# Introduction

While there have been various theories put forward as to the origin of writing, historians are in general agreement that the first instance of writing can be traced back roughly 4,100 years ago to Sumer.

There, in the ancient cities of Uruk and Jemdet Nasr, nesting in the valleys between the Tigris and Euphrates rivers, the first known civilization thrived. At this epoch, the dominant system of writing was Cuneiform consisting of wedge shaped marks on clay tablets.

In 1952, Dr. Samuel Kramer, a noted historian had two fragmented tables excavated at Nippur shipped to him from the Istanbul Archeological Museum. In what was heralded as the most important discovery, Dr. Kramer had found the Code of Ur-Nammu, the oldest written law code (2100 BC) known to man written 300 years before Hammurabi’s law.

The Code of Ur-Nammu is arguably the most important piece of factual history we have evidencing human cooperative systems which, at the margin, functioned much like the present. Let us review the prologue of the code as it was written verbatim 4,100 years ago:

To help illustrate the ancient weights and measures today, I offer the following table:

Volume — 1 Sila = 1 Liter — 1 Gur = 300 Liters

Weight:

1 Mina (or Menē) = 567 grams of Gold worth \$22,368 today.

60 Shekels of Silver= 1 Mina of Silver.

The ratio of conversion between Gold to Silver hovered between 7–100 depending on the sources.

(note that even today the ratio of Gold to Silver in the free market is virtually the same at 69)

For the purpose of this essay, I want to focus on what I believe is the single most important deductive conclusion from the Code of Ur-Nammu: The recurrence of Weight as objective and immutable (unchanging over time) measurement. Why is it that the first instance of written law from 4,100 years ago repeatedly refers to the concept of weight as being so crucial to order and fairness? I believe the answer is quite obvious: Because weight is not an abstract human invention to probe reality, it is a feature of reality. Weight is endowed to us by the laws of nature (physics) and is therefore intrinsic to the first order natural properties.

# The Foundational Properties of Nature (Basic Physics)

Weight isn’t the only natural phenomenon. In fact, what great minds from Euclid, Aristotle, Newton, to Maxwell have come to appreciate is the inextricable interconnectedness of the forces and properties inherent in nature. These properties aren’t just spatiotemporal within a specific realm of our existence, they are omnipresent throughout nature itself. Let us review the most obvious as has been understood (whether implicitly or explicitly) from the time of Sumer to the present:

Elements / Matter — Anything you can see, touch, hear, smell, taste, or breathe is made up of unique building blocks also known as pure elements. Since the time of Sumer, we have been able to classify 92 unique natural elements in our Universe. On our planet, the relative abundance of the elements, and therefore their cost in units of energy and time, is well understood through the lens of geology.

Gravity — A force which pulls matter down.

Weight — An intrinsic phenomena to matter which reflects the intensity or measure of gravity pulling matter down.

Time — The arrow of time (Bergsonian Duration) begins at the inception of our universe and runs until its demise. Cycles of time (Gould) can be compared to the ideas of localized space/time — a measuring system that emanates from a relative gravitational force as seen on our own planet.

Energy and Entropy — Within nature the two most important properties are: 1) Energy, which can be best described as the ability to do work or cause motion. Energy does not originate or dissipate, but is conserved; and 2) Entropy, which acts on any system of energy by urging it toward disorder.

Humans do not cooperate under an economic system within a vacuum. These activities are caused by and are part of nature. Therefore, any inquiry into money, economics, and history requires a deep understanding of our natural world.

# Natural Law, Cooperation, and Commodity Money

What is money? and why do we need it? In this section, I will show why any free society is simply a system to organize a division of labor and cooperate for the purpose of achieving an energy surplus (also known as prosperity). Money is simply the signal which most closely mirrors the state of energy surplus or prosperity. The contiguous and growing stock of Money is the sum total of human prosperity, a reservoir of energy at rest which reflects our ability to do work in the future. Like energy itself, money cannot be created or destroyed but merely conserved.

To help convey this concept, I ask you to imagine our world as a computer simulation where the natural properties and forces are immutable features programmed into the source code of the simulation. Now imagine a geographic sphere called Earth which is bound by those features including the endowment of a fixed quantity of matter (“elements”). Next, introduce a seed of multi-cellular organisms (call them “humans”) which, through an innate desire to survive and reproduce, recognize the need to cooperate. Finally, add a dose of “qualities” intrinsic to these organisms— Love, Hate, Fear, Greed, Altruism, Empathy, Courage, Kinship—and run the simulation.

Given enough time, the humans will always figure out the need to organize into a cooperative system (society) that maximizes the usage of energy in order to withstand the forces of entropy. Given the complexity of the system (due in part to the random and infinite variation potentials implicit in human qualities and natural law), a market system will eventually be employed to discover, extract, transport, and exchange various combinations of energy units (goods/services/information) for the purpose of maintaining the rigidity and state of energy surplus with the intent on further growing the energy surplus. It is at this precise moment that a system of accounting (money) between the cooperating humans in the society will arise.

This system will need to keep track of the surpluses and deficiencies attained by each individual in the cooperative society. This system of accounting will ultimately allow for the market to clear (balance demand with supply) the collective energy units at a level which, at the margin, maintains or grows the overall energy surplus. If the system of accounting fails and there is a loss of energy surplus, the society will succumb to entropy and will fail on its primary objective: reproduction. If the system of accounting succeeds, the state of energy surplus will fuel more accelerated growth in reproduction which in turn will form a more rigid and anti-fragile state of energy surplus with decentralized nodes spread out across various geographies on earth.

