Cryptocurrency and the Nature of Modern Money
 

This is my first post to this new medium of information exchange, Patreon. As a prelude to what I'll be creating in exchange for your patronage in the days and months to come, let me introduce myself.

I'm Richard Nikoley. I live in the Sierras at 4,200 feet of elevation. I Graduated from Oregon State University in 1984. I was a US Navy officer. I was a financial services entrepreneur for a long time. I also traded options full time. My full bio is here.

I've also been a blog writer for a long time. My blog, FreeTheAnimal.com, began in November of 2003 and I just never stopped writing stuff for very long. That was 4,600 posts ago. It comes out to 330 posts per year out of a possible 365. On average, of course. Oh, and readers have, for the most part, graced me with 105,000 comments along the way.

What do I blog about? Almost a little bit of everything with various interests and diversions along the way. At various times, pretty heavy on politics, philosophy, social concerns, diet, health, low-carb, paleo, keto, weight loss (including my own), money, and trading.

So let's delve into what this is going to be about...

It's my intention to get people thinking about money in a whole new way, and I mean to its very core. This knowledge, then, facilitates engaging in rational asymmetric risk taking with a view towards downright crazy, lottery-like, life-changing payoffs.

When you think about the modern manifestation of money, a couple of things ought to come to mind. To some extent, it's a supposed store of value. To a far greater extent, it's a medium of exchange.

Why?

It's a supposed store of value because it's supposed to be relatively scarce and hard to get. This easily applies to something like gold. Has to be mined, literally, right out of the ground. That's not easy to do or everyone would do it. On the other hand, gold is not a particularly great medium of exchange. Everyone would have to lug around clipping tools and gram scales just to transact business. Plus, it can get heavy, the more you amass. How would you go on an extended 1st Class vacation to Europe lugging around your gold and the tools you'd need to trade with it?

Currency—like cash, bank accounts, financial ledger balances and so forth—solves this problem. And with plasic...credit and debit cards...it's hyper-solved. It's as though it's too easy to spend.

The thing to understand, however, is that the transactional ease by which modern money can be exchanged or spent is by a design that's somewhat nefarious at its root. Have you ever wondered why it's so necessary to have a "financial sector" in the first place? I'm speaking in broad terms here, encompassing everything from central banking, securities exchanges, stocks, bonds, options, and futures to a passbook savings account or certificate of deposit issued by your local branch office.

Why?

It's because of inflation, which is that thing that makes modern money everything from an awful store of value to a downright disaster of value erosion and destruction. Let's look. Suppose you were alive in 1900 and had $1,000. You held it. What would it be "worth" today, in terms of purchasing power? But let's look at it the opposite way.

You can run various scenarios yourself here. How about gold? $1,000 would have bought you 50 ounces of gold in 1900 at $20 per ounce. Today, gold is trading at $1,350 per ounce, making that 50 ounces worth $67,500.

Are you convinced, now, that government fiat currency ("fiat" meaning: it's money 'cause we say it is and everyone agrees) is not a store of value at all? Modern fiat money, while very efficient in terms of ease of use and credit comes at a pretty hefty price when you consider how much wealth—as a store of value—dwindles away over time.

Here's the circularity that's baked into the whole cake: we have enormous "financial sectors" to "manage inflation." So why just not inflate the currency as a matter of monetary policy in the first place? Well, because, you see, we have enormous "financial sectors" to keep busy and well fed. We also have this thing called "the economy" and the fear from all on high is that The Economy must grow, or stagnate and die. A growing economy is simply assumed to be a good thing.

Why?

We can assume that wealth and value creation is a good thing. It doesn't automatically follow that inflating and eroding the medium of exchange we use to trade values is a good thing. It's probably a bad thing.

We can understand why all governments inflate the national currency on purpose. An inflating currency motivates people to "buy it now" and this is a fundamental necessity for a growing and robust economy, or so it's believed. Spend, spend, and spend some more.

Before I move onto how cryptocurrency is different in theory—plus, I believe, in practice now, owing to Bitcoin—perhaps read this primer: Deflation Is Always Good for the Economy. A quote:

According to most experts, a little bit of inflation can actually be a good thing. Mainstream thinkers are of the view that inflation of 2% is not harmful to economic growth, but that inflation of 10% could be bad news. (Indeed the Fed’s inflation target is 2%.)
Thus, we can conclude that at a rate of inflation of 10%, it is likely that consumers are going to form rising inflation expectations.
According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditure on goods at present, which should boost economic growth.
So why then is a rate of inflation of 10% or higher regarded by experts as a bad thing?
Clearly there is a problem with the popular definitions of inflation and deflation.

Cryptocurrency, like Bitcoin, is inherently deflationary.

Why?

Because it's limited. In the case of Bitcoin, there will never be more than 21 million bitcoins, a limit that will be reached in 2140 when there will be no more coins to mine. (Each bitcoin is divisible by 100 million units, or Satoshis.) Even gold doesn't have that feature since we don't know how much of it there is, whether or not some enormous cache that could dilute the whole market is yet to be found, or what the future of mining technical and cost efficiency has in store. All we know is that so far it has been a reliable store of value and is inherently deflationary because of it—the limitation of supply.

