 1, 2017
13                                              The Power of Money: A Case for Bitcoin
14
15
16
17
18Contents
19
20       By Ihsotas (Izzy) Otomakan ............................................................................................................. 1
21Chapter 1: Introduction .......................................................................................................................... 4
22   Background ......................................................................................................................................... 4
23   3 Core Truths....................................................................................................................................... 5
24   Bitcoin Vs. Altcoins .............................................................................................................................. 6
25   Quick Overview ................................................................................................................................... 6
26   Disclaimer............................................................................................................................................ 7
27Chapter 2: What Is Money? .................................................................................................................... 7
28   The Core Definitions ........................................................................................................................... 7
29   Back to Basics ...................................................................................................................................... 9
30   Enter Barter......................................................................................................................................... 9
31   Our Final (Functional) Definition of Money ...................................................................................... 10
32   Moneyness ........................................................................................................................................ 11
33Chapter 3: Dangers of An Unfixed-Money Supply ................................................................................ 13
34   Type 1 of Un-Fixed Money Supply .................................................................................................... 13
35   Type 2 of Un-Fixed Money Supply .................................................................................................... 14
36   The Three Masters-of-Money Commandments ............................................................................... 14
37   Power (and Wealth) of the Priests .................................................................................................... 15
38   On MoM Commandment #3 ............................................................................................................. 18
39Chapter 4: From Gold to Gold-Backed Currencies ................................................................................ 19
40   Gold as money .................................................................................................................................. 19
41   The Birth of Banks and Gold-Backed Currencies .............................................................................. 21
42Chapter 5: Questionable Currency ....................................................................................................... 23
43   Introduction to Fractional Reserve ................................................................................................... 23
44   Dangers of Fractional Reserve – Unaligned Incentives Part 1 .......................................................... 26
45   Dangers of Fractional Reserve – Unaligned Incentives Part 2 .......................................................... 30
46   Physical Gold As Backing – The Great Equalizer ............................................................................... 33
47   Dangers of Fractional Reserve – Unaligned Incentives Part 3 .......................................................... 34
48   Government – the Ultimate Cover Story .......................................................................................... 36
49Chapter 6: How We Got Here ............................................................................................................... 38
50   Early Warnings .................................................................................................................................. 38
51   Reserve Status................................................................................................................................... 39
52
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57
58   Gold & Oil – The Last Safeguards Fall ............................................................................................... 41
59   Gold – Not to the Rescue .................................................................................................................. 42
60Chapter 7: Enter Bitcoin ........................................................................................................................ 44
61   Bitcoin’s Moneyness ......................................................................................................................... 44
62   The Threat of Bitcoin......................................................................................................................... 44
63   Visions for the Future – The First Two .............................................................................................. 45
64Chapter 8: This, Here, Now ................................................................................................................... 46
65   A Human Aside .................................................................................................................................. 46
66   The Third Vision ................................................................................................................................ 47
67   Practical Steps ................................................................................................................................... 48
68Chapter 9: Valuation ............................................................................................................................. 50
69   Basic Framework ............................................................................................................................... 50
70   Bitcoin as Insurance .......................................................................................................................... 51
71   On Signalling and Feedback Loops .................................................................................................... 52
72   The Master’s Dilemma ...................................................................................................................... 53
73Chapter 10: Concluding Messages ........................................................................................................ 55
74   To the Masters of Money.................................................................................................................. 55
75   To Everyone ...................................................................................................................................... 56
76Epilogue................................................................................................................................................. 56
77   Privacy, Backups and Mr. Miyagi ...................................................................................................... 56
78   Monero Valuation ............................................................................................................................. 57
79
80
81
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86
87Chapter 1: Introduction
88
89Background
90I had begun to read about Bitcoin roughly 4 years ago - mostly in the comments sections of financial
91websites that I favored. On the whole, the posts I read seemed like the ramblings of fanatics, and so
92while they were entertaining, I dismissed them from serious consideration. Surely the massive run in
93Bitcoin’s price was just today’s computer-age-version of a bubble scheme. I thought briefly about
94buying some as pure speculation, but decided against it. I’ve never been much of a gambler.
95
96The stock and bond markets had long since frustrated me - it had for the past several years become
97a sucker’s game. Fundamental valuation no longer mattered. Even technical analysis no longer
98mattered. All that mattered was what Central Banks and those ‘in the know’ decided to do. It was an
99increasingly open secret that the game was rigged – and there didn’t seem to be any alternatives. It
100was depressing. I could try and play-along (by trying to anticipate the Central Banks’ activities), but it
101didn’t feel right. I didn’t really want to be part of it, so I proverbially ‘sat on the sidelines’.
102
103It wasn’t until earlier this year, when JP Morgan announced its ‘Ethereum Alliance’ (along with
104Microsoft and Intel) that my ears perked up again. These were major and influential corporations
105with significant resources - and they were interested in blockchain technologies. They must see
106something I thought – but what?
107
108I began doing my own research, and investigating blockchain – what it is, and how it worked. I
109assumed that I had probably ‘missed the boat’ on Bitcoin, but thought that maybe I hadn’t yet
110missed the boat on these other crypto-currencies that were springing up. There were quite a few of
111them, and as I investigated, I found that I could use my knowledge of finance and deductive
112reasoning to break them down and arrive at valuations.
113
114I was going to begin with ETH, but before I could dig into the concept of ‘smart-contracts’, a different
115Alt-coin got my attention – Ripple. My quick ‘back of the envelope’ math showed me it could be
116easily worth a lot more than then current levels – and I didn’t even need to get into the more
117esoteric concepts of blockchain. I knocked out an analysis and posted it on my new blog. It got a
118reasonably favorable response, and I was ready to dive back into ETH.
119
120But then I noticed another coin – one whose marketing struck me as sufficiently suspicious such that
121I wanted to examine it more closely. “I’ll just do this quick report” I told myself, “and then get back
122to ETH”. But after that it was an email from a blog-reader asking me about another coin – TenX. So I
123knocked out another treatment. Suddenly there were lots of distractions. New Alt-coins were
124springing up every day – from scammers and genuine entrepreneurs alike. There was clearly
125something to this concept of blockchain that was feeding all this activity. But what exactly was it?
126
127I decided to go back to first principles, and try to understand what was happening. I wanted to know
128what it all really meant – as I felt that without a grasp on that, any investing I did in this space would
129be nothing more than gambling. I could also feel that there was something bigger happening, and I
130wanted to see it more clearly. I don’t know exactly how it began coming together – in some ways it
131seems that I had been collecting the pieces to this jigsaw puzzle for the last ten years or more - but
132once I made it my intention to try and ‘figure this stuff out’, the pieces began falling into place.
133
134It was a daunting task though. I could see the finished product in my mind’s eye and I knew it would
135take time and a lot of energy. Months at least, maybe longer – especially considering it would have
136to be done on nights and weekends. But it seemed like every day I saw another article discussing
137
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141
142Bitcoin and Altcoins and in my view, missing the point. Even worse, I watched as institutions with a
143vested interest in undermining Bitcoin produced reports and summaries that seemed at best simply
144unfair, and at worst disingenuous and misleading. I felt increasingly clear what the big story was, but
145there would be only one way to truly find out for sure – get this piece done and share it.
146
147I’ve put my heart into this work. It is my sincere wish that it provides the insight sufficient to inspire.
148
149
150
1513 Core Truths
152As a rule, all advanced social structures need money to function1. We’ll explain the reasons for this
153as well as explore what money fundamentally is, but the intention of this essay is not merely to
154inform on history and functional definitions. Instead, it is to inspire an awareness of three core
155truths. They are:
156
1571) The selection of what we use as money has a profound effect on some of the most fundamental
158   ways in which we live our lives.
159
160This may strike you as an odd or even bizarre statement to make, but I hope that by the end of this
161analysis you will realize and agree its truth.
162
1632) Our current system of money is exceedingly imbalanced – and as such does an exceedingly poor
164   job of supporting our individual and collective human journey.
165
166The world’s current monetary system is fraught with perverse imbedded incentives and moral
167hazards that inevitably lead to massive social and political imbalances. Many of the local, national
168and global ills we see today are the late-stage consequences (and co-incidents) of having such a
169warped system of money. Colloquially, we all know this – at least insomuch as we make reference to
170it in common speech. Any reporter worth his weight will tell you that when looking to uncover
171corruption and scandal, you simply need to follow the money. Religious literature points to the same
172theme when it declares money ‘to be the root of all evil’. Perhaps no one expressed the sentiment
173better in modern times than 20th Century Automobile magnate Henry Ford when he said2:
174
175    “It is perhaps well enough that the people of the nation do not know or understand our banking
176    and monetary system, for if they did I believe there would be a revolution before tomorrow
177    morning.”
178
1793) We all have an opportunity to transform our world in enormously positive ways, simply by
180   deciding to adopt a form of money different from that which we have been conditioned to
181   accept.
182
183Many of us are troubled by ills and injustices we see around us in society on a daily basis. There is no
184shortage (and perhaps never will be) of those calling for revolution in one form or another. I do not
185advocate for revolution. A revolutionary approach only breeds a changing of the guard, not growth
186out of the system of oppression itself. In even the most ‘successful’ revolution the oppressors
187eventually become the oppressed, and the oppressed the oppressors. George Orwell beautifully
188demonstrated this mechanism in his novel Animal Farm where the pigs ultimately become
189indistinguishable from the men. The rock bank ‘The Who’ expresses the sentiment even more
190
1911
192  As with all rules, there is always one exception to prove it! We will address that exception shortly but suffice
193it to say that the exception is sufficiently aberrant relative to our modern conception of society as to be
194effectively excluded.
1952
196  The quote was attributed to Mr. Ford by the late Congressman Charles Binderup.
197
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201
202succinctly when they proclaim, “Meet the new boss – Same as the old boss.” This is not true
203progress.
204
205Instead, I advocate for evolution. Evolution begins with honestly and directly assessing the current
206situation – a tall order for sure, but achievable for many. Action may ultimately be taken in some
207form, but as it was birthed through awareness and not resistance, it leads to a new state of balance
208– not an endless repetition of the old fruitless cycles. That we have the ability to facilitate the
209evolution of our world through an act as simple as deciding to accept something different ‘as money’
210is to me, nothing short of miraculous.
211
212
213
214Bitcoin Vs. Altcoins
215Ironically, as you no doubt can tell from this piece’s title, I’ve returned to ‘the boat that I thought I
216had missed’ – Bitcoin. In this treatise, I will speak of Bitcoin here as the representative of all
217Cryptocurrencies. There is much to be said about Alt-coins, but I have reached the (tentative
218perhaps) conclusion that they – while in some instances may be incredibly valuable (and no doubt
219may yet make many people wealthy in a traditional sense) – are best approached as providing
220ancillary functionality to the Bitcoin ecosystem.
221
222Some people assert that since new crypto-currencies can be created at any time (as evidenced by
223the hundreds of new alt-coins) that the value of any one (such as Bitcoin) is vulnerable to dilution
224and displacement. This is incorrect, as it presupposes that through sheer volume of additional
225offerings, ‘one or several’ will inevitably displace Bitcoin’s dominance. Once an appreciation for the
226power of money is gained, it will be clear that not only are the minimum technical requirements to
227serve as global money already contained within the current Bitcoin protocol and support
228architecture, but its ubiquity, market position, and ethos are sufficient to maintain its relative
229position and role. This is not to say that other coins lack importance or critical functions. In fact,
230security concerns surrounding Bitcoin’s adoption have led to me include an analysis of one
231additional Altcoin which I feel has a vital role to play. I address this other coin in the Epilogue.
232
233
234
235Quick Overview
236This paper is organized into 10 chapters and an Epilogue. I’ve done my best to only include pieces
237that are necessary to the progression of the narrative. As such, I recommend trying to read it in
238order without skipping sections. Even if you don’t absorb all the detail along the way, simply
239following through all the steps once can inform greatly. That being said, some of it (particularly in
240Chapter 5) gets a bit technical and isn’t for everyone. For those who might otherwise find it too
241daunting, I’ve included TLDR/Summaries just prior to diving into the more complicated sections, as
242well as some bolded summaries after their completion.
243
244We start our next chapter with what might seem like a simple question - ‘What is Money?’ We
245quickly realize that answering it requires a bit of exploration. From there we walk through the
246elements of trade, barter, and how barter may be improved upon by introducing money. We discuss
247the different broad categories of money, and introduce the concept of the money-supply being
248controlled by a small elite group, the situation we find ourselves in today.
249
250We then take an apocryphal story-ride, following the use of gold as money - from its most basic
251forms to advanced monetary schemes and beyond. Doing this gives us the technical and narrative
252context necessary to understand the problems we face today with our current fiat money systems.
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257
258This then brings us to a discussion of Bitcoin itself, including what I consider to be the ‘bigger
259picture’. We discuss practical approaches for facilitating Bitcoin adoption, a valuation framework,
260and finally concluding messages.
261
262While I had wanted to refrain from discussing any Altcoins in this treatise, the need to address
263privacy concerns and the game theory surrounding it led me to do so. The epilogue discusses privacy
264and the use/valuation of what I believe to be an integral altcoin in the Bitcoin ecosystem.
265
266Disclaimer
267This paper is not intended as investment advice. While there may be opportunities within it to see
268valuation and investment opportunities, the onus is on you the reader to determine whether the
269arguments have merit, and if or how you should translate them into action within your own personal
270life. Everybody’s circumstances are different, and what might be right for one person may be wrong
271for another.
272
273While I outline practical steps which I believe will facilitate Bitcoin adoption (including generically
274buying Bitcoin), there remain many risks that I may not have covered. One or many of my
275assumptions may prove incorrect, and unforeseen events could occur resulting in drastically
276different outcomes than those which I describe. I do not have a crystal ball. To the extent that you
277can, do your own work. Ask questions. Get informed. The importance of deciding to be as
278responsible as you are able to be for your own experience cannot be overstated.
279
280Chapter 2: What Is Money?
281
282If a child were to ask you this question – the answer to which is something seemingly so obvious –
283you might be surprised to find yourself at a loss to explain it in depth. You might reach into your
284wallet and take out a piece of paper with symbols on it, or show them your phone or computer
285screen (assuming you were logged into a money account of some sort). But if you were to do so, you
286would likely realize that your efforts fall short, as you are only pointing to a demonstration of
287money, not addressing its core definition. It turns out that asking what money really is is not a
288childish question at all – but something deceptively adult. For most of us, its definition lives at the
289outskirts of our awareness and we may spend our entire lives never grasping its nature.
290
291The Core Definitions
292Money at its existential and philosophical core has two definitions – one that is both as evolved as it
293is simple, and another that breeds materialism and devolution. Unsurprisingly, it is the latter with
294which most of us are familiar, and so we begin with that.
295
296Money Definition #1: the base version
297
298Money is the promise of our desires satisfied.
299
300While things like coins, bank notes and screen balances are often pointed to as being money, they
301are in truth just the symbolic representations of money3. Without the promise of ‘desires being
302satisfied’ behind it, a bank note is nothing more than an inked piece of paper and a coin is nothing
303more than a (usually base) metal with an imprint. These things are coveted not because of what they
304are physically, but the intangible thing that they represent.
305
306
3073
308    These things are currencies which is a term we will formally define and address.
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313
314With money, we believe we can get what we want - whatever it is we desire. Of course we may tell
315ourselves saying and slogans like ‘money can’t buy happiness’ or ‘money can’t buy love’ – but few
316people viscerally believe this. If we truly believed we couldn’t acquire love and happiness (even a
317little bit) with money, our behavior in the world would likely be vastly different that it is today.
318
319Money, as the promise of wants satisfied, is the ultimate carrot – that with which no amount of
320sticks can every truly compete. Mayer Rothschild realized this, which is why he famously said:
321
322 “Give me control of a nation's money and I care not who makes the laws.”
323
324Rothschild understood the power of money and with this knowledge was able to build a multi-
325generational dynasty. His power through mastering money (whether by his physical descendants or
326simply inheritors of his legacy) has been maintained by keeping those who are controlled by it
327ignorant of its importance and mechanisms.
328
329While dictators and strongmen have used brute force throughout the ages to corral and control the
330masses, these efforts are always eventually undermined by violent upheaval. You cannot push the
331people aggressively in one direction without expecting that they will eventually push back. House-
332slaves who are pressed into service by force and threat always remain at risk to escape or rebel.
333
334What Rothschild realized was that if you control money – the promise of wants satisfied – you can
335motivate people to do your bidding even if it’s ultimately against their best interests. This is an
336enormous power, greater than any brute force weapon or threat thereof can confer upon its owner.
337In fact, this power is so great that to keep it in the hands of men is to invite corruption and disaster.
338
339With money, one can create the perfect house-slave. Rather than scheming at night over ways to
340escape captivity, he instead dreams of acquiring more money and ‘stuff’ that will satisfy all of his
341wants - except of course for true freedom which is now seen as of insignificant importance. Rather
342than connecting with the true inner nature of the world around him, he is entranced by a
343materialism that weakens his connection to spirit and makes him vulnerable to exploitation. This is
344the world into which we have all been born – even those who find themselves seemingly at the helm
345of these mechanisms. That the masters are themselves slaves to a mode of awareness which keeps
346them from realizing broader truths is a secret hidden in the best possible place to remain
347undiscovered - plain sight.
348
349Money Definition #2: the simple yet refined form
350
351Money is a tool that facilitates equitable trade between humans.
352
353Humanity has been engaged in trade for all of recorded history (and then some). It’s no coincidence
354that archaeologists often look to ‘ancient trade routes’ as the earliest markers of civilization. Even in
355the simplest forms of societal existence, different people have access to different resources. It is
356only natural then that humans developed the drive to trade these resources. That humans generally
357have a concept of what is ‘fair’ and mutually beneficial speaks to higher innate aspects of our
358species.
359
360When money is appreciated in this way – as a tool to facilitate fair trade – many (if not most) of the
361ills associated with money (as the ‘root of all evil’ for instance) fall away. As such, while we
362acknowledge that no amount of discussion or debate can change the fact that many people
363viscerally subscribe to the first definition, for the purposes of aspiration and elucidation we will
364adhere more closely to the latter definition.
365
366
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371
372Depending on your background (and exposure to economic theories) you may already be
373questioning this money definition as being functionally too broad. Indeed it is, but was purposefully
374left so to express the basic sentiment. We can and will refine this to arrive at a more robust
375workable definition. We will do this by going back to basics, and starting with the one societal
376scenario where money is not necessary.
377
378Back to Basics
379If you and your immediate family were to live on a farm and not only be entirely self-sufficient, but
380have no desire for anything that you couldn’t provide for yourselves, then you wouldn’t need money
381at all. Even more simply, you wouldn’t need to trade with anyone else. Assuming it was a
382‘traditional’ family of mother, father and kids, then the parents would dole out work responsibilities,
383and the family could all share evenly in the benefits.
384
385Well, actually, not entirely evenly. After all, giving an exact equal portion of everything to each
386family member would not only be impractical, but probably sub-optimal. Should the baby’s bedroom
387be as big as the parent’s bedroom? Should everyone at the supper table be given an exact equal
388portion of food, despite body sizes (and appetites) ranging widely? Probably not. But assuming the
389family more-or-less gets along, these small discrepancies can generally be looked past and worked
390through. Everyone (more-or-less) agrees on what chores need to get done, and how to share the
391benefits amongst themselves. Money is unnecessary in this scenario - a life without trade.4
392
393However, if the family wants to acquire goods or services from people in the outside world, things
394get more complicated. They can of course politely ask others for ‘stuff’, but this approach is likely to
395hit a dead-end quickly. After all, one cannot consistently rely upon outsiders giving ‘stuff’ to you
396without some sort of value exchange (and no matter how politely you ask). This is now beginning to
397approach a description of the world in which we live – a world with trade.
398
399Enter Barter
400The simplest way to engage in trade is through barter. Barter is simply the exchanging of some
401goods and services for other goods and services. But barter has limitations of its own that prevent it
402from being scalable in a larger economy (and over time). Let’s quickly run through a few of them:
403
404    ï‚·    Bartered items may have uncertain value.
405
406Since barter items have value mainly in their perceived utility (how the ‘buyer’ thinks they can use
407and/or appreciate the item), the perspective of the person you are looking to swap with matters
408greatly. If the other person doesn’t have immediate use or interest in the particular item you’re
409trying to barter, you’re out of luck. Furthermore, if the item you’re looking to barter has an
410expiration date (say for instance, a liter of milk), then you only have a limited window within which
411to try and trade it (i.e., before it spoils).
412
413    ï‚·    Bartered items are (generally) not divisible and therefore, not easily transactable in terms of
414         relative value.
415
416
417
4184
419  Technically, if we switch things up just a little bit, we see that trade actually can happen (albeit subtly) even in
420our family example. For instance, maybe the teenage son is given a bigger portion of food at supper but he’s
421also expected to use his physical size and strength to perform more of the hard manual labor on the farm than
422his sisters. Let’s be romantics though and assume that in this particular family, ‘more’ is given when asked
423simply out of unconditional love. Alternatively, we can simply define ‘trade’ as happening between
424family/living units, and not within them.
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429
430If you wanted to buy a loaf of bread and all you had was a Van Gogh painting, you’d be in a tricky
431position. You wouldn’t want to swap the painting (presumably worth a fortune) for a single loaf of
432bread. But you also can’t “break off a tiny piece” of the painting to buy the bread. Because the
433painting is not divisible (without dramatically reducing its worth) – it’s by and large an all or nothing
434situation.
435
436    ï‚·   Bartered items may have other attributes making them difficult to use in general trade.
437
438Away from the examples we’ve already used above, there are more that can be problematic. For
439one, how about transportation of your goods? If you had to barter for everything, then you would
440presumably be carrying all your ‘stuff’ with you wherever you went intending to trade. This could
441quickly become very costly and cumbersome. After all, what good is a Van Gogh painting to
442someone else if by the time you brought it to market it’s been damaged from the journey?
443
444And so, we come to a solution to these problems of barter: money.
445
446
447
448Our Final (Functional) Definition of Money
449Money is a thing that through physical and/or symbolic representation solves some (if not all) of
450the limitations of trade using the barter system.
451
452This is admittedly a mouthful, so let’s walk through it in pieces to break it down.
453
454Money is a thing…
455
456Being ‘a thing’ is the only requirement to be money – so long as the qualifying criteria are met.
