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The title of this post is intentionally misleading. We frequently discuss the traits that lead to value here in the Lifeboat Blog. But today, I was asked a more nuanced question: “What things will hold their value?”

And there is a ulterior motive in being a columnist for Lifeboat. Analyzing the dynamics of durable value leads to some surprising conclusions about the money supply and what a society chooses to use as money. We’ll get to this at end of this post.

We know that value comes from supply and demand. There are no exceptions. But, we have not addressed the properties that make an asset hold value over the long haul. Let’s consider some examples…

Cars

In an affluent, mobile society, most people desire personal, point-to-point transportation — and so there is clearly a demand for automobiles.

But style & technology change rapidly and automobiles deteriorate with use and weather. After 8 to 10 years, their cost and maintenance rise dramatically, and owners lust for a new model. So cars don’t get our award for assets that hold value.*

Popular Toys

In the 1970s, the Cabbage Patch doll from Calico Industries, and later, Tickle Me Elmo in the 1990s created a buyer frenzy that rivaled a lemonade stand in the desert. Shoppers fought each other to grab a limited supply. Clearly, demand was very high. The one shown below is listed at Ebay this week with a starting bid of $5,000. Other, less popular styles can be found for $4.99.

At first, this demand was driven by clever marketing and crying children in the week before Christmas. Demand was driven by a parent’s love. But at the peak of frenzy, demand shifted to buyers without children who felt certain that they could profit from selling the dolls that they snatched up first.

But the demand was not durable. Fads driven by frenzy don’t hold value for the long haul—especially when a manufacturer can simply turn the spigot back on.

Stocks & Bonds

A share of stock represents ownership in a corporation. A municipal bond represents a lien against a city—or the fees generated by an infrastructure project.

In both cases—especially bonds, which are a limited promise—no one expects value to last forever. It is a time-sensitive bet with the intention of expiration, redemption or exchange. So, these things also fail our criteria for durable value.

Houses & Real Estate

Like cars, homes require ongoing maintenance. But, most people weigh the maintenance cost against the benefit of having shelter, rather than comparing it to their gain or loss in value.

On the other hand, real estate value fluctuates in the long run due to things that are difficult to predict — population density, demographics, and quality-of-life issues related to infrastructure: weather, seismic events, politics, and access to health care and education.

Some real estate rises enormously in value over 50 or 100 years. Yet, we have seen boom-and-bust cycles that wipe out substantial wealth. So, real estate does not cut it in our contest for durable value.

Gold

The allure of gold and other precious metals is that their supply is capped — or limited by slow and predictable growth. The asset is difficult to find. It is acquired only from natural phenomena.

So, if we can also make it fungible, divisible, portable and difficult to counterfeit, then it meets most of Aristotle’s requirements for a functional currency. Theoretically, this can lead to widespread demand.

Gold certainly has exhibited its ability to hold value throughout thousands of years. But it is not so easily tested and divided in the field, and the impression that it has intrinsic value is an illusion. That’s because the fraction of gold acquired by investors dwarfs the amount actually needed for dentistry, electronics and even jewelry. In this modern era, even gold is becoming a house of cards, because its value is built upon speculation and emotion.

Oil (aka “black gold”)

With the rise of the automobile and power plants that burn fossil fuel, oil became a reserve currency of the 19th and 20th centuries. But there are two problems with it holding value over the long haul.

First, unlike gold, oil is a consumable in every market. Therefore it is difficult to think of it as an asset. Also, we now live in a century in which energy and transportation is rapidly switching away from oil, while at the same time, new technology is making it cheap to acquire new oil. This (along with a history of violent political theater) dramatically deteriorates its potential as a store of value in coming years.

Money

The supply-demand dynamics of money is widely misunderstood. More than 2,300 years ago, Aristotle defined the properties of a functional currency.

