Automated Banking, With Bitcoin: PART TWO
PART TWO - AN ERA OF FRAUD, AND IMMUTABLE LEDGERS WITH FIXED SUPPLIES
The following is an ongoing series we are calling Automated Banking, With Bitcoin.
The aim of this series is to offer a clear and full picture of Bitcoin for all ages and levels of adoption from nocoiner, to precoiner, to remnant pleb, in the context of fiat, and with an eye towards the inevitable outcome currently in progress. We hope you take the time to share and discuss this series as it unfolds with family and friends.
Enjoy.
PART ONE RECAP
In Part One we introduced the three primary components of Bitcoin; its fixed supply of self custodial tokens (or “bitcoin” if you like), the trustless transaction mechanism of those bitcoin, and the record keeping function or “ledger” of those transactions. We will continue to explore the unique properties of these components as we progress through this series and contrast them with the current banking system.
We also introduced the three functions or services banks provide; that they store customer tokens (or “dollars” if you like), that they provide a trusted transaction mechanism of those dollars, and that they lend (or more precisely, create) dollars at uncontrolled and unknowable cadences.
Notice there are multiple big differences between Bitcoins components and the services provided by banks.
Let’s focus on two for the moment —
(1) That unlike Bitcoin, banks do not have a record keeping function inherent to their design. As we briefly explored in Part One, the record keeping function of banking is haphazardly provided through an obligation imposed by men with guns within the legal jurisdiction of the banks, and verified by trusted, and at times fraudulent, third party “independent” accountants.
And (2) that unlike Bitcoin, the token creation through bank lending is an inherent permanent feature in the banking design, whereas for Bitcoin, token creation is an important, but in the long term, a trivial scheduled known cadence, and most importantly, a temporary aspect of its functionality over the next 120 year start up.
With regards to the record keeping function of banks, we identified in Part One a major fault in the banking system, the inherent human fraud, because of the need to utilize trusted humans to verify the accounting records of banks. We concluded that Bitcoins automated and public record of transactions, the Bitcoin ledger, would remove the inherent financial statement fraud for not only banking but for all organizations and individuals that utilize financial statements, and that the Bitcoin ledger would therefore be a tremendous advancement from the antiquated outdated model, for all stakeholders, with the minor exception of the fraudsters whom will no longer have the ability to carryout their fraudulent activities behind private “cooked” books.
There does remain one piece of the Bitcoin public ledger left to explore, it’s immutable nature, and how the fixed supply of Bitcoin ties into this feature in a special way as we pull on this thread. We’ll discuss this here in Part Two, but before we do, let’s enjoy another brief clip from our good friend, the one and only, Max Keiser.
WE LIVE IN AN ERA OF FRAUD
In this 2015 clip Max is speaking to an audience about banking and more specifically about central banking, a particular type of banking with a special ability to create tokens, or “print money” from nothing, ex nihilo.
Max also addresses government and specifically government officials that regulate and transact with these central banks enabling the ex nihilo token creation. What we will explore throughout this series, and why Max gets so irate in this clip, is that the money printing, the supply increases, have a direct impact on interest rates, which drives all business decisions in the economy, as interest rates are the “cost” of money, if you will.
In this series we will eventually arrive at the blindingly obvious conclusion that a fixed money supply, that is to say, Bitcoins token supply, is the basis of an inherently moral and ethical monetary system, and that banking, and more importantly that a banking system anchored into central banking, is an inherently unjust, and fraudulent system by comparison, for the sole reason of the central banks ability to create monetary tokens ex nihilo, from nothing into perpetuity, and thereby distort the “cost” of money, the interest rates for the entire planet.
Without further ado, I give you, the one and only, Max Keiser!
TO BUY, OR NOT TO BUY ZE BITCOINS
Before we dive further into the boring topic of the civilization changing aspects of Bitcoins immutable ledger, presumably you’ve already increased your interest in getting your hands on some of that fixed supply bitcoin goodness after listening to Max rant and rave about fraudulent money printing! Let’s address that itch before you overthink it by a half.
There is an old adage among stock market trading aficionados; it’s not about timing the market, it’s about time in the market...