457Where this thing comes from or what it looks like doesn’t matter. It could be something a child
458crafted in the sandbox. It could be something sent from a far off inter-planetary dimension as a
459nebulous thought-form. It could even be a series of zeros and ones in a complex computer network.
460The point is, if this thing satisfies the rest of the definition’s criteria, then this thing may be
461considered money. Furthermore, if this thing does a better job than say, Dollars, Gold or Bitcoin in
462satisfying the rest of the definition, then this thing is better money than those alternatives.
463
464…that through physical and/or symbolic representation…
465
466All this is saying is that the thing which we are considering as money is ultimately represented by
467something else.
468
469Odds are that if I offered to give you a piece of paper with a bunch of ink on it you wouldn’t get too
470excited. But you would likely be much more interested if I told you that this paper had the precise
471color of green and exact letters, numbers and symbols to make it look like a 100-hundred-dollar bill.
472When you hand someone a dollar bill it’s treated with value because through the physical item
473handled, some other value is being represented – namely the perceived money of dollars. Whether
474you handle physical paper currency or transfer balances on-line from one account to another, you
475are ultimately moving symbolic representations of some ‘thing’ (dollars in our case).5
476
477
478
4795
480 Interestingly, there are many instances where the physical item itself may have value away from its symbolic
481representation of money. If the date on any of your dimes (American 10 cent pieces) is 1952, then odds are
482good that that dime is minted out of 90% actual silver (as opposed to cheaper metals). With the current value
483for pure silver being around $16 an ounce, its pure silver value would be worth about $1.25. You could also
484deposit it in your bank for 10 cents - but why would you?
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489
490…solves some (if not all) of the limitations of trade using the barter system.
491
492This last piece of the definition is purely functional - it’s all about solving problems of barter-trade,
493and implicitly leads us to an interesting conclusion:
494
495    ï‚·    There can be many types of money, and of varying qualities.
496
497Using a money of ‘lower quality’ (presumably solving fewer of the problems of barter-trade) can be
498done, but it exposes you (sooner or later) to problems that might otherwise be avoided by using
499‘higher-quality’ money.6 Let’s refer to how well something satisfies our definition of money as that
500thing’s ‘moneyness’. Things that express a high degree of ‘moneyness’ may be considered ‘high
501quality’ or ‘sound’ money.
502
503
504
505Moneyness
506So what makes for ‘high quality money’? What are the traits that allow some thing to solve the
507problems of barter-trade, and therefore be considered sound money – having a high level of
508moneyness? It turns out there are 3 main characteristics which when well-addressed, generally
509cover the scope of problems associated with barter-trade.
510
511Characteristic 1 of 3: Serve as a store of value
512
513There are two primary aspects to being a store of value:
514
515         1) The thing we use as money can’t be perishable.
516
517         Remember our first example of barter, using a liter of milk as the bartered item? Well milk is
518         not a stable store of value because it changes state very readily. It might start out as milk,
519         but depending on circumstances, it can spoil, turn to butter, or even turn to cheese.
520         Whatever we use as money, in order to be a stable store of value must not expire, corrode
521         or decay.
522
523         2) It has to be of a sufficiently limited supply.
524
525         When it comes to valuing some thing as a potential candidate for money, this is especially
526         critical. If new units of the thing can be produced frequently enough, then its usefulness as
527         money may deteriorate drastically. A bit of new supply may be ok7, but thousands of years
528         of (repetitive) human history has proven that when you go beyond that you are sowing the
529         seeds of a money system’s demise. We will explore this critically important concept more
530         fully in the next section.
531
532One additional note here regarding the concept of store of value is worth making. Price volatility is
533not a component of the Store of Value moneyness assessment. Price volatility makes broad adoption
534of something as money more challenging than it might otherwise be, but this is a separate issue8.
535Thought of differently, one could rightly argue that the volatility of Bitcoin in terms of fiat currency
536
5376
538  Some people (known as ‘gold bugs’) assert that ‘gold is money’. I don’t disagree, and we’ll in fact explore gold
539in more depth shortly. But money isn’t exclusively gold. There are other types of money – some better (and
540worse) than others. As such, I would rephrase the statement of ‘gold is money’ to ‘gold is a high-quality form
541of money.’
5427
543  New supplies of ‘money’ can at times be introduced to systems without causing imbalance. If allowed to
544persist though, they all ultimately result in the same place – catastrophe.
5458
546  This relates to the characteristic of medium of exchange, and is temporary with continued adoption.
547
548                                                                                                               11
549                                The Power of Money: A Case for Bitcoin
550
551
552might just as easily be interpreted as the volatility of fiat currencies in relation to Bitcoin. Considering
553how relatively poorly fiat currencies pass moneyness tests, this has significant intuitive and
554theoretical appeal. Of course, the main difference between the two perspectives is that currently,
555the bulk of ‘price points’ for assets are denominated in fiat currencies, giving the illusion of stability
556in fiat over short time horizons. If and as this changes (with sellers of goods and services pricing their
557wares in Bitcoin) we will see this fall away.
558
559Characteristic 2 of 3: Serve as a unit of account.
560
561This is a trickier sounding one, but for all intents and purposes, we can keep it simple by answering
562this question:
563
564Can you measure ‘stuff’ in terms of this thing that you are proposing to use as money?
565
566We can do this with dollars. Whether it’s a wide-screen television or a steak dinner, we can
567represent all sorts of ‘stuff’ in terms of dollars. The television might be represented (or valued) at
5681,200.99 dollars, and the steak dinner might be accounted for as 24.95 dollars.
569
570It may seem that we could even do the same with milk! After all, couldn’t we say the television is
571worth 436.72 gallons of milk, and the steak dinner is worth 9.07 gallons of milk?
572
573Well, we could try, but we’d run into some problems (away from milk not being a stable store of
574value). We might ask what type of milk? Whole, low-fat, or skim milk? Were the cows free-range or
575factory milked? Are all the milks plain unflavored, or are some chocolate milk?
576
577In order for something be a suitable ‘unit of account’, that thing must be uniform. Any unit of the
578‘stuff’ you are using as money must be exactly the same as another other unit of the ‘stuff’, with the
579only acceptable differences being quantity or magnitude. There is no functional difference between
580a $1 bill I receive as change from a local shopkeeper and a $1 dollar bill I receive upon withdrawing it
581from my bank account.
582
583Furthermore, the thing that we use as money must be able to be fractionally divided such that the
584sum of all its components exactly equals the value of them all put together. Yet again, this probably
585sounds either silly or confusing, so let’s revisit a previous example we used when talking about
586barter – a Van Gogh painting (while noting that classic art generally serves as a poor unit of account).
587You cannot break a Van Gogh painting worth $100 million in half and expect to sell each piece for
588$50 million. Odds are, you will have simply destroyed most of the value. The pieces of a broken Van
589Gogh painting do not equal their value put together. Alternatively, if you have 100 of 1 dollar bills,
590you would have no issue (from a value perspective) of exchanging them for a single 100-dollar bill.
591
592Characteristic 3 of 3: Serve as a generalized medium of exchange
593
594The thing to be used as money, (or its functional representative, whether that be paper bills or
595electronic accounts) must be practical and easy to use for trade.
596
597Fine art (to stay with the earlier example) is generally a poor generalized medium of exchange
598because in order to protect its value, it must be protected from the elements, which requires
599(expensive) effort. It’s also not very easy to transport, and as we’ve already seen can’t be used to
600‘make change’.
601
602There are all sorts of features that make for a better medium of exchange – transportability,
603durability, value density to just name a few. We’ll go through some more detail on these when we
604examine gold and then cryptocurrencies.
605
606                                                                                                         12
607                                 The Power of Money: A Case for Bitcoin
608
609
610It may seem at this point that many different things could be used as money, and used successfully.
611However, upon examination it turns out that very few things in our world ‘tick the boxes’ of serving
612as high quality money.9
613
614While this basically covers all the aspects of moneyness, I would like to re-draw your attention to
615one particular characteristic - store of value – and more specifically to how this may be determined
616by a money’s supply. While all other elements of moneyness are valid in their own right, the
617corruption inherent in the current monetary system hinges on this one aspect. There are effectively
618two possibilities for money regarding supply - both with very different implications and
619consequences.
620
621Something used as money can either be of a fixed (or near fixed) supply, or an un-fixed supply of
622money.
623
624The full consequences of having a fixed money supply have rarely if ever been realized throughout
625human history – at least not for extended periods of time. This is because the temptation for those
626in power to assert control over the money supply (and therefore bestow upon themselves the ability
627to create more units of money at will) is generally irresistible.
628
629Nevertheless, instances throughout history where a fixed-supply approach to money was honored
630have generally been periods of relative economic and social balance. This is in stark contrast to the
631alternative scenario of an un-fixed money supply which history has shown over and again always
632ends in repression, violence and despair. While we will not spend much time now discussing the
633direct details and implications of having a fixed money supply, we can for now assert that most if not
634all of the problems of having an un-fixed money supply (which we are about to discuss in greater
635depth) can instead be avoided. It turns out that avoiding disaster is quite a strong selling point.
636
637Chapter 3: Dangers of An Unfixed-Money Supply
638
639To demonstrate the perils of having an un-fixed money supply, we must differentiate and then
640explore the two main types. Once that is done, the dangers inherent in both systems should become
641clear.
642
643Type 1 of Un-Fixed Money Supply
644    1) The mechanism for addition/creation of new units of money to the economy is accessible to
645       a large percentage of the populace.
646
647An example of this would be if we decided that leaves were to be used as money. By the unit of
648money being leaves (yes, the kind that grow on trees), it would be within nearly everyone’s grasp to
649create new units of money for their own benefit. It would make sense (at least initially) to plan a trip
650to the woodlands, where you could spend an afternoon collecting wild-leaves. Once your basket was
651full, you could return to town and use these leaves to acquire goods and services - effectively
652introducing this new money into the economy.
653
654The consequences of this type of activity though would be (as you might already realize) disastrous.
655As everyone has the power to ‘create new money’, all it takes is a little bit of time and standard
656human behavior/motivation and the monetary system would collapse in hyperinflation. The amount
657
658
6599
660 The one that throughout the ages has done the best job (and which we discuss at more length shortly) is
661gold.
662
663                                                                                                           13
664                                  The Power of Money: A Case for Bitcoin
665
666
667of leaves brought into the economy would soar, causing their purchasing power to plummet. Soon,
668even wheelbarrows full of money (leaves) would be insufficient to purchase even the most modest
669of goods or services. As such, we can effectively disregard this scenario as being entirely unworkable
670(as it would self-destruct enormously quickly). We instead bring our focus to the second type of an
671un-fixed money supply, as this is the one the world is currently facing. This type will remain a prime
672focus of our attention.
673
674Type 2 of Un-Fixed Money Supply
675     2) The mechanism for addition/creation of new units of money to the economy is accessible to
676        a small minority of the populace.
677
678To illustrate this simply, let’s modify our leaves-as-money example slightly. Let’s suppose that it isn’t
679normal leaves that are money, but special blessed-leaves. That is, there is a caste of priests (who
680make up only a small percentage of the total population) that has the power to ‘bless’ leaves and
681turn them from just a normal leaf, to one that is usable as money. Once a leaf is blessed (and
682embedded with an anti-counterfeit chip) it becomes money.
683
684The benefits of having a priestly caste as the only ones who can ‘bless leaves’ and so create new
685money are two-fold. The first benefit to the public, and the second benefit to the priestly caste
686themselves. Unfortunately, what benefits the priestly caste serves to the detriment of the public, as
687we will see.
688
689For the public benefit, as long as the priestly caste doesn’t act recklessly, the amount of new leaves
690which enter the system can remain relatively subdued – keeping the threat of hyperinflation very
691low. Of course, this same benefit of avoiding hyperinflation (and the knock-on destabilising effects of
692it) could be achieved by one in which the supply of money is fixed. Nevertheless, without
693hyperinflation (or its imminent prospect) the average citizenry can live and operate with a fair
694degree of economic stability (for a time)10.
695
696For the priestly caste the gain is potentially stupendous. With the power to bless-leaves and thus
697create new money at will, they wield the power of the ‘ultimate carrot’ – being able to motivate
698nearly anyone to surrender their real property and/or do their bidding by offering up newly created
699money - the promise of wants satisfied.
700
701 “Give me control of a nation's money and I care not who makes the laws.” – MA Rothschild11
702
703The Three Masters-of-Money Commandments
704There are however, three constraints on the power of that small selected group who controls the
705money supply. While we have referred to them as ‘priests’ in our previous example, and will
706continue to do so at times, they may also be more generally herein referred to as the Masters of
707Money, or MoM. If these three constraints are not honored, the MoM’s power will be short-lived (if
708lived at all). As homage to the late Notorious B.I.G.12 we will refer to these constraints as The Three
709MoM Commandments.
710
711
712
713
71410
715   As we will see though, although immediate hyperinflation is no longer a high risk, long-term inflation and its
716consequences remains not only a risk, but a certainty.
71711
718   I know that I am repeating the quote. Please allow me some leeway for introducing what I see as
719appropriate dramatic effect.
72012
721   And his song ‘The 10 Crack Commandments’.
722
723                                                                                                               14
724                                The Power of Money: A Case for Bitcoin
725
726
727MoM Commandment #1: Thou shalt convince the public to grant and allow you control over the
728money supply.
729
730The first of the constraints has to do with being granted the power to control the money supply to
731begin with. Without the initial controlling mechanisms being handed over willingly (even if not from
732a fully informed basis), there is no power to discuss. History has shown that (at least in recent times)
733this is generally not very difficult to accomplish. People may be easily impressed by propaganda,
734titles, pomp and circumstance – such that they assume that a) others are ‘appropriately qualified’, b)
735those others have perfectly noble intentions, and c) the mechanisms through which these others
736operate are immune to corruption. The convincing need not be perfect or absolute – just enough to
737keep the average citizen from objecting too strongly.
738
739MoM Commandment #2: Thou shalt not create so much new money that inflation reaches levels
740where the usefulness of the currency for the majority of the populace is nullified.
741
742The second of the constraints has to do with supply and its impact on inflation. While the priests in
743our example can in theory create as much money as they want, if they create too much new money
744this would cause high levels of inflation which erode the usefulness of the money. The consequences
745would approach that of the scenario where a majority of the public had the power to create money,
746and so flooded the economy - creating hyperinflation. As such, people would ultimately reject the
747money and revert back to either barter systems or money systems based upon some different thing
748than the blessed leaves13. The priests would have ‘killed the goose that laid the golden egg’. The
749priests can create new money to generate some inflation, but if they push too far, the whole system
750risks collapse and being rejected by the public.
751
752MoM Commandment # 3: Thou shalt only gift wealth (via new money creation) to yourselves and
753others via opaque and hidden mechanisms.
754
755Simply put, the most attractive thing about being a ‘Master of Money’ is not just the ability to create
756the money, but to direct it where and to whom you want – whether that be yourself, or your friends
757and family. If the Master of Moneys decide they want to gift it to themselves, they may do so – but
758only if they honor this third commandment. Any gifting of wealth and value to themselves (or their
759cohorts) must be non-obvious and ideally steeped in complication – lest the public realize that a
760swindle is taking place.
761
762        “It is perhaps well enough that the people of the nation do not know or understand our
763        banking and monetary system, for if they did I believe there would be a revolution before
764        tomorrow morning.” – Congressman Binderup quoting Henry Ford14
765
766
767
768Power (and Wealth) of the Priests
769Luckily for the Masters of Money, the facts that a) there are relatively few of them, and b) the power
770they wield is enormous, mean that there are many ways that they can enrich themselves while not
771violating the 3 MoM Commandments. Let’s explore a couple of simple examples to demonstrate
772this.
773
774
775
77613
777   This is precisely what has happened in countries such as Zimbabwe and Venezuela where the 2 nd MoM
778Commandment has been violated.
77914
780   My last repetitive quote in this treatise.
781
782                                                                                                        15
783                                The Power of Money: A Case for Bitcoin
784
785
786Note though, that in these immediate examples, we are only taking as a given that Commandments
7871 & 2 are honored. We are (for the sake of example) allowing the priests to violate Commandment
788#3 (making sure the process is not obvious). We are doing this (for now) because a basic
789understanding of ‘theft through inflation’ is critical, while the mechanisms for hiding the fact that
790this is a theft can (and will be) returned to later. It is worth noting though that besides ‘theft through
791inflation’ there are other powerful and insidious methods with which the priests may enrich
792themselves. These other methods will be addressed in the same future section where we address
793their compliance with the 3rd MoM Commandment.
794
795Let’s begin our example with a simple assumption – that the priests have convinced the public that
796small levels of inflation (say, less than 3%) are acceptable - and maybe even needed for a healthy
797economy. Considering that this is literally taught in economics classes and textbooks today, it should
798be easy to accept this scenario as reasonable. We will continue our illustration of how the priests
799may massively enrich themselves through inflation by using a simple theoretical example of a
800country – called Leafistan.
801
802 TLDR/Summary of the remainder of this section
803
804 Even though many of us have been taught that small amounts of annual inflation (2-3%) are
805 healthy, in reality they amount to a significant stealth-tax on the public that benefits a small elite.
806 While in any one year the cost of the tax may seem slight to the average citizen, the benefit to
807 each of the elite recipients is enormous. In just a few decades, this mechanism alone can cause
808 most of the wealth of a society to become concentrated into the hands of the very few.
809
810 While I highly encourage readers to do their best to follow this section through (as I think it offers
811 enormous value to see the numbers in action), if you are satisfied with this TLDR, you may now
812 skip ahead to the next sub-section, ‘On MoM Commandment #3.’
813
814
815
816Leafistan is a country of 100 million people, and has a priestly caste amongst this total (who blesses
817their leaves, turning them into money) of only 25,000 people. Every single Leafistan citizen (priests
818and non-priests alike) is allocated a personal net worth of 50,000 leaves at the founding of the
819country. This means that the total amount of money in the country is 5 trillion leaves.
820
821At the end of the first year though, the priestly caste rewards themselves (for assuming the mantle
822of leadership) by awarding each priest an amount of leaves equal to 100 times the average citizen’s
823net worth of 50,000 leaves. 100 x 50,000 means that each priest is awarded 5,000,000 leaves. Since
824there are 25,000 priests the total amount of new leaves created is 5,000,000 x 25,000 = 125 billion
825leaves. This seems like an enormous amount, and it is on an individual basis. But when compared to
826the existing total pool of money in Leafistan (5 trillion leaves) it only translates into 2.5% of the
827whole. If we further assume that this newly introduced money supply immediately generates
828uniform inflation for all citizens, then we can measure individual wealth levels in terms of original
829leaves (now worth less due to the inflation).
830
831Let’s see how this impacts the citizenry - non-priests and priests on an individual basis:
832
833
834
835
836                                                                                                           16
837                                                 The Power of Money: A Case for Bitcoin
838
839                                                                                                    Total Wealth as Measured in           Cumulative Net Worth
840                  Pre-Priestly                                                                   Initial-Leaf-Allocation Purchasing     (measured in original leaves
841                     Award                             Post-Priestly Award                                      Power                            value)
842
843Average           50,000 Leaves        Still has 50,000 leaves, BUT as the total supply of                 48,750 Leaves                           48,750
844Citizen                                  Leaves has been diluted by 2.5%, the 50,000
845                                      leaves today are only worth as much as (1-2.5%)x
846                                        50,000 = 48,750 leaves from before the award.
847
848
849
850Average           50,000 Leaves        Still has 50,000 leaves, BUT as the total supply of                 48,750 Leaves
851Priest                                   Leaves has been diluted by 2.5%, the 50,000
852                                      leaves today are only worth as much as (1-2.5%)x
853                                        50,000 = 48,750 leaves from before the award.
854
855
856
857                                         Awarded 5,000,000 leaves, but these too are                     4,875,000 Leaves                        4,923,750
858                                          worth only 97.5% of prior leaves' value, so
859                                       5,000,000 x (1-2.5%) = 4,875,000 leaf value from
860                                                      before the award.
861
862
863
864
865On an individual basis, the average citizen is only slightly worse off, while the average priest is
866massively wealthier. It’s worth noting though that the inflation impacts both common citizen and
867priest alike - the new leaves that the priests gave themselves are worth less-per-leaf than before the
868inflation. The saving grace for the priests though is that they now have far more leaves than their
869loss due to inflationary impact. When we look at the example from a consolidated national level, we
870see something else quite remarkable.
871                                                               Pre-Priestly Award                                                     Post-Priestly Award
872
873
874                                                                                         % of Total                                                               % of Total
875                                            Per Indiv.              Total             National Wealth                                                          National Wealth
876                   # of Individuals          Leaves                Leaves                 (Leaves)             Per Indiv. Leaves            Total Leaves           (Leaves)
877
878
879
880                  100 million MINUS
881                                                                  4.99875                                                                     4.99875
882All Non-Priests     25,000 Priests =          50,000                                         99.975%                 50,000                                            97.537%
883                                                                  Trillion                                                                    Trillion
884                      99,975,000
885
886
887
888
889                                                                    1.25                                                                       126.25
890All Priests             25000                 50,000                                         0.025%                5,050,000                                           2.463%
891                                                                   Billion                                                                     Billion
892
893
894
895
896                                                                     5.0                                                                       5.125
897                                 Total National Wealth                                       100.000%                                                              100.000%
898                                                                   Trillion                                                                   Trillion
899
900
901
902
903On a percentage-of-all-wealth basis, the priestly caste has just grown enormously – going from
904controlling only .025% of the wealth to nearly 2.5% of all wealth! What we are seeing is a wealth
905transfer from the non-priests to the priests. This may be thought of as a tax, which benefits some
906(the priests) and hurts others (non-priests). Unlike traditional taxes though, the populace was never
907approached by a single individual or organization, demanding that they ‘pay up’. Most of the
908citizenry may not even understand that there is a wealth transfer mechanism occurring at all. So
909long as they accept without question that annual inflation of ~2.5% is normal, they are bearing this
910burden to benefit the priests (who they may never come into contact with, or even know exist!)
911
912To see the long-term impact of this wealth-transfer tax (from the ignorant masses to the priestly
913caste who are enriched by the system) we fast-forward by 50 years, using the exact same math. Let’s
914assume there is zero population growth, and ‘inflation’ continues via the annual award of 5,000,000
915leaves to each priest (representing less than 2.5% annual inflation).
