Is Bitcoin Just an Experiment?
By: Jason Deane
Tags: Money, Economy, Finance, Cryptocurrency, Bitcoin

Is Bitcoin Just an Experiment?

Y’know, like the cash in your pocket.

Image: Licensed adobe stock, by metamorworks

Anyone who is full time in the cryptocurrency space — like myself — will tell you that most objections to cryptocurrency in general (and Bitcoin in particular) are based around a few key issues.

Generally speaking, these are to do with Bitcoin not being physical and therefore not real (covered in this article), Bitcoin not being backed by anything (covered here) and Bitcoin being no more than an experiment.

Interestingly, most — or even all — of these objections are experienced by the majority of current users, holders or advocates of Bitcoin at some point on their journey to fully understanding it, and it was certainly true in my own case.

People either take the time to understand the answer to each of these logical questions and ultimately end up adopting Bitcoin, or they don’t and simply move on with their lives, staying entirely within the traditional financial system.

Others — such as those with motives not to encourage widespread Bitcoin adoption — will use those very same objections to create doubt in people’s minds of the viability of Bitcoin on all levels.

These people usually have a vested interested in the status quo which is, partially at least, threatened by the successful implementation of a non-sovereign monetary system, or have vested interest in a more traditional store of value, such as gold.

However, in all cases, these objections are an illusion, and what is most striking about the matter on a macro scale is that money itself — in all forms — is the biggest one of all.

And that includes the cash in your pocket.

In fiat we trust … ?

If we go into a shop and buy an item with a note of our local currency, the shop keeper will accept it without any hesitation, as long as it is not counterfeit and in a condition that indicates it has retained its value, i.e. it is still recognizable as the unit of exchange it was meant to be.

Most of us don’t think about the psychology that is going on behind this transaction.

Fiat currency, that is the notes and coins in your pocket, has absolutely no intrinsic value whatsoever, and it is not backed by gold. This is a fact that I believe many of us are probably aware of to some degree or another, but if we ARE aware of it, why do we not question where that value comes from?

The reality is that this perceived value (which is really what it is) comes from our governments simply saying it has value through the Latin decree of “fiat” or “let it be done.”

If you want to be more cynical, you could say it has value simply because the “men with guns” say it does. We won’t be arguing with them anytime soon.

I find this fascinating, because we live in a time when global distrust of governments has never been higher, according to data gathered by the Organization for Economic Cooperation and Development (OECD).

There are the usual expectations of course. The governments of New Zealand, Canada, The Netherlands, Norway, Luxemburg and Sweden have routinely enjoyed a 60%+ trust level for some time, but many countries, including the U.K. and especially the U.S., have seen a significant decline in the last few years.

In the former case, Brexit is thought to be a significant factor and in the latter it’s usually attributed to the divisive policies of the current administration.

The U.S., in fact, is now dealing with some of the lowest trust figures it has ever faced, yet very few citizens question the validity of the dollar bills in their pockets. These are the same dollar bills, in fact, that are issued by that very same government, which, incidentally, also directly controls the value of those bills through monetary policy.

It’s a paradoxical statement that doesn’t stand up to scrutiny. Even hardcore anti-establishment commentators will still trust the very organization they are opposing with their personal wealth by implication of continuing to use it. Almost all of us do, in fact, even if we’re not necessarily opposed to the establishment.

But in almost all cases, we do so because we don’t see a real alternative and, after all, money has always been issued by the government, right? Therefore, it must be real. Bitcoin, on the other hand, is surely only a large-scale global experiment.

There is some truth in this. After all, the Bitcoin experiment is only about 12 years old.

But here’s the thing. The money we know is also young. In fact, very young in terms of human history.

At 49 years old, fiat itself can still only be classed as an experiment. An experiment that, although widely adopted, we already know cannot work as a long-term solution.

Without something else in place, that could be disastrous for economies of the future.

The fiat experiment

In broad and slightly simplified terms, currencies came off the gold standard in 1971 and became truly “fiat” versions of their previous selves.

