Using Democratised Money Theory to Understand Bitcoin

imagesPoints from previous posts on Democratised Money Theory can be taken and applied to Bitcoin and other Cryptocurrencies. This can give an interesting insight into all forms of money.

 

Democratised Money Theory:

 

Money is a contract – a set of words and images that embodies a decree. (This is the decree gold and silver bugs get confused about when they refer to fiat money). This decree element is a vital component of a money contract. It decrees the economic environment for the life of the money contract. This decree is expressed in form of the central bank interest rate in respect of that specific contract.

 

Applied to Bitcoin:

 

Bitcoin is a set of words and images that embodies a contract. This is what Bitcoin is in its totality that and nothing else. In its form, Bitcoin differs from government money in how and where that contract is recorded. In the case of Bitcoin the contract is recorded in programming code form. This is the decree that Bitcoin embodies, which is intended to function exactly the same as the decree embodied by government issued money. Programming code embodies the method and thence the rate at which Bitcoins can be ‘mined’ or Bitcoin ‘decrees’ made. It effectively decrees the rate of creation of decrees!

 

But this is really no more than a marketing device. By making the issuing of Bitcoin decrees ‘automatic’, the creators of Bitcoin are seeking to obscure their role as the Authority which delineates the terms and form of Bitcoin. They do this precisely because the people who might adopt Bitcoin don’t like the idea of conforming to a given authority. The ‘anonymity’ of ‘Satoshi’ is more of the same marketing…. a personification of the commons; ‘Everyman’ and ‘No One’

 

Bitcoin is a commercial contract as opposed to a state sponsored contract in the case of Government Issued Money.. Despite the best efforts of Bitcoin advocates to obscure the fact, Bitcoin is at its core a business proposition and in this it differs fundamentally from state issued money which is at its core a political proposition.

 

This points to a fundamental difference. State issued money is derived from the commons, crypto currencies are not. Crytocurrencies, like all ‘democratised’ currencies, represent an exact inversion of the developmental dynamic of state issued currencies.

 

State issued currencies began their existence in the commons operated for the benefit of all, and were appropriated for the benefit of a minority. This process culminates in the creation of specific forms of privately issued Democratised Money.

 

Democratised currencies such as derivatives and Bitcoin were created and developed by a minority supposedly for the benefit of all. Democratised money and Government Issued Money begin at opposite ends of the money spectrum and move in opposite directions.

 

There is no point in simply describing the differences between state issued money and democratised money as they are now. At best this will offer you a blurred snapshot of the development of money in the 21st century. You have to describe the trajectory of development of both democratised privately issued money and state issued money simultaneously and how they will affect each other as they develop.

 

Democratised Money Theory:

This money contract is mounted on a transferable medium. Something that can be securely transferred from one owner to another. The contract is issued by the relevant legal authority which is the body authorized to mount that specific proclamation upon that specific transferable medium.

Applied to Bitcoin:

 

The Bitcoin contract is recorded as code which can be transferred from one processor to another. The proprietary name that is given to the contract and its mode of transference is the ‘Blockchain’. The blockchain in its totality serves as both decree and record of Bitcoin whereas individual notes serve as decree or record of government issued money. But the blockchain cannot be owned by any one person; unlike a money note (or all money notes), which can be transferred, stored and even destroyed by its owner. (Although interestingly it is a crime to modify and deface modern banknotes. Now why would that be?…)

 

(As a secondary point of interest, bank credits are not money despite what many insurgents argue. Bank credit transactions require a separate and autonomous mode of record, disqualifying them as money.)

 

There may be some confusion over the designation of the ‘relevant legal authority’. In this case it is the creators of the blockchain code and the issuers of Bitcoin. The authority to do this is vested in private property which is a totem of capitalist states. Satoshis have legal authorization to issue Bitcoin, although final rights are reserved by national governments.

 

Democratised Money Theory:

 

The validity of a money contract depends on the extent to which it decrees the nature of the real economy. The ‘value’ of that money contract is an expression of its validity. In other words: The money contract is valid to the extent that it decrees the nature of the real economy. Not ‘reflects’ the nature of the economy, decrees it. It is valuable to the extent it is valid. This comprehensively defines the value of money.