916
917                                                                                                                                                                                 17
918                                 The Power of Money: A Case for Bitcoin
919
920
921
922                                                               After 50 years of Priestly Awards
923
924
925                                                                                                      % of Total
926                                                                                                   National Wealth
927                      # of Individuals         Per Indiv. Leaves            Total Leaves               (Leaves)
928
929                    100 million MINUS
930                                                                              4.99875
931All Non-Priests       25,000 Priests =              50,000                                            44.433%
932                                                                              Trillion
933                        99,975,000
934
935                                                                                6.251
936All Priests               25,000                 250,050,000                                          55.567%
937                                                                               Trillion
938                                                                                 11.3
939                                                                                                      100.000%
940                                                                               Trillion
941
942Incredibly, the tiny priest caste, representing far less than 1% of the population and with inflation
943creeping at a meager 2.5% per year pace, now controls over half of all national wealth. For the
944astute observer of modern economics, this should be eerily reminiscent of both wealth distribution
945and dollar purchasing-power over recent decades.
946
947
948
949On MoM Commandment #3
950MoM Commandment # 3: Thou shalt only gift wealth (via new money creation) to yourselves and
951others via opaque and hidden mechanisms.
952
953As mentioned in the preface to our example, the priests were obvious in giving themselves the new
954money – violating MoM Commandment #3. This would not stand over time as the public would
955object. They may still give themselves the money, but the way they transfer it to themselves must be
956obfuscated and roundabout so that the average citizen is unaware of what is truly happening.
957
958We will shortly explore the mechanisms for doing this while conforming to the commandment, but
959the key takeaway at this stage is that the mere presence of such enabling mechanisms inevitably
960leads to corruption. With money comes power, and if there is a single lesson we can learn from
961human history it is that power corrupts. No individual born into the priestly caste may be perfectly
962insulated from the pressures of assuming very different values to those of the average non-priest.
963Sadly, these different values tend to (by virtue of time, separation, and human nature) be focused on
964selfish self-preservation and the maintenance of an ‘us versus them’ mentality. Non-priests, though
965useful at times, may become viewed as little more than cattle, convinced to enter the milking house
966(or abattoir) by keeping them in a state of confusion and alarm.
967
968There is (and has been throughout the ages) a portion of the populace keenly aware of these types
969of nefarious and hidden monetary mechanisms - viewing them as contrary to the higher aspirations
970of humanity. In today’s day and age, some of these people are at times referred to as ‘gold bugs’ – as
971gold has served the role throughout the ages as money of a fixed supply, and thus avoids all the
972negative consequences of money-supply-control falling into fallible human hands. But gold, while for
973periods in history succeeded in establishing itself as money, has ultimately failed to defend this
974position. There are several reasons for this – some due to the cunning and improvisation of those
975who seek to control the money supply themselves, some due to its inherent limitations.
976Nevertheless, to continue in our quest of understanding ‘where we are’ we now explore this
977incredible substance called gold – for it offers an enormity of lessons and insight.
978
979                                                                                                                 18
980                                   The Power of Money: A Case for Bitcoin
981
982
983Chapter 4: From Gold to Gold-Backed Currencies
984
985Gold as money
986Money has in some way always revolved around gold as its ‘spiritual’ anchor point.15 There are many
987good reasons for this, but let’s start with the simplest and most basic one, even before focusing on
988its moneyness. Throughout history a particular species of primate, us humans, have been
989aesthetically drawn to gold. Throughout the ages both we and our ancestors have adorned ourselves
990with it and used it for religious, social and political ceremony. Maybe there’s something magical to it
991that we are drawn to. Maybe it’s just the look and feel of it that triggers the right receptors in our
992brain for a ‘pleasure’ sensation. Whatever the case may be, there’s no denying that people generally
993have a positive visceral response to gold.
994
995While people have sought after gold for the above reasons, the value it offers by using it as ‘money’
996is arguably orders of magnitude higher than all those other aspects. Of course this is dependent on
997how well gold satisfies our ‘moneyness’ criteria, so let’s quickly run through them.
998
9991) Store of value
1000
1001To be a good store of value something can be neither perishable nor of unrestricted supply. Gold
1002satisfies these conditions extremely well. It doesn’t expire, rust, corrode, wither or fade. You can go
1003to museums and marvel at the very same gold upon which Pharaohs gazed thousands of years ago –
1004and it’s in the same condition. If you heat it to high enough temperatures you can melt it (and purify
1005it if it’s been combined with another metal), and once allowed to cool it re-solidifies. This allows it to
1006be shaped it into all sorts of useful shapes and designs.
1007
1008Gold is also very rare. There just isn’t that much on Earth. Some people have asserted (and they’re
1009probably correct) that all the gold in the world would fit into a cube just 20 meters long on each side.
1010Considering how large our planet is, that’s not terribly much.
1011
1012It’s true that we ‘discover’ more gold each year via mining and exploration, but even ignoring the
1013fact that much of gold is ‘not in circulation’16 all the gold found only accounts for an annual increase
1014of less than 2-3%. When you couple this increase in supply with the fact that it’s only achieved
1015through a lot of hard work and resource expenditure, we can more-or-less treat gold as a fixed
1016supply asset.
1017
10182) Unit of Account
1019
1020Gold works extremely well here too. It can be easily purified and so kept perfectly uniform. It’s also
1021terrifically divisible. Measuring other things in terms of units of gold (whether than be in grams or
1022micrograms) is very easy to do. You can have gold in the form of thick bars, or shaved as thin as 1
1023molecule width gold-leaf – it still maintains its chemical and physical properties and characteristics.
1024
10253) Medium of Exchange
1026
1027Gold excels here. Because of its chemical properties, it can be shaped into basically any form and
1028carried around with minimal expense. It’s sufficiently compact such that for practical uses, it can be
1029
1030
103115
1032   There is quite literally, something otherworldly about this stuff that is born out of astronomical collisions and
1033explosions. Modern science isn’t exactly sure how gold molecules are formed, but current consensus is that
1034they’re created in either supernovas or neutron star collisions.
103516
1036   A topic we leave alone here, as it doesn’t materially add to this exposition.
1037
1038                                                                                                                 19
1039                                 The Power of Money: A Case for Bitcoin
1040
1041
1042held or accessed by a single person and accompany one on his or her travels – whether that be to
1043the corner shop or to the other side of the world. Depending on the purity, a single gold coin could
1044range in value from just enough to buy a loaf of bread, to enough to buy 1,000 loaves.
1045
1046It’s also relatively easy to tell if an item of gold is genuine as well as the level of its purity. Even
1047without modern scientific measuring equipment, touchstones have been used for over 5,000 years.
1048This is especially useful when you’re in an environment where you might otherwise not trust the
1049person with whom you are transacting.
1050
1051
1052
1053 A Quick Side Note On Silver
1054
1055 Many of the same traits that gold has are held by silver. The key functional difference though
1056 between gold and silver (relative to their usefulness as money) lies in their scarcity17. There’s a lot
1057 more silver in the world than gold. As such, its value per ounce is much lower than gold.
1058 Historically an ounce of gold has been worth 30-40 times more than an ounce of silver, though
1059 these days that ratio is closer to 70 times. The practical implications of this are significant.
1060
1061 For instance, if you wake up one day and realize that your country has turned into a dictatorship
1062 and decide to flee, you will probably want to take as much of your wealth with you as you can
1063 carry. Because gold is denser on a value/weight ratio, you can carry a lot more wealth in gold that
1064 silver. Carrying 1 gold bar out of the country weighing 1 kg is a lot easier than carrying 70 kg of
1065 silver bars – the potential equivalent in value.
1066
1067 However, if you want to go to the local shop and buy some groceries, you are probably better off
1068 bringing a 1-ounce silver coin rather than a 1-ounce gold coin. One ounce of silver is currently
1069 worth about $16 – sufficient to get milk, bread and some other staples. But a one-ounce gold coin
1070 is worth close to $1300 – far in excess of what you need. Do you really expect the cashier at the
1071 grocery store to ‘make change’ on your gold coin? And with what? Dozens of pieces of silver? In
1072 terms of day-to-day smaller denomination transactions, silver is generally superior to gold.
1073
1074 There is definitely a place for silver in the consideration of investment allocations – and silver is
1075 indeed a great form of money. That being said though, for the purposes of this paper and for the
1076 sake of expediency we will largely focus on gold.
1077
1078
1079
1080Over the millennia, many different things have been used as money. Gold has (generally) remained
1081at the forefront of the very few long-term survivors. This is not only because of how well gold serves
1082as money, but how poorly everything else that was ever used as money performed in the long-run.
1083When it comes to meeting the criteria for ‘sound money’, there isn’t much margin for error. History
1084has shown time and again that if all criteria of ‘moneyness’ are not met, then that thing being used
1085as money or currency will ultimately collapse – usually violently.
1086
1087
1088
1089
109017
1091 There are other features silver has which gold does not – for instance its use in many industrial processes.
1092We acknowledge this as a fact, but pursue it no further as it doesn’t materially add to this exposition.
1093
1094                                                                                                                20
1095                               The Power of Money: A Case for Bitcoin
1096
1097
1098The Birth of Banks and Gold-Backed Currencies
1099While gold has historically been the best form of money, it’s not without limitations. Though the
1100narrative I’m about to describe is more apocryphal than historical fact, using the sequencing of
1101events as I do is useful nonetheless. With it, I hope to demonstrate key features of gold, as well as
1102how it is (or was) related to banking and gold-backed currencies.
1103
1104In ‘the old days’ when everybody accepted that gold was money, money was gold, and nothing else
1105would do – there was still one main problem that remained and needed solving – security.
1106
1107With gold as the only form of money, the question of where to securely store your gold became a
1108major issue. You could keep your gold in or around your home, but unless you also invested a
1109significant amount of resources in things life safes and/or armed security, your gold holdings would
1110be at risk to thieves and robbers. This cost, while was prohibitive for most individuals, could be
1111widely afforded if people pooled their resources and kept their gold in a single centralized (and
1112adequately protected) place. This is where banks were born.
1113
1114The basic premise of a bank is simple: People keep their wealth (gold) in the bank, and share in the
1115costs of providing adequate security – whether that be in the form of safes, armed guards or
1116otherwise. By using a centralized location, security could be optimized while keeping the costs of
1117maintaining that security low on a per-account basis.
1118
1119With the bank set up, participants realized quickly that there were basically two ways to operate,
1120either with or without currency.
1121
1122Before exploring these options, let’s first define this term which we are introducing – currency.
1123
1124A currency is a medium of exchange that is used to represent money by mimicking and tracking
1125the underlying money’s store-of-value and unit-of-account characteristics.
1126
1127Just as money is defined as something that can be symbolically represented by something else,
1128currency is that thing which does the symbolic representation. Currencies do not innately pass any
1129of the tests that define something as money. There is nothing inherent in the traits of, for instance, a
1130piece of green paper that keeps its supply constrained or the logic of its divisibility sound. Despite
1131this lack of innate ‘moneyness’, active management of its supply, distribution and account
1132measurement features (so that it tracks underlying money) can enable it to be used as an effective
1133money representative.
1134
1135Banking Option 1 of 2: No currency - keep the bank strictly gold-in, gold-out (GIGO).
1136
1137The advantage of a GIGO bank is simplicity. If you have gold you want to be kept safe, you deposit it
1138at the bank. If you want to use your gold, you go to the bank, withdraw it, and then spend it where
1139and how you like.
1140
1141The problem with a simple GIGO bank though is one of cost and efficiency. Having to go to-and-from
1142the bank every time you want to make a transaction can be very cumbersome – especially if you are
1143transacting in large quantities.
1144
1145For instance, if you wanted to buy a large property for 1,000 ounces of gold, you would need to go
1146to the bank, withdraw the gold, and then arrange for security to bring it to the property seller. Once
1147you paid the property seller, he would need to arrange for security, and bring it back to the bank to
1148deposit it. This transaction would be made a whole lot simpler (and less costly) if the gold never left
1149the bank, but rather the owner of record was simply changed from the buyer to the seller of the
1150
1151
1152                                                                                                        21
1153                                The Power of Money: A Case for Bitcoin
1154
1155
1156property. This is made possible with gold-backed-currencies, and they form the backbone of the
1157second option of how banks may operate.
1158
1159Banking Option 2 of 2: Have the bank issue a gold-backed currency
1160
1161Rather than the GIGO approach, the bank instead issues all depositors tokens which represent their
1162holdings. These could be tin or copper coins, or elaborately decorated pieces of paper. Regardless of
1163the form it takes, the tokens now represent a gold-backed currency. This is because the bank agrees
1164to three things when they issue them:
1165
1166        1) Each token/unit-of-currency represents one unit of gold being held at the bank.
1167        2) In exchange for units of tokens, the bank will give the related units of gold to whomever
1168           submits them.
1169        3) The tokens are negotiable – meaning that they are transferable. Regardless of who
1170           submits the token for a gold withdrawal, the bank will honor it.
1171
1172This makes transactions much simpler now (with one glaring complication we will address
1173momentarily). Rather than having to transport 1,000 ounces of gold to purchase the property of our
1174last example, you could simply hand over a Banknote with a stated value of 1,000 gold ounces to the
1175property seller. By doing so, you are forfeiting your ability to claim that gold from the bank, and
1176instead giving that right to him.
1177
1178If he wants to receive the actual physical gold, all he needs to do is take that note to the bank and
1179withdraw it. Of course, he may find it easier to just leave his gold in the bank and hold on to the note
1180which he can use for further trade.
1181
1182The introduction of currency introduces yet another complication, and that is the issue of
1183counterfeiting.
1184
1185Counterfeiting
1186
1187It’s relatively easy to identify if a piece of gold is in fact genuine and not counterfeit, but not so easy
1188when it comes to other materials. The authenticity of paper currency, no matter how elaborate the
1189design, is ultimately vulnerable to a skilled hand. Furthermore, counterfeit metallic coins may be
1190fairly easily cast. This poses a significant risk for our bank that uses gold-backed currency.
1191
1192A successful counterfeiter can show up at the bank and withdraw gold that does not belong to him.
1193This means that the holders of genuine (not counterfeit) currency now have a pool of gold backing it
1194which is less than the nominal amount they hold. They may think they have a certain amount of
1195physical gold backing their notes, but if a counterfeiter has withdrawn gold using counterfeit notes,
1196they may have far less.
1197
1198Fooling the bank directly is actually not even required – simply fooling another person in a
1199transaction will do the job. The counterfeiter may simply use his fake currency to buy goods and
1200services from honest tradespeople. When the tradespeople go to redeem their currency at the bank,
1201they may be told that the notes are fake and will not be honored by the bank. They will then realize
1202that they have given away their wares for worthless counterfeit notes.
1203
1204Even the prospect of there being counterfeit currency in circulation can affect purchasing power. If
1205for instance there was a rumour that 10% of all notes in circulation were counterfeit, then
1206tradespeople might only value even a legitimate unit of currency at 90% of its face value in gold if
1207not less. These are the stirrings of a potentially deadly (for the currency) form of inflation.
1208
1209
1210                                                                                                         22
1211                                  The Power of Money: A Case for Bitcoin
1212
1213
1214As counterfeiting presented an existential crisis to banks that wished to use a gold-backed currency,
1215drastic measures were called for. In addition to trying to make the currency as difficult as possible to
1216replicate, an additional deterrent was added – the threat of death. Throughout much of history, the
1217penalty for counterfeiting currency was death. This of course opened the door to link currencies with
1218government – as the banks needed government to enforce the counterfeiting prohibitions (and
1219punish violators). Government involvement, as we will later see, would become increasingly
1220problematic.
1221
1222Nevertheless, with rule of law (by and large) preventing counterfeiters, the business of banking
1223progressed fairly smoothly. Bankers were seen as little more than custodians, and people were
1224happy with that arrangement. Currencies (or Bank Notes) were used as money, and when actual
1225physical gold was demanded by the currency holder, the banker would simply go to the vault and
1226swap the currency for the gold.
1227
1228As a consequence of this, the public began to forget that the currency had no innate value, but
1229rather only had value derived from being linked to money. This loss of awareness on the part of the
1230public opened the door for direct-linkage between money and currency to come under attack. The
1231breaking of this link would give power and privilege to the few at the expense of the many.
1232
1233Up until this point bankers (custodians of the gold) had to be very careful to not issue paper currency
1234in amounts that differed from the physical gold (money) deposits on hand. As they had not yet
1235established compliance with the 1st MoM Commandment, any discovery by the public that they
1236were controlling the money supply (generally to increase it by printing currency) could be expected
1237to be treated no differently than common counterfeiting.
1238
1239What the bankers needed first and foremost was a mechanism which would not only see to it that
1240the power to create money18 was given to them to manage, but that it was done under the guise of
1241being for the benefit of the general public. Without the public believing there was ‘something in it
1242for them’ to cede this power to bankers, no lasting compliance with the first MoM commandment
1243could be expected. The bankers found their answer in the form of what is now called Fractional
1244Reserve Banking – and is intimately tied to lending and loan creation.19
1245
1246Chapter 5: Questionable Currency
1247
1248Introduction to Fractional Reserve
1249In a proper and untarnished form (that is to say, a purely theoretical functioning), fractional reserve
1250banking works quite admirably. Its danger lies in how easily seemingly minor changes to its honest
1251operation can corrupt the process. To demonstrate this, we will explore the pure forms (theoretical
1252
1253
125418
1255   Actually, it is currency they will be printing, not money. I apologize now and in advance for what I expect will
1256be a continued ‘mixing up’ of terminology. I do this for the sake of ‘flow’ and humbly ask understanding that
1257sometimes, in order to clearly communicate complex topics, some liberties must be taken in relying upon
1258useful but technically incorrect terminology. I hope that by the time the reader understands the core issues, he
1259or she will be able to re-read the document and point to the instances where this occurs without malice.
126019
1261   It is a curious fact that many religious scriptures have stern warnings and prohibitions surrounding the act of
1262borrowing/lending money, often even discussing remedies for the imbalances that inexorably arise (e.g., debt
1263jubilees). Perhaps this is because the very nature of entering into a loan introduces seeds of enslavement, even
1264if only in the seemingly mild and innocuous mindset that one party (the borrower) is now beneath another
1265(the lender). This dynamic hides in plain sight in our language anytime we refer to someone as being indebted
1266to another.
1267
1268                                                                                                                23
1269                                   The Power of Money: A Case for Bitcoin
1270
1271
1272side) of fractional reserve lending and banking, and then demonstrate how the process can be (and
1273has been) corrupted so heinously. The problem with all ‘isms’20 is that the benefits which they
1274provide in theory (and upon which their idea is ‘sold’ to the public) belie the true negative impacts
1275they confer on those who adopt the system. This is the vast chasm between theory and practice
1276which we as a species would on the whole benefit greatly from appreciating.
1277
1278
1279
1280
1281 TLDR/Summary of the remainder of this section
1282
1283 Bankers discovered that by lending out depositor’s gold, which they would do by ‘creating more
1284 currency’, they could pay depositors a portion of the interest earned and keep the rest for
1285 themselves. If the loans performed well, the bankers stood to gain more. If the loans fared poorly,
1286 the depositor’s assumed the losses. It was a classic ‘heads I win, tails you lose’ coin toss. Once this
1287 power was attained by the bankers, a plethora of ways to enrich themselves was now available –
1288 ranging from assuming huge volumes of risky loans, to extending additional loans to failing
1289 enterprises, to engaging in duplicitous self-dealing transactions.
1290
1291 While I (again) highly encourage readers to do their best to follow through with the remainder of
1292 this section, if you are satisfied with this TLDR, you may now skip ahead to the next sub-section,
1293 ‘Physical Gold As Backing’.
1294
1295
1296
1297Returning to our bank example: what the custodians at the bank noticed was that on any given day,
1298the vast majority of the gold in the vault was never touched. Of course the exact amount of gold the
1299bank held changed day by day – but on a percentage basis the swings were fairly low. For instance,
1300the average amount of daily gold withdrawals might be between 3-5% of gold held. At the same
1301time, the average amount of daily gold deposits might also be 3-5%. With deposits netting against
1302withdrawals, this meant that on any given normal day, on average, the gold stores in the vaults
1303never even needed to be touched. This meant that if the bankers were to print more notes than
1304there was gold in the bank vaults, from an operational perspective, it wouldn’t cause any immediate
1305problems.
1306
1307Of course if people found out that they had printed more notes which had been given away without
1308consent (thereby diluting existing noteholders’ claims on the gold), they would be considered
1309counterfeiters (as explained earlier). But from an operational perspective, having more notes than
1310gold reserves wouldn’t prevent the system (of gold deposits and withdrawals) from running
1311smoothly on a day-to-day basis – at least in all but the most extreme circumstances. All that was
1312needed now was a demonstration that giving bankers the power to create new notes would benefit
1313the public – i.e., depositors. This lure was the promise of interest on deposits, and was to be
1314achieved through lending.
1315
1316Up until this point in our scenario, depositors earned no interest on their deposits. In fact, to cover
1317costs of security, the average depositor might even be expected to pay a small amount each year for
1318the privilege of having their gold kept safe in the bank’s vault. But if the depositors would only allow
1319the bankers to lend some of their gold out, they could earn interest! Unbeknownst to most
1320
1321
1322
132320
1324     Communism, capitalism, socialism, idealism, and in this case, monetarism.
1325
1326                                                                                                           24
1327                                         The Power of Money: A Case for Bitcoin
1328
1329
1330depositors though was that by allowing the bankers to do this they were unwittingly granting them
1331the power to ‘create money’ and thus satisfy the 1st MoM Commandment.
1332
1333To follow this example, you simply have to accept that a bank’s balance sheet is represented by
1334Assets, Liabilities, and Equity. Assets are the things ‘of value’ that a bank holds in its vaults. Liabilities
1335are claims against those assets that exist. Equity is the difference between Assets and Liabilities. If
1336the total Assets exceed the total Liabilities, then the Equity is said to be positive. If Liabilities exceed
1337Assets then there is negative equity. The equation which must always remain true is: A = L + E, or
1338Assets = Liabilities + Equity.