Governments were truly free, in relative terms, to explore their own monetary policy while keeping an eye on what their actions did to international values and domestic inflation rates.

Of course, on a macro level, pretty much everything is theoretical anyway.

For example, we can be fairly sure that raising interest rates will reduce certain types of inflation over time, but none of this is absolute, and the sheer number of variables is impossible to calculate.

We’re also pretty certain that printing lots of fiat money will lead to devaluation, but we have no idea of timescale or to what degree.

Does it happen all at once? Or gradually then suddenly? Does it make a difference if the money is injected at different places in the economy? History gives us multiple examples, but it does so without providing explanations as to why one version may be different from another.

But the main point is that I am actually older than the money we use today. The fact that I can, figuratively speaking, look at an entire global monetary system and say “I am older than you” is simply an astonishing thought.

We are still in the experimental stages of fiat. We’re still learning what the limits are and what levers affect what. We are also beginning to understand, through impossible and unsustainable global debt, that this simply will not work in the long-term.

So where do we go from here?

The Bitcoin experiment

Bitcoin is only 37 years younger than our entire fiat system, not even a blink of the eye in human evolutionary terms.

We can already be certain that the fiat experiment will fail, or, at the very least, have to be significantly modified to continue to operate as-is. The only thing we don’t know for sure is the time scale.

It could be next year, or it could be 10 years, although it’s unlikely to be more than a generation away using any basic extrapolation of current numbers and trends.

Put simply, beyond that point, none of the numbers add up.

However, Bitcoin’s numbers, again using basic extrapolation, provide an exactly contradictory picture over the same time scale.

In basic terms, as fiat devalues, Bitcoin holds steady with a predictability that can be calculated to eight decimal places, and even more, if, for some reason, you wanted to go that far.

So, is Bitcoin simply the latest replacement? Perhaps, perhaps not, but it is definitely something that hasn't been tried before, and for several solid reasons.

And one of those reasons is of particular importance on a global scale.

Until now, the key point of failure of any monetary system has been human intervention. We just cannot resist either tinkering with it, printing more for our own gain (either collectively or individually) or finding some other way to abuse and ultimately destroy it. Put simply, we can’t be trusted with it.

Bitcoin, either by design or as a useful byproduct of the design, recognizes this human failing and eradicates it as a point of failure by effectively removing us from the equation completely.

This is entirely unprecedented in human history. Money has always been controlled, influenced and ultimately abused by the few in power. We have never had a medium where this has been impossible. This is truly uncharted territory for the first time in our entire history.

The theory says this should be a strong advantage, but we won't know in practice whether that is true for a very long time. After all Bitcoin, like fiat, is an experiment.

Money is simply technology

Economists will tell you that money must have three main attributes for it to be truly considered so. These are:

It has to be a medium of exchange

It has to be a unit of account

It has to be a store of value

All forms of money have fulfilled these requirements to different degrees, but on a broader level money can, in fact, be anything you and I agree it is, literally anything. Our mutual agreement can trump pure economic definition, at least on a micro level.

But more importantly, the money we have exchanged between ourselves on a macro level has actually always been about the latest technology fulfilling these attributes.

Precious metals replaced barter, regulated coins replaced irregular chunks of precious metals, notes replaced coins (in terms of precious metal content) and digital representation replaced notes and coins, to the point where the vast majority of transactions are no longer carried out in cash.

Over thousands of years of human history, we have continuously improved our monetary systems, each time experimenting with new approaches, better transmission, higher store of value by weight, levels of scarcity and control, and so on.

Most of the time we have improved it, learning from mistakes of the past, but not always. Some experiments failed. Some we have tested to destruction. All have been centralized.

In this context, Bitcoin is an entirely natural step. Bitcoin is the logical conclusion of the coming together of technology and thousands of years of evolution.

It is simply another experiment in a long line of never-ending experiments.

So, next time someone points out that Bitcoin is just an experiment, you can wholeheartedly agree.

Because it is.

Just like the cash in your pocket.