Tag Archives: fiat money

Information Economy 2.0

Bitcoin is a Trillion $ Economy

We often hear that we live in an Information Economy. We have an information-based economy, but we don’t have a pure form of “money as information”. Instead we have a hybrid of digital money and paper money with encoded information such as denomination and serial numbers and engraving details.

Money (Money 2.0, ‘paper’ fiat money) today is mostly information, but the modern monetary system was designed long before the Information Economy. Even so, money is mostly held in digital form, on the ledgers of banks, and as monetary reserves at central banks. Physical currency in circulation is a small fraction of the money supply. So today it is a hybrid. One can argue it is not fully suited to our rapidly evolving information economy.

Steven Mnuchin, Louise Linton, Leonard Olijar

Steven Mnuchin, Treasury Secretary, and Wife Posing as Bond Villains, while Enjoying Dollar Bills at the Bureau of Engraving, While Dreaming of Tax Cuts for Multimillionaires

Bitcoin and cryptocurrencies collectively are Money 3.0, a form of money that is entirely digital, entirely information. Even if you have a physical bitcoin wallet or paper wallet, the money does not reside in the wallet, only the keys! The keys release bitcoin money held on the blockchain.

Trying to separate the blockchain from bitcoin or cryptocurrency is like trying to separate the economy from information in the information economy. The blockchain holds the ledger information, the cryptocurrency powers the economy. The term ‘blockchain’ does not appear even once in Satoshi Nakamoto’s seminal paper for bitcoin and cryptocurrency.  See this OrionX.net podcast discussing Nakamoto’s vision and the Nakamoto consensus algorithm: https://youtu.be/ZLS5P7SYcyI

Today, market participants mostly look at the market cap of bitcoin and other cryptocurrencies, as if they were some sort of equity shares. But actually, they are currencies, or perhaps digital gold, and what is somewhat strangely called ‘market cap’ is actually the money supply for that currency. It is simply the price of bitcoin, times the aggregate number of bitcoins in circulation. Here, in circulation means securely committed to the blockchain through a cryptographic hashing algorithm.

The size of the economy for bitcoin is related not only to the money supply, but also how rapidly that turns over. In macroeconomics this is called monetary velocity. In fact GDP = M2*V where the GDP is equal to the M2 money supply and V is the velocity of that money. It reflects how fast money moves through the system per year.

In the US the GDP is about $19.5 Trillion, the M2 money supply is about $13.7 Trillion and the velocity is about V = 1.42. That is, on average, the money supply turns over 1.42 times per year. In fact the Federal Reserve has been worried that the velocity is too low. It has been dropping steadily, which is a symptom of stagnation.


Velocity of M2 Money: Federal Reserve of St. Louis

For bitcoin the velocity is much higher. It turns over about 9 times a year, V = 9. Today the money supply or market cap for bitcoin is about $121 billion. With a velocity of 9, that translates to a bitcoin economy that is over $1 trillion. It amounts to around 5% of US GDP and more than the GDP of the United Kingdom. Bitcoin is not usually described in such terms, but this is a measure of the vibrancy of the economy for the cryptocurrency.

Many cryptocurrencies have even higher velocities. Bitcoin Cash, which has only been in existence a few months, has a velocity of 26 and a total economy of over $500 billion, similar to the GDP of Sweden. The world economy of cryptocurrencies exceeds $2 trillion. This is more than the GDP of Italy.

Bitcoin and other cryptocurrencies are enabling the Information Economy 2.0, where whole new forms of efficient exchange of value can be implemented with fewer or even no middlemen and at lower cost.

Cryptocurrency a Bridge to the Future

Bitcoin, and cryptocurrencies more generally, can be a bridge to a better monetary future for the globe. In almost every nation today, fiat currency managed by a central bank is the norm. This is money that is inherently inflationary by design. Since central banks are controlled by national governments, and governments routinely run substantial deficits, the banks promote inflation in order to benefit their governments.

In our current low growth environment, the Federal Reserve has grown the money supply (M2 money stock) 4.9% during the past year when inflation is running at 2% or less. They are operating on an equation of around 2% inflation plus 2% to 3% GDP real growth for about 5% monetary growth.

Bitcoin has a very controlled and low absolute inflation, much less than 1%. There are currently 16.6 million bitcoins available, and there will never be more than 21 million, and that does not occur until over 100 years from now. In practice, Bitcoin is currently deflationary since the economy around Bitcoin is currently increasing very rapidly, at triple digit rates. It has been gaining value against fiat currencies rapidly, albeit with very high volatility.

Bitcoin meets the attributes of currency, see Money 3.0 article. It is not debt-based, as are all currently circulating fiat moneys, paper and digital money backed by nothing but debt (Money 2.0).

Akashi Kaikyo bridge is the world’s longest suspension bridge. GFDL license.

The entire financial system was at risk of collapse in 2008 due to accumulated debts and risky and fraudulent derivatives built on top of those debts. Trillions of dollars of wealth were destroyed, with Americans losing 40% of their net worth during a 3 year period.

In addition, the system is well-designed for the money center banking elites to pull more and more wealth into their own hands, through financial techniques that create no real wealth. Those who get to create the money lend it out and accrue the highest benefits.

A more stable system is required, and Bitcoin could play an important role, as an asset-based, not debt-based, currency. Dollars and Euros come into creation as new loans are issued by commercial banks. Central banks manage the reserve and equity requirements of those banks, but a large amount of leverage is inherent in the fractional reserve system.

Bitcoin comes into creation as a result of the mining process, that occurs as new transactions are forged into the blockchain. Bitcoin creation is a direct result of the operation of the economy around the cryptocurrency. Bitcoins are ‘minted’, not ‘printed’. Like fiat currency they have value due to scarcity and utility, and dependent on the growth of their economy.

Bitcoin and other cryptocurrencies can be the basis for more honest money, as well as for decreased transaction costs, and higher efficiency. Banking will change forever. Like fiat currency, bitcoin can be borrowed and it can be lent.

Those who are involved in Bitcoin today, a “peer-to-peer cash” are pioneering a future that could be a more stable, more honest monetary system. Today Bitcoin is young, has plenty of growing pains, and volatility, but it is now 8 years old and maturing rapidly.