[ And allow me to cut in momentarily here on this commentary about “trading” before all of you die on the hill “Bitcoin or Slavery” maxi’s start punching your computer screens right about now reading what appears to be the start of a discussion on bitcoin trading techniques. Worry not my brothers and sisters, we too are all die-on-the-hill-Bitcoin-or-Slavery maxi’s here, and I too hear the voice in my head telling me that bitcoin is not for trading, lol, so hang with us momentarily as we drop some wisdom on the noobs that are also tuning in to this series. ]
…Because this adage about time in the market being superior to timing the market could not be more true for Bitcoin. Timing the bitcoin market is a fools errand. The volatility of bitcoin price is EXTREME.
A 10% move in a day for bitcoin is a normal day, not enough to even warrant a look at the price for most of us, and after a while 50% moves aren’t enough, until eventually, you stop looking at the price all together, and just smash buy as soon as some more dirty fiat hits your bank account or the palm of your hand.
If you are just getting off zero, and are new to buying and holding bitcoin, or even if you’ve been in for less than a full four year halving cycle, you are in for a fun learning experience.
When people say that you don’t change bitcoin, bitcoin changes you, one of the many reasons this is so true, and one of the early learning experiences about holding bitcoin, is developing conviction in your original thesis about why you purchased the bitcoin in the first place. Over time that thesis for your original purchase changes and eventually evolves into the reason we are all here long term; a 21 million fixed supply, it’s either Bitcoin or it’s Slavery, and we’ll die on this hill.
Everyone comes for the number go up technology, but everyone that stays finds themselves here to fix the money, fix the world, with the pleasant bonus of monetary wealth along the way. We all came for the profits, but in time everyone stays for the prophets.
In this time of working through your initial experience of price volatility, learning occurs, you are forced to consider alternative stores of wealth like bonds, equities, gold, shitcoin cryptos, or real estate, and in this forced education you come to Bitcoin Zen, to the radical understanding that there is deep truth in each of the Bitcoin mantras, like stay humble, stack sats, and a new character building empowering process occurs within you.
It all sounds like some sort of unfounded hyperbole from the outside…until you learn about the foundation of the source of the hyperbole, and realize money is just a confidence game, and in the fiat monopoly money world, and in the shitcoin crypto token world, that confidence is based on a belief in the infinite supply growth of worthless tokens. You can then contrast that reality with the Bitcoin reality, that our confidence is based on a belief in an uncensorable, permissionless fixed supply of tokens with an infinite value.
Once you see that, you end up back where you started, except rather than getting off zero, you find yourself trying to get on zero, getting on zero fiat. The great thing about buying bitcoin, is eventually you don’t care what the price is, you just buy as soon as you have the opportunity to do so, because you eventually get comfortable with the reality that it is way more safe than any other asset or money that you could hold. And it is far more unlikely that you can spend your time more productively by timing the market than you can by actually spending your time doing something useful, adding value to the world in exchange for more bitcoin.
Since money is about reducing future uncertainty, the more you learn about Bitcoin, the more you realize that Bitcoin is the least uncertain thing on the planet, by a long shot. And it really is based on this idea of a fixed supply we keep eluding to that also happens to be the underpinning of Bitcoins immutable ledger.
But before we get there...
IT’S GOING UP FOREVER, LAURA
An easy way to see the supply growth in fiat (and crypto tokens as we will see later in this series) is through a visual example. We know the debt supply is going to continue to go up forever, which means more dollars in the system, as they are two sides of the same coin.
We will explore the mechanics of this fiat money creation later on in this series, with a 26 year old NYU student named Tiffany who prints billions of dollars every morning for the central bank of the United States, the Federal Reserve, but until then, in very simple terms, when the United States raises the debt ceiling - as they did once again last week for the 78th time since 1960, lol, - doing so authorizes the government to issue more bonds, and those bonds are ultimately purchased by the central bank through money printing, ex nihilo, which increases the US governments bank account balances to spend newly created money, which in turn causes price inflation as more money is chasing the same supply of goods and services.
The arrow in this chart is pointing to 1971, when the US came off the gold standard, when they no longer allowed foreign governments to convert their US dollars into gold. It was the last tether holding us to reality.
