How Sh!tcoins Could Save Capitalism

[This post is part 2 of our previous lesson. Read part 1 here.]

In case you are unwilling to read the previous post, here is the Cliff’s Notes version:

Capitalism relies on a system where saving money is not the best play. Bitcoin, as the greatest savings vehicle ever invented, could thus destroy capitalism if it is adopted as money, for why would anyone trade their money for investments if that money will reliably outperform all other assets? Adding AI to this mix only makes capitalism die quicker.

With that out of the way, let’s examine what may be the only way to thread this needle—to build a future where both Bitcoin and capitalism can thrive indefinitely.

What Makes Sh!tcoins so Sh!tty

The creator of Bitcoin—an anonymous technologist operating under the alias “Satoshi Nakamoto”—made clear that Bitcoin was intended to be permissionless money.

What did he mean by permissionless?

He meant that the issuance, transmission, and exchange of this money would operate outside the authority of any government, bank, or corporation. There are no barriers to entry. Transactions cannot be blocked or declined. And even if all the world’s most powerful banksters tried to stop this, they would be unable to.

This is the first thing that sets Bitcoin apart from sh!tcoins: permissionlessness.

The second thing that separates these two is ossification. The Bitcoin protocol resists change. In rare cases, the software can be updated or the rules changed—but to do so, the changes must receive overwhelming support from the Bitcoin community. In theory, only 51% of the network needs to agree to a change before it is adopted, but in practice, no software update can be implemented without near-unanimity. Any attempt to “fork” the Bitcoin code with less than 90% of the community’s support results in a drawn-out war where people can freely switch sides over the course of months. And when the dust settles, the winner of the fork is usually whichever branch implements the least amount of change.

(I should point out this is not hypothetical. Such wars have already occurred, and the pattern has been established.)

The third difference between Bitcoin and sh!tcoins is that Bitcoin is not designed to enrich its creators. Yes, people have gotten rich from buying and saving Bitcoin. But never in Bitcoin’s history has a rug-pull occurred to benefit the early adopters/investors at the expense of everyone else.

Satoshi Nakamoto could have created the Bitcoin ledger in such a way that a billion bitcoins already existed in his personal account. Instead, the Bitcoin ledger starts with every account having the same quantity: zero.

And while Satoshi might have acquired as many as one million bitcoins during his tenure, he earned them the same way everyone else has to: by mining, trading, and donations. Furthermore, the coins he did have are likely lost forever. Those coins have never moved in fifteen years, and they likely won’t ever move. Because Satoshi is, in all likelihood, dead.

But that story is tangential. The point is that Bitcoin is the only permissionless, ossified, and non-ulterior cryptocurrency in existence. All the other cryptocurrencies—often called sh!tcoins—violate one or more of these principles.

Wait. Do You Mean all Other Cryptocurrencies Are Scams?

Yes. And it’s easy to prove. All you have to do is look at how those sh!tcoins conduct themselves.

Some—like Ethereum—are permissioned. The company which controls Ethereum can (and has) forbidden or even reversed transactions which it deemed unsavory. If a government or bank commanded them to do this again, the Ethereum team would have little choice but to comply.

Others—like Ethereum—are non-ossified. Massive changes to the Ethereum protocol have been implemented due to pressure from outside groups. The Ethereum protocol has changed its issuance schedule to suit the whims of third parties and doesn’t even have the same central algorithm it used during its heyday.

And then there are a few cryptocurrencies—Ethereum, for example—which were designed to enrich the creator and early investors. Ethereum began with what is called a “pre-mine”, in which the Ethereum ledger started with certain privileged accounts which were already full to bursting. Everyone else started with nothing.

And while not every sh!tcoin has demonstrated the same level of corruption as Ethereum, they all violate at least one of the three principles. Either they have the ability to block transactions (which can be hijacked by government or other authorities), or their way of operating can be corrupted by arbitrary changes, or they have been set up in a way that enriches the few at the expense of the many with winners and losers pre-picked.

