By: Trey English
This month marks 16 years since the release of the nine-page Bitcoin Whitepaper (https://bitcoin.org/bitcoin.pdf) and through it the conceptual invention of cryptocurrency. In that time, cryptocurrency has grown from nothing to be worth over $2 Trillion, following roughly a power-law curve. Most fads unfold differently and last for a shorter time, making cryptocurrency look like a trend. So, you might ask, what drives this? Why does cryptocurrency exist, and why now? Should I do something?
Money and its meaning underpin these questions. Money is a special pervasive good that holds value and can be traded for anything. It endures and can be exchanged over distances. Many types of money have been tried: precious metals, shells, beads, carved stones, cocoa beans, feathers, coins, paper bills, and careful records (on media from clay tablets to computers), to name some. For a form of money to be good, it must be mutually desired and hard to create. People have to want it, and if it is too easy to make more, inflation undermines it as society becomes flooded.
The Bitcoin breakthrough came in 2008 from a still-anonymous person or group going by the name Satoshi Nakamoto. The Whitepaper outlined a new money that was digital for modern needs and hard to duplicate through its very nature. By design, no one can make more than what is prescribed by the system’s rules, taking money-creation out of human hands. The technology behind cryptocurrency is quite complex, meriting its own articles and books, but that doesn’t matter for a high-level understanding. You just need to know that—when functioning properly—compelling incentives, math, and computer algorithms keep people from making more than is intended.
The other key ingredient of money, that it be wanted, wasn’t certain when the Bitcoin Whitepaper was written, but has turned out to be true. Hundreds of millions of people worldwide choose to own it and have given it enormous value. Part of that value comes from speculation, part from utility, and part from principled philosophical appeal.
A cornerstone of cryptocurrency’s principled philosophy is that governments should not have the power to create money—that we are better served by separation of money and state, if you will. Today around 160 national currencies exist, all over time suffering inflation from new money creation. Some—like Sudan’s—have triple-digit inflation, some—like Egypt’s—double-digit, and some—like the US’s—single-digit. With time, this takes away almost everything. A dollar bill from 50 years ago holds just 16% of its original value (https://www.usinflationcalculator.com/). If you owned one of those, now it’s gone and you’re left with just a bad tip.
The Cantillon Effect explains that when a government creates new money, it enriches the privileged close to the government. Value is taken from the people and given to bankers and other powerful government-aligned individuals. This causes strife with obscure origin for the general population, bringing a sense that things are going wrong and they are getting cheated by the rich and well connected. It also funds government warmaking and other harmful actions in ways and to degrees not wanted by the people. Advocates motivated by its principled philosophy see cryptocurrency as a tool to fix this money-creation problem and with it many of society’s ills.
A heroic analogy comes from The Lord of the Rings trilogy (movies worth watching based on a book worth reading). In this story, the villain Sauron makes a magical ring to force his rule over the fictional world called Middle-earth. This evil ring, like the power to arbitrarily create money, corrupts all who come into contact with it. It twists the simplest of folk (Hobbits, in the story), and drives the more sophisticated (Humans, Elves, Dwarves, and others) to crazed evil. Many cryptocurrency advocates see themselves as fighting a similar malevolent force.
And they see this era as special. Governments increasingly apply new technology to surveil citizens, like the growing Eye of Sauron in the story. And with artificial intelligence a government can now manufacture policy-enforcing agents separate from its own citizens, like the story’s unnatural mass production of Orc soldiers in pits in Isengard. Permissionless rules-following cryptocurrency resists this pattern and shifts power away from expanding governments. Cryptocurrency advocates tend to believe in limiting centralized authority and strengthening individuals.
To continue the analogy, like the many creature types of Middle-earth, there are now diverse cryptocurrency communities striving for change. CoinMarketCap (https://coinmarketcap.com/) lists thousands of cryptocurrencies, each with its own community. Like the Humans, Elves, Dwarves, Hobbits, and other denizens of Middle-earth, these communities bring different cultures and ideals. Among them lies a place for almost anyone.
A taste of this diversity comes by sampling just three: Bitcoin, Ethereum, and Monero. Bitcoin, as touched on above, was the first, and remains the largest. With a limit of 21 million Bitcoins set to ever exist, its community argues for the soundest possible noninflationary money. The no-frills case for Bitcoin is much like the case for gold. Ethereum, on the other hand, was the first major cryptocurrency to enable general user-created software to execute as part of its core security. This software, called smart contracts, allows purposeful computer processes to be guaranteed to run and automatically move money. The Ethereum community seeks new uses for digital money. The cryptocurrency Monero applies cryptography to hide its own transactions. You cannot just look at the public record and see who owns what or has sent how much to whom. Its community advocates for personal privacy as a fundamental right.
You can see how these example communities differ. The principled philosophy that aligns them, and most of the thousands of other cryptocurrencies, is a belief in finding a better way than traditional government money. And this brings us to where analogy with The Lord of the Rings stops. In the story, the characters know that the evil ring can be destroyed in only one way: in lava in the volcano Mount Doom. In our world, it isn’t clear which approach—Bitcoin, Ethereum, Monero, one of the thousands of other cryptocurrencies, or something yet to come—might end government money creation and control. Individual cryptocurrencies can rise and fall while the principled philosophy behind them remains.
Money represents all of life’s material goods and more: even glory, vanquishing rivals, and power can often be purchased. The Cantillon Effect tells us we should fix government money as it exists because the wrong people get enormous benefit while others get hurt. How and if we do this forms an important milestone on humanity’s winding path ahead, through forests, rivers, and misty mountains. At 16, the cryptocurrency movement is young. If any of these philosophical points resonate with you, you might want to investigate and see if you should follow and encourage it, or even if, like a Lord of the Rings character, you have a personal role to play in the unfolding story.