1339
1340Let’s imagine that the bankers find themselves as custodians of 100 ounces of gold and so issue 100
13411-ounce ‘notes’ to the depositors. The bank’s balance sheet at this point looks like this:
1342                                       Assets                     =                  Liabilites             +       Equity
1343
1344                                                                      100 ounce-notes (paper obligations
1345Items                      100 ounces of Gold (physical)          =             to depositors)           +          Nothing
1346
1347
1348
1349Value in Gold Ounces                    100                       =                     100
1350
1351
1352
1353
1354Within a period of time, they are approached by ten individuals, all looking to borrow the equivalent
1355of 10 ounces of gold each. Each of the prospective borrowers offers collateral initially valued at 10
1356ounces of gold (also each). In exchange for the promise to repay the 10 ounces plus 10% interest in
1357physical gold (an extra 1 ounce each) after 1 year, the bank ‘prints’ 100 ounces worth of new notes
1358and gives them to the borrowers. Now the bank’s balance sheet looks like this, with the new ‘Loans’
1359treated as an asset – it is, after all, an IOU from the borrower:
1360                                        Assets                         =               Liabilites               +    Equity
1361
1362                                                                           100 ounce-notes (paper obligations
1363Items                        100 ounces of Gold (physical)                           to depositors)                 Nothing
1364                        Loans (totalling 100 ounces worth) with            100 ounce-notes (paper obligations
1365                                  Collateral provided                                to borrowers)
1366
1367
1368
1369Value in Gold Ounces                  100 + 100 =                                     100 + 100 =
1370                                          200                          =                  200
1371
1372If all the borrowers pay back the bank-notes at the end of one year (with interest), then the
1373collateral is released to them. As the banknotes are no longer ‘in circulation’, they are removed as a
1374liability. There are also now an extra 10 ounces of gold that may be distributed. Let’s assume that
1375the bankers keep 2 ounces for themselves and give the other 8 to depositors as interest. These value
1376transfers are done through printing new notes. The balance sheet now looks like this:
1377                                       Assets                     =                Liabilites            +          Equity
1378                                                                      108 ounce-notes (paper obligations
1379Items                      100 ounces of Gold (physical)                        to depositors)                        0
1380                       10 ounces of Gold (physical, earned as          2 ounce-notes (paper obligations
1381                                     interest)                                   to bankers)
1382
1383
1384Value in Gold Ounces                    110                       =                     110                 +         0
1385
1386The depositors can be said to have earned 8% interest on their savings, and the bankers have earned
1387the currency equivalent of two gold pieces while not using any of their own capital, but rather
1388providing the service of managing the whole process.
1389
1390                                                                                                                              25
1391                                          The Power of Money: A Case for Bitcoin
1392
1393
1394But what if rather than everyone paying back their loans with interest, some of the debts ‘go bad’?
1395Well, in this case, the presence of interest and collateral mitigates the losses. Let’s assume that 2 of
1396the 10 borrowers don’t pay back their loans at maturity – not at all. In this case, the bank seizes the
1397collateral they have posted. Let’s further assume that the value of the collateral they posted (which
1398was initially worth 10 ounces of gold each, or 20 ounces total) has lost value and is now only worth
139918 ounces total. The bank’s balance sheet now looks like this:
1400                                       Assets                     =                  Liabilites          +              Equity
1401                                                                      100 ounce-notes (paper obligations
1402Items                       100 ounces of Gold (physical)                         to depositors)                   6 ounces of equity
1403                                                                       20 ounce-notes (paper obligations
1404                        8 ounces of Gold (physical, earned as           lent to borrowers who have not
1405                            interest from those that paid)                       returned them)
1406
1407                       Collateral seized, now worth 18 ounces
1408
1409
1410
1411
1412Value in Gold Ounces                     126                      =                    120                     +           6
1413
1414The bank still has a gain, or ‘equity’ of 6 ounces of gold. They may now sell the collateral for actual
1415gold, and distribute the ‘equity’ to the depositors as interest and themselves as a management fee.
1416After the collateral sale and distribution of equity, the balance sheet looks like this:
1417                                       Assets                     =                 Liabilites                 +        Equity
1418
1419                                                                      104 ounce-notes (paper obligations
1420                                                                      to depositors - initial deposit plus 4
1421Items                       100 ounces of Gold (physical)                 ounce notes paid as interest)                    0
1422                                                                       20 ounce-notes (paper obligations
1423                        8 ounces of Gold (physical, earned as           lent to borrowers who have not
1424                            interest from those that paid)                       returned them)
1425                                                                       2 ounce-notes (paper obligations
1426                       18 ounces of Gold (from collateral sale)                    to bankers)
1427
1428
1429
1430
1431Value in Gold Ounces                     126                      =                    126                     +           0
1432
1433The bankers have still paid themselves 2 ounces of gold, and the depositors have still earned positive
1434interest, although rather than 8% interest they only earned 4% interest.
1435
1436The takeaway from the above example is this:
1437
1438So long as losses on ‘bad loans’ remains relatively low, the presence of collateral and interest still
1439allows for interest to be paid to the depositors.
1440
1441This is the carrot – the mechanism whereby depositors are motivated to allow the bankers to lend
1442out their money – which by virtue of the fact that they do so by printing more currency, is really
1443giving the bankers the power to ‘bless new leaves’ and increase the money supply. While the
1444bankers are not yet ‘gifting money’ to themselves, they have the ability to ‘take a cut’ of the interest
1445earned on the bank’s loans.
1446
1447Dangers of Fractional Reserve – Unaligned Incentives Part 1
1448
1449
1450
1451
1452                                                                                                                                        26
1453                                        The Power of Money: A Case for Bitcoin
1454
1455
1456Even before more advanced forms of bankers ‘gifting new money to themselves’ are introduced, we
1457can see that there is an inherent misalignment of interests in the current lending scenario21.
1458
1459Since the bankers earn money for themselves by taking a portion of the interest earned on all loans,
1460it is in their interest to try and lend as much money out as possible. At the same time, if the loans ‘go
1461bad’, the losses are borne not by the bankers, but by the depositors. Let’s look at a couple of
1462scenarios to demonstrate this.
1463
1464Assume again that the bankers find themselves as custodians of 100 ounces of gold and so issue 100
14651-ounce ‘notes’ to the depositors. The bank’s balance sheet looks like this:
1466                                      Assets                     =                  Liabilites             +       Equity
1467
1468                                                                     100 ounce-notes (paper obligations
1469Items                     100 ounces of Gold (physical)          =             to depositors)           +          Nothing
1470
1471
1472
1473Value in Gold Ounces                   100                       =                     100
1474
1475The bankers understand the mechanisms for how they will get paid... earning a portion of the
1476interest paid on the loans. The more interest earned on loans, the more they earn. As such, they try
1477to lend as much as they can. Let’s assume that they promise their depositors a rate of return on
1478savings of 8%. Like in the previous instance, they begin by lending out 100 ounces of gold – again
1479taking collateral for the loans. The balance sheet looks like this:
1480                                       Assets                         =               Liabilites               +    Equity
1481
1482                                                                          100 ounce-notes (paper obligations
1483Items                       100 ounces of Gold (physical)                           to depositors)                 Nothing
1484                       Loans (totalling 100 ounces worth) with            100 ounce-notes (paper obligations
1485                                 Collateral provided                                to borrowers)
1486
1487
1488
1489Value in Gold Ounces                 100 + 100 =                                     100 + 100 =
1490                                         200                          =                  200
1491
1492But now the bankers decide to lend more gold (notes) out to more speculative borrowers. On the
1493one hand, these new borrowers do not have collateral to post, and so are riskier loans. If the loans
1494go bad, the bank will not be able to seize collateral to offset the losses. On the other hand, the banks
1495can charge a much higher rate of interest to these more desperate borrowers. Let’s assume the bank
1496lends out another 500 ounces of gold notes to these riskier borrowers (without collateral) at 20%
1497interest. The balance sheet now looks like this:
1498
1499
1500
1501
150221
1503  As human beings, we all have both higher and lower aspects to our nature. It’s vitally important that we
1504provide ourselves with systems and structures that are conducive to the expression of our more noble
1505aspirations, or at the very least, don’t provide a breeding ground for our baser impulses. It’s nothing short of
1506extraordinary what can be accomplished in systems when the interests of all participants are aligned.
1507Conversely, when interests are not aligned, it is generally only a matter of time before the system starts to
1508express imbalance – whether that be an initial wobble or a full-on collapse.
1509
1510
1511                                                                                                                             27
1512                                          The Power of Money: A Case for Bitcoin
1513
1514
1515                                        Assets                      =                Liabilites              +    Equity
1516
1517                                                                        100 ounce-notes (paper obligations
1518Items                         100 ounces of Gold (physical)                       to depositors)                 Nothing
1519                         Loans (totalling 100 ounces worth) with        100 ounce-notes (paper obligations
1520                                   Collateral provided                            to borrowers)
1521                       Loans (totalling 500 ounces worth) with No       500 ounce-notes (paper obligations
1522                                         Collateral                               to borrowers)
1523
1524
1525
1526
1527Value in Gold Ounces               100 + 100 + 500 =                             100 + 100 + 500 =
1528                                          700                       =                   700
1529
1530Let’s suppose now that at the end of one year, all of the collateralized loans pay back principal (the
1531notes lent out) and interest (10 ounces of physical gold). The interim balance sheet would be:
1532                                        Assets                      =                Liabilites              +    Equity
1533
1534                                                                        100 ounce-notes (paper obligations
1535Items                         100 ounces of Gold (physical)                       to depositors)                 10 ounces
1536                               10 ounces of Gold (physical)
1537                       Loans (totalling 500 ounces worth) with No       500 ounce-notes (paper obligations
1538                                         Collateral                               to borrowers)
1539
1540
1541
1542
1543Value in Gold Ounces                100 + 10 + 500 =                                100 + 500 =
1544                                          610                       =                   600                  +      10
1545
1546The bankers look to be in good shape! They can give 8 ounces of the equity to depositors (the
1547promised 8% interest) and keep 2 ounces for themselves. But what of the remaining riskier loans?
1548
1549Let’s assume that 10% of the loans ‘go bad’. This means that of the 500 ounces lent out, 50 ounces
1550worth of loans are now worth zero (as there is no collateral behind them). But 10% of the loans
1551going bad means that 90% of the loans repaid the principal and interest! That would be 450 ounces
1552of gold notes returned as principal, and 20% of this amount (the rate of interest on these riskier
1553loans), or 90 ounces of actual physical gold, would be repaid as interest. This means that the bank’s
1554balance sheet looks this:
1555                                        Assets                      =                Liabilites              +    Equity
1556
1557                                                                        100 ounce-notes (paper obligations
1558Items                        100 ounces of Gold (physical)                        to depositors)                 50 ounces
1559                              10 ounces of Gold (physical)
1560                            Loans for 50 ounces worth ZERO               50 ounce-notes still outstanding
1561                                  Loans for 450 ounces                   450 ounce-notes still outstanding
1562                              90 ounces of Gold (physical)
1563
1564
1565Value in Gold Ounces               100 + 10 + 0 + 90 =                              100 + 50 =
1566                                          200                       =                  150                   +      50
1567
1568Even when writing down the bad-loans to a zero-value, there are now 50-ounces worth of equity
1569value which may be distributed. But remember, the banks only promised the depositors an 8%
1570return on their money, so they only need to give away 8 ounces… meaning they can keep 42 ounces
1571of gold for themselves! Quite a windfall!
1572
1573But what happens if more of the loans in the above scenario ‘go bad’? What happens to the bank,
1574bankers, and depositors then? Let’s explore that now.
1575
1576Assume that the banks have made the same types of loans as above – the balance sheet at the
1577beginning of the year (again) looks like this:
1578
1579                                                                                                                             28
1580                                          The Power of Money: A Case for Bitcoin
1581
1582
1583                                        Assets                      =                Liabilites              +     Equity
1584
1585                                                                        100 ounce-notes (paper obligations
1586Items                         100 ounces of Gold (physical)                       to depositors)                  Nothing
1587                         Loans (totalling 100 ounces worth) with        100 ounce-notes (paper obligations
1588                                   Collateral provided                            to borrowers)
1589                       Loans (totalling 500 ounces worth) with No       500 ounce-notes (paper obligations
1590                                         Collateral                               to borrowers)
1591
1592
1593
1594
1595Value in Gold Ounces               100 + 100 + 500 =                             100 + 100 + 500 =
1596                                          700                       =                   700
1597
1598Let’s now assume that all of the collateralized loans again are paid off with no losses. In this case, at
1599the end of one year (and before taking into account the impact of the uncollateralized loans) the
1600balance sheet is again as follows:
1601                                        Assets                      =                Liabilites              +     Equity
1602
1603                                                                        100 ounce-notes (paper obligations
1604Items                         100 ounces of Gold (physical)                       to depositors)                 10 ounces
1605                               10 ounces of Gold (physical)
1606                       Loans (totalling 500 ounces worth) with No       500 ounce-notes (paper obligations
1607                                         Collateral                               to borrowers)
1608
1609
1610
1611
1612Value in Gold Ounces                100 + 10 + 500 =                                100 + 500 =
1613                                          610                       =                   600                  +       10
1614
1615But different from the previous example, let’s assume that instead of 10% default rates on the
1616uncollateralized loans, a full 50% fail to repay. In such a case, 250 ounces worth of loans are now
1617worth zero, while the other 250 are paid off in addition to interest of 20% on them (20% of 250
1618ounces is 50 ounces). The new balance sheet will look like this:
1619                                        Assets                      =                Liabilites              +     Equity
1620
1621                                                                        100 ounce-notes (paper obligations
1622Items                        100 ounces of Gold (physical)                        to depositors)                 -150 ounces
1623                              10 ounces of Gold (physical)
1624                           Loans for 250 ounces worth ZERO               250 ounce-notes still outstanding
1625                                  Loans for 250 ounces                   250 ounce-notes still outstanding
1626                             50 ounces of Gold (physical)
1627
1628
1629Value in Gold Ounces               100 + 10 + 0 + 50 =                              100 + 250 =
1630                                          200                       =                  350                   +      -150
1631
1632Let’s finally assume that the bankers still satisfy their promise of 8% interest to their depositors –
1633through issuing new notes. Let’s also say that they don’t pay themselves anything as there were no
1634profits. The balance sheet looks like this now:
1635                                        Assets                      =                Liabilites              +     Equity
1636
1637                                                                        108 ounce-notes (paper obligations
1638Items                        100 ounces of Gold (physical)                        to depositors)                 -158 ounces
1639                              10 ounces of Gold (physical)
1640                           Loans for 250 ounces worth ZERO               250 ounce-notes still outstanding
1641                                  Loans for 250 ounces                   250 ounce-notes still outstanding
1642                             50 ounces of Gold (physical)
1643
1644
1645Value in Gold Ounces               100 + 10 + 0 + 50 =                              108 + 250 =
1646                                          200                       =                  358                   +      -158
1647
1648
1649
1650
1651                                                                                                                               29
1652                                 The Power of Money: A Case for Bitcoin
1653
1654
1655Note that equity is now negative. It has to be negative as equity is the ‘plug’ to satisfy our equation
1656of Asset = Liabilities + Equity. But what does this mean?
1657
1658From the banker’s perspective, they have not earned any money (from interest), but they also
1659haven’t lost any money. They were, after all, lending OPM (other people’s money) and so had no
1660’skin in the game.’
1661
1662From the depositors’ perspective though, things are quite different. There are now a total of 358
1663claims on gold ounces in the bank, but only a total of 200 ounces available. Said another way, each
1664depositor’s note claim has lost 45% of its value… although each depositor may not even know it yet!
1665After all, we have already established that on any given day no net physical gold enters or leaves the
1666bank, so for as long as the average depositor is kept in the dark about the bank’s financial position,
1667nothing need happen.
1668
1669Of course, it’s only a matter of time before knowledge of the bank’s negative equity (insolvency)
1670filters its way into the public’s awareness. When that happens, a bank run is likely – depositors will
1671rush to withdraw their gold in exchange for their notes. Of course, if the bank honors its word of
1672offering up 1 ounce of physical gold in exchange for each 1-ounce note, then only the first 200
1673noteholders will receive their gold (as that’s all there is). Anyone later to the game will get zero.
1674
1675The purpose of these examples is to demonstrate how it can be in the interests of bankers to
1676make as many loans as possible, as they are in a ‘heads-I-win, tails-you-lose’ situation. If the many
1677loans perform, then the bankers get a windfall from the interest profits. If the loans do not
1678perform, then losses are borne by the depositors.
1679
1680It can rightfully be said that any ‘banking crisis’ you may have heard of boils down to the same type
1681of scenario: namely, too many bad loans were made, which benefitted the bankers (for a time, while
1682the loans were performing and interest was earned by them), but ultimately put the depositors in a
1683capital deficient position. In the days when banking systems were on the gold standard (like in this
1684scenario, the ‘notes’ were backed by gold deliverable upon demand) a loss in confidence of a
1685particular banking system’s solvency could cause ‘slow motion bank runs’. Indeed, depositors would
1686submit their notes for gold, and ship the gold off to another safer location – often internationally. In
1687the days of J. Pierpont Morgan there were many such ‘banking crises’ where astute international
1688investors would literally ship tons of gold out of what they perceived to be failing banking systems.22
1689
1690The good news about the gold standard though is that this transfer of physical gold out by nervous
1691investors (who have lost confidence in a bank’s solvency) is ultimately some form of a check to
1692systemic imbalances. Things can only get so bad before astute investors withdraw their gold and
1693force an accounting for the true state of a bank’s finances. As such, bankers will generally work to
1694keep loans from becoming too risky, lest they lose the confidence of depositors and suffer gold
1695withdrawals. We will return to this point, but before we do, it is worth exploring a permutation to
1696the above scenario – one which shows how bankers can not only keep an insolvent bank functioning,
1697but further enrich themselves at the same time (and at the expense of depositors). We call it
1698unaligned incentives: part 2, but could be called ‘how to rob a bank in broad daylight.’
1699
1700Dangers of Fractional Reserve – Unaligned Incentives Part 2
1701In the scenario above (where the bankers made risky loans that failed) we assumed that at the end
1702of the first year, they (and the borrowers) admitted that the loans had failed. If however, those
1703
170422
1705  It’s worth noting that in recent years, many international governments have requested a return of their gold
1706being held in other countries – with varying degree of compliance from the custodians.
1707
1708                                                                                                            30
1709                                          The Power of Money: A Case for Bitcoin
1710
1711
1712involved do not admit it, the bankers can continue to pay themselves handsomely. We will
1713demonstrate this again with an extension of the example - but know that what we are describing is
1714akin to what many have called (particularly in Japan) “Zombie Banks” – that is, banks which should
1715be considered insolvent and losses taken, but for various reasons (the enrichment of bankers being
1716one of them, the ongoing functioning of failing borrowers being another) are allowed to keep
1717operating – like the walking dead23.
1718
1719Imagine again that we are at the end of the first year of the risky loans, and 50% of them have again
1720not paid back their principal or interest. Prior to addressing the riskier (and partially non-performing)
1721loans the balance sheet looks like this:
1722
1723
1724                                        Assets                      =                Liabilites              +     Equity
1725
1726                                                                        100 ounce-notes (paper obligations
1727Items                         100 ounces of Gold (physical)                       to depositors)                 10 ounces
1728                               10 ounces of Gold (physical)
1729                       Loans (totalling 500 ounces worth) with No       500 ounce-notes (paper obligations
1730                                         Collateral                               to borrowers)
1731
1732
1733
1734
1735Value in Gold Ounces                100 + 10 + 500 =                                100 + 500 =
1736                                          610                       =                   600                  +       10
1737
1738If the bankers were brutally honest, they would book a loss on half those risky loans, and the balance
1739sheet would be (again, same as in the previous example):
1740                                        Assets                      =                Liabilites              +     Equity
1741
1742                                                                        100 ounce-notes (paper obligations
1743Items                        100 ounces of Gold (physical)                        to depositors)                 -150 ounces
1744                              10 ounces of Gold (physical)
1745                           Loans for 250 ounces worth ZERO               250 ounce-notes still outstanding
1746                                  Loans for 250 ounces                   250 ounce-notes still outstanding
1747                             50 ounces of Gold (physical)
1748
1749
1750Value in Gold Ounces               100 + 10 + 0 + 50 =                              100 + 250 =
1751                                          200                       =                  350                   +      -150
1752
1753However, there is an alternative. Rather than admit that those 250 ounces worth of loans have gone
1754bad, they could instead extend more credit to those bad borrowers. They could lend those borrowers
1755enough additional money to (nominally) pay the interest that was due, and extend the original loan
1756for one more year. This is where things begin to get a bit tricky, so we’ll break it into fewer steps.
1757
1758For starters, the collateralized loans have been paid off (plus 10 ounces of physical gold as interest),
1759as well as half of the riskier uncollateralized loans (250 ounces, plus 50 ounces of gold as interest).
1760Besides that, the remaining bad 250 ounces of loans are kept on the books valued at 250, with
1761maturity extended by one year. As principal has not been paid back, the extra 250 worth of gold
1762notes remains outstanding as well.
1763
1764
1765
1766
176723
1768  What typically happens is that these banks are ‘bailed out by the government’, aka, the public taxpayer.
1769Although it may feel like this is a victory, all that has happened is that the public (like depositors of times past)
1770has shouldered the losses, while those who enriched themselves throughout the process keep their gains.
1771
1772                                                                                                                               31
1773                                            The Power of Money: A Case for Bitcoin
1774
1775
1776                                           Assets                         =                Liabilites              +            Equity
1777
1778                                                                              100 ounce-notes (paper obligations
1779Items                          100 ounces of Gold (physical)                            to depositors)                      60 ounces
1780                                10 ounces of Gold (physical)
1781                              Loans for 250 ounces 'worth' 250                 250 ounce-notes still outstanding
1782                                    Loans for 250 ounces                       250 ounce-notes still outstanding
1783                                50 ounces of Gold (physical)
1784
1785
1786Value in Gold Ounces                 100 + 10 + 250 + 50=                                  100 + 250
1787                                             410                          =                  350                   +              60
1788
1789But in order to not consider the existing loans for 250 in default, the bank must be paid interest in
1790the form of 50 ounces of physical gold. To ‘help them pay the interest’, the bank lends the same
1791borrowers another 50 ounces worth of gold notes. As such:
1792                                           Assets                         =                Liabilites              +            Equity
1793
1794                                                                              100 ounce-notes (paper obligations
1795Items                          100 ounces of Gold (physical)                            to depositors)                      60 ounces
1796                                10 ounces of Gold (physical)
1797                              Loans for 250 ounces 'worth' 250                 300 ounce-notes still outstanding
1798                                    Loans for 250 ounces                       250 ounce-notes still outstanding
1799                                50 ounces of Gold (physical)
1800                                Loans for another 50 ounces
1801
1802
1803Value in Gold Ounces               100 + 10 + 250 + 50 + 50                                100 + 300
1804                                             460                          =                  400                   +              60
1805
1806But the borrowers must deliver physical gold as interest – and 50 ounces worth. Not to worry
1807though, as they take their new 50 ounces of notes and exchange them for physical gold.