As regards to the system of accounting (money), it can follow two potential paths: abstract or physical. Though for it to scale, it must simultaneously exhibit three attributes:

1. Unit of Account — the money must have an intrinsic unit of measurement which is uniform and immutable.
2. Medium of exchange — it must be readily accepted across time and space and be time superior in every transaction such that it “finances its own movement” through all the space occupied by the cooperative society.
3. Store of Value — It must exhibit an intrinsic value which best resists entropy over time. This last attribute is the most important in my opinion as time itself seems to conquer anything and everything from information to civilizations. For something, anything to become a store of value it must exhibit a property I will coin as: “desirability at rest.” In other words, the thing must be so explicitly desired by its owner, at rest, that it alone can provide the confidence and satisfaction as final settlement. Moreover, while at rest, awaiting the next transaction, its owner need not inquire as to its value elsewhere due to external causes and effects. Ultimately, its intrinsic desirability at rest emanates from within rather than from an external cause.

Throughout the course of history we have seen many attempts at forms of money which have succeeded in being a unit of account, medium of exchange, or both, but we have never witnessed anything other than precious metals withstand time as a store of value while simultaneously being a unit of account and medium of exchange.

Back to our simulation: in theory, an abstract accounting system can be employed whereby the intrinsic properties of nature are not relied upon. Promises, Debts, Gifts, acts of Kindness could be and at some point in time will be employed. Over the course of time, however, entropy will easily render abstract accounting systems as obsolete. Just as an empty sack can’t stand upright, an accounting system based on abstract and individual human qualities will fail. Promises change with time, debts and gifts can be subjectively misinterpreted across varying temporal eras and spatial distances, and the mind itself is subject to memory loss and decay.

A more logical system of accounting would employ the foundational properties inherent in the simulation and, as a result, maximize the state of cooperation. Given enough time, physical matter most closely resembling the cost and utility of the energy surplus will be employed as the primary accounting unit. It is at this point in the simulation that “Commodity Money” arises as a physical unit of matter which can serve as money to settle varying surpluses of energy across time and space.

In the final phase of the simulation, society will recognize the basic differences and qualities between the natural elements and how they correspond to and withstand the foundational properties (natural law). It is at this point that experimentation between the elements will ensue for the ultimate arbiter and the truest definition of the energy surplus: an embodiment of the energy surplus at rest, because energy itself cannot be maintained at rest.

# Precious Metals — The Natural Exemplars

In the section above, I ask you to think of our world as a computer simulation. The goal of this thought experiment is to show that money must be a product of our natural existence and that the evolution of money follows a predetermined path given by the original features of nature. The simulation exercise points us towards establishing a commodity money emanating from and inextricably linked to the properties of nature. Because the system is so complex and beyond our understanding, and because entropy is so pervasive, a commodity money must exhibit all the characteristics rather than just some of the characteristics.

In an effort to be more explicit I have distilled this down to what I will call: The Natural Order of Money:

It must be made of Matter, one of the 92 Naturally Occurring Elements

Why? So that the force of Gravity will always govern its Weight.

This will in turn establish the commodity money as an immutable measurement through Time, allowing its value to be regressed backwards through cycles of time and enabling cooperation for a future goal by introducing predictability.

But before our commodity money can achieve all this, it must embody energy while also resisting entropy. Put differently, it must have a high relative cost in units of time and energy while lasting through cycles of time and manifestations of entropy (rotting, decay, rusting).

Of the 92 naturally occurring elements, only four could have ever ascended as the premier commodity money: Gold, Silver, Platinum, and Palladium. These are known as the Noble Metals. Don’t listen to physicists and economists who try to tell you there are other potential elements that would tick these boxes. “What’s the difference between Copper and Gold?” a noted Central Banker once proclaimed to me. The issue at hand is that most academic economists don’t understand the basic geology of matter, let alone the foundational forces and properties in nature. Most are therefore ill-equipped to deal with these concepts intellectually.

Careful inquiry on the part of the greatest minds in history shows that other elements are either too toxic to human touch, infinitesimally rare, or have other shortcomings.

What is so special about these precious metals is that they are a product of nature. They are not abstractions which can change with time. Their properties are not immutable in the face of nature, they are part of nature itself in all its complexity and randomness. They are deeply simple because they availed themselves to us through the same deep simplicity which we have always known: our natural existence.

Is it any coincidence then that through every epoch of human development we have seen either Gold or Silver ascend as the most desired commodity money? As the most critical ingredient in what was efficient cooperation and glorious prosperity? Reducing things back to these first principles, the answer is an unequivocal no. The reconciliation of precious metals as exemplars of nature (physics) with their ascension as commodity money in cooperative human systems should be celebrated and better appreciated as a treasure of history. Unfortunately, this wisdom has been forgotten in our present era.

# A word on Mass vs. Weight

Before I continue, I should explain a few things about the modern definition of “mass” and why I prefer to use the term “weight”. Physicists tend do obfuscate concepts on this planet (earth) when their math-driven theories of cosmology reach observational limits.

The differences between Mass and Weight seem to confuse most people because most of us will never need to care about the mass of an object unless we are theoretical physicists working within a prescribed mathematical framework. In their quest to explain the movement of the planets, scientists from Newton to Einstein have had to re-fashion our general and innate human understanding of “weight” into a more complicated variable concept of “mass” vs. “weight”. This intellectual coup caused a fissure around 300 years ago with the invention of the spring scale. From that point onward, Mass has been generally measured using balance scales, while weight is generally measured using spring scales.