Here’s a fun website to explore 1971 further —>WTF happened in 1971!
And by the way, if the red bars start to decrease, who’s going to be selling which assets? Do you think bonds, equities or real estate owners are not going to dump their holdings the instant the prices start tanking? Are they going to hold through a 70%, 80%, or 90% drop, the way Bitcoiners do? Absolutely not. Do they have conviction in their long-term moral and ethical monetary solutions with those assets to increase the future prosperity of humanity? Lol, no.
But just because fiat money came untethered to gold in 1971, doesn’t mean that going back onto a gold standard would somehow not cause the same problems we find ourselves in today. Gold got us here in this quagmire in the first place. Pepperidge Farms Remembers!
And another problem with gold? Just like debt, or any other asset on the planet, with the one exception being bitcoin, the supply of gold is going up forever, Laura, as well.
This chart is amazing! Gold mining production increased from 10,000 tons in 1900 to over 100,000 tons by the year 2000. A 10X supply increase in the last 100 years. Yikes! No wonder gold prices remain relatively flat compared with equities over long time frames.
And a shout out to Nick Laird for hooking us up with this awesome chart from his amazing website http://goldchartsrus.com/. And to Larry Lepard for connecting us with Nick. (Larry has a good twitter account @LawrenceLepard, go follow him.) P.S. guys, we understand your interest in gold, it’s a thousand times better than most any other asset when self custodied, and if it wasn’t for bitcoin, I’d be a buyer of gold. But bitcoin is AT LEAST a thousand times better than gold!
The absolute scarcity of bitcoin makes it the most valuable asset on the planet, forever. Here is the supply chart of bitcoin.
Unlike gold, where more gold is produced as the price rises, it doesn’t matter what the price of bitcoin is, people just can’t produce more of it than the amount scheduled to be produced every ten minutes. Bitcoin is the only asset that is not only limited in supply, but the future supply is known as well. There is no other asset on the planet that has a known predictable limited supply. Everything else can and will be increased in supply as demand increases.
Only bitcoin is engineered to increase the work required and the cost required to accumulate bitcoin, as the supply remains fixed, forever. Every other asset has a supply change to equalize demand. Only bitcoin has a price change to equalize demand.
Which brings us back to our immutable Bitcoin ledger…
BITCOINS IMMUTABLE LEDGER
In Part One we covered Bitcoins ability to automate financial statement preparation and the auditing of those financials through component three of Bitcoin, its public ledger system. But it’s not enough to have a public ledger. The ledger needs to also be immutable.
Remember, a ledger is simply an accounting term for a record of transactions. So how do we make those records unchangeable, so that frauds and criminals cannot lie about their transactions and misrepresent their financial statements to mislead investors, and lenders?
How do we make a ledger immutable?
One way is to carve the records into stone. The island of Yap used stones to make their record of transactions permanent. The problem with stones is that they are heavy, they’re physical, so their difficult to make public. You would need to go to the location of the stone to verify the records. In our digital internet based world that’s simply not going to work.
In addition stones don’t last forever. Even stones erode over time and can crumble into pieces, or get blown to smithereens if someone drops a bomb on them for example. The only way to avoid the physical problems of erosion and bombs, is to store the records digitally, which is exactly what the Securities and Exchange commission does.
Beginning in 1993 the SEC began requiring companies to submit their financial statements electronically. These records are stored within the EDGAR database. Unfortunately, even the United States military can’t protect this database from hackers. In 2016 Ukrainian hackers gained access to the SEC database to front run information and make $4.1M in illegal trades. https://www.sec.gov/news/press-release/2019-1
And more recently in 2021 the SEC brought charges to Russian hackers that were able to gain access to EDGAR filings and front run the market with $80M in illegal trades. https://www.sec.gov/news/press-release/2021-265
What would be neat is if there was an electronic public ledger system that has lived out in the open for more than ten years now with a bounty of more than $1 trillion dollars if someone could hack the information.
Oh wait, nevermind, there is a public ledger system that has never been hacked that lives out in the open with a market value that has exceed $1 trillion dollars, and it’s called Bitcoin!
So Bitcoins ledger has appeared to have solved the problem of hacking.
