Bitcoin’s Biggest Strength May Also Be the Least Apparent
How Bitcoin solves one unique economic problem for the first time in human history
It’s incredible to me that there are still people who think Bitcoin has no use case.
It’s an extraordinarily difficult position to try and defend even under any cursory examination, but nevertheless, even in the face of accelerating adoption by individuals, corporations, institutions and even countries, there are still some who maintain it doesn’t do anything.
I’ve written about Bitcoin’s use case before, and most of us are aware of the positive and revolutionary changes that a global monetary system could have on humankind going forward, but even so, there’s one more utterly fascinating — and entirely unique — application that is currently not talked about very often. Out of all of those applications, it’s the one that may yet yield the biggest impact of them all.
In reality, there are probably two reasons why this particular use case may not get the coverage it deserves. The first is that, to the average person, this is something that is not immediately obvious. The second is that it may simply to be too early in the asset’s lifecycle to recognize its power.
But make no mistake. Bitcoin’s “hidden” strength may change the way we deal with money, especially on an international basis, forever.
It may not yet be time to bring it to the forefront, but it is certainly the right time to remind ourselves of the possibilities.
The importance of a ‘constant’
Most scientific or mathematical fields rely on the concept of accepted “constants” to make complex calculations or create anchors which can be used to build hypothetical models for testing theories and new ideas.
So, using an extreme example, the field of physics uses at least 26 constants to manage and describe the attributes and strengths of the interactions and physical properties of all the particles that make up the known universe, a task that is mind-boggling to those of us not involved in that field of research.
They include such wonderfully named items as the strong coupling constant, the quark mixing parameters, the cosmological constant and the masses of the six quarks, six leptons and three massive bosons.
It should be clear that these are not just widely accepted assumptions, but hard absolutes based on the laws of physics and centuries of discovery and experimentation. Building this framework of constants allows us to explain our understanding and explore further and deeper.
Of course, even this simple summary probably has physicists pulling their hair out in frustration because those constants actually have arbitrary dimensions and units to them beyond how they first appear.
But then this is a particularly complex field. It’s difficult for a lay person to relate to it. However, you and I also use constants on a daily basis and, until now, you probably weren't aware you were doing so.
1 always equals 1?
Let’s say you decided to build a house. You would secure the land and any permission needed and then retain an architect to do the drawings for you.
That architect might use inches, feet and yards or they might use millimeters, centimeters and meters, but they’d use one or the other and most likely to stick to it. Once all has been agreed, the builder would be able to take those drawings and use those precise numbers to lay out the building exactly as planned.
The important point here is that, in theory, it wouldn’t matter where in the world you were building this house, or who you employed to do so. They would still refer to the same unit of measurement over and over again and apply it in the same way. These measurements are, in this sense, constants.
Interestingly, this wasn’t always the case. Prior to 1959, Australia, Canada, New Zealand, South Africa, the U.K. and U.S. had slightly differing definitions of the yard, which meant that on an international basis, some recalculation would need to be done. Even so, whilst this was inconvenient, that conversion was at least another constant, meaning that using the same fixed formula would always yield the correct result.
Since 1959 however, things have been much easier.
Well, they have for the most part.
The U.S. still has its own version of the mile, since theirs is based on a “survey foot” rather than the “statute foot” that the rest of the world uses. This means that U.S. miles are actually 0.999998 of an international mile. In theory this will all be resolved at the end of 2022 when the U.S. plans to deprecate the survey foot, bringing everything in line. But that’s a story for another day.
Now, here’s the problem.
Imagine that feet and inches and centimeters and meters were not fixed in length. Imagine instead that each unit was adjusted daily, weekly, hourly or even by the second on a centralized comparison system, and each country managed that comparison in line with their own objectives and domestic policies.
Not only this, but over time, let’s also imagine each foot or meter was gradually reducing in length on a variable basis overall, but some, relative to each other, were actually increasing in length. How difficult would it now be to build that house? How would you calculate a length in one country relative to another? Or over time?
The problems soon stack up. With our current fixed measurement system, for example, we know that if a certain type of house uses 300 meters of cable to fit out, we can be pretty sure that if we build another one, it will require the same number. But under a variable system, we have no idea what that length would be, and it would need to be recalculated each time we looked at the plans.
And how would you make a comparison between length now and a measurement made, say, 10 years ago?
Of course, this is a ridiculous example, because we’d never entertain such a system, but it is a decent approximation of how our fiat-based monetary system works. The value of each unit of account changes constantly not only within the jurisdiction it serves, but also with those it interacts with.
This is a feature (some might argue a “bug”) of having monetary units that are not tied to any asset, effectively backed only by collective faith and centralized power. New units can, and often are, created at any time in any quantity without consulting the people who actually use it.
This is messy and complicated and makes life very difficult, but it is deemed necessary so that different economies can execute different monetary policies. However, so many variables make economic theory difficult to predict on a macro level and in fact, as Ludwig von Mises, the famous economist pointed out more than once, economics is one of the few sciences that has no constant at all.
For a long time, gold was the closest approximation we had. It was scarce, hard to produce without a significant investment in time, labor and equipment, and had almost universal appeal.
But apart from the fact that gold has all sorts of practical limitations, it was never more than a loose framework in reality. It could also be produced in larger quantities if its value went up, as people were incentivized to go out and find more — something that still happens today.
In truth, it really wasn’t a bad attempt at having something consistent and was certainly the pinnacle of monetary technology at the time, but it could hardly be described as a constant. And, of course, after coming off the gold standard in 1971, it was largely abandoned in terms of being a solid frame of reference anyway.
Instead we try and measure global wealth using one government issued piece of paper against another, effectively using debt as a marker in an ever-increasing race to the bottom, at which point we can issue a new type of paper.
How exactly do we compare the value of widget produced in China that costs 8870 Angolan Kwanza with the same widget costing 320 Egyptian pounds? What about the same widget 10 years ago in those same countries?
Although it’s not impossible to calculate an approximation, the amount of variables involved makes it difficult task, and you would never be entirely sure the answer is 100% accurate.
What is needed instead is a truly global currency that is always absolute, with a totally fixed supply that cannot be altered whatever its purchasing power may be, and that is set up on a entirely non-sovereign basis, thereby preventing preference for any individual, state or nation. Ideally, it would be self-contained, utterly secure and come complete with its own payment rail.
You’d need a new globally deployed and uninterruptable technology for that.
Bitcoin — The world’s first economic constant
For the first time in human history, we have a constant that Mises would no doubt have loved to have to seen.
The widget that costs 0.00325 bitcoin in one country compares instantly with the cost of 0.00421 bitcoin in another. It’s the same unit of account with the same global value. A value that can’t be debased or controlled by any imperfect human — even well meaning ones — and can be accepted and used by anyone on the planet, no matter where they were born.
It’s difficult to put into words just how groundbreaking this really is for the human race. Right now, Bitcoin’s focus is on adoption, education and development, so we’re not necessarily looking at how we might use a true economic constant across the planet to build, plan and evolve future financial solutions and systems.
But that day will come and, with it, a whole new generation of opportunities and challenges will be created on a scale never before seen by human kind.
Just as the discovery and understanding of known constants propelled scientific knowledge forward, the introduction of the first true absolute — the fixed supply of Bitcoin — will create a new basis on which to anchor entirely new macroeconomic theories, many of which we probably haven’t even begun to conceive as yet.
And yet, as far as it feels Bitcoin has already come in just 12 short years, it should be clear that everything achieved so far is only the beginning — a first tiny step in a much, much longer journey.
And what a journey it could well turn out to be.