For our purposes, we must define weight as the earthly measurement of the gravitational pull of one object of matter vs. another as accomplished on a balance scale. This definition is precisely the same as what our ancestors have been doing for 6,000 years. Such nuances are important if we are to unearth the fact pattern which will help us understand how precious metals ascended as natural exemplars while cryptocurrencies are just another product of abstract maths.

# The difference between Natural Law (Physics) and Mathematics

I have thus far shown that an objective inquiry into the beginning of documented civilization shows an immutable link between human systems of cooperation and weight, a naturally occurring phenomenon. I have shown that aside from weight, there are other foundational properties inherent in our natural law and order: Matter/Elements, Gravity, Time, Energy, and Entropy. Finally, I have shown how our ancestors embraced these phenomena to devise of an accounting system that would withstand time, energy, and entropy to better optimize their meritocratic efforts of cooperation.

This long-winded introduction was necessary to delineate a basic understanding of nature which many “erudite” people I have come in contact with don’t seem to be familiar with. More importantly, it sets the stage for what I am about to discuss next: The difference between Mathematics (quantity) and Natural Law (Physics).

Whatever you may call our spatiotemporal existence, be it reality, physical reality, virtual reality, no matter what you call it, we should all agree on the basic premise that it is omnipresent. That there are basic sets of natural law and order which pervade our existence, are observable, and are repeatable through time. These are the natural properties I discussed above.

What about Mathematics? Is it a human invention or a force of nature? Is Mathematics truly as foundational as the natural properties of energy, entropy, gravity, and time? Is Mathematics as “real” as Matter and the Elements? Or is Mathematics simply an abstraction of our mind?

In what is my first argument for why humanity requires a commodity money that is a product of and intrinsic to our natural law (precious metals) rather than an abstraction of our mind (fiat/crypto currencies), I will make the claim that Mathematics is in fact a human invention that is secondary to the natural order of things rather than being foundational. Mathematics is a human abstraction which arises as a measurement of quantity in nature while completely disregarding the most important properties of nature: Time and Quality.

As a friend and leading Bergson scholar Stephen E. Robbins taught me:

This profound realization, that quantity (mathematics) does not encapsulate all relevant quality inherent in the natural world is a critical heuristic and helps elucidate the inconsistencies and limitations of mathematics to replicate natural world phenomena, let alone inquire into realms which are non-observable.

Weight vs. Mathematical Measurement of Weight — Cause vs. Effect

Let us go back to the concept of weight. When I weigh an apple on a balance scale against a predefined weight of silver, say 30 grams. I can deduce the weight of an apple in grams of silver. That relationship, between apples and silver may equate to the number 2 because it takes 2 apples to balance 30 grams of silver. I can then repeat this process noting the difference in weight between each apple I weigh. But the actual weight is not endowed by the mathematical relationship of apples to silver. The weight itself is observable as something that is endowed by nature, the gravitational force always and everywhere pulling the apple and silver down to earth unveiling a quantitative relationship to me that is purely abstract and only relevant to one property (weight) of the apple relating to one property (weight) of another material object, silver.

I can repeat this experiment at any time of the day and at any location on earth and the results will always be the same. It is this feature which confuses math zealots into believing the only relevant truths in nature are those which can be quantified. But the quantification itself does little to explain anything other than the relationship of those two values at a fixed moment in time and space. Of course to any observer, the omnipresent force of gravity doesn’t need to be quantified to be understood. We can simply see, feel, and touch matter and understand the various forces at work.

Trying to develop an entirely mathematical framework that would explain the concept of weight and gravity may offer accurate predictions by breaking down each step and translating it into mathematical values. But these values would be useless to predict the weight of other apples which have infinite possible weights based on how they absorbed energy and organically developed through time.

The same would be true if we tried to mathematically calculate what the weight of that same apple will be through time as it begins to rot and decay. Mathematics could never explain what can be easily observed by our own eyes and through our own conscious understanding: there is a natural order to the forces of nature that is always present just as the Sun always rises in the East and sets in the West.

Math vs. Matter, Energy, Entropy, and Time

Here is another example: Let’s say I want to plant an apple tree. I start with two seeds, and plant them in the soil. Given the properties of nature, those seeds which are an organic compound of matter made up of 80% Water (Hydrogen and Oxygen), 10% carbohydrates (Carbon, Hydrogen, and Oxygen) and 10% Vitamins and Minerals (Calcium, Copper, Iron, Magnesium, Manganese, Phosphorus, Potassium, Selenium, Sodium, and Zinc) will through the harnessing of energy (sunlight) and through cycles of time (weeks and months), develop into roots. Those roots, will eventually grow into a tree which will yield apples. At any point in this process. I could employ mathematics by measuring the quantity of days it took for the roots to grow, by measuring the quantity of branches on the tree or the quantity of apples produced each day. I could distill all these steps into mathematical rules that would be codified and taught through time. None of this however would help me understand what’s actually taking place which corresponds to the natural order of Matter, Energy and Time causing these small seeds to become Apple trees within a few months. My understanding of nature would allow me to experiment with other types of seeds and other types of matter. The concepts of energy, time, could be applied to other disciplines as well in the natural world without the need to follow any set of mathematical rules.

