Bitcoin, a scary chameleon.


Now, pretend you are in Davos sitting among the world’s financial elite. You face a panel made of renowned central bankers. You slowly raise your hand and ask the million dollar question: “Can anyone tell me what Bitcoin is?”. After a moment of stunned silence, the whole audience roars with laughter. As the laughter subsides, the “masters of the universe of credit”, will start the usual tirade: it’s a fraud (J.Dimon), don’t know …but it will end badly (W. Buffett), it’s only a speculative bubble (R. Dalio), it’s a Ponzi scheme, it’s backed up by nothing, it’s nothing at all… and so on.

So what really is Bitcoin?

The definition that I prefer was given by Andreas Antonopoulos: “Bitcoin is a planetary scale, thermodynamically guaranteed, self evident system of immutability”. Brilliant definition and you can see in this video what he means. This definition signals the many complexities of Bitcoin and how difficult it is to define it, because Bitcoin is many things together and it has many different features. Indeed Bitcoin was the first ever Blockchain, is today the largest open and borderless peer to peer system of payments, it is highly resistant to censorship, tampering, coercion and geopolitical manipulation, it incorporates a mathematical “thermodynamically guaranteed” mechanism of trust, lives by consensus and it has the features of money.

Now, when engaged in discussions about Bitcoin, regulators, central bankers and generally the financial elites, only see the tip of the iceberg and have very little or no idea of what lies under water. The tip of the iceberg they see are solely the features of money. So let me engage them on that and see if Bitcoin is — among all the other important features — also money.

The Position of the Regulators

On January 8th, the Bank of Israel was the last Central Bank to issue a press release trying to define what Bitcoin is or — better — what it is not.

Here they go, “Bitcoin and similar virtual currencies are not a currency, and are not considered foreign currency and should be viewed as a financial asset”.

For the State of New York, Bitcoin is a “digital unit that is used as a medium of exchange or a form of digitally stored value”.

For the German BaFin it is a “unit of account” and therefore a “financial instrument”.

More comprehensive definitions have been attempted by the EBA in 2014 (European Banking Association) and the Banca d´Italia, which both define Bitcoin as “a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically”.

Quite to the contrary, the Bank of England and the English FCA have not taken a position yet. In fact, the FCA has gone as far as to state that it does not regulate digital currencies and has no intention of doing so.

Money and Currency in history

Let’s see then how monetary history defines both money and currency. Money first.

In history there have been many forms of money, but just looking at modern times, one can identify essentially two forms of money: representative commodity money and fiat money. Throughout history gold and silver, as commodity money, have been the purest form of money. Because they have an intrinsic-use value and cannot be debased.

At the beginning of the 1900 — with the gold standard — commodity money became “representative commodity money”, which was fiat money backed and redeemable for gold. Our current system instead is based solely on fiat money (from the Latin, fiat — let it be) — which has no intrinsic value and is irredeemable — and whose value is in fact sanctioned by the government which makes it legal tender within a nation. Fiat moneys are guaranteed by the authority of the State and backed by its tax collections and the solvency of its finances. Money must have some essential properties, such as being (i) a medium of exchange, (ii) a unit of account and (iii) a store of value. Money must also be fungible, portable, durable and cognizable.

When a money circulates within an economic system and is accepted as a means of payment — through banknotes and coins — then it is also a currency (from Latin currens-entis — in circulation). Which is essentially “a generally accepted system of money which circulates within an economic system”. Therefore you can have a money which is also a currency and moneys that are not currencies. For example, the moneys par excellence — gold and silver — have been also currencies throughout history until Bretton Woods. Today, one can argue that they are not currencies anymore, but still they remain the purest form of money. Although, to be precise, some gold coins are still today legal tender at face value in the US and therefore still a currency. In 1912 J.P.Morgan, when called to testify before the US Congress, said his famous words: “Gold is money, everything else is credit”.

Bitcoin´s money features

So let’s see how Bitcoin fits in this framework:

- the EBA acknowledges that Bitcoin has the features of money, such as being a unit of account and a medium of exchange. To be more precise one should say that Bitcoin has — at least the potential — of being a unit of account and a medium of exchange. This because it still lacks the wide adoption as a means of payment and, by being too volatile, makes it still hard to price and sell goods. The same one can argue for the store of value and the stability features. However, at the same time one can legitimately assert that all our fiat moneys are not in fact a store of value, considering the central banks institutional policies of debasement and monetary inflation. As evidence suffice to look at the graph of the US dollar vs. gold from 1970 to date, to comprehend that the “king dollar” is definitely not a store of value having lost 97% of its purchasing power in terms of gold in 48 years.

Bitcoin´s volatility is also a function of its small market cap and young age. This will change with time and more widespread adoption. So, as far as the store of value is concerned, it is arguably more suited an instrument which has shown since its inception a deflationary trend which resulted — despite deep corrections — in an increase in its value by orders of magnitude.

- Bitcoin is clearly fungible, portable, durable and cognizable, like money should be.

- Bitcoin is not however commodity money nor fiat money. But the historical definition of money cannot be kept immutable in the face of time and technological advancements. Clearly, a digital form of money is nowadays possible. However, if one can easily accept all forms of digital money which are either derived from fiat or derived from commodities, with regard to Bitcoin one must go a step further. For no government nor a commodity with intrinsic value stays behind Bitcoin, it relies solely upon the trust that users, investors and miners put into it. For that reason, it is very important to analyze here what “trust” means.