Yes, sh!tcoins are called sh!tcoins for a reason. Now, let’s talk about how they might save capitalism, the human race, and the world.

The Benefits of a Two-Currency System

Some people believe that the United States lost its way when it abandoned the gold standard.

And, in truth, the death of the dollar can be traced to the moment it lost the hard assets which kept it tethered to reality.

How much is a dollar worth? Well, no one knows exactly. There is no way to link dollars to any unit of work or energy. The only reason dollars are worth anything is because people agree that they are.

And by “agree”, I mean they’re forced to comply. The US government doesn’t have all those bomber jets and aircraft carriers for public enjoyment. Those weapons exist to enforce the dollar hegemony put in place by the Bretton-Woods act. And so long as the nations of the world are forced to use the dollar as their reserve currency, the United States can steal the wealth of those nations by inflating the dollar.

So yes, you could argue that the loss of the gold standard set the dollar’s current death spiral in stone. But I would argue that the problem goes back even further. For, once upon a time, the United States existed before the gold standard had even begun.

What system did we use in this magical time before the US embraced the gold standard of gold standards? What money propelled us forward during our time of most accelerated growth. Was it gold?

Kind of.

In the era before gold was everything, America was a two-currency system, with two different kinds of dollars: one gold, the other silver.

And while the gold dollar and the silver dollar theoretically had the same value, they were used for different things. Gold served as a medium of exchange between banks and corporations. It functioned as the unit of account for treasuries.

But as for everyday, walking around, spending money—that was silver.

Because, at the end of the day, money is two different things, and it doesn’t make sense to treat the money you use to buy milk the same as the money one bank uses to settle a pallet of transactions with another bank. It’s possible for each of these things to operate under a separate and different monetary policy. The Big Money can be treated one way. The little money can be treated another.

The Bitcoin Future Needs a Counterbalance

As a reserve currency and a savings vehicle, Bitcoin cannot be beat. And no one else should even try.

The trouble only begins when people use Bitcoin to pay for common expenditures. The first recorded Bitcoin transaction was an exchange of 10000 bitcoins for two large pizzas. That amounts to millions of dollars in today’s money. For two measly pizzas! And while many proponents of Bitcoin push for it to be used to buy pizza, coffee, or any other common purchase, that is like using a bazooka to kill a mouse.

How much pizza would you ever buy, if you knew that purchase would one day amount to a multi-million-dollar loss?

You wouldn’t. You would instead choose to never eat or drink again. And that’s why the currency of savings and the currency of spending must be two separate things. Trying to force one kind of money to pull both jobs will cause it to die of exhaustion as it has to constantly switch gears from one to the other.

For this reason, sh!tcoins—for all their faults—will be necessary to keep the Bitcoin future from destroying itself.

Which Currency Will Become Silver to Bitcoin’s Gold?

The day-to-day spending currency of the Bitcoin future will need to be one that doesn’t share Bitcoin’s value proposition. Meaning that this currency will have to be one that does not become more valuable with time, the way Bitcoin is designed to do.

As such, the future’s digital silver will need a modest amount of inflation. Ideally, its inflation rate would be algorithmically locked against the deflation that occurs due to natural efficiency growth of the economy—most economists estimate that a natural deflation rate of 2%, year upon year, exists in our industrialized world. This is the reason the dollar’s target inflation rate has always been 2%. In theory, this will cancel out deflation and prevent prices from changing.

However, the dollar has never hit this target within my lifetime. Oh, government spin doctors will fudge the numbers to make it look as if the dollar is only inflating at 2% per year, but that has always been a lie.

But if a currency can hit that 2% target, that would make it an excellent candidate for the Bitcoin future’s digital silver. So which currency will fill that role.

Why Can’t We Just Use the Dollar?

BAH HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA HA!

Oh wait. You’re serious.

Alright. Allow me to clarify something: even though the Bitcoin future will require an alternative currency to coexist with Bitcoin, that alternative currency cannot be issued by any government. Governments can’t be trusted to create a small amount of inflation. Their incentive to print money into hyperinflation is simply too much of a temptation. And when Bitcoin reaches mass adoption, people will see that.