It is easy to confuse the predictablity of mathematics with the predictor which is nature. It’s obvious that mathematics didn’t predict anything at all, it simply allowed me to measure relative changes through time by breaking time into instances.

But what happens when we begin to become obsessed with mathematics? What happens when we begin to infer quantitative relationships within abstract quantities that appear to be self evident within the realm of mathematics?

It is the employment of quantity in purely abstract form while excluding the other important qualities, which leads mathematics towards a path of axiomatic proofs. Within this realm of “pure math” there becomes an infinite regress of potential outcomes.

Both Galileo and Plato misunderstood this. They believed that mathematics is a feature of nature that underlines the structure of the Universe. Galileo went so far as to call mathematics “the language of God”.

But these views have been sufficiently falsified both in the time of those great thinkers as well as in the present. These days in academia, the leading thinkers agree that there are limitations to math that have caused great harm to our basic understanding of nature and have led us astray in our quest for foundational truths. Physicists such as Lee Smolin and philosophers such as Roberto Mangabeira Unger even authored a book devoted to the problems inherent in Math. This view of mathematics is more consistent with how Einstein once described math:

From my personal experience in learning and debating the fundamental nature of quantity, pluralism, and mathematics, I have found that most great physicists, mathematicians, and scientists will agree (in private) that our fundamental understanding of nature through the prism of mathematics is misleading and flawed. Quoting Hellman and Bell:

The forces and properties which govern the laws of nature: Matter/Elements, Gravity, Weight, Time, Energy, and Entropy are not intertwined with mathematics. They are entirely different concepts. That said, our minds have a propensity to probe nature in a manner that allows mathematics to arise as a useful tool that holds true irrespective of time and space. But this exclusion of time has great repercussions and philosophers, logicians, and mathematicians have observed these paradoxes for thousands of years.

One of my favorite of these paradoxes is that of Zeno of Elea, a philosopher, logician, and great doubter of the efficacy of mathematics in the natural world. Zeno was born around 495 BC in what is now Southern Italy. As first recounted by Aristotle in Physics VI:9 Zeno proposed a paradox between our perception of reality and the probing of that reality through mathematical quantification. In his most famous paradox known as “Achilles and the Tortoise”, Zeno states the following:

The dichotomy when translated into mathematical rules is deeply simple: Suppose someone wishes to get from point A to point B. Well, first they must move halfway. Then, they must go half of the remaining way. Continuing in this manner, there will always be some small distance remaining, and the goal would never actually be reached. There will always be another number to add in a series such as 1 +1/2 + 1/4 + 1/8 + 1/16 + …. So, motion from any point A to any different point B is seen as an impossibility.

But of course we can see with our own eyes that a faster runner will not only catch up to, but easily pass a slower runner. Both pictures of reality cannot be true at the same time. Hence, either: 1. There is something wrong with the way we perceive the continuous nature of time, 2. In reality there is no such thing as a discrete, or incremental, amounts of time and distance, or 3. Mathematics has severe limitations as probing tool and is therefore a second order cause.

In 1895, Lewis Carroll the Oxford logician and author of Alice in Wonderland brought to light yet another central problem in logic. He showed that merely having axioms — even the best and most perfect axioms — is not sufficient for determining truth in a system of logic, for one also must be very careful about one’s choice of rules of inference. In other words, one’s assumptions must be explicitly augmented by the exact mechanisms by which one is to deduce consequences from those assumptions.

In 1954, British Philosopher James F. Thomson came up with another variation on Zeno’s Paradox called Thomsons Lamp. In this puzzle, a lamp has a toggle switch. Flicking the switch once turns the lamp on. Another flick will turn the lamp off. Now suppose we program a computer to perform the following task: starting a timer, the computer turns the lamp on. At the end of one minute, the computer flicks the switch again turning it off. At the end of another half minute, flicks the switch on again. At the end of another quarter of a minute, off. At the next eighth of a minute, on again, and the computer continues thus, flicking the switch each time after waiting exactly one-half the time it waited before flicking it previously. The sum of this infinite series of time intervals is exactly two minutes. But at the two minute mark can we ever truly know if the light is on or off? Thomson believed the answer is an unequivocal no due to the infinite regress problem. Of course in reality, we could easily repeat this experiment and figure out whether the light was on or off at the two minute mark.

What unifies Zeno, Thomson, and Carroll is a point that is essential to understanding modern logic. Unlike in the classical Aristotelian conception, modern mathematics relies ultimately on pure formalism in its use of logic. This avoids the infinite regress in which the tortoise traps Achilles.

This trap is impossible to avoid if logic is not formalized, because, as Douglas Hofstadter points out in Gödel, Escher, Bach in order to know how to use a rule (such as a rule of inference) you need a rule telling you how to apply the rule. And then a rule telling you how to apply that rule, and so on. By contrast, in formal logic, rules of inference are reduced to rules of symbol manipulation. Since the symbols themselves are uninterpreted, we have a system as austere and elegant as chess, where it is understood that the game arises from — and entirely consists in — the rules for moving the pieces on the board.

Kurt Gödel was an Austrian-American logician, mathematician, and philosopher. He is considered along with Aristotle and Frege to be one of the most significant logicians in history. The most important of his contributions was to our understanding of the limitations of mathematics. In 1931 at the age of 25 he published his two “Incompleteness Theorems.” Gödel posits that every non-trivial formal system is either incomplete or inconsistent:

Gödel shows that it is impossible to be completely truthful and completely universal; you can never say every true statement without saying some false ones, or, alternatively, you can never say only true things without being forced to withhold some true statements.