Earlier, we stated that all value comes from supply and demand. But, it is fair to ask “What creates the demand?” or “What backs the expectation of future demand?” Surprisingly, even if we limit our scope to just one country (USA), the value of government-issued currency has been tied to different things over time:

  • Gold
  • Promise of redemption
  • Legal tender (public must accept it for all debts)
  • Settlement of taxes
  • The “good faith and credit” of workers

Ultimately, demand is influenced by oversupply and by public perception more than government promises or laws. The perception that the US dollar has no cap and that its supply can be inflated whenever a body of transient politicians decides to raise the debt ceiling may eventually cause its value to collapse. Although it has not happened yet, at some point consumers (or those holding our debt), will begin to question if Americans have the capacity and will to produce and export the goods & services necessary to balance their mass consumption of the past half-century.

And so, government-issued Fiat does not pass our smell test for durable value. Sooner or later, all national currencies collapse. On a personal level, the only question that matters is if you will be caught by surprise—with a fraction of wealth tied to your favored currency.

What has the potential to meet all requirements for holding value?

Wouldn’t it be fascinating if we could find an asset that is a product of pure mathematics? A perfect asset would be fair, fungible, immutable, and capped. It could never be inflated or manipulated by politicians. It would decouple governments from monetary policy. It would be politically agnostic.

If correctly designed, it would be capable of absorbing and incorporating improvements developed by any copycat or pretender nipping at its heels. Most important, it would be open source, peer-to-peer, massively distributed, redundant, and completely permissionless.

This perfect asset would derive trust from mathematics and crowd-sourced consensus. It would not require that anyone believe in a government, a bank, a land mass, or the uncertain supply of precious objects. Authenticity could tested easily and its value transmitted instantly. The history of each unit would be completely transparent. With free tools, anyone, anywhere could trace its history of moving from one owner to the next.

Ten years ago, such an asset was unleashed into the wild by a person or team of developers under the pseudonym, Satoshi Nakamoto. It not only meets all of these requirements, it has built-in immunity from competition. It even resolves a technical problem that troubled Aristotle more than two millennia ago.

I won’t name this radical yet natural evolutionary development in this answer—but, I can confidently state that it passes our test for an asset that will hold value over time. Despite a wildly fluctuating exchange rate with Fiat currency, its inherent value has never dropped. Ultimately, you will no longer asses value based on the exchange rate of an anachronistic currency that fails all of the other smell tests. Instead, you will assess value on how many heads of lettuce you can buy or how much that new sailboat costs.

* A classic car avoids the problems associated with use & maintenance—and it can hold value over a long period. But like a Picasso painting, the market for classic cars has a limited audience, especially for the florescent green ’63 Mustang that I found in in my great uncle’s garage. Additionally, it is subject to the whims of popular perception. Styles go in and out of vogue and so we cannot predict how long that car will hold value. (Please call me if you value my uncle’s Mustang at more than $150,000).

Philip Raymond co-chairs CRYPSA, hosts the Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He is a top writer at Quora.

Maria Bustillos is founder of the blockchain supported publication, Popula. I stole the title of this post from her essay at Medium.com (linked below).* I hope that Maria considers it a tribute rather than title-plagiarism. Her article is blocked by a pay wall, so allow me to explain a concept that confounds even a Nobel Prize winning economist. My take on the issue is somewhat different than Ms. Bustillos.

The difficulty understanding or appreciating Bitcoin boils down to a misconception that the dollar is backed by something more tangible, such as gold, guns or the promise of redemption. Not only is this an illusion, but Bitcoin is backed by something far more tangible, intrinsic and durable.

The illusion that “real” value emanates from government coupled with a robust consumer economy has been woven into our DNA for millennia. But, the value we attribute to a Dollar, Euro, or Yuan is a result of conditioning rather than any intrinsic value. That same conditioning has led us to believe that there is something sane and inherent in a nation that controls its money supply and its monetary policy.

Most public works projects—power generation, space ships, or the telephone network—were controlled by government in the past. If not, they were regulated as a licensed monopoly. This creates a choke point, a lack of competition, and a gaping opportunity for inefficiency, mismanagement or graft. It defies a free market economy and it concentrates power in the hands of politicians. But, at one time, it seemed necessary.