1808                                           Assets                         =                Liabilites              +            Equity
1809
1810                                                                              100 ounce-notes (paper obligations
1811Items                          100 ounces of Gold (physical)                            to depositors)                      60 ounces
1812                                10 ounces of Gold (physical)
1813                                                                               250 ounce-notes still outstanding
1814                             Loans for 250 ounces 'worth' 250                   (50 tendered for physical gold)
1815                                  Loans for 250 ounces                         250 ounce-notes still outstanding
1816                        0 ounces of Gold (physical)(50 withdrawn)
1817                               Loans for another 50 ounces
1818
1819
1820Value in Gold Ounces                100 + 10 + 250 + 0 +50                                 100 + 250
1821                                             410                          =                  350                   +              60
1822
1823
1824Now, as the borrowers are holding onto 50 ounces of physical gold (which they just withdrew) they
1825can turn around and ‘pay that gold back’ to the bank as interest – leaving the balance sheet as
1826follows:
1827                                         Assets                      =                 Liabilites             +          Equity
1828
1829                                                                         100 ounce-notes (paper obligations
1830Items                         100 ounces of Gold (physical)                        to depositors)                      110 ounces
1831                               10 ounces of Gold (physical)
1832                                                                          250 ounce-notes still outstanding
1833                            Loans for 250 ounces 'worth' 250               (50 tendered for physical gold)
1834                                  Loans for 250 ounces                    250 ounce-notes still outstanding
1835                       50 ounces of Gold (physical)(redeposited as
1836                                        interest)
1837                              Loans for another 50 ounces
1838
1839
1840Value in Gold Ounces             100 + 10 + 250 + 50 +50                               100 + 250
1841                                           460                       =                   350                  +           110
1842
1843
1844                                                                                                                                         32
1845                                 The Power of Money: A Case for Bitcoin
1846
1847
1848As if by magic, the bank is once again ‘solvent’ - so much so that in fact the bankers can not only
1849distribute the 8% interest to depositors, but now have 102 ounces (110 – 8) left to distribute to
1850themselves as profit – more than in any other situation we’ve examined thus far! When the bankers
1851distribute this additional equity to themselves, they are effectively paying themselves a bonus, at the
1852expense of depositors who will have that much less value left for them when a true
1853reckoning/accounting occurs. As long as the bankers are not asked to give back this bonus when the
1854losses are ultimately recognized (perhaps years later), they will have made out quite profitably! By
1855the time the ‘reckoning’ does occur, the bankers have accumulated enormous wealth (which they
1856have likely now transferred into physical gold, making it immune from bank write-downs) leaving all
1857depositors to suffer in greater impoverishment.
1858
1859Physical Gold As Backing – The Great Equalizer
1860Given the examples above, demonstrating how fractional-reserve-lending creates incentives (for
1861bankers to not only recklessly gamble with depositors’ value but potentially falsify loan values), it
1862might seem like the whole concept is doomed from the get-go. However, as we have already alluded
1863to, it is the very prospect of a disorderly unwind – a bank run – that holds the prospect of preventing
1864things from ‘getting this bad’.
1865
1866While many depositors are ignorant as to the workings of the banks, some are aware of the process,
1867and effectively serve as restraints which can ‘keep the bankers honest’. Let’s spend a moment on
1868these more aware depositors (we’ll call them watchdogs) and see how they can behave to avoid
1869getting taken for a ride by unscrupulous bankers.
1870
1871First and foremost, the watchdogs will closely examine and scrutinize the actions of the bankers –
1872especially with regard to the loans they make. This is the birth of bank examiners. If at any time they
1873feel that the bankers are behaving recklessly or dishonestly (for instance, by making too many risky
1874loans, or throwing good money after bad by not recognizing bad loans and instead extending more
1875credit) they can act. They can (for simple example) take their gold out of the bank (by tendering their
1876bank notes in exchange).
1877
1878If enough of the watchdogs do this (and advertise the fact), a bank run may begin – effectively
1879ending the bank (and the bankers’ otherwise modestly profitable position). All the note holders will
1880attempt to redeem their notes for gold, but as there will not be enough gold to satisfy them a bank
1881failure occurs - potentially with social or legal liability for bankers who are viewed as responsible24. It
1882is the threat of these actions that keep the bankers in line – but importantly, it is dependent on
1883depositors being able to exchange their notes for gold on demand. This is a critical point and cannot
1884be overemphasized, as without this mechanism, there is little to keep the bankers reigned in from
1885behaving recklessly and in their own self-interests. This is not to say that bad loans will be prevented
1886from being made, nor that falsification of loan values will be entirely avoided – but there is at least a
1887mechanism to keep these things from getting enormously imbalanced.
1888
1889While we will return to the point shortly, it is worth noting here that as of 1971, when American
1890President Richard Nixon ‘abandoned the gold standard’, the American banking system (and
1891effectively most banking systems of the developed world) lost this mechanism. This feature, whose
1892mere presence served to at least threaten to ‘keep bankers honest’ was removed. Is it any wonder
1893
1894
1895
189624
1897  In the 21st century, there are strikingly few countries where bankers have been held accountable for criminal
1898behavior. Unfortunately, this system where bankers often feel they have blanket immunity to criminal
1899prosecution has tended to breed more illicit behavior.
1900
1901                                                                                                            33
1902                                    The Power of Money: A Case for Bitcoin
1903
1904
1905then that it would take only a handful of decades before the entire system would spin out of
1906control?
1907
1908Dangers of Fractional Reserve – Unaligned Incentives Part 3
1909Up until this point, we have explored ‘banking gone wrong’ from the simple perspective of loans
1910being made without proper regard for their risk, and bad loans being artificially ‘propped up’ with
1911additional lending. The manner in which the bankers transfer value to themselves (like priests gifting
1912‘blessed leaves’ to themselves) satisfies the MoM Commandments: The public (depositors) have
1913been convinced to grant money-making-authority to bankers, we have implicitly assumed that
1914inflation due to an increase in the money supply remains tame25, and the mechanisms for the
1915bankers enriching themselves are anything but transparent. In these instances, the bankers are still
1916limited to paying themselves a portion of interest earned on the loans. There is, however, a much
1917more effective way they may enrich themselves – should they be willing to compromise their ethics
1918further. Unfortunately, human nature being what it is, it is often only a matter of time before one (or
1919several) people appear to carry the mantle. The process we are about to describe is essentially a
1920form of unethical self-dealing in the loan process.
1921
1922In the previous examples we assumed that all the borrowers were (generally) honest or well-
1923intentioned entrepreneurs – some of them achieved success, others did not. But if we relax that
1924requirement we see a way in which dishonest bankers can gift themselves enormous amounts of
1925wealth – far in excess of the ‘interest on loans’. The first example we use will violate the 3rd MoM
1926Commandment – but is done for the sake of initial clarity. We will then introduce compliance with
1927the Commandment to demonstrate more closely how this occurs in the real world.
1928
1929
1930 As an aside, though I refer to corrupt bankers in these examples, please don’t walk over to your
1931 local bank and start calling people names! Away from the fact that this is an illustrative example,
1932 for us to collectively move beyond the predicament we all find ourselves in it is critical to move
1933 beyond blame. I address this point in more depth shortly, however if you find yourself feeling
1934 enflamed I suggest you skip ahead to the section entitled ‘This, Here, Now’ and read the first
1935 piece, ‘A Very Human Aside’ before returning to continue with this section.
1936
1937 On the whole, most people – regardless of who they work for - are decent and good. The vast
1938 majority of those associated with the enterprises we will discuss (banking, military contractors,
1939 etc.) are very likely unaware of the damage their employers facilitate. Even the much-maligned
1940 evil ‘Wall-Streeter’ has in many ways received a bad-rap. There is no shortage of individuals who
1941 have been misguided at one stage or another – let’s not make this personal. Most people simply
1942 want to ‘earn an honest living’, and believe they are doing so. To those that who after reading this
1943 begin to question the ethics of their current occupation, I suggest gentleness in self-
1944 remonstration, but resoluteness in determining to alter the course of one’s actions.
1945
1946
1947
1948Funnily enough, a good demonstration of this may be found in the popular comedic film and
1949Broadway show ‘The Producers’, written by Mel Brooks. In it, two Broadway show producers realize
1950that while a successful show can be profitable, an unsuccessful Broadway show (if approached
1951dishonestly and craftily) can be enormously profitable. They raise as much money as possible from
1952investors (selling ownership interests in the play exceeding 100% many times over – not unlike a
1953bank issuing more notes than gold!) and then plan to put on worst show possible – one that will flop
1954
195525
1956     We haven’t specifically addressed this, but it has been the ongoing assumption for our examples.
1957
1958                                                                                                        34
1959                                 The Power of Money: A Case for Bitcoin
1960
1961
1962after the first showing and allow the producers to keep all the capital raised (they will simply tell the
1963investors that it had all been spent, and nothing was left – keeping it all to themselves). Of course, as
1964this is a Mel Brooks comedy, things go hilariously wrong when the show they intend to be a
1965detestably offensive flop (written by a Nazi and called ‘Springtime for Hitler’) becomes an
1966unexpected smash hit.
1967
1968While ‘The Producers' is a fun example, we’ll use a more banking-oriented version to make the
1969situation clearer – using a dishonest banker and his 2 dishonest brothers. The ‘scam’ is perpetrated
1970as follows:
1971
1972The banker lends his 2 brothers’ new business 1,000 ounces of gold to start a project. The business
1973plan (at least on paper) is to build a machine that solves the age old quest of turning lead into gold.
1974In reality though, neither the banker nor his brothers have any intention of this plan succeeding – in
1975fact, they don’t even have a real plan for the product – it’s a scam. Here’s what happens instead:
1976
1977As soon as the brothers receive the 1,000 ounces of gold notes into the company account, they pay
1978themselves an annual salary of 999 ounces of gold. They then ‘invest’ 1 ounce of gold in taking out
1979advertisements seeking inventors who might know how to turn lead into gold (to demonstrate that
1980they ‘tried something’). When the advertisements come and go with no success, the brothers call
1981the banker and tells him that ‘their venture has failed’ – they will not be able to pay back the loan.
1982The company files for bankruptcy, and the bank takes a complete loss on the loan – all 1,000 ounces
1983of gold. Of course, the brothers have effectively gifted themselves the 999 ounces of gold, which are
1984happily shared amongst all three brothers. They have been enriched enormously and the depositors
1985have paid for it.
1986
1987There are of course many permutations of the above scenario – some even involving the situation
1988where the banker continues ‘extending new loans’ to the company to postpone the day of reckoning
1989(otherwise known in banking parlance as ‘extend and pretend’). Whatever the case, and whether
1990recognized now or later, a bank robbery has occurred under the auspices of normal banking practice.
1991
1992The above example however, as we stated, would violate the 3rd MoM Commandment – it is too
1993obvious. But there are many ways that it can be perpetuated such that it is sufficiently opaque in its
1994operations.
1995
1996Let’s pretend we are the unethical brothers’ advisor26 and see what changes we can make to
1997improve upon the scam.
1998
1999We need to find a business idea that will allow the brothers to ‘spend’ most of the money in the
2000normal operations of the business but at high enough profit margins that they can still extract
2001significant value for themselves while operating under the guise of ‘a legitimate business’.
2002
2003The first idea we have is to open a bakery, which we do under the name of Brother #1. Rather than
2004paying himself 999 ounces of gold as a salary (which would be quite obvious) he instead pays himself
2005a more reasonable 10 ounces of gold. In addition though, Brother #2 opens a baking-supplies
2006company (let’s assume he doesn’t need a loan to open this company). The supply company will buy
2007flour, sugar and eggs from farmers, and sell them to the bakery owned by Brother #1 for a profit.
2008Since no one can tell the bakery itself whom to use as supplier, this is an effective mechanism for the
2009brothers to transfer money to themselves.
2010
2011
2012
201326
2014     More Saul Goodman than Jimmy McGill.
2015
2016                                                                                                      35
2017                               The Power of Money: A Case for Bitcoin
2018
2019
2020The bakery (Brother #1) buys ingredients from the supplier (Brother #2), but overpays for them.
2021Whereas normally he could buy all the milk, eggs and flour he needs for 100 ounces of gold a year,
2022he ‘strikes a bad deal’ with the supplier (Brother #2) and agree to instead pay 200 ounces of gold
2023every year. Doing this accomplishes two things:
2024
2025    1) By stretching out the time involved, it becomes less obvious that they are doing anything
2026       wrong. Yes, the bakery will book losses each year (as they won’t be able to sell finished
2027       baked goods at a profit by overpaying so dearly for the ingredients), but these losses will be
2028       spread out and so easier to conceal.
2029
2030    2) The profits are recognized by the Brothers (all three) through another degree of separation –
2031       this time, through the distributor who earns an extra 100 ounces of gold a year pure profit
2032       for as long as the contract remains in effect.
2033
2034There remain a few problems with this arrangement though, which are limiting how much the
2035brothers can enrich themselves. First of all, the market for baked goods is extremely competitive and
2036well understood. When an outside auditor sees that Brother #1 is paying double the market rate for
2037raw materials, they will flag this is a question and we will have to either adjust our rates or admit the
2038fraud.
2039
2040What the brothers need to improve this situation is a business model where the products bought
2041don’t have an immediate and obvious value cap. The value cap for wheat flour is pretty clear – there
2042are substitutes. If wheat becomes too expensive, then people can switch to rice or barley.
2043Additionally, from a competition perspective, anyone with a bit of land and seeds can grow wheat,
2044so supply can be added to the market anytime. This can keep a ceiling on what prices may be
2045reasonably charged without drawing undue attention.
2046
2047We might try and solve these problems by finding the brothers a suitable alternative business or
2048industry (Healthcare springs to mind as a starting point for those curious to explore how that ‘solves’
2049many of these problems, though we take a different tack here). However, no matter what industry
2050we look to, they will all be limited by the need for profits to ultimately be realized. The goal of any
2051‘business’ is to make money, and if the business only loses money (by having value siphoned off by
2052dishonest owners and operators), eventually it will be shut down. What we need instead is a
2053‘business’ where profit in monetary terms is irrelevant. Lucky for the brothers in our example, such
2054businesses do exist and generally fall under the purview of Government.
2055
2056Government – the Ultimate Cover Story
2057Most people are put to sleep by talk coming from politicians about the need (or lack of need) to
2058have a ‘balanced budget’. Balancing the budget is often described in ways that make it more
2059complicated than it need be. For our purposes, we may refer to a government having a ‘balanced
2060budget’ as simply one that on a net basis, does not lose money – that is, the amount that is spent is
2061no greater than the amount of income earned (importantly, without having to borrow any funds to
2062make up a shortfall).
2063
2064The U.S. government’s tens of trillions worth of dollars in debt is testament to the fact that the
2065government routinely does not have a balanced budget, and instead spends far more than it earns in
2066tax (and other) revenues each year. The way that it is able to ‘keep going’ is by borrowing more. If
2067this reminds you of the earlier example (Unaligned Incentives Part 2) then you can pat yourself on
2068the back, as it is in many ways the same mechanism occurring. The U.S. government may be thought
2069of as effectively insolvent, and from the traditional perspective of lenders, should not be extended
2070
2071
2072                                                                                                      36
2073                                 The Power of Money: A Case for Bitcoin
2074
2075
2076any more credit. That more credit is being extended in the form of new loans each year is a
2077demonstration of the national (and international) banking system continuing to ‘extend and
2078pretend’ with one of their biggest customers.
2079
2080If you doubt that the U.S. government is in a poor fiscal situation (and so is poor credit risk) consider
2081this: even if the U.S. federal government cut all discretionary spending to zero – there would still not
2082be enough income left over to pay interest on existing debt. To pay the interest, the government
2083must instead borrow more money (again, like in our earlier example).
2084
2085We will shortly explore what has allowed the government to ‘avoid a reckoning/accounting’ up until
2086this point, but first let’s return to our example of a crooked banker scheming with his 2 brothers to
2087siphon money to themselves under the guise of a business loan. We now have enough pieces to put
2088together the way these things actually happen (albeit in a far more simplified version to reality).
2089
2090The banker is the central bank, along with its member banks who (at least partially) own the central
2091bank itself27. Brother #1 is the Federal government who borrows money from the banker to engage
2092in the business – let’s call this business War, or in better Newspeak28, ‘Defense’. Brother #2 is a
2093military contractor who supplies all the weapons of war to the Government.
2094
2095The military contractor business is a fantastically profitable one. Most of the (direct war) products
2096sold are ‘one time use only’. Bullets, bombs and missiles may only be used once and so need
2097constant replenishment (so long as there is an enemy to shoot them at). ‘Security’ technologies
2098(screeners, sniffers, surveillance technology) can conveniently be ‘never quite enough’ to remove all
2099risk, always requiring more. Then there are all the ancillary services which offer endless
2100opportunities to overcharge – from fuel, to logistics to ‘rebuilding projects’ after active hostilities
2101have ceased. So long as members of the public are continually convinced that there is a dire threat
2102(ideally, an ever-present and amorphous bogeyman from a far-away place29 who cannot be dealt
2103with in any way but with violence) they will demand that money be spent by the government (to the
2104contractors) to fight the danger. Their ‘customer’, the government, isn’t concerned at all with
2105profitability – in fact, it’s barely even an afterthought. The bankers continue to extend new credit to
2106them year-after-year to fund the projects. Furthermore, the industry has significant barriers to entry.
2107There are all sorts of registrations, security clearances and the like keeping participants relatively
2108few, and thus enabling contractors to charge exorbitantly for their products30. This is sadly, the
2109world in which we currently live, and is known (usually outside the U.S.) as the ‘global war economy’.
2110
2111I do not mean to represent the war economy as the only beneficiary of this corrupt financial
2112arrangement. Indeed, it is only one aspect of what American President Eisenhower warned the
2113country of in his farewell address as the ‘Military Industrial Complex’. Nevertheless, I draw attention
2114
2115
211627
2117   It is worthwhile noting that while the Federal Reserve is a private (not government owned) institution that
2118wields enormous power over the entire world – the public does not know who all the owners are. Furthermore,
2119even while there are areas of activity within it that are causes for concern, an audit has never been done. If
2120you’ve wondered up until now what people who call to ‘Audit the Fed’ are referencing, this is it.
212128
2122   If you haven’t read George Orwell’s novel 1984 please do so. Orwell coined the term Newspeak in the novel.
212329
2124   Appealing to human being’s innate xenophobia is a terrific bet. If these bogeymen are represented as
2125sufficiently culturally different, it also enables the public to de-humanize them and their cohorts.
212630
2127   If you question whether there is indeed endemic graft and misappropriation of funding in the US Defense
2128industry, you need only compare the US military budget to, for instance Russia. You may note that despite its
2129egregiously larger spend, there are many who convincingly argue that the U.S. does not maintain a significant
2130advantage (if one at all). Similar demonstrations can sadly be made (though not necessarily in comparison to
2131Russia specifically) in the US Healthcare and Education industries (among others).
2132
2133                                                                                                           37
2134                                 The Power of Money: A Case for Bitcoin
2135
2136
2137to it as a representative demonstration of ills that have sprung from our imbalanced and corrupted
2138monetary system.
2139
2140Chapter 6: How We Got Here
2141
2142It’s clear to anyone paying attention (and not believing the carefully spun narratives presented by
2143bought and paid for news programs) that our world’s current monetary system is broken and
2144continues to spin out of control – only being kept together by active manipulation and machination.
2145So-called markets continue to make new highs while the social and economic fabric surrounding
2146them disintegrates. So-called experts have been reduced to discussing absurdities like 'negative
2147interest rates'. All the while, efforts to keep the populace distracted from the root causes reach
2148dizzying proportions. You may be wondering just how things got so off track, especially when there
2149appears to be a solution (the gold standard) that could seemingly keep things (relatively) in line. As
2150such, I’d like to run you through a quick history – one that isn’t taught in most school textbooks
2151(much like this whole paper) but yet one that I think adequately touches upon (if not fully vets) some
2152of the more relevant points and events in history31.
2153
2154Early Warnings
2155If you were wondering if any of this material is new – it isn’t. The founding fathers of the United
2156States of America were by and large keenly aware of these monetary mechanisms32, as well as the
2157possibility for it to be used for the benefit of malevolent elements within society looking for power
2158and control. To show this, let’s return to the example we had of our gold-backed bank, where
2159bankers had effectively garnered the power to ‘create money’ – and through the lending mechanism
2160had made far too many loans out to the public – perhaps even continuing to extend credit to failed
2161enterprises so that they could continue to reap interest income. The impact of this happening would
2162be as follows:
2163
2164First, inflation would rise. This is because the amount of ‘money’ in the system (due to excessive loan
2165creation) would have risen dramatically. Remembering that it is in the banker’s self-interest to
2166create as many loans as possible33. To use a simple (and simplified) illustration, there are more units
2167of money chasing the same amount of services around – especially if the loans made are of the
2168dubious kinds we’ve discussed. Throughout this process, the bankers would be getting wealthier, as
2169well as the beneficiaries of their bad-loans (like with the banker and his two brothers). Eventually
2170though, there would be a reckoning – a bank examiner would figure out that the bank was insolvent
2171and the depositors would be left to absorb the losses. These losses would ensure that depositors
2172(the general public) would be poorer, as they would need to spend more of their money to plug the
2173hole. As such, there would now be less money in the system, and so deflation would occur. People
2174would (on average) have less money to purchase ‘stuff’, and prices would go down. Of course, the
2175
2176
2177
2178
217931
2180   For those interested, I highly recommend Howard Zinn’s People’s History of the U.S. Last I checked, it was
2181free to read at the website ‘historyisaweapon.com’.
