“Capitalism is not the simple desire to make a profit. Capitalism is the fantasy that growth can continue at a consistent rate indefinitely. When a child is young, it cannot yet imagine being an adult, so it thinks it will keep on growing forever. The fantasy that you can grow forever is exhilarating, one of the many aspects that make children seem so alive. We live in fantasy, all of us, all of the time, to a greater or lesser extent ” — Jacob Wren, Rich And Poor
“The Internet is the first thing humanity has built that humanity doesn’t understand, the largest experiment in anarchy we have ever had ”— Eric Schmidt, Executive Chairman — Alphabet
Salvator Mundi (savior of the world), a painting by Leonardo da Vinci, was auctioned by Christie on November 15, 2017 for an astronomical value of $450 million. Many claim that the painting is fake and not worth what it was auctioned for. Very telling are the words of Frank Zöllner, a German art historian and professor at Universität Leipzig, who’s written a book on Leonardo as reported in the Huffington Post: “A heavily damaged painting by Leonardo, which was created with the substantial involvement of his workshop after 1507 or even later, achieved a record price, which is significantly higher than the sums that are called for modern masters.”
“Of course, [‘Salvator’] is the symbol of a very unequal, even obscene distribution of wealth in the world,” Zöllner added
That very same week Bitcoin staged a rally that pushed it very close to $8000 USD. The painting and the value of Bitcoin are both a giant step for the business world. They are also icons of obscene inequality and of a deeper malaise in human nature — a vice called greed.
These facts do not take away the intrinsic value of both art and the crypto currency. Bitcoin is a proof of concept of the future of currencies and the overall financial system. Whether it is worth $8,000 is a matter of perspective. Just like the value of the painting.
This article looks at two parallel phenomena: the rise of Bitcoin and the slowdown of global growth and rise of inequality. The two mega trends are not mutually exclusive. Rather, they signal a clamor for reform of the current system. In the absence of a new economic order, civility could be at peril. Until then, beware of your own greed. While Satoshi Nakamoto may have created Bitcoin in the 21st century, greed and the need to be free of shackles are primordial.
Value Is In The Minds of The Observer
If you observe the world with curiosity, the chances that you will see something extraordinary in the mundane are very high. Ben Franklin, Leonardo da Vinci and many others excelled because of their unusual curiosity. Think about it: if you ask someone why is the sky blue?, you will be judged a weirdo for asking absurd questions with obvious answers. Maybe, the answers may not be so obvious and digging deeper is called for.
Fundamentally, a polymath is defined as a person of wide-ranging knowledge or learning. The polymath, therefore is an outrageously curious person. To the majority of people in the world — a crazy man or woman. Very similar to Bitcoin: To many, a bubble. To others the holy grail of the future economy.
What is true, over the years, is that greed or the human desire to conquer others or to take much more than necessary is a pact with the devil. When all else is done, the bargain takes away the very soul of humanity. From numerous wars to rampant insider trading, greed has robbed millions to enrich the few. Ultimately, leaving the few with an empty promise of happiness.
Bitcoin and Bubbles
In hindsight, in a lot of bubbles such as the housing crisis and the tech bubble, laborious research could reveal patterns such as borrowers with bad credit buying houses and tech companies without any underlying business models having million dollar valuations. Remember, I say hindsight.
One look at the chart below and you might think Bitcoin is an even bigger bubble than the housing crisis or the tech bubble. However, it’s not easy for anyone to pronounce Bitcoin a bubble although many do. Bitcoin is an idea that is perceived to be worth $7500 today. It could reach higher or crash faster.
Also, with Bitcoin, the volume shifts from country to country. Once China banned trading, Japan occupied the top spot for trading Bitcoins:
Conditions Ripe For A Global Ponzi Scheme
Economic growth = population growth + productivity growth.
Simplistically, Productivity =output/ labor or output/capital. In short, output as a function of factors of input. You can even measure output as a function of energy consumed. While population has a loose correlation with economic growth, productivity has a very strong correlation with economic growth.
One of the best measures of comparing performance of different economies is Real GDP (economic growth adjusted for inflation) Per Capita (population).
Put simply, if Per Capita growth shrinks when population increases, it’s because productivity has declined or population has outpaced productivity growth. On the other hand, if labor productivity has reduced but the Per Capita growth has increased, it could be because of higher productivity of capital ie machines.