You might assume that government controlled these industries because they relate to areas of critical infrastructure and public welfare. That’s part of it, but it’s not the real reason. In each sector, a distributed or free market solution was prevented due to technology limitations or issues of scaling and geography.

Government issued money exists because in the past, we had no mechanism to arrive at a consensus on the value of something that is portable, fungible, secure, anti-forgeable and easily transmitted. Not even Gold fits the bill (pun intended). Prior to 2009, the only thing that met the criteria for money in a modern society was government issued fiat. At least someone, somewhere said that this is money and that this is what we must use to pay our taxes.

Today, there is no more reason for a government to control its money supply than there is for it to control communication networks, space travel or package delivery services. Today, a free and competitive marketplace benefits all of these industries and even government itself. And here’s the kicker: No harm will come to a government that uses a completely trusted, transparent and decentralized currency, rather than firing up a printing press whenever a group of transient politicians spends beyond their means.

The economic order facilitated by the blockchain is not as radical as it seems. Aristotle sought to solve the double-spend problem and lamented the lack of an accounting tool that we can now address via the clever combination of encryption and a communications network that is both instant and ubiquitous.

I am not smarter than your average bear, nor am I clairvoyant. But once in a while, I recognize a truth before the masses—and before its time. It’s time to clearly and succinctly illuminate business, banks, consumers, creditors and government:

1. The value we attribute to the dollar is an illusion

2. Bitcoin is not just fair and cost effective. It is tangible and durable. It is good for consumers and good for governments.

Bitcoin ushers in an era of accountability and more fairness. It does not facilitate crime, nor interfere with a government’s ability to tax, spend or enforce tax collection.

Bitcoin is a cryptocurrency with a firmly capped supply. Will it lead to deflation? Could governments lose control over their own monetary policy? Yes to both questions…

But, these are each good things. Capping the money supply and decoupling a nation from monetary policy not only eliminates inflation—it increases access to capital, retires debt more quickly, reassures creditors, imposes transparency and honesty—And it accelerates economic growth, rather than retarding commerce.

Dispelling three millennia of conditioning can be confusing and unsettling. I hate understanding something before my peers. Let’s please get ahead of the curve on this one. I want to enjoy the benefits of using real money in my lifetime.

Related Reading:

* I wrote the first article more than 7 years ago. It is a simple explanation of a geeky, new economic mechanism. Bitcoin had not yet entered mainstream media nor gained attention of Wall Street investors. But consider the similarity to Maria’s tutorial in the 2nd article. Perhaps Maria and I think alike!

Philip Raymond co-chairs CRYPSA, hosts the New York Bitcoin Event and is keynote speaker at Cryptocurrency Conferences. He advises The Disruption Experience in Singapore, sits on the New Money Systems board of Lifeboat Foundation and is a top Bitcoin writer at Quora. Book a presentation or consulting engagement.

Oh, Cheez…We’re back to this question, again!

As a Bitcoin columnist, I get this question a lot. Today, an answer was requested at Quora.com, where I am the lead contributor on cryptocurrencies:

“Clearly, some people value Bitcoin. But How can
this be? There is nothing there to give it value!”

Many individuals, like the one who asked this question, suspect that Bitcoin was pulled out of thin air—and that it is not backed by gold, a government, or an authoritative redemption guaranty. After all, it is just open source code. What stops me from creating an ElleryCoin using the same code?!

Let’s start with the short answer:

  • Indeed, it was pulled out thin air
  • It isn’t backed by an asset, government or promise
  • You could easily clone Bitcoin (the entire mining ecosystem) and distribute it yourself. It would be exactly like Bitcoin. Yet, Bitcoin is clearly valued by everyone, and your new coin is unlikely to generate interest or adoption.

A More Complete Answer: What is value?

Bitcoin has more intrinsic value than a government printed paper bill. The value arises from a combiation of fundamental properties:

  • It has a capped supply
  • It is widely recognized, liquid, and resistant to legislation
  • It has attained the robust supply-demand of a growing, 2-sided network.
  • It is open and transparent. This elevates user trust
  • Unlike cash and credit, Bitcoin requires no back-end settlement. That’s because it is not a payment instrument. Rather it is money itself.
  • Finally, it’s value is likely to be durable, because it is not printed by a country that has racked up debt. In fact, it can never be inflated.