In money we trust

There are two forms of trust in money: objective or intrinsic trust and subjective or extrinsic trust. The former is the trust that one has in commodity money. One trusts that mother nature has made gold scarce enough and costly to extract as to ensure a limited supply. One trusts its scarcity, objectively. This form of trust is intrinsic in precious metals´ nature. On the contrary, the form of trust in fiat moneys is subjective, extrinsic, meaning that one trusts groups of individuals or societies — such as governments or central bankers — to act in a way that does not jeopardize their finances and not to debase its fiat issued moneys.

This type of subjective-extrinsic trust is the basis of the social construction that makes fiat money valuable for the exchange of goods and services in a modern society. The Bank of England for instance, clarifies that the trust in the fiat GBP is instilled by (i) measures to avoid counterfeiting and (ii) low monetary inflation. Simply put, one trusts the government’s promise not to abuse the printing presses and — in short — to be able to repay its debts and remain solvent.

Since 2007, the unprecedented monetary experiment of massive credit creation by central bankers worldwide has dramatically eroded the residual “trust” that people had left in their governments and the banking system. The social construct that attributed value to fiat moneys then started to collapse and Bitcoin was born as a consequence. Therefore, if this type of “government instilled trust” is nowadays irreversibly broken, do then people have more reasons to continue trusting their governments (i.e. fiat money) or a mathematical algorithm (i.e. Bitcoin)?

The question is by no means irrelevant. In fact, one can argue that Bitcoin is closer to commodity money than fiat moneys — in the sense that the social consensus that makes Bitcoin valuable as money is coalesced around its mathematically pre-determined monetary supply and its technological features. For, math, thermodynamics and technology do for Bitcoin what mother nature does for gold and silver. This perception is amplified at this historical moment when all social constructs that back up this dollar centric fiat monetary system seem to be falling apart.

One can hardly refute that an objective-intrinsic form of trust is far superior to a subjective-extrinsic trust. The latter can only be rated according to its historical record. Unfortunately, the historical record of fiat moneys is pretty poor. The answer is yet again in Cicero’s magistra vitae. Because history proves ultimately that, when humans have incentives — such as governments, politicians and bankers have in creating new money — they will always abuse it. The result is that no fiat currency in history has ever survived its inevitable debasement. There will always be another Roosevelt, another Nixon, more LTCM´s, more Lehman, more bailouts, more QEs…, it is just human nature. This form of “subjective” trust is easily lost and when in history the social construct that attributes value to fiat moneys breaks down, the results have been the collapses of past empires or — in modern times — the hyperinflations of the Weimar Republic, Argentina, Zimbabwe or Venezuela.

That is the fundamental reason why a Blockchain based decentralized monetary system, “thermodynamically guaranteed” by a mathematical algorithm, which ensures limited money supply, no duplication and no double-spending, which is highly tamper resistant, secure, transparent and which transactions are recorded in an immutable distributed ledger, is no doubt intrinsically and objectively trustworthy. And that is a huge argument in favour of Bitcoin.

If one agrees on this key issue of “trust”, then Bitcoin is not only money but it is superior to any fiat money. Not that it matters, but more recently also Goldman Sachs has changed its opinion and now agrees that Bitcoin is money.

Not yet a currency

If Bitcoin is in no doubt money, can it be also considered a currency? Probably not yet. But it may well become a currency in the future, depending on how much Bitcoin will evolve into a “generally accepted system of money within the global economic system”. For instance the Ether (ETH), which is in no doubt a generally accepted system of money payments within the Ethereum community, can be considered for all purposes a “private” currency today. Bitcoin however — unlike the ETH for the Ethereum community — does not perform a currency function within a closed system and for this reason it must be more widely adopted in the global economy before being considered a (global) currency.


Of the many properties that Bitcoin possesses, the money feature is the one that scares the establishment. Admitting that Bitcoin is money superior to fiat means that governments, central bankers and the whole banking system have lost the monopoly of money creation. This is an existential threat to the current monetary system. Christine Lagarde of the IMF, said “not to dismiss lightly crypto currencies like Bitcoin because they could give government-backed cash and monetary policy a “run for their money” in the future”. More recently also Rodgin Cohen, the Senior Chairman of the giant Law Firm Sullivan & Cromwell, said more or less the same on Bloomberg TV, “crypto currencies may well in the future pose a direct threat to the Fed and other central bank policies´, as well as to the reserve status of the US dollar globally”.

Because of that, the future is by no means secure for Bitcoin. A fierce battle is to be expected by governments and bankers worldwide, because Bitcoin is their enemy nr. 1 and must be either controlled or suppressed at all costs. One feels the “winds of war” blowing in the chilling title of the blog recently released by Christine Lagarde “Addressing the Dark Side of the Crypto world”. Here you will find my comments to that blog.

The financial elites will try to embrace and control what benefits and serves their interest and will try to suppress what threatens their interest. The path is clear, the financial industry is already the largest holder of Blockchain patent applications and they will fully embrace permissioned and centralized Blockchains to leverage their position. If anything, governments may issue centralized fiat-crypto-currencies, thereby achieving the double objective of removing cash — the last bastion of freedom — and enabling total control of their citizens, at will debasement, unlimited bail-ins and expropriation through negative interest rates.

If this scenario unfolds, Satoshi´s vision may well remain utopia and Lagarde´s dystopian vision of the Blockchain and her Orwellian dream of societal control may well become reality.

Time will tell.

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