 

Applied to Bitcoin:

 

Trade and creation are ubiquitous in human society. Human beings purposefully alter the environment around themselves continually and without exception. This is the real economy. The control of this alteration is the purpose of politics and economics. Money is one method of implementing this control. A piece of money is a decree of who will do what where and when. It is specific to the extent that this serves the purpose of the issuer. It is generalised to the extent that this serves the interest of the issuer.

Bitcoin contract is specific in that it serves the interests of ‘Satoshi’ to create a privately issued digital currency through ‘mining’ and recording transactions on the Blockchain.

The Bitcoin contract is generalised to the extent that it operates as a store of wealth and to a much more limited extent as a means of exchange and transfer.

 

I have previously used the example of a train ticket to illustrate another aspect of money but the metaphor can be useful in this context too:

 

  • All train tickets are contracts.

All pieces of money are contracts.

 

  • All train tickets are the same in function and distinct from other contracts.

All money is the same in function and distinct from other forms of contract.

 

  • You need a valid train ticket to access the rail system.

You need a valid piece of money to access the economy.

 

  • Train tickets are specifically valid in terms of the journey you are permitted to undertake

Money is specifically valid in terms of the economic activity you are permitted to undertake

 

  • A specific train ticket contract decrees a type of journey will take place

A specific piece of money contract decrees a type of economic activity will take place

 

  • A train ticket is valid to the extent that the journey it decrees will take place, does take place

A piece of money is valid to the extent that the economic activity it decrees will take place, does take place

 

  • A train ticket is valuable to the extent it is valid

A piece of money is valuable to the extent it is valid.

 

(NB. Claiming gold is naturally money is like getting on a train with a piece of Stephenson’s Rocket in your hand and claiming it gives you a right to ride!)

 

The decree aspect of Bitcoin is well illustrated by the apocryphal ‘10,000 Bitcoin For A Pizza’ story.

 

Bitcoin, like any form of money, does not reflect reality or the economy. If it did, then the first Bitcoin would be designated as worth the totality of the economy, the first and second would each be worth half the economy, the first, second and third would each be worth one third of the economy and so on… This is obviously nonsense

Since money does not reflect the economy as it is or was, it must instead decree the economy as it is going to be.

 

In the case of the Bitcoin Pizza, 10,000 Bitcoin didn’t call the pizzeria that made the pizza into existence.

It didn’t call the flour purchase for the pizza into existence.

It didn’t bring the pizza man into work to make the pizza. All this stuff was already there.

But what it did, was to call this specific pizza into existence.

Bitcoin like all other money, decrees how the world will be from now on.

 

Once the Bitcoin Pizza transaction was successfully completed, the Bitcoin became both decree and record and its value was accordingly modified.

 

Democratised Money Theory:

 

A money contract is valid to the extent that everyone complies with the terms of the decree it embodies. A money decree is complied with to the extent that the amount and terms of money contracts issued compare with the amount and terms of economic activity undertaken for the same territory and time span.

 

Applied to Bitcoin:

 

Here is a ‘sketch’ graph which roughly illustrates the dollar value of Bitcoin since its beginning. The graph is useful in illustrating the decree function of Bitcoin. I have marked five significant points on the graph:

NEWGRAPH

1.Bitcoin the beginning has no recording function, so no value added there. The mining protocol decrees Bitcoin is virtually valueless.

 

2.Bitcoin records some few transactions; ‘wealth store’ value increases. This leads to an increase in mining which decrees Bitcoin is again virtually valueless.

 

3,4.The number of Bitcoin records begins to accumulate rapidly, especially in relation to the number of fresh decrees issued because it is becoming harder and more specialised to ‘mine’. The increased cost of ‘mining’ is effectively a decree of greater value.

 

5.The validity of recent decrees increasingly comes under question. Bitcoin is having trouble making the real world conform to what it proclaims. This is reflected in the recording function. Bitcoin falls in ‘value’

 

 

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