Downside and Risks

But wait! What about the long transaction delay and high cost? There are sharp disagreements anong miners, users and developers concerning block size, transaction malleability, and replay issues. Aren’t these a deal killers? And what about wild volatility in the exchange rate? Doesn’t this retard adoption as a functional currency?

These are transient issues associated with a new technology. Although Bitcoin is weathering growth pains that arise from a new and distributed governance technology (democracy can be messy!), all of these issues have sound solutions. We have already witnessed and tested the solyutions with various forked coins. Think of them as beta tests. Even if current problems delay the day when you can spend bitcoin at every retail establishment—it is already sucking liquidity from national currencies and becoming the world’s de facto reserve currency.

Many individuals find all of this hard to accept. That is because we have been conditioned to think that ‘value’ arises from assets with ‘intrinsic’ value, the promise of redemption, or by edict. This is not true. In all things, (including gold, a Picasso painting, or your labor) value arises from simple supply and demand.

Some individuals claim that all other factors are secondary. But, even this statement is false. All other factors are irrelevant. They may be related, but they are not the source of value.

I recognize that this answer may seem smug or definitive. So, allow me to suggest related questions with answers that are a bit more interesting, because they are subtle. Unlike the question of value, these two questions are open to analysis and opinion: (1) “Will people continue to value bitcoin in the future?” — And (2) “When will Bitcoin stop swinging wildly in value?” (measured by its exchange rate with other currencies).

This is fun! Let’s explore…

Philip Raymond co-chairs CRYPSA, publishes A Wild Duck and hosts the New York Bitcoin Event. Last month, he kicked off the Cryptocurrency Expo in Dubai. Click Here to inquire about a live presentation or consulting engagement.

I use to hate it when my dad insisted that I read something longer than 2 paragraphs. (Something related to his interests, but not to my school work, his career or our family). That’s because it shouldn’t require a 30 minute read to determine if it piques my interest, as it does his.

But I am asking Lifeboat readers to invest 37 minutes in the video linked below. Even if you give it just 5 minutes, it will provide sufficient motive for you to stick around until the end. [continue below video]

I want you view it because we are on the threshold of something bigger than many people realize. Bitcoin and the blockchain is not just a new currency or a way of distributing books among network users. We are becoming involved with a radical experiment in applied game theory that is shockingly simple, but nascent. Opportunities abound, and the individuals who recognize those opportunities or learn to exploit them will benefit themselves as they benefit the global community. Because it is so radical (and because it clashes with deeply ingrained beliefs about authority, control mechanisms, democracy and money), it seems complex and risky—but it’s really not.

I am a Bitcoin educator and columnist. I have taught college seminars in Bitcoin and I will be keynote speaker at the 2017 Digital Currency Summit in Johannesburg. I design online courses for the most popular cryptocurrency self-learning groups. But Antonopolous runs circles around me. He is a Bitcoin evangelist extraordinaire. All of his presentations are superb, but this one provides context. It conveys an understanding that Bitcoin novices and professionals equally appreciate. It answers questions the viewer hadn’t asked, but would have.

There are hundreds of videos and PowerPoint presentations that explain how Bitcoin works. But they rarely provide context. Few of them convey why it is such an important development and why it has overtaken biotech & pharmaceuticals as the focus of VCs . Few can explain why an ethereal Bitcoin (a unit that you cannot hold) has just surpassed the value of a unit of gold. And few people realize that volatility has been abating as the increase in value and adoption is surging.

As you watch Antonopolous, you are certain to think about things that you did not previously know—or at least, that you did not reflect upon. My purpose in asking you to view it, is not to sell you on Bitcoin or the blockchain, but to provide the context that may help you to code, consult, write articles, teach, begin trading, start saving, and more.

Philip Raymond co-chairs Crypsa & Bitcoin Event, columnist & board member at Lifeboat, editor
at WildDuck and will deliver the keynote address at Digital Currency Summit in Johannesburg.