Mathematics Arises from Nature but is a Second-Order Property Accessible to the Human Mind

In this section I have sufficiently demonstrated that mathematical abstraction is a second- order property to the first-order natural properties and forces. Applied mathematics or quantification can be a useful tool in terms of probing reality or helping us measure relative values through time and space. However, I think it a fool’s errand to believe mathematics causes nature and I think it even worse to attempt to reconstruct nature within a rigid system of mathematical values under a belief that such values may unveil a more complete understanding of nature.

Naturally, there is a significant body of work from the mathematical community that has for two thousand years attempted to falsify some of the arguments I have put forward. None of these pass the common sense test and require ever more infinite regresses which still cannot reconcile the basic problem: irreconcilability of math with reality.

Always remember, when you pick up anything and it drops, that force is gravity. The reason that different “things” you pick up have different “weights” is because everything is made up of elemental matter. The reason silver can’t be turned into gold is because each element has unique physical properties that are foundational and immutable. When you heat organic matter and it combusts into a combination of light and energy (fire) that force is energy. When that fire dissipates through time, that force is entropy. And the reason why every cause has an effect is the irreversibility of time (duration). All of these properties and forces are the first order causes and are more important to money than mathematics, I implore you to familiarize yourself with them.

# Cryptocurrencies — (Abstraction Squared)

Thus far, I have discussed the fundamental properties in nature. I have shown how these properties have been well understood back to the beginning of written history. I have demonstrated how these properties of nature produced natural exemplars: precious metals that ascended as commodity moneys in a cooperative society that yearns for a state of maximum energy surplus. I have shown how in a system of cooperation, a commodity money must always ascend and how, over time, precious metals have always been recognized as the preeminent commodity money reconciling with their natural properties. I have then gone on to explain mathematics as second-order human abstraction from nature.

In this section, I will introduce cryptocurrencies, a newish monetary phenomena which at its core resembles all past historical attempts at abstract monetary systems from the Romans to failed Chinese attempts, to John Law’s Mississippi scheme to countless others.

I will show how, irrespective of the hype and proclamations of technological advancements, cryptocurrencies, being built entirely within the realm of mathematics and therefore being entirely abstract, lack the intrinsic properties of nature found in precious metals.

Finally, I will show how cryptocurrencies will follow the trajectory of past experiments with abstract moneys leading to one of two potential outcomes:

1. Competition ad nauseum leading to an impossibility to retain desirability at rest and rendering cryptocurrencies obsolete as long-term stores of value.
2. Potential systemic tail risks due to the inability of any mathematical system to be 100% resilient.

In 1998, Wei Dai, a cryptographic researcher working for Microsoft published a paper entitled “b-money” which outlined a cryptographic system that would reside on computer servers and be entirely anonymous. Dai described it as “money which is impossible to regulate”. In his paper, Dai goes on to layout a mathematical system which has the following axioms:

• Requires a specified amount of computational work (aka Proof of work).
• The work done is verified by the community who update a collective ledger book.
• The worker is awarded funds for their effort.
• Exchange of funds is accomplished by collective bookkeeping and authenticated with cryptographic hashes.
• Contracts are enforced through the broadcast and signing of transactions with digital signatures (i.e., public key cryptography).

Nearly 10 years passed with no subsequent inquiry into the concept of cryptocurrencies. Then on December 27, 2008, Nick Szabo, a legal scholar, computer scientist, and cryptographer published a new mechanism for a decentralized digital currency called: “bit gold”. Szabo’s “bit gold” (not to be confused with my own “BitGold.com” ), was a revolution in that it attempted to quite literally mimic the natural properties of the element Gold (Au) though in digital form.

In my prior life, I was a hedge fund manager running a small investment partnership. Around 2007, I began to develop a deep interest in gold and natural resources. From 2007 to 2012 I acquired and invested in several dozen gold mining companies all over the world and even acquired mines and deposits outright. Even today, I still personally control 6 deposits in North America with significant in situ resources of gold, silver, zinc, and iron ore.

Reading Nick Szabo’s proposal for bit gold is a bit like having someone compare what’s actually happening in the extractive industries to a game of Minecraft. The core difficulties inherent to the physical extraction process which ultimately set the long-run marginal cost of various commodities are smoothed over with such finesse (proof of work, digital assaying, challenge bits, and secure time stamps) that leave you scratching your head. Over the years, I have had the pleasure of discussing these ideas with experienced mining investors, geologists, engineers, and geostatisticians who have all unequivocally agreed with me on this point.

At its core, what Nick was trying to achieve is a formal mathematical system which would (as he believed based on his own understanding) be as rigid as the properties found in nature. His belief was that this mathematical system could be programmed with rules that would yield an abstract commodity with a high marginal cost in the form of a “proof of work”. This abstract commodity, though not intrinsic to nature, would be digitally omnipresent at any point in digital space. The result, as posited, would be a “digital gold” which would, owing to the programmed properties at inception, have a (1) high and escalating marginal cost through time and (2) circulate freely within the system enabling it to function as a unit of account, medium of exchange, and store of value — money.