A store of value that can also serve as a medium of exchange, whose supply is limited, is inherently deflationary because in order to secure some of it yourself you have to produce some value someone else wants more than whatever unit of that thing you've agreed to in exchange. So, and this is very important, over time, people will have to produce more and greater relative values for the same unit of the thing.

This is the exact opposite of what we tend to think makes and grows a The Economy. In fiat currency land, everyone is obsessed with "making money."

Why?

Because each unit is worth less and less in exchange for the things we need and want, to live and prosper (inflation). And, since we like the idea of prospering, we tend to desire more and better things as we progress through life, so everyone is waging two battles: get more and more money to get more and better stuff, and also get more and more money because it takes more and more money just to buy the "crappy" stuff we already have.

There's the essence of your so-called growing and vibrant economy right there.

In gold or crypto land, it's the opposite. Your money gets more valuable relative to stuff you may want over time because people are creating valuable stuff just to get a chunk of it so that they can sit back and watch it appreciate over time, such that they can buy more and better stuff with the money they already have.

Do you see the difference in fundamental motivations? It's the difference between the drive to make more [increasingly valueless] money vs. the drive to create more and greater tangible values to trade for a sound store of value that can then be used to exchange for something else and will become more valuable while you wait.

Pretty nifty, and cryptocurrency is our path to that (how I became a believer). All of the foregoing is the basic theory. Of course, there are still problems to work out as we take the theory to practice and that's what this space will be all about. Here's a list of some of the issues, in no particular order.

  • Bitcoin is more of a store of value than it is an efficient medium of exchange, currently, especially for micro-transactions.
  • Easier and cheaper to exchange than gold, but not up to fiat-money debit-card standards in terms of speed and transaction cost.
  • Securing Bitcoin and other cryptos. It's just like gold or physical cash in this regard. It can be lost or stolen.
  • Volatility is far too high relative to the fiat currencies that still run the "growing and robust economy," so moving fully to crypto is not yet a practical reality for most.
  • The wild west aspect. There are hundreds of coins now, most worthless, some fraudulent pyramid schemes, and some outright con and theft schemes.
  • The tools aren't fully integrated yet. You have to exchange with fiat currency in one of a number of places (who do you trust?). Then you have to buy other coins you might want in many other places. Then you have to secure them in still many other places. It's a jungle out there.

In a nutshell, navigating all of that and more will be the prime mission of this space and above all, to do so rationally. It's not often that an opportunity comes along for such potential asymmetrical rewards for such little risk. We're not going to mess up on that.

...So, the traditional way this sales pitch is done is that I'm to create a few "Reports" and "How-To" guides and offer those free ("$349 value"). To get them for free, you subscribe to my publication...anything from a monthly newsletter to email alerts, or both. That normally sells for $149, but if you act now, it's yours for only $69. Oh, and it's guaranteed. You can receive a 100% refund at any time over the year and you get to keep all past issues and alerts, as well as the freebies.

But I said we're going to start by being rational, we're going to stay being rational, and we're going to profit by being and staying rational at all times.

So here's the deal: $5 per month, access to everything. You can cancel it on a whim and a couple of clicks any time.

That's it. No gimmicks, no hype, no undercutting the core message of sanity and rationality at all times. Here's what I'll be putting up here:

1. A living Resources Page that's regularly updated, where patrons can go for links, instructions, videos, etc. that are the nuts and bolts about where to go to do what in terms of crypto. It will grow to be a long list, but v1.0 will be up within a few days.

2. I'll be posting one to two posts per week covering the general crypto environment, news, victories, defeats, economics, policy, monetary philosophy (kinda like the foregoing in this post).

3. All of my crypto trades, in and out, and price. Initially, I'll be putting up a post that covers all of my current positions.

4. Heavy engagement with all patrons in the comments. And I will ensure that the best of those exchanges get delivered to patrons as a whole regularly. This creates a community of patronage.

5. A monthly summary of everything that was very, very important over the month. Part newsletter, part index of the past month with links and commentary.

6. Not immediately, but at some near point in the future, I'll also begin addressing other ways to participate in crypto as a business sector. We're talking about various technologies, both hardware and software, that service the sector. There are probably some excellent micro-cap stocks to look into.

7. Anything else that comes to mind that I want to do.

In closing, let me emphasize just one thing that this will not be: a market timing service. First of all, I don't think they've ever really worked out who's better at timing the markets, expert market-timers or screeching monkeys.

So we'll leave market timing to the screeching monkeys.

the nature of this game is to view cryptocurrency as a store of value that, due to its limited nature, tends to be deflationary relative to fiat money, goods, and services and as such, we are looking to take small positions over time, increasing them by small amounts when warranted, and to hold for as long as it takes.

I hope you will give serious consideration to becoming a patron of this creative endeavor.