I was asked this at Quora.com, where I answer questions under the pen name, ‘Ellery’. But the query deserves a companion question, and so I approached the reply by answering two questions.

You might have asked “Why was Bitcoin designed to have a cap?” But, instead, you asked “Why is the cap set at 21 million bitcoins”. Let’s explore both questions starting with the choice of a circulation cap…

Why set the cap at 21 million BTC?

The choice of a cap number is arbitrary and in fact, it could be 1 or it could be 1 hundred trillion. It makes no difference at all and it has no effect on the economy—even if Bitcoin were to be adopted as a currency all over the world. If it were set to 1 BTC, we would simply discuss nano-BTC instead of 1 BTC for amounts of about $650.

In fact, we already do this today. For many purposes, people are concerned with very small payments. And to best discuss these payments, we have the Satoshi. There are 100,000 Satoshi to each bitcoin (BTC).

What is important, is that the total number of bitcoin (regardless of how many units there are) can be divided into very tiny fractions. That way, the total worldwide supply can be divided into smaller and smaller slivers as market adoption gains traction. Everyone needs to earn, save, spend or pay with a piece of the pie. All users need to know is what fraction of the pie do I control? and not how many ounces, pounds, Kg, or tons is the pie. That is just a number.

Incidentally, the same could be said of gold (it can be shaved very thin), but gold is not quite like computer bits. It has industrial and cosmetic value, and this intrinsic demand for gold (beyond it’s role as a pure monetary instrument) has an effect on supply and demand along with the influence of investment, circulation, savings and reserve.

Why is there a cap at all?

At the beginning of this answer, I suggested another question: Why is Bitcoin capped at all? After all, the monetary supply in every country grows. Even gold production is likely to continue for centuries to come. Why not Bitcoin?

Satoshi designed Bitcoin to eventually become a deflationary currency. I believe that he/she recognized inflation is an insipid tax that constitutes an involuntary redistribution of earned wealth. With a firm cap on the total number of units that exist, governments can still tax, spend and even enforce tax collection. They can go about business building bridges, waging war and providing assistance to the needy. But without a printing press in the hands of transient politicians, they can only spend money with the consent of their constituents and residents.

Of course, they could borrow money by issuing bonds. But with a capped currency, each creditor would earnestly believe in the will and ability of the country to repay its debts.

In effect, monetary policy is restricted to the business of the governed, but the money itself is not coined by a domestic treasury. It is the province of something that is far more certain than a human institution. It arises from pure math. It is open and transparent. In effect, everyone is an auditor. That’s because the bookkeeping is crowd sourced.

For prescient legislators and national treasurers, Bitcoin presents far more of an opportunity than a threat. It is good for both government, business and consumers, because it forces everyone to be open and honest. Ultimately, it builds trust in government, because no one can cook the books, water down wealth, or print their way out of debt.

What about recession. Isn’t it a result of deflation?

Deflation doesn’t lead to recession. Rather, it sometimes accompanies a recession. Recession is caused by an uncertain job market, war, a massive supply chain interruption or political upheaval. In one way or another, it boils down to a lack of confidence sparked by one of the economy’s core foundations: consumers, investors, business or creditors.

Bitcoin as currency removes a major impediment to confidence. By creating a system that cannot be rigged, it fosters trust in government along with an open and transparent treasury.

Philip Raymond co-chairs CRYPSA and was MC at The Bitcoin Event in New York. He writes for Quora, LinkedIN, Wild Duck and Lifeboat Foundation, where he sits on the New Money Systems Board.

What is Bitcoin?

Bitcoin-05-t-sSure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched a ride on an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.

But what is Bitcoin, really? To what class of instruments does it belong?

• Ardent detractors see a sham: A pyramid scheme with no durable value; a house of cards waiting to tumble. This is the position of J.D, an IRS auditor who consults to The Cryptocurrency Standards Association. As devil’s advocate, he keeps us grounded.