But there is a crucial aspect of mining physical commodities under the laws of nature which is missing: non-linear, non mathematical, infinitely complex randomness. Whether it’s metallurgy which changes with each mine, geopolitical instability, changes in the cost of capital, or labor issues, these variables are not equivalent to a randomized proof of work as embodied in the original cryptocurrency proposal by Nizk Szabo. To me, there is an even more important fatal flaw: exploration. In order to have the privilege of “mining” in nature you must first explore. The exploration process whereby nature is probed by capable professionals renders 5,000 exploration attempts as obsolete for each economic “ore body” that is discovered. This is completely different than a digital proof of work requirement whereby a collective of digital miners can run software at a subsidized energy cost and simply wait for the passage of time to produce coins. Back to the natural world, after a mining company successfully delineates an ore body and raises sufficient capital to build the mine (generally 10–20 years), they then have to combat the entropic cycle which depletes their ore body in time. Therefore, they must continue to explore for another ore body in the future which may be in an entirely different geographic position on earth.

It is precisely these ebbs and flows, this constant negotiation with nature and its omnipresent properties by man which yields commodities (made up of matter/elements) that have intrinsic value. Their price is irrelevant at any given time because they have ultimate desirability at rest. They are not mined within a second-order cause mathematical realm, they are required as part of an effort towards maintaining a maximum energy surplus for our species.

In January of 2009, a mysterious individual released software called “bitcoins” launching the network which became the first cryptocurrency: bitcoin. The individual launching the software did so pseudonymously under the moniker “Satoshi Nakomoto” which means “Central Intelligence” in Japanese. Though Nakomoto published a paper before Szabo in October of 2008, it is my and others belief that Szabo and Dai’s work in developing the cryptographic proof of work/digital gold philosophies predate the official Bitcoin Whitepaper and that the intellectual genealogy can be traced back to them as well as a computer scientist named Hal Finney who passed away in 2014.

Why is this important? Because I believe most participants in the cryptocurrency space, especially those proclaiming that cryptocurrencies will supplant precious metals as premier commodity moneys, don’t fully appreciate that the original conception has always tried to mirror the natural properties of precious metals. This salient point is important as it is ultimately the reason why these abstract systems of money became nascent in the first place. As Szabo was a scholar of monetary systems, he was uniquely positioned to architect a system which may exhibit some of the properties that enable a commodity money to rapidly ascend as a medium of exchange and unit of account. While I haven’t asked Szabo this, I wonder whether he truly believes that “Bit Gold” or any cryptocurrency for that matter could ever exhibit the store of value properties endowed to precious metals by nature.

On January 2, 2009, the “genesis block” of bitcoin was “mined” marking the inception for what would become a new revolution in abstract money: cryptocurrencies. Since then, 16,224,950 bitcoins have been mined that are presently valued at \$16.7 billion. The term “Bitcoin” has become so ubiquitous that its now searched for nearly as often as the word “Copper”, one of civilization’s most important elements.

The advent and subsequent proliferation of bitcoin has made a lot of people a lot of money. By allowing bitcoins to trade on exchanges, the value of bitcoin, which itself is an abstract mathematical concept existing only within its rigid system of mathematical rules, could be traded for other assets and currencies. This is how bitcoin truly derives its value — when it is traded against a US Dollar, Euro, or through my own company Goldmoney where we allow the bitcoin to be converted into physical gold. But if you take away this exchangeability, bitcoin has no desirability at rest. I will expound upon this point further below.

Though Bitcoin was the first cryptocurrency to gain wide adoption in practice, its fundamental properties being a mathematical abstraction mean it has no long-term moat from competition. There can be no limits to the amount of bitcoin copies or improved versions of bitcoin which can be created by man through time. I implore any readers to show me any abstract concept or idea throughout history which survived the arrow of time without being challenged, debated, changed, improved, or improvised? Information and abstractions are second-order properties that, given enough time, suffer from “paradigm shifts” and are therefore incapable of withstanding entropy.

It is no surprise then that only 8 years following the creation of bitcoin, we now have 669 cryptocurrencies. These cryptocurrencies are presently valued at \$23.5 Billion and trade nearly \$900 million a day. But what are these abstractions ultimately achieving aside from enabling speculative fervor?

When I buy a share of stock, that share corresponds to a business in the real economy which provides a service or produces goods that ultimately yield a capital profit. That share of stock is therefore a claim on the future earnings of that business. When I buy a bond, I have a specific claim against tangible property I can touch and feel, or earnings streams owing to some real economic activity in the future. When I buy and sell a physical commodity (whether electronically in the future, or at a spot transaction physically) I am acquiring ownership over something I need as either an input good in a process or to be consumed for the purpose of maintaining my energy surplus.

Where does a cryptocurrency fit? It’s clearly not a security (stocks, bonds), as it does not have a claim on anything in the natural world. It’s also not a commodity future as there is no end consumption and its not an input good in any productive process in the real economy. The closest comparison I can come up with is that with fiat currencies. Cryptocurrencies are simply variations on the concept of fiat currency. While they may have different bells and whistles and they may be supported by a different government (“decentralized miners”) that regulate their issuance and decree, they ultimately lack desirability at rest due to their being a product of the mind — a human abstraction. They can be engineered as superb units of account and medium of exchanges that even pay for their own movement within their rigid systems of mathematical laws. But their being a store of value will always rely on the exchangeable value rising requiring the continuous inflow of capital at an increasing rate of change over time.

We can already witness this claim manifest in the market. Eight years ago, bitcoin was the only cryptocurrency around. Today it must compete with 668 other cryptocurrencies. Because there is no desirability at rest and the exchangeable value cannot rise forever, time will cause rich bitcoin owners to convert their bitcoin gains for other cryptocurrencies that may have better characteristics or exhibit a more avant-garde informational abstraction consistent with future temporal trends.