But besides hackers, the other problem with electronic systems is that if there is a power outage or a massive solar flare or an electromagnetic pulse from a nuclear weapon, that could completely erase all electronic ledger systems, whether it is EDGAR or Bitcoin. Unless of course the ledger system had many duplicate copies spread all around the world. Unfortunately, the EDGAR system also fails in this area. There are very few copies of those records. But once again this is where the Bitcoin ledger shines.
The immutable public bitcoin ledger lives inside of nodes, small computers, and the sovereign individuals that maintain these nodes are scattered all around the world. There are hundreds of thousands of copies of this ledger around the world in every country. Even if a nuclear war between Russia China India and the United States completely wiped out these countries there would easily be thousands of nodes that continued to maintain a copy of the ledger, and Bitcoin would continue operating just fine from over 100 other countries of the world. Bitcoin only needs one of these nodes running in order to process all global transactions. The public ledger is indeed immutable from this physical attack.
The Bitcoin ledger is in fact orders of magnitude more robust than the EDGAR database that has far fewer backups. Large corporations, their investors and their lenders should be demanding the utilization of the far more safe Bitcoin ledger over the far more fragile EDGAR database, susceptible to hackers, war, and just plain poor engineering.
Oh and by the way, the rest of the world has the same silly setups. In Belgium the equivalent of EDGAR is called the Federal Publics Service Economy. In Canada it is called SEDAR. Denmark’s version is called Central Business Registrar. The United Kingdoms version is called Companies House. India has the Securities and Exchange Board of India. They are all vastly inferior ledger systems that Bitcoin will eventually supplant because of its vastly superior immutable characteristics.
But there is one last attack vector to consider; changing the code, allowing administrator access to the database could allow for the alteration of transactions, of financial statements. In the case of EDGAR there is a small group of people that can access the database and change the records. This is why it is susceptible to hackers.
In the case of Bitcoin, the code is open source, anyone is free to change the code, but nobody is going to use the altered code. Why? Because all of the users of Bitcoin have a financial incentive to keep the code unchanged, primarily including keeping the supply of Bitcoin fixed at 21 million, which is what ultimately drives the vitality of the Ledger.
The Bitcoin ledger is so robust because of its open source code that everyone has a financial incentive to keep unchanged. Nobody is going to voluntarily agree to inflate the total bitcoin supply because it is dilutive, it would reduce the value of each bitcoin, so nobody has an incentive to harm themselves financially to such a code change. For this reason, as Satoshi explained in 2010:
The nature of Bitcoin is such that once version 0.1 was released, the core design was set in stone for the rest of its lifetime. Because of that, I wanted to design it to support every possible transaction type I could think of…Future versions can add templates for more transaction types and nodes running that version or higher will be able to receive them. All versions of nodes in the network can verify and process any new transactions into blocks, even though they may not know how to read them.
The design supports a tremendous variety of possible transaction types that I designed years ago. Escrow transactions, bonded contracts, third party arbitration, multi-party signature, etc. If Bitcoin catches on in a big way, these are things we'll want to explore in the future, but they all had to be designed at the beginning to make sure they would be possible later…I don't believe a second, compatible implementation of Bitcoin will ever be a good idea. So much of the design depends on all nodes getting exactly identical results in lockstep that a second implementation would be a menace to the network.
One of the hardest aspects of Bitcoin to understand is that a second implementation of Bitcoin does not create more bitcoin, and therefore does not dilute the 21 million bitcoin included in the original implementation, and therefore does not influence node runners to stop using the initial implementation of Bitcoin.
Running a second implementation could increase the chances of a code change that might damage the immutability of Bitcoins ledger, but there is simply no financial incentive to do so, it simply can’t happen with the incentives in place. But people certainly have tried to create a second or third implementation.
In fact thousands of people have made thousands of copies of Bitcoins code, made small changes to the code, and everyone of these “alt” coins have had a brief moment of hope for a future use case and then proceeded to plummet into the dirt from whence they all came. We’ll explore the scambrian explosion, why shitcoin cryptos are destined to fail, and why there will only ever be 21 million bitcoin in Part Three.
Stay humble, stack sats. Continue learning. Once you see it you can’t un-see it.
Until next time, cheers!