218232
2183   Understanding of these issues goes much further back, but I think beginning here with the time of Jefferson
2184suffices.
218533
2186   If you are looking for modern day analogues, consider (sub-prime) mortgages, student-loans, auto-backed
2187loans, and now the plethora of ‘personal loans’ advertised seemingly everywhere.
2188
2189                                                                                                            38
2190                                  The Power of Money: A Case for Bitcoin
2191
2192
2193bankers and corrupt businessmen would have long since stashed their wealth in actual gold or other
2194real property, thus immunizing themselves from the inevitable crash in the bank’s solvency.34
2195
2196So to summarize, there is inflation – whereby the ‘bank robbery occurs’. Then there is deflation
2197once ‘the jig is up’. When the dust clears, the bankers and their cronies are wealthier than ever
2198while others around them are impoverished.
2199
2200Now read this quote by American founding father Thomas Jefferson, and see that it speaks precisely
2201to what we have just described:
2202
2203         “I believe that banking institutions are more dangerous to our liberties than standing armies.
2204         If the American people ever allow private banks to control the issue of their currency, first by
2205         inflation, then by deflation, the banks and corporations that will grow up around [the banks]
2206         will deprive the people of all property until their children wake-up homeless on the continent
2207         their fathers conquered. The issuing power should be taken from the banks and restored to
2208         the people, to whom it properly belongs.” – Thomas Jefferson
2209
2210Since Jefferson’s time there have been countless individuals who have warned against the
2211consequences of bestowing the power to ‘create money’ to a select group of people. Most of the
2212time this has taken the form of demonstrations and railings against central banking – including the
2213current Federal Reserve. It takes only a bit of research to see that calls to ‘End the Fed’ began long
2214before U.S. Congressman Ron Paul wrote his book of the same name. There were in fact calls to
2215prevent it from coming into being in 1913. It wasn’t until the end of World War 2 though that the
2216truly malevolent impact of U.S. central banking was given a ‘turbo boost’.
2217
2218After WW2, the U.S. found itself in a remarkably powerful position – and incredibly exposed to risks
2219of financially led corruption. At the same time as the U.S. ‘Military Industrial Complex’ had been
2220birthed, a new mechanism for creating currency to be funnelled to it was created. In short, the U.S.,
2221as the sole global superpower, had its currency (the U.S. Dollar) transformed into the world’s
2222Reserve Currency.
2223
2224Reserve Status
2225Throughout economic history, the world has had varying single currencies dominate global trade -
2226often going hand-in-hand with the military and political power of the currency’s sponsoring country.
2227The dominant global currency has traditionally been referred to as a ‘global reserve currency’, and
2228while this title is (and was) never ‘officially’ bestowed, it is generally fairly obvious when a currency
2229reaches that status. For instance, for the past several decades, the US Dollar has been the reserve
2230currency of the world, and as such, you could expect it to often be accepted as payment for
2231international trade between countries (even when the U.S. isn’t directly involved!) as well as being
2232sought after and accepted by citizenry of countries all over the world. Before the U.S. Dollar, the
2233reserve currency was the British Pound Sterling, and before that the French Franc, and then the
2234Dutch Guilder. The reason it’s referred to as a ‘reserve’ currency has to do with one of the
2235definitions of the word reserve: “something stored or kept available for future use or need”. People
2236generally have faith from one day to the next that the globally dominant currency will maintain its
2237
2238
223934
2240   If you are wondering what sort of numbers we are talking about with regard to the current ‘reckoning’ that
2241is imbedded in our current system – consider this: U.S. Federal debt is over $20 trillion (about half of that
2242creates in the last 10 years). When you add Social Security and Medicare obligations to that number, it quickly
2243reaches well in excess of $60 trillion (arguably substantially higher). Assuming U.S. population of 350 million,
2244that’s $175,000 of debt which the average (unwitting) member of the public (man, woman, child) will need to
2245account for – and the number is rising each year. Did you know that you were signed up for this?
2246
2247                                                                                                              39
2248                                  The Power of Money: A Case for Bitcoin
2249
2250
2251status, and so use it as a store of value. They may hold dollars in local bank accounts in foreign
2252countries as ‘safe’ savings (especially if they don’t trust their own government’s currency), or
2253figuratively (and sometimes literally) hide dollars under the mattress.
2254
2255In any case, the reaching of ‘global reserve status’ by a currency creates a huge pocket of demand
2256for the currency, based solely on people’s use for it as a store of value. People seek the reserve
2257currency simply to sit on it, and hold it for a rainy day35. This has vast implications for inflation.
2258Previously, when we discussed inflation occurring through the money supply being increased, we
2259glossed over a simple but crucial fact – that for an increase in money supply to generate inflation,
2260the excess money has to circulate in the economy. If the priests in our old example blessed billions of
2261‘new leaves for themselves’, but never did anything with them (that is, never spent them in the local
2262economy) then from an inflation perspective, they would have no impact.
2263
2264With regard to our reserve currencies, people ‘holding it for a rainy day’, or ‘sitting on it’ as a store of
2265value means that all those units do not circulate and therefore do not contribute to inflation. The
2266impact of this is best shown by example.
2267
2268In our original Leafistan example, the priests increased the money supply by about 5 million leaves
2269per year (each), which assuming they entered circulation, led to inflation of about 2.5%. The Priests
2270might have wanted to increase supply (to themselves) by 50 million leaves each, but this might have
2271led to inflation of about 25% per year – far too high to avoid violating the 2nd MoM Commandment.
2272
2273But what if the blessed leaves of Leafistan were considered a global reserve currency? If that were
2274so, then we may assume that other countries’ citizens would want Leafistan leaves as a store of
2275value – potentially up to 50 million worth a year. With that sort of ‘reserve currency demand’, the
2276priests could increase the money supply by 50 million, as once spent by the priests, most of that
2277would drain into the mattresses and bank accounts of reserve currency seekers abroad – preventing
2278inflation from occurring in Leafistan and allowing the priests to stay within the confines of the
2279second MoM Commandment.
2280
2281To summarize, when a currency has reached reserve currency status, the supply of that currency
2282can be significantly increased without a corresponding increase in local inflation. This means that
2283what was one of the ‘checks’ to keep the priestly (or banking class) from issuing too much
2284currency (the 2nd MoM Commandment) is largely circumvented.
2285
2286So finally, with that said, we can move back to our real life example, and the situation the U.S. found
2287itself in at the end of World War 2. With Europe (and the UK) devastated, and the U.S. having
2288emerged as the global military superpower, the US Dollar cemented its status as the new world
2289reserve currency. That this happened at the same time as the birth of the Military Industrial Complex
2290(MIC) meant that vast sums of money could now be printed and funnelled into the MIC, enriching all
2291participants, without causing runaway inflation. One of the safeguards (the threat of generating
2292runaway inflation) which was previously preventing bankers (and central banks) from funding
2293dangerous and corrupt projects was removed. The history of American military interventionism since
2294then sadly speaks for itself to anyone willing to research.
2295
2296
2297
229835
2299  This is admittedly an oversimplification. There is demand for reserve currency not just for store of value, but
2300other moneyness aspects. Furthermore, it may be spent in foreign countries, which can lead to a concept
2301called ‘exporting inflation’. We note these complications, but spend no more time on them here as the net
2302effect in the country of the Reserve currency’s sponsor is the same – a greater ability to grow the money
2303supply without generating local inflation.
2304
2305                                                                                                               40
2306                                     The Power of Money: A Case for Bitcoin
2307
2308
2309Gold & Oil – The Last Safeguards Fall
2310Even with the US Dollar achieving reserve status (and thus allowing the money supply to be enlarged
2311such that it enriched a privileged class through nefarious undertakings) there was still one safeguard
2312left – Gold.
2313
2314The US Dollar had in various forms always been linked to Gold, and as such, if lending got too ‘out of
2315hand’ (like in our simple banking examples), investors could simply redeem their dollars for gold, and
2316create what would effectively be a national ‘bank run’ against the currency.
2317
2318Throughout the ages, Kings and Princes have tried to de-couple their currencies from gold, as only by
2319doing so could they exempt themselves from the restrictions on money supply creation having gold
2320as a currency-backing demands. Members of the groups controlling the US Dollar found themselves
2321in a similar position. If gold was no longer linked to the US Dollar, there could be no national bank
2322runs on the US Dollar. So long as inflation were kept subdued (or importantly, people were
2323convinced that it was subdued) there would be no limit to how much money could be printed and
2324directed into projects of their choice. But without gold as backing, what assurance could the bankers
2325have that people would accept US Dollars as a valid currency?
2326
2327The answer to this problem of assurance of acceptance was twofold. First and foremost, with the
2328dollar as the global reserve currency and U.S. as a military superpower, they had a reasonable head-
2329start. Much like Coca-Cola introducing ‘New Coke’ in the 1980s (where they could rely upon their
2330distribution and marketing networks to ensure people would try it), the US could rely upon the
2331Dollar’s reserve status to ensure that people would ‘try’ these new Dollars – no longer backed by
2332gold, but by faith (otherwise known as Fiat Currency). Just like New Coke failed though, these new
2333Fiat Dollars would ultimately fail if there wasn’t another hook that kept the US Dollar centrally
2334required in global trade. This hook was provided with oil – and the system which evolved through it
2335became known as the Petrodollar system.
2336
2337By the 1960’s oil had grown to be arguably the single most important commodity for driving global
2338industrial development, and therefore trade. It’s unlikely though that anyone in the United States
2339ever seriously considered ‘backing dollars with oil’, in the same way that they had been backed with
2340gold. First and foremost, the US simply didn’t have the oil supplies to do so36. But more importantly,
2341backing the dollar with oil (like gold before it) would defeat the purpose of having a pure fiat
2342currency – unconstrained in its supply by linkages to real world assets. No, there would have to be a
2343clever new solution to somehow merely align the dollar with oil, such that people wanted – even
2344needed – dollars. The solution was found through striking a deal with a rich and powerful group –
2345the ruling family of Saudi Arabia.
2346
2347The deal, while in many ways horrific in its impact on the world, was in many respects quite beautiful
2348in its elegance. The Saudis had enormous oil reserves, but lived in what some might call ‘the tough
2349neighborhood of the Middle East.’ The Saud family had power and wealth, but many enemies – both
2350external and internal. If they wished to maintain and even consolidate their grip on power, they
2351would need powerful allies supplying them with weapons and protection. The U.S., as the leading
2352world superpower, had the military wherewithal to provide the Saudis with military support –
2353ensuring they maintained (and even grew) their power and wealth. The deal struck was therefore
2354essentially as follows: the U.S. would support the Saudi regime by supplying them with all the
2355weapons of war and oppression they needed to maintain their control over the region. In exchange,
2356the Saudis would declare to the world that payment for their oil (which every country relied upon)
2357
235836
2359     Never mind that oil does a poor job of satisfying ‘moneyness’ criteria.
2360
2361                                                                                                    41
2362                                  The Power of Money: A Case for Bitcoin
2363
2364
2365could only be made in U.S. Dollars. This was a win-win for both parties (though not for the average
2366citizen of the world). The U.S. now had additional support to its currency as the world’s reserve (in
2367the form of global demand for dollars needed to buy Saudi oil). As this connection was not a strict-
2368backing though, they maintained the monetary freedom of a fiat currency. The Saudis had their
2369political and regional dominance guaranteed, and were further assured of enormous new riches.
2370After all, America was the land of any type of consumer good one could imagine, and with their
2371coffers filled with US Dollars from oil sales, the Saudis could go shopping for anything their hearts’
2372desired.37
2373
2374And so, by the early 1970s, the United States had “successfully” abandoned the gold-standard,
2375allowing it to create money with impunity, and use (and abuse) its power as master of the world’s
2376reserve currency. While the dangerous and horrific effects of this bargain were felt all over the world
2377in various forms for decades, it took until the new millennium before its excesses and imbalances
2378began to enter the consciousness of the average American citizen.
2379
2380Gold – Not to the Rescue
2381Getting the public to reject a currency (effectively to force a renunciation of the first MoM
2382Commandment) is exceedingly difficult if the other two commandments are still being upheld.
2383Expecting the public to comprehend the complexity of the system is a tall order for sure, and makes
2384it extremely difficult for people to realize enough of the situation to challenge the status quo – even
2385as social and economic calamity sweeps across the land. The far more likely way that people will
2386realize ‘something is wrong’ is through recognizing inflation. This is why it is so imperative to keep
2387people convinced that inflation is ‘tame’ and under control – even when it is not38. While there are
2388many methods used to convince people that inflation is subdued and/or controlled (things like
2389hedonic adjustments to inflation indexes, or chopping off ‘zeros’ from currency nominal values)
2390there is the price of a single commodity which is looked to more than any other for determining
2391whether a currency is experiencing inflationary effects – gold.
2392
2393Even though gold hasn’t officially backed the US Dollar since 1971, many still look to the price of gold
2394in dollars as an indicator for the health of the US monetary system. If inflation were truly rampant,
2395and the system itself was collapsing, then people would flee the dollar and purchase gold as a safe-
2396haven store of long term value. After all, just because the dollar isn’t officially backed by a fixed
2397quantity of gold doesn’t mean you can’t still find someone willing to part with their gold for your
2398dollars.
2399
2400If for instance, gold was to suddenly triple in dollar price, more and more people would question the
2401integrity of the Dollar money system – causing yet more people to abandon the dollar in exchange
2402for gold - a feedback loop. Gold spiking in value would be a major warning sign and accelerant for
2403people losing faith in the fiat currency – and as faith is all that back the dollar, the implications
2404would be disastrous. For many ‘gold bugs’, that this will happen is just a matter of time, and they
2405have positioned themselves accordingly – buying and holding large amounts of gold. Unfortunately
2406for them, the pending skyrocketing of the price of gold has yet to materialize.
2407
2408The MoM and administrators of the current monetary regime are (and have been) very aware of this
2409prospect and through manipulative trading activity have been diligent in neutering its possibility. I
2410
2411
241237
2413   There was also an element to the agreement whereby the Saudi’s would invest their dollars in U.S.
2414government debt, but we gloss over this here as it isn’t critical to this aspect of the narrative.
241538
2416   It also becomes increasingly important to keep the public distracted with issues that (while often have merit
2417in their own right) often pale in comparison to the big issue of monetary structure.
2418
2419                                                                                                              42
2420                                The Power of Money: A Case for Bitcoin
2421
2422
2423will not go far into the details of their price suppression mechanisms, as there is currently ample
2424material available for the interested reader to pursue with an internet search. Briefly though, the
2425ability to keep the price of gold (and silver) artificially low is dependent on three things:
2426
2427    1) The ability to ‘naked-short-sell’ related contracts which are settled for cash, not settled in
2428       the actual physical commodity. This condition exists as the de facto standard on American
2429       exchanges.
2430    2) The public being convinced that the price of gold contracts on these exchanges is to be used
2431       to dictate the price of physical gold - despite the fact that little physical gold actually exists in
2432       support of the outstanding contracts.
2433    3) The party or parties manipulating the price of the commodities have the suppression of
2434       prices as the utmost goal, with profitability and/or notional trade-size limits being
2435       considered all but irrelevant.
2436
2437Perhaps the greatest limitation of gold as a modern solution to our ‘money ills’ though exists beyond
2438the fact that its price is currently being manipulated lower. Instead, its fundamental drawback as the
2439true basis for ‘money’ today is based upon three features.
2440
24411) It is a physical thing, and so not conducive to electronic transfers.
2442
2443If we hope to maintain our current levels of technological advancement and interconnection, having
2444a money that can be represented as a digital medium of exchange is vital. We cannot expect all
2445transactions across the internet to suddenly rely upon physical gold transfers. This necessarily leads
2446to the second feature.
2447
24482) Displacing fiat with gold would still require an intermediate currency to be used as a modern
2449   medium of exchange.
2450
2451Unless scientists can learn to transmit gold over power lines (they cannot), we would need to return
2452to a digital representation of the gold. We would need a new currency. It could be called eGold, or
2453BitGold, or any such thing, but ultimately, it is not gold – just another currency that claims to be
2454represented on a fixed basis with physical gold. This then necessarily leads us to the third feature.
2455
24563) We would again find ourselves in a position where we have to ‘trust’ some new ‘Masters of
2457   Money’ with the proper accounting and safekeeping of the physical gold itself, as well as its
2458   direct proportionality to the currency supply.
2459
2460This essentially brings us right back to the situation where we had a gold-backed currency issued by
2461bankers. It does not fundamentally alter the structure of our money systems, and yet again leaves
2462the public beholden to a ‘Priestly Caste’ to represent that all the gold is accounted for and kept safe
2463– and that none of the fiscal experiments of old will be repeated, despite the inevitable and
2464irresistible temptations.
2465
2466It is also no trivial matter that there exist many thoughtful and intelligent individuals who question
2467whether even now, the U.S. (and other governments) actually have all the gold they claim to
2468possess. A cursory examination and review of the ‘audits’ of the gold in, for example, Fort Knox,
2469bring up inconsistencies and logical holes big enough to (as the saying goes) drive a truck through.
2470Regardless, even if all gold held in custody by governments is properly accounted for, corruption of
2471the system would be inevitable. This is because once again, placement of money stewardship
2472powers would be handed to a small elite.
2473
2474
2475
2476
2477                                                                                                         43
2478                                The Power of Money: A Case for Bitcoin
2479
2480
2481Chapter 7: Enter Bitcoin
2482
2483I hope that by this point, you see that many evils are borne out of having an un-fixed money supply.
2484The power to create new units of money is - like the One Ring from Lord of the Rings – too powerful
2485to be wielded by a mortal without becoming corrupted by it. The notion that humans can be trusted
2486with wielding this power must be once and for all consigned to the history books as a description of
2487imbalanced structures in times long past. While gold has held (for many) the promise of being the
2488foundation for a new, finite and sound money system, it not only has failed to overcome the barriers
2489of the current monetary regime, but has further limitations as described above. Bitcoin however, is a
2490different and exciting story. Let’s first begun by quickly reviewing the moneyness of Bitcoin to ‘get
2491on the same page’.
2492
2493Bitcoin’s Moneyness
2494Bitcoin, like gold passes the Store of Value test with flying colors, and in many ways surpasses it.
2495There will never be more than 21 million bitcoins in existence, and so long as the Internet remains
2496functional and even modestly accessible, they will remain durable and untarnished. This is in
2497contrast to gold, where the total amount that exists on Earth will forever remain the subject of
2498speculation, not certainty.
2499
2500Also like gold, Bitcoin passes the Unit of Account test. They are effectively infinitely divisible and
2501uniform.
2502
2503With regard to Medium of Exchange, Bitcoin actually does better than gold in many ways. Critically,
2504Bitcoin does not need an intermediating currency. Bitcoin can serve as both money, and direct
2505medium of exchange. Not needing an intermediate currency means that the public need not entrust
2506the Power of Money in the hands of any group of mortal men.
2507
2508Of course, there is still value in gold, as Bitcoin relies upon the premise that our modern society
2509(with electricity and networked computers) will survive the turbulent times of today (and tomorrow)
2510and not be ‘knocked back to the stone age’. Though this limitation is real, it is far more appealing to
2511me to take steps (some of which I will outline shortly) which can serve to navigate us all into a better
2512world, rather than giving up on humanity and anticipating devolution as inevitable. We must
2513recognize that this decision – to believe either in evolutionary movement or devolutionary
2514movement is, together with concurrent activities, a self-fulfilling prophecy. As the saying goes, ‘No
2515one is coming to save us from ourselves.’ We must act with faith and vision to ensure our balanced
2516today and tomorrows.
2517
2518The Threat of Bitcoin
2519Much has been said and written (predictably, by those who stand to lose the most by Bitcoin’s
2520success) about the threats and dangers of Bitcoin. While there may be small kernels of truth in these
2521arguments they are as a whole vapid and empty arguments. The threat of Bitcoin is extremely real,
2522but only exists insomuch as it may displace existing power structures – namely, removing the power
2523to create money (and thus control people and events) from those who currently wield it. That this
2524particular class of ‘priests’, as well as the classes of those who rely upon their largess, fear the
2525coming ‘overturning of the money-changing tables’ is understandable and unsurprising. The onus
2526though is on everyone else to see the truth and so to reject their attempts to obfuscate and deceive.
2527To be fair, to the extent that serious social changes occur as a function of Bitcoin adoption there will
2528undoubtedly be disruption. But considering that the future to which ‘leaders’ seem intent on
2529marching the world toward includes war, strife and oppression (with ‘salvation’ from these ills of
2530
2531                                                                                                         44
2532                                 The Power of Money: A Case for Bitcoin
2533
2534
2535their own devising advertised as achievable by giving them even more power and authority) -
2536reasonable alternatives have appeal.
2537
2538In a world where governments increasingly rely upon threats to extract tax revenues from their
2539populace (who have begun to realize en masse that they are not represented by politicians on
2540matters of importance) the prospect of having to rely upon citizens willingly transferring tax
2541revenues to the state is understandably terrifying to those in power. What citizen feels that their tax
2542revenues are being used responsibly, as opposed to for the perpetuation of massive social ills such
2543as surveillance, war, and the enrichment of elites and their cronies? With the exception of high-
2544stress interrogation-type tactics, Bitcoin cannot be extracted from an unwilling giver. Encryption
2545keys can easily be hidden and are essentially un-hackable39. In a world where entire generations of
2546people have been sold into indentured servitude by the Higher Education, Healthcare and Housing
2547Rackets, the prospect of an economy existing outside that in which their debt burden lives is
2548understandably terrifying to lenders.
2549
2550I would like to be clear here that I do not believe in the abrogation of personal responsibilities –
2551including taxes and indebtedness. However, I do see that as people become increasingly aware of
2552our collective plight, the prospect of there being an alternative to taxation-without-representation
2553and indefinite debt-serfdom may spur on honest and productive re-assessments on all sides.
2554
2555Visions for the Future – The First Two
2556These are frightening and uncertain times for most of humanity. Financial, social, political, and
2557religious systems are collapsing – leaving a void which has so far been filled with fear, anger and
2558hopelessness by those who would seek to use crisis as opportunity. There are however, 3 scenarios
2559which I, broadly speaking, see as possible. Through briefly describing them, I will try to express what
2560I see as the benefits of Bitcoin adoption. I describe the first two here, and return to the third in a
2561further section.