This claim is backed by empirical proof: Since 2009, Bitcoins share of the total market value of cryptocurrencies has dropped from 100% to 72.5%. We have seen entropy take its toll on the original rigid rules of Bitcoin slowing down transaction speeds and requiring actual network participants to yearn for an improved version (Bitcoin Unlimited). And while the Bitcoin community has been squabbling, a dark horse cryptocurrency built on an entirely different model that doesn’t mimic any of gold’s original properties and actually embraces inflation as a fundamental property, Ethereum, has ascended into a market value of \$3.6 Billion. Ethereum has seen investments from the world’s largest banks and it’s creator, the 23 year old Vitalik Buterin, has seen his personal stake in Ethereums go from 0 to \$70 million in just 2 years. Last week, yet another cryptocurrency: Dash has seen an inflow of capital as the proponents claim its algorithmic rules are even better than Ethereum. The list goes on and on: Ripple, Monero, Zcash, Litecoin, and Ethereum Classic (oh yeah cryptocurrencies can also get hacked), every few weeks a new abstract idea seems to compete with the hegemony of the original idea (bitcoin).

Cryptocurrency zealots are temporally arrogant in believing they can replicate the fundamental properties of nature. Their view is that the proof of work/marginal cost translates to units of time/energy. That underlying marginal cost, they believe, is what will serve as a long-run “put” propelling the storage of value properties for cryptocurrencies.

The issue with that argument is that markets do not clear based on historic cost, they clear based on future utility. That a bitcoin has a high energy cost does not change the fact that it has no desirability at rest. And as I have shown above, being mathematical rather than natural means there will always be competition from other abstractions for what potential utility may exist in the future.

Remember, unlike physical precious metals, a cryptocurrency can’t just be removed from its rigid mathematical system and held in your hand. The omnipresent force of gravity can’t just unveil its weight to you whenever, wherever, and forever. In the case of Gold, it’s naturally endowed elemental properties govern that, from 92 potential elements it will always be the best form of matter to fashion into a ring, or to be employed in a semiconductor chip to conduct energy. The cryptocurrency only exists as an abstraction and therefore its desirability at rest is always inexorably linked to its utility as an abstraction.

Most Convincing Desirability at Rest Use Case for Cryptocurrencies is Illegal — Anonymous Money Laundering

There is of course one potential use case which I can think of that may change my view on cryptocurrency desirability at rest and therefore its long-run relationship to its proof of work cost.

In an increasingly centralized global society, there may be demand for cryptocurrencies as an apparatus of liberty, to exchange value anonymously and outside the laws and regulations governing money transfers. This use case, though illegal, may be the ultimate arbiter of value long-term. Why else would anyone choose to own the cryptocurrency at rest if its price is no longer rising? And as I have explained, the price can’t always rise due to the Ponzi finance mechanics inherent in all fiat and abstract moneys.

Unfortunately, there is is an issue with this argument too. If the primary store of value properties correspond to anonymous exchanges in the present predicated on future “like for like” exchangeability, the competition ad nauseum from other cryptocurrencies will always render the anonymous exchange of value properties as volatile and random. This makes it nearly impossible to predict what the future exchange value of the cryptocurrency will be.

This is also a big problem as there is no “like for like” utility here. You can’t acquire one unit of a cryptocurrency knowing that in the future you will simply part with that unit and receive commensurate value in the natural economy. The value of the unit is always being referenced in what it can be converted into: mainly fiat currencies or other cryptocurrencies.

With precious metals, though this may not be well understood or appreciated, an acquirer is almost always measuring in weight and parting in weight. The fiat conversion value is secondary within the long-run decision. Why is that? I will explain in the next section…

# Understanding the Difference in Utility between Natural Elements and Abstract Money

4,500 years ago, Meskalamdug, an early ruler of Ur wore this pure gold helmet as he marched down the battlefield. When his tomb was discovered in 1924, the helmet along with other pure gold artifacts he had been buried with were in pristine shape, radiant like the sun.

As I have discussed here and here, Gold’s physical properties as a malleable metal, make it extremely useful to humans in the natural economy. Gold can be fashioned into jewelry which provides unequivocal value at rest satisfying desirability at rest of “final settlement”. Being chemically inert, it’s also the single best conductor of electromagnetic energy. That’s why every smart phone has roughly .04 grams of gold on its circuit board worth about \$2. While it is true that through time and throughout the world, civilizations primary desirability at rest for gold has been as commodity money to be used in future transactions, that doesn’t change the fact that gold has fundamental physical utility at rest. Why did King Meskalamadug wear a shiny helmet to battle? Why was he burried with that helmet? My opinion on this may help elucidate the critical differences between natural elements as money vs. abstract concepts.

It is my opinion that King Meskalamadug didn’t wear shiny gold helmets because they exhuded strength and superiority to his enemy. Owing to his state of surplus as measured in the premeir commodity money gold, he was incentivised to preserve his optionality by moulding some of that surplus into useful goods — from helmets, to daggers, to bowls, plates, and jewelry.

The ability to mold precious metals having a cost in energy while resisting entropy, into a physical good is imperative for why they have “value at rest”. Their natural properties are always enforced by nature at no cost. This means that to its owner, there is a well understood implicit future optionality always inherent while at rest. This optionality doesn’t reference the exchange value but the intrinsic natural properties. Those properties lend themselves towards the first cause: usage as commodity which in turn enable the secondary effect: ascension as a premier commodity money. However, once the ascension has taken place and the commodity money has been adopted. That first cause: utility as a commodity is what permits the growing stock to have desirability at rest.