Besides, the failure of the dollar is written in stone. There is no saving it. If there was, then Bitcoin would never have been invented. Think of something else

Okay, Then How about Ethereum?

Still a bit too centralized for my tastes. I estimate that Ethereum will implode sooner rather than later. It would be far too easy for the US government to seize control of it, and then it becomes just another digital dollar.

Besides, the scammy nature of its founding and governance continues to plague it. It may eke out a short future as digital silver, only to be replaced once a better alternative presents itself.

How about Litecoin?

An intriguing possibility. Litecoin has been called digital silver in the past. And has served as an experimental frontrunner to the Bitcoin protocol, taking on controversial algorithm adjustments as a kind of testnet for Bitcoin.

Litecoin would be a better candidate than 99% of sh!tcoins for this job. But a better one still exists.

The Optimal Solution: Bitcoin Certificates/IOUs

There can only ever be 21 million real bitcoins. That’s not going to change.

However, Bitcoin is also a type of money. And no matter how rare a type of money is, one can always trade it on credit. Meaning that one can make purchases with the promise of money, rather than with the real thing. Even when gold was the coin of the realm, people didn’t usually trade with real coins or ingots of the stuff. Instead, they exchanged banknotes representing gold to make these trades.

And the same thing can be done with Bitcoin. Only 21 million real bitcoins will ever circulate, but one could potentially have billions or trillions of bitcoins held in credit. This alternative currency functions as a kind of Bitcoin certificate. One full unit of this currency can theoretically be traded for one full Bitcoin at any given time. And so long as every creditor does not try to cash in at the same time, the system carries on without problems.

But Wait! That’s Just Fractional Reserve Banking

Yes. And fractional reserve banking is one of the problems that Bitcoin was invented to fix.

But here’s the thing: Bitcoin still fixes it. The fractional reserves of this scenario are not real Bitcoins. They are promised Bitcoins. If there comes a time when everyone tries to cash out all their Bitcoin IOUs at once, that will only crash the Bitcoin IOUs. The value of real bitcoins would skyrocket in such a scenario, because the debtors of these IOUs would desperately seek out the means of paying what they owe. The money people use for savings would be safe. Only the money they use for spending would be harmed.

And because real bitcoins cannot be fractionally reserved, that incentivizes the issuers of these Bitcoin IOUs to be conservative in how much they inflate the value of the IOU. If the value of the IOU ever strays too far from the price of a real bitcoin, collapse is inevitable, with no possibility of a bailout (since governments can’t print more real bitcoins to relieve the strain placed on the IOUs). Under these conditions, it is realistic to assume the issuers of the IOUs would be incentivized to keep the inflation rate at 2% or lower. Because no one will come to save them if they fail.

In the end, the only good sh!tcoin is one that uses Bitcoin as a reserve currency.

But Will It Actually Pan Out This Way?

*Shrug.*

What did you expect? I don’t know how this future is going to turn out. For all I know, Bitcoin may never find its digital silver, and will end up destroying both capitalism and all life on Earth. That’s still a possibility.

Yet I expect that, whether deliberate or not, humanity will muddle through the coming crisis and settle on the most efficient solution. Because we’re like that. We’re needy enough that we demand solutions yet lazy enough to pick the easiest one. That’s just how we work.

For that reason, I suspect that the winner of this race for second place will be a kind of Bitcoin credit system, where promised/potential bitcoins are traded like the real things. I suspect the IOUs will go through one or two crashes early on, before people learn their lesson and realize that Bitcoin credits are only sustainable so long as they don’t drift too far from the price of actual bitcoins. This will pressure the issuers of these IOUs into being tight fisted with inflation. Such a system forces them to keep it low and slow.

Still, the title of digital silver remains up for grabs. Litecoin, Ethereum, and any number of other currencies may yet clinch the deal before the music stops. It’s still anyone’s game.

Until then, the smart people will be accumulating as many bitcoins as they can get their hands on.

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