2562
2563Neo-Feudal Dystopia
2564
2565This is the version of the future in which structures that concentrate power into the hands of the few
2566either remain intact or are strengthened. With ‘money making the world go round’, this is the
2567equivalent of ‘Sauron re-claiming the Ring, from out of the hands of Frodo’. Fiat currencies maintain
2568their grip on world economies – which is another way of saying that those relatively few ‘priests’
2569who control the world’s money supply can continue to manipulate society with power unchecked
2570across all caste and creed. It is likely that there would be agitation toward further centralization of
2571power outside of money – abdication of individual rights in favor of ‘the government’ – or ultimately
2572‘Big Brother’ in whatever name it decides to adopt. The world would enter a neo-feudal age where
2573those in control continue to motivate others to do their bidding – often in clever ways that mask the
2574fact that they are being kept at serf status. Things like ‘universal basic income’ and ‘unification of
2575governments’ are marvellous examples of brilliant and manipulative marketing – on par with the
2576best propaganda of any recorded human age.
2577
2578I personally see this outcome as the most unlikely. There are many millions of individuals becoming
2579increasingly aware of the traps gathering around them, and many of them are willing and (in many
2580ways) sadly, eager to react violently. As pending conflict(s) may prevent this form of dystopia from
2581
2582
2583
258439
2585  Yes, there is the possibility of future quantum computing advances breaking the encryption. There are
2586however already technologies that may be implemented via a future fork of the chain to offset this risk.
2587
2588                                                                                                           45
2589                                The Power of Money: A Case for Bitcoin
2590
2591
2592occurring, the next form of the future is in my view more likely, though not the likeliest – and
2593certainly not the most desirable.
2594
2595Collapse Dystopia
2596
2597This version of the future is more akin to the ‘Mad Max’ movies. In this version, while many of the
2598corrupt elements to societal mechanisms are removed, the ‘baby is thrown out with the bathwater’.
2599Many wonderful and evolutionary elements of modern society are lost. This is a world where the
2600social fabric, including the ability of even the Masters of Old to maintain ‘order’, collapses. This is the
2601world of the ‘survivalist’ and the ‘prepper’. The key physical elements for survival in this world are
2602thought by some to be:
2603
2604        -   Access to fresh food and water, away from potentially disrupted supply chains
2605        -   Shelter that accommodates the above
2606        -   The means to defend the above as required (for many, this means firearms)
2607        -   A form of money that would ‘hold its value’ (this eliminates fiat currency as a possibility)
2608            as well as be immune to widespread power-grid disruptions (this potentially eliminates
2609            cryptocurrencies). As such, physical gold and silver hordes would likely become the de
2610            facto standard for ‘money’.
2611
2612This form of dystopia is essentially the route taken throughout most of human history when
2613societies have collapsed. It represents retrograde motion in terms of our collective human evolution,
2614as advances in knowledge and awareness are lost.
2615
2616 If we allow ourselves to fall into this path, thousands of years of knowledge and wisdom can be lost
2617                                          in a destructive instant.
2618
2619This is the lesson of the great fire at the Library of Alexandria. This is the lesson of the countless
2620civilizations who have disappeared from the Earth, leaving only a tale of their decay and fall in the
2621archaeological record – but no true description of the advancement at their civilization’s pinnacle. It
2622is sadly all too common in modern thinking to assume that history and knowledge move forward
2623throughout the ages in a straight line of progress. The truth is, we as a species have not been able to
2624‘hold it together’ for long enough stretches (before dissolving in conflict and strife) to evolve past
2625these repetitive and chaotic outcomes. Let it not be forgotten by any who question this fact that
2626while the Ancient Romans enjoyed the convenience of indoor plumbing, ‘more modern’ Europeans
2627hundreds of years later dealt with their bathroom functions by defecating out windows onto the
2628streets below.
2629
2630Chapter 8: This, Here, Now
2631
2632A Human Aside
2633While this paper may appear to be predominantly on economics and money matters, I feel obliged
2634to take a moment to share perspective on the bigger picture. Who we are as a species, and how
2635evolved we allow ourselves to become, is deeply intertwined with how we interact with money and
2636in what form we use it. This is because money, as the promise of wants satisfied, touches upon deep
2637primal currents that live within us all - currents which whisper questions to us about our level of
2638connectedness with life, and indeed about the nature of life itself. But money is only one aspect
2639(albeit a significant one) to the situation in which we all collectively find ourselves.
2640
2641
2642
2643                                                                                                        46
2644                               The Power of Money: A Case for Bitcoin
2645
2646
2647There is a bigger transformation occurring than what money we use, what flag we wave (or don’t) or
2648whether we consider ourselves in the ‘yes’ or ‘no’ camp of a particular issue. We are all evolving–
2649and on dimensions that were previously outside the periphery of our vision. There is an awareness
2650growing in the world, and it is something that I see in the eyes of nearly everyone that I meet. For
2651anyone sensitive, often only modestly so, these past several years have been amongst the most
2652trying, humbling, and intense of our lives. But yet they’ve also been the ones in which we’ve grown
2653the most. We have gotten a better glimpse (often ‘the hard way’) of who and what we really are.
2654
2655We are discovering that the big questions – those that we have for generations been discouraged
2656from asking – are coming to the fore. None of us are immune to at one point or another (perhaps
2657our entire lives up until this point) being distracted from this growing awareness through means of
2658sedation and control. Sometimes these distractions are obviously self-inflicted. Other times, (such as
2659with some of contents of this treatise) it may appear that we have had the distractions thrust upon
2660us.
2661
2662                      It is vitally important to not turn this into a ‘blame-game’.
2663
2664None of us are free of some guilt of ownership of the world in which we find ourselves. We have all
2665had experiences where we contributed to its imbalanced condition. At the same time, none of us are
2666without some innocence - we were all born into a societal structure that was intact and running
2667while we were still in a pre-conditioned infant state. We have all ‘done our best’ with what we have
2668been given and where we have been placed. To focus on blame, rather than assuming personal
2669responsibility in our own lives now is to miss the opening which the current state of our world
2670provides.
2671
2672Evolution cannot occur amidst an environment of witch-hunts. Without an appreciation for amnesty,
2673there can be no lasting peace. To think that we can eradicate what we perceive as ‘our enemies’
2674with reactionary aggression is to misunderstand how experience flows. The energy of opposition
2675must be integrated and assisted to evolve, not stifled or attacked so that it simply changes form
2676while maintaining its antagonism.
2677
2678The Third Vision
2679The third vision I would like to share is one of a world with humanity more deeply connected to one
2680another – not just via technological innovations (which are nonetheless still appreciated) - but with
2681an awareness that we all live here on this Earth in a shared predicament. We all face fear; we all face
2682loss; we all face death. It is through honestly acknowledging our collective feelings that we truly
2683realize there is nothing to fear. We integrate the message of the Abhaya Mudra – the simple hand
2684gesture depicted in statues of teachers from long ago – and feel it. Once this happens, what seemed
2685like the nasty and unfortunate occurrence of being born into this world shows itself for what it truly
2686is – the blessing of a loving and evolving experience.
2687
2688However, as with any injury, the open-wound of our collective humanity must be treated in a
2689particular order. Before it can be healed, it must first and foremost be cleansed. All bacterial,
2690infectious and parasitic organisms must be gently removed from the wound area. This often hurts,
2691as no attachments may be broken without some pain. But once done, balance organically restores
2692itself.
2693
2694I would like to leave this vision of the world relatively short and open-ended. I do not know what
2695form it may take, but I believe that it will arrive with a higher degree of certainty than any of the two
2696previous dystopian visions. I present it therefore as a series of questions:
2697
2698
2699                                                                                                      47
2700                                   The Power of Money: A Case for Bitcoin
2701
2702
2703How might the world be different if the mechanisms through which trillions of dollars are siphoned
2704each year to perpetuate corrupt systems and structures (largely against the will of the public who
2705provide it) were rendered impotent?
2706
2707How might the cost of living be changed if wealth were not siphoned into the hands of the few via
2708the corrupt mechanisms we have so far described?
2709
2710How might we view social, racial and class distinctions in a world driven by deflationary forces, such
2711that the material world essentials for healthy living were available to all?
2712
2713How might we begin to view ourselves and all those around us if we lived with a calm certainty that
2714we would always have enough?
2715
2716Practical Steps
2717There are actions we all can take today that will have a profound impact towards facilitating this
2718evolution away from systems of old to a new ‘sound money’ future. That is, one where we all return
2719to an appreciation of the higher definitions of money – appreciating it as a tool to facilitate equitable
2720transfers, rather than a promise of desires satisfied that may be used as a weapon against us.
2721
2722This change is not a war, and requires no one to pick up arms and fight. It simply requires that we
2723take steps to facilitate a re-focusing of our money system away from fiat and toward fixed-supply.
2724We must remain resolute in our determination to do so, regardless of inevitable obstacles and
2725circumstances where we are deliberately incited to alarm. Evolution does not occur through
2726reactionary aggression – whether initiated or provoked. It occurs through redirected attention and
2727intention.
2728
2729From a practical perspective, I offer a few suggestions that I believe will facilitate this movement.
2730This list is by no means exhaustive. If you are inspired to find other modes and methods that work
2731for you, by all means share them as appropriate. But for those interested, I offer these to you.
2732
27331) Continue to buy Bitcoin.
2734
2735There’s a saying in microeconomics (the study of business finance, as opposed to the study of larger
2736economic systems): “People vote with their wallets.40” This is to say that regardless of how people
2737may express their viewpoints when asked, the ultimate expression of their opinion is voiced when
2738they spend their money. For instance, you may say that you oppose the War Economy, but by simply
2739participating in the Fiat economy you are indirectly supporting it. Instead, I propose a modest
2740alteration of the saying:
2741
2742           -   “Vote with what you select as your money”
2743
2744Buying Bitcoin (or other relevant cryptos) demonstrates confidence and support of the new
2745paradigm, just as it simultaneously demonstrate the lack of support for the old paradigm. Every time
2746one buys Bitcoin (and simultaneously sell Fiat Currencies), a message is being sent that people no
2747longer want to play the rigged games. Instead it serves as a vote to emancipate all of ‘us’ from the
2748restrictions of the corrupted mechanisms in which we find ourselves. This buying also generates
2749upward pressure on the price of Bitcoin, which has very particular consequences we will address in
2750the Valuation section.
2751
27522) Accept Bitcoin as payment in transactions, and at a discount to fiat prices.
2753
2754
275540
2756     Another version of the saying is ‘putting your money where your mouth is.’
2757
2758                                                                                                        48
2759                                  The Power of Money: A Case for Bitcoin
2760
2761
2762
2763
2764Despite Bitcoin’s incredible rise in price, the percentage of the populace who actually owns and
2765transacts in Bitcoin is exceedingly low. For Bitcoin to displace Fiat currencies, it must be used as not
2766only a store of value, but a transactional currency. More of the general populace must be brought
2767into the ecosystem and become acquainted with acquiring and spending Bitcoin. One way to do this
2768is to make it clearly in people’s immediate best financial interests to participate. Expecting the
2769average ‘man on the street’ to read this paper and absorb all the information is a tall order, but
2770expecting the same person to appreciate that they can get a better deal if they pay in Bitcoin is much
2771easier.
2772
2773Wherever possible – whether trading with friends, on Craigslist or ideally as a business41, let
2774counterparties and customers know that you will accept Bitcoin as payment at a discounted price to
2775Fiat Currency. I propose a 10% discount42, though you may of course pick whatever discount works
2776for you.
2777
2778For example, assuming you are in the U.S., and selling a bicycle on Craigslist for $1,000 – advertise
2779that you would be willing to accept only $900 worth of Bitcoin for the bike. Rather than exchanging
2780cash or a wire-transfer, you may do an on-the-spot Bitcoin transfer – using the reference price of
2781Bitcoin at any of the many online exchanges (I favor Preev.com as it aggregates prices across many
2782sources).
2783
2784There are several implications to doing this. Firstly, you motivate those who have not yet ‘taken the
2785plunge’ into Cryptos to buy their first amount of Bitcoin – even if it is only to earn the savings that
2786you offer on the item or service sale. While it is true that at the time of the transaction you may be
2787taking a small ‘loss’ (whatever discount you offer), you are also taking real action to promote Bitcoin
2788adoption, which may ultimately significantly improve the value of Bitcoin. As more people transact in
2789Bitcoin, the ‘10%’ the seller ‘lost’ would undoubtedly be made up many times over as the Bitcoin
2790received further appreciate in value. Of course, once Bitcoin adoption rates are high enough such
2791discounts will become increasingly unnecessary.
2792
27933) Do your best to remain informed and not fall for the propaganda that rails against Bitcoin and
2794   Altcoins as negative things that need to be controlled and heavily regulated.
2795
2796Bitcoin represent an existential threat to many of the corrupt power structures in our society today –
2797and it so happens that these same structures have vast media, propaganda and political resources at
2798their disposal. It is likely that the rhetoric trying to paint Bitcoin in a negative light (whether belittling
2799it, demonizing it, or calling for its outright ban) will increase. Do not allow yourself to be swayed by
2800these appeals. Do not naively relinquish your right to determine for yourself what is suitable to be
2801used as money. This is a decision we all must make for ourselves and for the future of our world. We
2802must not allow ourselves to be scared or bullied into passively accepting a status quo that we can all
2803see is devouring itself. Those managing and attempting to control public perception will never
2804
2805
2806
280741
2808   Relatively few people own their own businesses and so have the discretion to make this decision directly.
2809Most people though are employed by others and certainly have it within their power to raise the topic with
2810employers, as well as increase patronage to businesses that adopt this mechanism.
281142
2812   For those who have an appreciation for different religious traditions, 10% is traditionally the amount used
2813for ‘tithing’. Whether you believe in religious tradition or not, it is to me intuitively appealing that a small
2814‘sacrifice’ (the 10%) is made – almost as an ‘offering’ to the advancement of the greater good. The fact that If it
2815works as I envision, it would ultimately enrich everyone involved is icing on the cake.
2816
2817                                                                                                                49
2818                                   The Power of Money: A Case for Bitcoin
2819
2820
2821earnestly offer momentous decisions like these to formally be ‘up for vote’43. This is why we must
2822vote not with ballots or protest signs, but with simple, distributed adoption, which can be neither be
2823stamped out nor denied.
2824
2825Chapter 9: Valuation44
2826
2827Unlike other Alt-coins (a few of which I’ve so far opined on in other notes) the basic valuation of
2828Bitcoin may be done relatively simply45. The difficulty lies not in grasping the math or logic, but in
2829accepting the enormity of that which it represents. As humans, we are not used to seismic shifts and
2830have no good reference points for assessing the meteoric rise of Bitcoin valuations. It is
2831understandable that without an appreciation for ‘the Power of Money’ one may remain sceptical of
2832predictions that Bitcoin will rise further in price – after all, what stocks or bonds in recent history
2833have risen in value nearly as much as Bitcoin outside of irrational ‘bubble’ schemes?
2834
2835Basic Framework
2836It is worth noting that while we will be using some traditional investment terms to describe Bitcoin,
2837this is a bit of proverbially ‘mixing apples and oranges’. Things like ‘Market Cap’ and ‘Enterprise
2838Value’ are terms used in finance to describe individual investments such as stocks and bonds, not
2839money itself. We wouldn’t for instance refer to the total percentage of global M3 held in actual US$
2840as the American Dollar’s ‘Market Cap’46. It is partially because of this misguided use of terminology
2841that people have difficulty accepting the enormity of Bitcoin’s value potential. To liken it to a stock
2842trading on an exchange, rather than to major world currencies such as the US Dollar or the Euro – is
2843to use the wrong reference set, and so make the final results look suspiciously large by comparison.
2844
2845We may first begin by identifying the size of the global money supply, of which Bitcoin may
2846prospectively assume a larger proportion. The metric that we will use to represent global money
2847supply is M3, which tends to be used by economists to represent money used not just as a medium
2848of exchange, but as a store of value. This includes cash currency, checking accounts, demand
2849deposits, savings accounts, money-market securities, and time deposits. While global consolidated
2850estimates vary somewhat, I use a current global value of US$80 trillion equivalent. I believe that this
2851number is somewhere between fair and conservative (i.e., to the low side).
2852
2853If Bitcoin is successful over the coming years in displacing Fiat currencies, then we may simply
2854ascribe a greater portion of that M3 ‘pie’ to Bitcoin’s ‘market capitalization’. While I leave it to the
2855reader to determine what his or her own estimations are with regard to both M3 penetration and
2856probabilities of achievement I will demonstrate an example which I believe to be reasonable.
2857
2858Considering the advantages Bitcoin holds over Fiat currencies we might estimate that in a ‘Bitcoin
2859Success’ scenario it garners 40% of global M3 attribution within 10 years. This means that its ‘market
2860
286143
2862   Attempts to convince people that ‘they have a say’ in government will be made with issues of strong
2863emotional appeal but limited practical significance. This is already happening.
286444
2865   If you’ve just skipped to this section without reading any of the previous ones, Hello! It is my belief that the
2866sum total of this report before this section confers significant strength to the valuation assessment I will
2867propose here. As such, I highly encourage you to review earlier chapters as they may not only impart deeper
2868conviction in terms of the value and utility of Bitcoin, but the moral consequences of adopting (or not
2869adopting) it.
287045
2871   While there are many important nuances and details to consider I will reserve addressing those for another
2872time and/or venue. My main focus here is to offer frameworks rather than detailed exposition.
287346
2874   This number currently stands at approximately $15 trillion of our $80 trillion total – just under 20%.
2875
2876                                                                                                                 50
2877                                  The Power of Money: A Case for Bitcoin
2878
2879
2880cap’ would be $32 trillion, split amongst 21 million ‘fully-diluted’ coins – or approximately $1.5
2881million per coin. We further may personally ascribe a minimum 2% probability to this ‘success’ case
2882occurring47. Therefore, the expected value48 is equal to 2% times $1.5 million, or $30,000. If we
2883further assume that current value for a Bitcoin is $4,000 and the scenario unfolds after 10 years (and
2884not before) we can deduce our expected rate of return. In Excel, the financial formula would be
2885=RATE(10,0,-4000,30000), or ~22% annually for ten years.
2886
2887Note though – this is not the return an investor today would actually earn if Bitcoin achieves
2888‘success’ as per this example. That return would instead be a nearly 375-fold increase in investment.
2889This 22% is our probability weighted return today. That it advertises a yield substantially higher than
2890the Risk-Free-Rate49 points to Bitcoin currently being significantly undervalued based upon our
2891penetration, timing, and probability assumptions. If we wish to value Bitcoin today, we simply need
2892to discount our ten-year forward expected value ($30,000 per coin) back to now at the Risk-free-rate
2893(which we assume is 2.5%, the approximate yield on the current US 10yr Treasury Note). We do not
2894need to apply any additional discount factors (or use ‘risky rates’) as we have already accounted for
2895the probability in our initial estimation. All that is left is to account for the time value of money. The
2896formula is therefore simply = 30,000/(1.025^10) or $23,345 – approximately 6 times current levels.
2897
2898Bitcoin as Insurance
2899Hopefully by this point you have been convinced that there is at least a marginally greater-than-zero
2900probability that Bitcoin may displace global fiat as per our ‘success’ scenario above50. Perhaps you
2901instead think it’s a 0.1% chance (1 in 1,000), or perhaps you think it’s a 5% chance. Perhaps you think
2902success penetration would be either 20% or 80%.
2903
2904Let’s instead assume that you give it a 1% chance of reaching an M3 penetration of 1/3 within 10
2905years. This success case would correspond to an approximately 300x increase in value from current
2906levels. In this case, what sort of allocation to Bitcoin makes sense – simply from an insurance
2907perspective? Wealth management is, after all, first and foremost about wealth preservation. If I
2908believed there was a 1 in 100 chance that it would rise in value by 300 times, then I can do some
2909simple math to determine an allocation that would leave me at least as wealthy as I am today in
2910such a scenario – that is, not ‘missing out’ relative to everyone else. Consider it an insurance
2911premium that pays off just in case Bitcoin actually succeeds.
2912
2913This is best demonstrated by example. Let’s suppose I have an investment portfolio currently valued
2914at $10 million. If I allocated 0.333% or $33,333 to Bitcoin (that is, buying approximately 8 BTC) then I
2915ought to be able to sleep at night, knowing that I won’t totally miss the Bitcoin boat. If Bitcoin
2916succeeds, and the price rises (as per our assumption) by 300x, then my initial investment will be
2917worth $33,333 x 300 = $9,999,000 – approximately $10 million – the initial (inflation adjusted)
2918amount of wealth I currently have, even if I exclude all my other investments from the final total.
2919
2920
2921
2922
292347
2924   For the purposes of this example, we can assume that all upside is capped at our definition of success, and
2925any shortcoming results in a 100% loss of investment.
292648
2927   Although it may not sound like it, Expected Value is actually a formal statistical and financial term. It’s
2928achieved by simply multiplying each possible outcome by the likelihood of each outcome. In our instance, we
2929are ascribing a 2% likelihood to a value of $1.5 million, and a 98% likelihood to a value of zero.
293049
2931   Risk-free-rate. This is, of course a misnomer, and I find it almost ridiculously so – but in the interests of
2932‘speaking the language of finance’ I am treating it as valid.
293350
2934   In case you were wondering, a current price of $4,000 – while still adhering to our example’s rules dictates
2935that the implied probability of success is 0.341%.
2936
2937                                                                                                               51
2938                                  The Power of Money: A Case for Bitcoin
2939
2940
2941Considering that investors typically pay insurance premiums far in excess of a one-time 0.333%, this
2942should warrant serious consideration for anyone managing wealth51.
2943
2944
2945
2946On Signalling and Feedback Loops
2947Near the beginning of this paper, we discussed the scenario in Leafistan where all citizens had the
2948ability to ‘create money’ by collecting leaves. We were presented with a demonstration of how a
2949system structured such that a particular behavior is encouraged (in that case, for people to go out
2950and collect leaves) can have consequences that return to impact the sustainability of the system
2951itself. In that particular case, the impact was one which would have caused the abandonment of that
2952monetary system. A destructive outcome though needn’t always be the case – and in fact with
2953regard to Bitcoin, it isn’t. What we see instead is that, once understood by enough people, the
2954behavior that is encouraged actually supports the stability of the system itself – creating what may
2955be called a ‘virtuous cycle’.