# Conclusion

In this essay, I have set out to prove that money must follow the natural order of things and that abstract concepts of money not inexorably linked to nature will inevitably fail as money. I have taken the reader through a history of our species back to the first written word. I have demonstrated the omnipresence of physical phenomena (natural law) and how our ancestors embraced these phenomena to cooperate under a meritocratic accounting system that would maximize our chances for survival. I have shown that the predominant unit of account through time has been weight and that weight as a concept has been well understood since that first written word 4,100 years ago.

In what was a rather long section, I have expounded on the problems first highlighted by Zeno of Elea and more recently discussed by Lee Smolin and Roberto Unger, as to whether mathematics is intrinsic to nature or is caused by nature. I have shown how abstract mathematics leads us down a slippery slope that does not fully encapsulate the deep simplicity inherent in our natural world. That a system conspired entirely of the mind and math will fail to exhibit the basic resiliency built into nature.

I have shown how precious metals are intrinsic to nature and are part of the same system which governs weight, gravity, matter, energy, entropy and time.

Once this position was sufficiently established, I showed how the first and most successful Cryptocurrency, bitcoin, was designed by humans to mirror the natural properties of gold. I then showed, basing on a decade of experience in geology, mining, and the extractive industries that these designs were poorly conceived even in their attempt to mimic the long-run marginal cost of natural commodities. More importantly, I showed that all cryptocurrencies being rigid mathematical abstractions lack the most fundamental property of nature: resiliency to adverse change (entropy).

It is my view that abstractions of the mind are susceptible to the cycles of time, or erode through the cycles of time, while properties of nature are intrinsic to the arrow of time (duration).

For precious metals, the “blockchain” is nature and natural law. Holding gold in your hands requires no reference to a block of bits or bytes to tell you what you own and requires no future exchangeability to establish its long-run value. It’s weight, its elemental classification, its ability to resist entropy, its cost in energy, are all endowed by nature. It’s utility as a commodity money, jewelry money, or its optional input value as a commodity in the production of goods is what sets the marginal demand through time. To its owner, gold is more valuable at rest than it is in an exchange.

Conversely, blockchain and cryptocurrencies, being a human abstraction, have no value at rest. There is no need to “store” them for the future aside from two potential catalysts:

1. A rising price
2. The marginal value as an anonymous medium of exchange and therefore store of value.

Therein lies the problem. I have shown how, due to the classic ponzi-finance dynamics (not enough new money entering the system to maintain a rising price), 1 can never always be true, otherwise bubbles would form.

Moreover, we have issues with 2 as well. For 2 to be true, there can be no competition for cryptocurrencies. As I have shown, since the advent of the first cryptocurrency, bitcoin, there have been 668 additional cryptocurrencies invented, all competing for the #2 spot. That competition will make it difficult for any one cryptocurrency to maintain hegemony as the defacto anonymous medium of exchange and store of value. This constant reshuffling of the deck chairs will lead to just one remaining use case for cryptocurrencies: Speculation. Yet when it comes to cryptocurrency speculation, we see a world akin to the historic “bucket shops” with no regulations either as a currency future, or security. While I can see how, given the billions of dollars involved, capitalists will try hard to force these currencies into financial markets under the guise of them being “the new gold” or other nonsense, and I have even made a personal bet that this bubble is in its 2nd or 3rd inning at best, a recent SEC Order made sensible and logical arguments as to why cryptocurrencies lack the fundamental properties necessary to be traded in a regulated environment.

Finally, in the Cryptocurrency section of this essay, I mentioned but did not expand upon the following: Potential Systemic Tail Risks due to the inability of any mathematical system to be 100% True.

As discussed in the section on Mathematics, there can be no guarantee that any mathematical system is full proof. While our present understanding of cryptography and prime numbers allows these mathematical abstractions to appear as entropy-proof, I am confident that, with time, entropy will also render this view as flawed. This fundamental tail risk means that cryptocurrencies are always susceptible to “downside asymmetry” as information which is believed to be true can, at any point in the future, be rendered false. With precious metals, we have the inverse. So long as the laws of nature don’t change, the general trend will be “upside asymmetry” as there can be no surprises as to the fundamental properties of precious metals and therefore their ultimate desirability at rest.

In closing, I should mention that in full-disclosure, I hold a significant stake in bitcoin and even a small stake in ethereum. You might ask why I would publish this piece while being long bitcoin? The answer is that I believe these are early days in the cryptocurrency bubble and I have made a career out of speculating both long and short on secular bubbles. Like other astute capitalists, I can smell lots of money will be made in this bubble on the speculation side, but unlike others, I am not disillusioned as to how this bubble will end, with massive losses of capital for most participants.

The reason I ultimately decided to author this essay was to correct the public record after seeing increasingly ridiculous assertions by financial market participants, economists, and technologists that cryptocurrency was an improved version of precious metals. “Bitcoin is Better than Gold” or “Cryptocurrencies are more valuable than Gold” seems to be a mantra repeated by the cryptocurrency crowd desperate to maintain the rate-of-change inflow of capital needed to support a rising price. These poorly conceived statements have imbued in me a desire to remind people of the natural order of money which seems to have been forgotten. It is my hope that this primer will guide investors and allow them to avoid making critical errors in judgement.

Roy Sebag, March 21, 2017

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