Also, Per Capita economic growth masks inequality. If owners of capital (proxy for the rich) get more of the share of growth and workers (proxy for middle and lower middle classes) get a lower share, inequality rises.
As a consequence, appetite to take risks and be greedy ie invest a major portion of savings into Bitcoin purely for profits increases. As more people jump into the fray, Bitcoins price rises even further.
If the wealthy invest a sizable portion of their money in Bitcoin, they can weather the storm. But, if people with low or no savings go the same route, it’s like swimming naked.
Today, with stagnating or barely increasing real wages for middle and lower middle classes, Ponzi schemes become instantly attractive. Especially if Bitcoin delivers outsized returns compared to any asset class:
The Economy of The Future
Each country issuing its own cryptocurrency on a worldwide Blockchain could be one reality. Smart contracts can deduct tax and artificial intelligence can scan for fraudulent activities. If transactions or a third party aparty’s suspicious, there could be traceability. The entry and exit points to be a participant on the Blockchain can be guarded by using carefully vetted digital identities. Since the Blockchain is a global decentralized mechanism, it guarantees 24/7 uptime and a backup of all transactions at all times.
Capital can be raised using Initial Coin Offerings and companies can go public by recording shareholders on a Blockchain register. Proxy voting can take place digitally. Meetings can be held virtually using VR or holograms.
Labor can be paid in cryptocurrencies and payments may occur faster than traditional networks as new consensus mechanisms such as Proof of Stake become the norm.
Bitcoin thus provides a glimpse into this future and therein lies its value. However, if you don’t understand the technology, follow Warren Buffett’s advice and invest only in things you understand even though your greed may tempt you as you watch Bitcoins price rise higher everyday.
Bitcoin is already powering many businesses. For Instance, Andreas Antonopoulos, author of Mastering Bitcoin, already pays his employees and suppliers by Bitcoin and accepts Bitcoin for work performed. This is called earning a Bitcoin which is different from mining a Bitcoin.
The other option is to use exchanges such to buy and sell Bitcoins. However, because a third party vendor (the exchange) is susceptible to hacking and stolen information, earning or mining a Bitcoin in a digital wallet with the keys saved and stored in an offline, secure place could be a good option.
The third option is buying Bitcoins from an ATM which can prove to be extremely costly. For instance, the local ATM can charge upwards of a $1000 premium over the price of the exchange. You can always google local Bitcoin ATM to find one.
This is just a snapshot of how a small local economy can explain the power of Bitcoin and why it poses a threat to incumbents in the financial services arena.
Some day, smart contracts will be able to deduct tax at source and remit it to a governments digital wallet. The government in return can offer guardrails and protection to unsophisticated participants such as grandparents living in a small village in India. However, private Blockchains and government supervision could be the antithesis of a decentralized economy. Having said that, control over absolute anarchy is a must.
Today, in addition to being an idea, Bitcoin is:
a) a shape of things to come and a Proof Of Concept (POC) of a smoothly functioning but very volatile decentralized currency;
b) as Andreas Antonopoulous says “a trust protocol over the internet” and the internet of money.
c) an advanced application of cryptography that could be challenged by quantum computing;
d) a possible replacement of payment networks and contracts;
e) the underpinning of a new economy and an act of rebellion against the current economic order;
f) in the wrong hands, a disruptor;
g) a possible bubble or a giant Ponzi scheme to many less sophisticated investors; just like any other market, the timing of a huge correction is anybody’s guess.
What Bitcoin is not is fiat currency backed by the government. That’s not to say every government could not issue its own coin just like Estonia is planning to do with the Estcoin. All these could then work on a worldwide Blockchain. However, cash is still king in many countries. It would take complete disruptions such as India’s demonetization experiment to fight cash.
Bitcoin, therefore represents two very primordial human instincts greed and the desire to be free members of a tribe called Homo sapiens. While freedom is a very benevolent concept, the path to true decentralization goes through the jungle of greed. Also, ironically, to protect middle and low income population, there could be a centralized control of a decentralized network. In today’s world, it is called Central Bank Cryptocurrencies (CBC’s).
In the end, I leave you with these words from Yuval Noah Harari:
“Does happiness really depend on self-delusion?”
I would say to some extent yes. There is a bit of delusion and a bit of a dream mixed into Bitcoin. But then again, what do I know?