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Bitcoin is more stable than the U.S. Dollar

DATE POSTED:January 11, 2019
This isn’t about Economics — it’s about Emotionssource: imgur.com

The finance world is a bit alien to you? I feel you.

Growing up in rural Germany, I spent most of my childhood in a bubble, fairly uninterested in any topics other than anime, Linkin Park, and the Lord of the Rings. I worked part-time jobs so I could eat bread from my favourite bakery every day, and the typical German way, I would complain whenever they raised their prices a couple cents, but then I’d shrug it off and pay anyway.

I successfully missed a record number of economics classes during my high school years. I was a headline-skimmer and content-skipper of finance news. “I don’t want to become a banker, so this stuff is not for me,” I thought, and looking at my surroundings, be it teens or adults, I saw similar opinions, so I was convinced that I was in the right. I didn’t care, because such things didn’t affect me.

It’s difficult to “make yourself interested” in something you can’t personally relate to. A mechanism of self-protection — what emotional wrecks we would be if every incident we heard of got to our psyche! But this also puts us at danger of becoming blind to the things that are happening around us.

I still know more about the Lord of the Rings than about economics, so this article is not a deep-dive into the world of finance and business. Much rather, it’s a word of caution, from a privileged small-town kid to the privileged small-town kids out there. There’s an elephant in the room, and it doesn’t take the eyes of an economist to notice.

We are privileged — not because we have bank accounts to withdraw money from whenever we like and spend it on our food and our bills. We are privileged because we are witnessing the failure of centralised money, and it didn’t hit us first. We have the privilege of time to react. And we’re taking it for granted.

Small-Town Kids don’t ‘need’ Bitcoin

As of today, we are fine regarding Bitcoin as “play money”, and we are fine even if we don’t know of its existence yet. It’s a fun experiment, not an actual contender.

You can be sure that buying a pizza for 10 dollars today will not make you immortal for all the wrong reasons in the near future, and that those 10 dollars will probably buy you the same amount of pizza tomorrow, or next week. If you buy that pizza using Bitcoin, chances are that in a matter of hours, the amount of pizza that you could have bought with your Bitcoin doubles or halves. Why would you take that risk?

As we go about our day, we want our money to be stable. We want to rest assured that what we have under our pillows and in our bank accounts is going to reliably sustain our life standards. So looking at the cryptocurrency market, it seems clear that this feature of stability is missing. But what about the pieces of paper and coins in our pockets?

In fact, they’re as stable as us small-town kids at the height of puberty.

Gold, the failed First Love

The on-off relationship of government-issued currencies and gold reaches back thousands of years. Its chemical solidity and scarcity made gold a near-perfect commodity that is superior to other metals and, most of all, superior to human judgement. It prompted the introduction of the Gold Standard, a measure to provide stability in currency exchanges by fixing the value of global currencies to gold.

“We have gold because we cannot trust governments” — Herbert Hoover, 31st President of the United States, 1933

Ironically, the inconveniences caused by the limited supply of gold would eventually lead governments to suspend the Gold Standard and enable them to freely print money themselves, shifting the trust from gold, a measurable, emotionless commodity, to governments and central banks. Life gets easier if you can print money when you need it.

The attempt to remove the power of secretly manipulating monetary supply from the hands of centralised institutions failed, at the hands of these very centralised institutions.

Who do you trust?

I was brought up in small-town Germany where you have banks and ATMs a bicycle ride away from home and online and mobile banking at hand quite literally, whenever you need them. Trusting your bank is as normal as accepting paper sheets in return for products or services and expecting that you can pass those paper sheets on to any other merchant. The last time I heard somebody ask, “what is money?” was when my teacher explained a working task in politics class to a bunch of 15-year-olds that didn’t care.

Our money works, so it has value to us. We are conditioned not to think further than that. We live in a bubble, one that is so well-formed and comfortable that we struggle to get up and peek at what’s behind that shiny facade, even if the flaws of the system pop up on our screens in block letters. We are the exception much rather than the rule.

source: bbc.com

Only one of several examples is India’s “demonetisation” which in 2016 saw the country’s Prime Minister give four hours’ notice that all 500 and 1,000 rupee bank notes would be made essentially worthless.