• This week, MasterCard was only slightly less dour. They claim that the distributed nature of Bitcoin will ultimately cause it to unravel. They want us to believe in the necessity of a trusted authority as broker/guarantor/arbiter. I get it! After all, the block chain is a serious threat to the legacy model for moving money

• Many people recognize that it can be a useful transaction medium—similar to a prepaid gift card, but with a few added kicks: Decentralized, low cost and private.

• Or is it an equity asset, traded by a community of speculative investors, and subject to bubble psychology? If so, do the wild swings in its exchange rate diminish its potential to be used as a payment mechanism?

• Full-fledged ehthusiasts say that Bitcoin has the potential to be a full-fledged currency with a “real value” that floats based on supply and demand. Can something that lacks intrinsic value or the backing of a bank or government replace national currency?

Regardless of your opinion about Bitcoin, it does one thing that few pundits dispute: Sure, the exchange value fluctuates—but for those who don’t plan to retain holdings as an asset, it reduces transaction costs to —nearly zero. This characteristic, alone, is a dramatic breakthrough.

Peering Into the Future?

Removing friction is certainly what it is all about. As a transaction medium, Bitcoin achieves this, but so does any debit instrument, or any account in which a buyer has retained house “credit”.

Bitcoin_pullback-sCurrently, there is a high bar to get money exchanged into and out of Bitcoin. It’s a mess: costly, time consuming and a big hassle. Seriously! Have you tried using an exchange? Even the most trusted one (Coinbase of San Francisco) makes it incredibly difficult to get money in and out of BTC, prior to establishing your account, identity and banking history. Fortunately, this situation is gradually improving.

Where Bitcoin really shines (or more accurately, when it will shine), occurs at the time when more vendors choose to leave revenues in BTC, pending their own purchases from suppliers, shareholder payouts, or simply as retained savings.

When this happens, all sorts of good things will follow…

• A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.

• Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.

• Sellers begin pricing merchandise in Bitcoin rather than national currencies—because they are less anxious to exchange out of BTC immediately after each sale.

When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenon will follow. I call it the tipping point…

• If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.

• If goods and services are priced in BTC, then the public will begin to perceive exchange rate volatility as a changing dollar rather than a changing bitcoin.*

• If buyers also begin to save their BTC (i.e. they do not worry about immediately moving it back to national currency), it means that Bitcoin is being perceived as a stored value—not just an exchange chit. That may seem to be a subtle footnote, but the ramifications are earth shaking. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified and currency that we can all trust.

People, everywhere, will one day place their trust in a far more robust and trustworthy mechanism than paper promissory notes printed by regional governments. A brilliantly crafted mechanism that is fully distributed, p2p, transaction verified (yet private), has a capped supply and is secure.

What Then?

O.K. So we believe that Bitcoin is the future of money and not just a replacement for credit cards. But what does this really mean? Can the series of cause-and-effect be extrapolated beyond widespread user adoption? Absolutely! …

Adoption of Bitcoin as a stored value (that means as a currency) leads to the gradual realization among governments that Bitcoin is not a threat to sovereignty nor even to tax policy. Instead it presents unbounded opportunity: The opportunity to stabilize markets, eliminate inflation, reduce costs and restore public trust. In short, Bitcoin will ultimately level the playing field, revive entire economies, transform the role of government, and save consumers and businesses billions of dollars each year.

Did I mention that Bitcoin is the future of commerce and a very possible successor to legacy currencies? Aristotle must be smiling.

* We tend to think of the dollar as more ‘real’ than Bitcoin. It is not! It has only one advantage. At the end of the day, taxpayers must settle their debts in the currency demanded of their nation. But as Bitcoin adoption gains traction—even if only as a transmitting medium—fiat currencies will gradually become marginalized as play money. That’s because they are susceptible to inflation, politics and manipulation. Bitcoin is held to a higher standard. It is governed by pure math. Despite high-profile news of the day, Bitcoin will even become more resistant to loss and theft than dollars, once tools and practices become well established.

Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation
Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation

Philip Raymond is Co-Chair of The Cryptocurrency Standards Association. He advises banks on new
age currency. Raymond was master of ceremonies and 1st speaker at The Bitcoin Event in New York.

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