2956
2957In the earlier chapter of ‘Next Steps’ we offered up that something people could do to support
2958Bitcoin was to buy it. That some might have a knee-jerk reaction to such a statement as sounding
2959like a ‘Ponzi scheme’ is absolutely natural. However, it is no such thing. This is because in Ponzi
2960schemes there is no culmination scenario that may be achieved through continued growth - outside
2961of inevitable collapse. There is no crystallization event or threshold whereupon valuations previously
2962perceived as ‘too-high’ are suddenly imminently logical and reasonable. In the instance of a new
2963form of money being adopted though, that crystallization of value is a very real prospect. Its
2964achievement would immediately validate nearly all prior ‘leaps of faith’.
2965
2966Buying Bitcoin has two primary consequences which are integral to understanding the ‘virtuous
2967cycle’ to which we have referred.
2968
2969     1) When faced with buying pressure, the price of Bitcoin, like any traded asset (that cannot be
2970        manipulated lower) will rise.
2971
2972While this may seem obvious, the consequences of the price of a Money/Currency rising are vastly
2973different from the consequences of the price of an investable asset rising (such as stocks or bonds).
2974Let’s first examine the latter case (with stocks).
2975
2976When a stock rises in value, the underlying fundamental investment thesis of the stock itself rarely
2977improves – in fact, the future valuation returns typically get worse. For instance, If Apple stock is
2978trading at $150 a share today and you believe it is ‘worth’ $200 a share, then if tomorrow it begins
2979trading at $175, your prospective returns from tomorrow onward are now lower52. Whereas today
2980you expected to earn ($200 - $150)/($150), or a 33.3% return, any ‘new money invested’ at the new
2981price would return only a ($200-$175)/($175) return, or ~14% return. Your price target may rise
2982
2983
2984
2985
298651
2987   If we assume that just 5% of those controlling the approximately US$40 trillion in investable wealth
2988controlled by High-Net-Worth individuals acts this way, this alone would represent incremental demand for
2989Bitcoin in the amount of nearly $7 billion, or about 11% of its total market-cap – not an insignificant upward
2990pressure, even before considering the substantial implications of feedback loops and iteration.
299152
2992   You have of course booked an unrealized gain already, so you are not unhappy – but there is now ‘less
2993upside’ left.
2994
2995                                                                                                                 52
2996                                 The Power of Money: A Case for Bitcoin
2997
2998
2999above $200 from a ‘technical analysis’ perspective, but from a valuation perspective the price rise
3000has done nothing to impact valuation53. It has simply moved closer to the static price target.
3001
3002Money and currencies though are different, and this is largely why the MoM have seen to it that the
3003prices of gold and silver have been kept artificially kept low. When people see that one form of
3004money is rising in value relatively to another – they may interpret it as meaning that the latter form
3005of money is losing value.54 The very perception that a money is losing value tends to spur people to
3006move further away from the losing currency, and into the winning currency – particularly as the
3007transition becomes one that points leads to a new economic model. This is particularly true when the
3008losing form of money is backed by nothing other than ‘faith’ – as is the case with all Fiat.
3009
3010Furthermore, there is nothing ‘magical’ that happens should the breadth of ownership of a stock rise
3011drastically. Although a successful stock might soon be considered a component of ‘the Dow Jones
3012Industrial Average’ (and perhaps get an Index driven boost) it still remains just a stock that people
3013own. But things are different with a new form of money. Once a critical mass of participants is
3014achieved, the ability of the money itself to satisfy the requirements of ‘moneyness’ increases
3015enormously55, until a threshold is breached and it fully steps into its valuation.
3016
3017As the price of Bitcoin continues to rise, more and more people will adopt it. Some will do so with an
3018appreciation for its end-use in displacing fiat56, and others will just view it as a curiosity, investment
3019vehicle, or moral statement. The reasons for adoption matter far less than the adoption itself. This is
3020already happening right now, and like any virtuous cycle, it becomes stronger the further it
3021proceeds, until it reaches ‘escape velocity’.
3022
3023     2) More people will own it as an investment.
3024
3025Again, this is fairly obvious – but its implications are subtler. As more people have a vested financial
3026interest in Bitcoin succeeding, there will be increasing amounts of public pressure to ‘let Bitcoin win’.
3027Of course, the bulk of the opposition may still be expected to come from the MoM, but particularly
3028as wealthy (and influential) citizens of the world increase exposure to Bitcoin, it will become
3029increasingly difficult for the MoM to maintain their grip on power. This is even before the potential
3030for a ‘prisoner’s dilemma’ type situation to arise which looks at participation in Bitcoin from the
3031perspective of the Master of Money themselves.
3032
3033The Master’s Dilemma
3034Let’s assume for a moment that you, the reader of this treatise, are a proverbial member of the
3035Masters of Money club. Perhaps you are a central bank president, or simply a (relatively) direct
3036beneficiary of their largess. If this were the case, you might find yourself grappling with a dilemma –
3037entirely divorced from moral imperative or ‘visions of the world’, but simply focused on self-
3038preservation.
3039
3040
3041
304253
3043   Theoretically, rising prices of a stock may help fundamentals insomuch as the Company may use their now-
3044more-valuable stock as currency to pay for prospectively value enhancing projects. This is hardly a given
3045though and may be thought of as (once again) an ‘exception’ that proves the rule.
304654
3047  Unlike when someone sees a stock or bond rise in value. When that happens, they don’t think that the
3048underlying currency it is priced in has depreciated!
304955
3050   Particularly as a medium-of-exchange. Furthermore, although price-stability was excluded from our
3051‘moneyness’ definitions, we would see this express itself as more goods are priced in Bitcoin, causing Fiat to
3052finally bear the burden of its own volatility.
305356
3054   Which I hope is a camp of which readers of this treatise will consider themselves a member.
3055
3056                                                                                                             53
3057                                    The Power of Money: A Case for Bitcoin
3058
3059
3060You might like to maintain the status quo. After all, the status quo has you firmly embedded in
3061control of the wealth (and power) of nations. But unfortunately, you cannot deny that ‘cracks’ have
3062begun to show57. There is a non-zero probability that all this ‘Bitcoin stuff’ might actually undermine
3063the current system. If that happens, what will happen to you and your wealth?
3064
3065You might want to begin secretly making preparations – taking out an insurance policy of your own.
3066Perhaps you decide to secretly (without telling any of the other MoMs) begin doing the unspeakable
3067– buying Bitcoin.
3068
3069This is a tricky business though. Since you have enormous Fiat wealth to begin with, in order to
3070purchase enough Bitcoin to make a difference to your portfolio, you’d have to accumulate a
3071significant amount of (current) dollars’ worth of Bitcoin. But we’ve just explored how any large
3072purchases would push the price up – not only facilitating the success of Bitcoin itself but keeping you
3073from buying as much as you would like at lower prices. As such, you might try different strategies.
3074For starters, you might do your best to send signals to the marketplace to keep the price down long
3075enough for you to buy it in the volumes you desire.
3076
3077Perhaps you publicly deride it as a Ponzi scheme or fraud. Perhaps you take steps to outlaw it (of
3078course knowing that any victories in this direction will be Pyrrhic – particularly with the presence of
3079privacy enabled Cryptos like Monero). You do anything you can to keep the price down while you
3080accumulate as much as you can. Of course you tell no one outside your inner-inner-circle. Any other
3081MoMs not in-on-it with you must not know you are doing this, lest they accuse you of breaking ranks
3082and being a traitor.
3083
3084But there’s a catch.
3085
3086You suspect that other MoMs might be secretly doing the same thing! They might have had the
3087same idea as you! And any Bitcoins they secretly acquire to maintain their wealth in the new
3088economic order are Bitcoins that you haven’t successfully purchased. It’s a competition that no one
3089will admit to it! Or will they?
3090
3091You know that after a while, it will become increasingly difficult to keep acquiring Bitcoin without
3092the price rising dramatically. Once that happens, you may not be able to purchase meaningful
3093amounts to cement you in ‘the lifestyle to which you’ve grown accustomed’. As such, perhaps you
3094should be bold. Perhaps you should aggressively start buying Bitcoin now – price rise be damned. If
3095you are the first MoM to do this, then this could still work out for you. Who cares if you have to pay
3096$10,000 per Bitcoin if the price will ultimately be over 100 times higher than that?
3097
3098While you suspect your MoM brethren have buying programs in place, you will out-do them with
3099your aggressiveness. Every time they bid higher for Bitcoin, you will bid higher yet. You will see to it
3100that you are at the head of the pack of the MoM. Perhaps they will find out what you are doing – but
3101even if so, it will be too late. You will have amassed perhaps the last great Fiat-fuelled fortune, and
3102your other MoM brethren will be also-rans as the window to accumulate at entry-levels will have
3103closed.
3104
3105But no – this is a bad idea. After all, you would be acting selfishly, and without consideration for the
3106other MoMs. You cannot bring yourself to do it. But you have a lingering question. Could any of the
3107rest of them bring themselves to do it? If just one of the other Masters of Money breaks ranks and
3108
3109
3110
311157
3112     Calling the systemic problems ‘cracks showing’ is truly making a molehill out of a mountain.
3113
3114                                                                                                      54
3115                                The Power of Money: A Case for Bitcoin
3116
3117
3118goes on a Bitcoin binge, then you will be left out, and perhaps quite quickly. Perhaps you should try
3119and ‘beat them to the punch’?
3120
3121A conundrum indeed.
3122
3123Chapter 10: Concluding Messages
3124I do not know what the impact or durability of this treatise will be. Perhaps a handful of people will
3125read the first few pages and no more. Alternatively, perhaps enough people stick with my
3126(admittedly verbose) writing style long enough to reach this part. If they do – if you do - I thank you.
3127
3128To the Masters of Money
3129It is stating the obvious to say that the rules of the game have been altered. The arcane laws
3130governing action and reaction, which up until this point obediently bent to your will, appear to be
3131deserting you. Part of you knows this, as things that ‘used to work’ now flail in disappointment and
3132morass. Every day may be the birth of a new scheme, a new patch, a new grand plan to salvage the
3133kingdom – but these are all false hopes and all lead back to failure. The genie’s lamp has become the
3134monkey’s paw58. But this is the lot of us all – not just you. Perhaps you feel it most keenly though as
3135you seemingly have ‘the furthest to fall’. In truth, you have a new world to gain.
3136
3137Money has an enormous ability to sedate and control the inner stirrings that ‘something is amiss’,
3138but it lacks the ability to forever repress and suppress them. Some part of even the wealthiest
3139members of society knows that there is an anesthetizing quality to money – especially in great
3140quantities. With enough of it – too much of it – the endless subtle beauties of (what might otherwise
3141be derided as mundane) every-day living remain invisible. Perhaps this is what scripture speaks of
3142with regard to ‘rich men’, ‘camels’ and ‘eyes of needles’.
3143
3144The masses are waking up, and there is nothing you can do to prevent it. You are waking up, and
3145there is likewise nothing to be done to prevent it. You may attempt to fight this transformation, but
3146doing so is akin to attacking reflections in a house of mirrors. You would shatter glass fighting a
3147phantom of yourself - causing painful, if not mortal lacerations for yourself and those around you.
3148Instead, you may choose to acknowledge the opportunity - and so discover that true victory lies not
3149in conquest, but abdication.
3150
3151                           You are not being asked to relinquish your wealth.
3152
3153You control assets (away from the fiat money which is being displaced) sufficient to keep you and
3154your kin materially kept for generations to come. What you are being asked to relinquish is the
3155notion of control.
3156
3157There are indeed stewards of humanity all about us, and perhaps you or your progenitors were at
3158some point earnest in the assumption of that responsibility - but that stewardship has long since
3159been corrupted. It has been co-opted by a presence that seeks to corral and control, not in the best
3160interests of those who need assistance but in order to fuel the passions and shortcomings of those
3161who seek to be master. The time has come to move beyond control, and into the unknown – to
3162realize that our resistance is the very thing keeping us from being reborn into life – a life we perhaps
3163cannot yet comprehend, save for vague notions of awe shrouded in trepidation of the hidden being
3164slowly revealed.
3165
3166
316758
3168  "The Monkey's Paw", by W.W. Jacobs is a short story I highly recommend. I seem to recall a Halloween
3169episode of ‘The Simpsons’ doing a parody of it.
3170
3171                                                                                                         55
3172                                 The Power of Money: A Case for Bitcoin
3173
3174
3175You are being asked to either participate or stand-aside. Through any other doorway of expression
3176lies madness. You, perhaps in ways befitting a true ‘Master of Money’, have the means to facilitate
3177the evolution of our world. While few will sing your praises for doing so, and indeed, some may
3178malign the role you have heretofore played, there will be another group. These others will see you
3179not for what you were, but for what you allowed yourself to become.
3180
3181To Everyone
3182We find ourselves now is on the edge of unfathomable possibility – where we take real and
3183impactful steps toward facilitating ourselves, and thus our world, back to its natural state of balance.
3184For some concrete examples, I encourage everyone to consider the ‘Practical Steps’ for action
3185(previous section). However, we must also realize that our new economic world will not be a utopia.
3186Such notions do not exist, except perhaps within our own individual ability to remain open to life
3187and consciously respond.
3188
3189There is, and will be much work to be done to restore balance to our collective humanity. Many of
3190the ‘bad characters’ who until now have used their enormous wealth and influence for nefarious
3191purposes will still have enormous wealth and unchanged inclinations. Many of the ‘good characters’
3192of today may disappoint or become corrupted. This is alright. The purpose of shifting to a fixed-
3193supply money system is not to re-distribute all wealth according to a particular social or political
3194philosophy. Nor is it to enforce mental, moral and spiritual acquiescence in those who remain
3195steadfast in disagreement. Individual liberty to express oneself must be respected in all – especially if
3196it results in topics being considered that make us uncomfortable. Let us not seek to squelch dissent,
3197but instead allow it to facilitate our awareness such that we are no longer lose ourselves in
3198reactionary inclinations.
3199
3200
3201
3202Epilogue
3203
3204Privacy, Backups and Mr. Miyagi
3205As alluded to in the introduction, there are many instances and use cases in which Alt-coins (that is,
3206cryptocurrencies away from Bitcoin) offer significant value. There are and will be many niches in the
3207Bitcoin ecosystem which may be best served by coins with different twists, flavors and functions.
3208While I will not explore most of those that I currently envision here, I will address one need (and a
3209related Altcoin) which I feel is critical to the evolution of Bitcoin itself. Ironically, it is not this coin’s
3210adoption, but the threat of its adoption that offers critical support to Bitcoin.
3211
3212We’ve already established that since global adoption of Bitcoin (as a replacement to fiat currency) is
3213a threat to existing power structures, there will likely be calls by those at risk to simply ban Bitcoin.
3214These calls have already begun, and may yet grow stronger. As such, having an alternative
3215Cryptocurrency, immune to controls and clampdowns, is critical to keep such actions in check.
3216
3217In its current version, Bitcoin lacks the anonymity that was initially advertised by its early
3218proponents. Governments (and others) have already made advances in deciphering the Bitcoin
3219blockchain such that transfers may be tracked and potentially tied to the real-world people who are
3220involved in the transactions. As such, if Bitcoin were to ever be strictly outlawed, law-enforcement
3221agencies might have a means to pursue and punish violators. Whether that would actually happen is
3222a different story. After all, doing so would truly lay out in the open for all to see that the public is not
3223free from the yoke of their money masters. As such, it could incite a public backlash strong enough
3224
3225
3226                                                                                                             56
3227                                 The Power of Money: A Case for Bitcoin
3228
3229
3230to more deeply undermine the very authority which the Masters of Money would be trying to
3231protect. Regardless of how it actually plays out though, it is likely to cause turbulence and conflict –
3232and as such it is best avoided if possible. But how?
3233
3234In the (original) ‘Karate Kid’ movie (from the 1980’s) Mr. Miyagi teaches his student Daniel the real
3235reason to learn martial arts. With a little help from the internet, I offer the relevant dialogue to you
3236here.
3237
3238                 Miyagi: Miyagi hate fighting.
3239
3240                 Daniel: Yeah, but you like karate.
3241
3242                 Miyagi: So?
3243
3244                 Daniel: So, karate's fighting. You train to fight.
3245
3246                 Miyagi: That what you think?
3247
3248                 Daniel: [pondering] No.
3249
3250                 Miyagi: Then why train?
3251
3252                 Daniel: [thinks] So I won't have to fight.
3253
3254                 Miyagi: [laughs] Miyagi have hope for you.
3255
3256
3257
3258Daniel learned that true power is wielded in order to maintain peace and balance. The same applies
3259for Bitcoin and cryptocurrencies, and is why having a backup coin is critically important. If
3260governments see that a mechanism exists for the ‘outlawing’ of Bitcoin to fail, then it becomes
3261increasingly unlikely that they would bother to try and do so. This is not to say that they still
3262wouldn’t try, but doing so would be all the more clearly unproductive, and as such the logic of not
3263trying to ban it may yet prevail.
3264
3265History has shown time and again that when the government tries to ban something for which there
3266is genuine public demand, all that they wind up doing is driving its use ‘underground’ and into the
3267black market. While enforcement actions may still be attempted, so long as there is a mechanism for
3268the black market economy to function, it will. As such, all the governments will have accomplished is
3269a demonstration that they do not respect the will of the people, which will breed further antagonism
3270and dissent. While attempts may be made to convince the public that the banned items are evil or
3271bad, this is unlikely to be successful. First of all, as people increasingly understand the mechanics of
3272the monetary system they will see through the propaganda and realize the true merits to Bitcoin.
3273Secondly though, to think that people will stop using something they like, just because they are told
3274it is bad for them is to ignore observable human behavior.
3275
3276While a ban might curtail actual Bitcoin use, all that would happen is the mantle of ‘the people’s
3277money’ will be handed from Bitcoin to an Altcoin that wields the privacy features necessary to keep
3278it immune from government tracking or snooping. I believe that the coin Monero is currently the
3279best candidate.
3280
3281Monero Valuation
3282I won’t go into great detail here of why I favor Monero as a ‘Bitcoin Backup’, particularly over other
3283altcoins which also offer privacy features. This is, after all, a treatise on Bitcoin with what I felt to be
3284
3285
3286                                                                                                          57
3287                                 The Power of Money: A Case for Bitcoin
3288
3289
3290a necessary addendum addressing privacy. Suffice it to say that in my view Monero has the most
3291favorable combination of privacy features, adoption and ethos to be the best candidate. If this is
3292insufficient for you, then by all means feel free to apply the methodology I use to any alternative
3293privacy enabled coins. Considering the upside potential, even if you were to split the total valuation
3294between the top ‘contenders’, the ultimate ‘success’ valuation for each would still be hundreds of
3295times (or more) above current prices.
3296
3297Let’s assume that governments cannot help themselves, and despite knowing that it will in many
3298ways be unsuccessful, they still announce a ban on Bitcoin and all Cryptocurrencies. As such we
3299anticipate two things for our valuation:
3300
3301     1) Monero becomes the primary ‘bearer of the torch’ of fixed supply money59
3302
3303This means that we will attribute some portion of global M3 to Monero allocation, similar to what
3304we did with Bitcoin.
3305
3306     2) Governments have some success in keeping Monero’s use from becoming as widespread as
3307        a ‘Bitcoin Success’ scenario.
3308
3309In a ‘crackdown’ scenario, any investment in Monero would likely be outlawed, and despite
3310enforcement of such a ban being difficult if not impossible (due to its innate privacy features), the
3311prospect of prosecution would likely keep some people away from it. As such let’s assume that
3312Monero achieves only a 5% penetration rate in its success scenario (one where Bitcoin is outlawed).
3313
3314If we stick to our 10-year horizon then all that remains to perform our analysis is a probability
3315estimate of a global government ‘crackdown’ on Bitcoin. Let’s assume this scenario at 1%, and now
3316we can do the math.
3317
33185% of an M3 sized at $80 trillion is $4 trillion. This would be distributed over (let’s say) a future
3319Monero coin supply of 20 million60. This means that each coin would be worth $200,000 a coin. At a
3320current price per coin of less than $100, this translates into an investment return (started today) of
3321over 2,000x – or more than 5x greater than even our Bitcoin scenario.
3322
3323If we now probability weight it (at 1%) we have a future expected value per coin of $2,000, and an
3324expected return (that is, probability weighted and present valued) of 35%. Again, this does not
3325represent our return in a success scenario (that would be the 2,000x+ appreciation), merely the
3326implied discount rate which by virtue of the fact that it is higher than the risk-free-rate indicates
3327current prices are undervalued. To find today’s ‘fair value’ we apply the same formula as we did with
3328Bitcoin – discounting our future ‘expected value’ of $2,000 at the 10-year risk-free-rate, or 2.5%. This
3329yields = 20,000/(1.025^10) or $1,562 – nearly 16 times current levels.
3330
3331But there’s more. This analysis ignores the prospect that in a ‘Bitcoin success’ scenario (one in which
3332it has not been banned, outlawed or otherwise stifled) there will still be demand for strictly private
3333money transactions. Whether it’s due to black market transactions, or simply people not wanting
3334their activities to be part of the public record, demand for Monero will persist at some level.
3335
3336
3337
333859
3339   There is some calculated inflation in Monero, but the mechanisms differ drastically enough from the
3340inflation in our current monetary system as to be looked past here.
334160
3342   The calculation for future Monero coins is a bit more complicated than that for Bitcoin. The actual number
3343within ten years will be less than 20 million, but for simplicity we have made this overly conservative
3344assumption.
3345
3346                                                                                                                58
3347                               The Power of Money: A Case for Bitcoin
3348
3349
3350I leave it to the reader to come up with probability and penetration assumptions for this scenario,
3351with the recognition that any probability-weighted present value arrived at in this way would be in
3352addition to the valuation we performed above (as the scenarios are mutually exclusive). In short,
3353there appear to be multiple ways that Monero could perform quite well from an investment
3354perspective. Furthermore, as one of the most resistant altcoins to ‘crackdown’ due to its innate
3355privacy features, is likely to persist in some form regardless of how political and legal environments
3356develop.
3357
3358
3359
3360
3361                                                                                                     59
3362