Four hours. Then your cash won’t be accepted anymore. It won’t have value anymore. Because your government says so, and they can say so.

Back in small-town Germany, in our bubbles, we would skim through such news on our smartphones and half-heartedly comment, “wow, crazy what the world has come to,” or think, “there are some really bad people out there,” or wonder, “who in the world would do such a thing?”

Humans. Humans would.

What it comes down to, ultimately, is the fact that we are flawed in that we have emotions, feel greed, and experience opportunism. The reason why we need a middleman when we send money is that no matter how friendly the person on the other end seems, we know we can’t trust them. The reason why we make contracts and put them down on paper is that we know we can’t trust each other. Such is the nature of humanity.

We know that humans can’t be trusted, yet our entire financial infrastructure builds on trust in the judgement of a group of humans with the power to decide over the fate of billions of other people.

The reason why we opt out of fiat and into Bitcoin is that humans can’t be trusted. This realisation spreads faster to some places than to others. But once your trust is shaken, you will relate. Why wait until the damage is done?

For the first time in history, Bitcoin successfully eliminated from the financial world the largest danger to any ecosystem: human emotion.

source: cointelegraph.comBitcoin is not unstable

— its price is. And nothing else is to be expected today. One popular argument is that the cryptocurrency market capitalisation (~120 billion USD) makes up just a fragment of that of the U.S. Dollar alone (~1.5 trillion USD in 2017), and however hackneyed it might sound to you by now, it’s still true and accounts for the very largest part of Bitcoin’s price fluctuation. A great analogy for this can be found on Quora:

source: quora.com

For Bitcoin to become an ocean, it takes time. Such a process goes hand in hand with the improvement of infrastructures and applications, and any high expectations in sudden adoption will be disappointed — at the same time, development continues quietly and steadily.

Fiat is emotional

— if under your control, it will give in to you. It will be what you want it to be, and it will make exceptions to your benefit. And that will work — for a while. Until it becomes apparent that Fiat is manipulable, unreliable, unstable. Until it loses the confidence of everyone around you, and with that its value.

Fiat is convenient to governments in that it has a back door for emergencies (or other needs). Need to fund a war? Got some debts to pay? Just print money. But what if that option is taken from you, and you commit to a currency that you cannot print? What if there is no loophole to manipulate the supply? Then, no matter how susceptive you are to giving in to the “easy way out” of printing money, you won’t be able to. You will have to find other solutions. We don’t know what these solutions could be, for the simple reason that up until now, there has always been a loophole: change monetary policies and print more money. But you can’t print more Bitcoin.

We live in a bubble, comfortable and seemingly secure, we use Euros or Dollars and deem ourselves safe. But our bubble has an expiration date. That might be in a few years, or in a few decades, or in four hours.

Bitcoin is unemotional

— you can’t argue with Bitcoin. Bitcoin will have its way, and if you don’t like that, you can leave, but you won’t just change its personality. At the same time, you know that you can rely on Bitcoin to do what it says, and to always speak the truth.

Bitcoin is a protocol. You can’t change it because you feel like it, or because you think you have a valid argument to knock over the rules. Technology has no emotions, and that might seem merciless, but it means stability, it means predictability, and it means control — not in the hands of any government, but in the hands of the network.

Bitcoin has never tried to “replace” fiat. It has always been an option, voluntary for us to choose or ignore. We can opt in or opt out, whenever we like. It will be up to the free market to decide how far Bitcoin can go. Meanwhile, technologies and infrastructures will improve; applications and use cases will be tested; cryptocurrency payment solutions will spread. Step by step, our options will increase, and we will make decisions to drive the direction of development. It’s not a black-or-white, yes-or-no choice. We will not renounce fiat tomorrow. We will make a small decision every time we make a purchase with Bitcoin, every time we receive our salary in Bitcoin, every time we shift parts of our savings to Bitcoin. We will choose a currency that is borderless and free and unemotional, over a currency whose fate is entirely in the hands of the least stable of all forms of existence — human beings.

More stuff to read:
Why (and how) we should spend our Bitcoin (coming soon)

Bitcoin is more stable than the U.S. Dollar was originally published in Decentralize Today on Medium, where people are continuing the conversation by highlighting and responding to this story.