This article is the third and last part of a mini-series about Bitcoin and the Lightning Network. In the first article, I had a short look at the Lightning Network and why it will have a catalysator effect on Bitcoin and participating cryptocurrencies to give up HODLing and start using. Another article was dedicated to the effect of the Lightning Network I expect to see in a reduction of the importance of proof-of-work-based mining and a sustainable downsize in the next decade or so. I encourage you to read about the Lightning Network and understand it as an extension of Bitcoin, which corrects all flaws, unfold in the last few years. In this article, I want to enable you to draw conclusion why Bitcoin combined with the Lightning Network is not able to fail — from an ideological point of view. Please note that I use the term “Bitcoin” equivalent to the “Lightning Network as a top layer on Bitcoin”.
Before taking a brief look into the future I need to ask you some patience and to realize a few facts and events from the past. I will not directly draw conclusions from the past events, but let you decide, in what way they probably could influence the future of Bitcoin.
With a brief look back at history, you will be able to follow my ideas about Bitcoin’s future below.
Events to consider — judge yourself
Not even 100 Years ago most of the people’s wealth was backed by gold. The amount of gold was (and is) limited on this planet, it is a worldwide accepted commodity und due to these facts an ideal candidate to store wealth and protect it from inflation. A knight armor in medieval times, a pageantry robe or a tailored high-class business suit today cost approximately the same amount of gold.
Fiat money, on the other hand, is issued by states and was only backed by gold in the past. These times are long gone. The global gold reserves can only cover fractions of the World’s economy. Gold generally is highly undervalued and the gold price completely manipulated. From this point of view, there is a lot of truth in the phrase “In God We Trust” on the US banknotes.
From this, it can be concluded that the value of fiat money is only a generally accepted agreement of all users under the leadership of the issuing institution. The end user has practically no influence on the valuation of money, while the issuing institution can influence its value in both directions by controlling the money supply. Below more about that.
Anyway, gold is still the first choice if it comes to storage of wealth and the expropriation of all gold and gold certificates in the year 1933 shows clearly that even the government does not trust the value they print on paper. Issuing paper money never kept governments all over the world from taking gold away from people in times of urgent need and high demand. It is said, today the value of fiat money is backed by the work of the people. Is there an equality of wealth and work? How can you store the wealth you worked for and protect it from being taken away from you if even gold is not an option.
From the past, you can learn, that even if you don’t believe in a sustainable value of cash and you save your wealth in gold it is not secured against your government’s hand.
Do you think this example is too far-fetched? Please remember the Great Recession triggered by the Financial Crisis 2007/2008. A detailed description of both events would go far beyond the scope of this article. Moreover, the effects and views on size and duration are subject to ongoing discussions — in both scientific and economic circles.
But for those who do not want to bite through tons of books and meters of scientific discourse, I recommend socio-critical, populistic and entertaining approaches. In other words, watch these movies:
So who learned a lesson from the Financial Crisis? The governments? The bailed-out banks? The Central Banks and Federal Reserve Banks? Politicians? Banker? Hedge fund manager? Ordinary People? That is a serious question. If your kids burn their fingers they learn something and tend not to repeat it. But if they have to deal with hot stuff again they are by far more careful than before, or? Are the central banks worldwide acting the same way? Are the governments trying to control inflation or are they printing even more paper with the word money? The system did not change even a little!
Die Deutsche Bank, who seemingly was left with the Old Maid in form of all the bad loans and derivates, is, in fact, unassailable, because it has gained the power to let the whole system collapse. That is the only reason they are still allowed to play in the same sandbox with the other kids.
Fiat money is not inflation-proof. It is an instrument to control wealth. If governments want higher inflation they give out more paper notes (or issue more, or lend out with lower interest), and the other way round if they want to restrict inflation. But the tendency is clear: Through the amount of money you can control the value. And the value is not controlled by people, but by a system operated by a small group. As a user you cannot decide how much you value one Dollar, it is valued by what you I see two options only: They spared wealth in the past and enriched in an outrageous way from the compound interest effect and/or they are the ones who dare to claim that they are the wealth issuing entity. In fact, that declaration entitles them to collect interest without any equivalent.
But the real problem is the accumulation of interest. See, if you work you get paid a salary. The salary you use to make a living. So your only source of income is your work. The interest you get, if you are already in possession of reasonable wealth and you have enough of it to lend it out. In general, the value of interest is linked to the lender’s risk or considered as a reward for providing capital (in the form of increasing liquidity). That rarely questions anyone but is still not the point. By lending out money for interest, the money volume is virtually raised and thus inflation funded. But that is still covering the biggest issue with the system of interest. Dare to ask the question: How did that institutions get the money for the first time to be able to lend it out? What put them in a position to accumulate assets so that you can increase without a counterpart in labor?
I see two options only: They spared wealth in the past and enriched in an outrageous way from the compound interest effect and/or they are the ones who dare to claim that they are the wealth issuing entity. In fact, that declaration entitles them to collect interest without any equivalent.
In summary, the value has shifted from gold to paper money. Paper money is an instrument to buffer and control wealth. In contrast to gold, the amount of money is potentially unlimited and is subject to the laws of inflation. The difference in valuation between inflation-resistant gold and inflation-prone banknotes is subtracted as added value by the money-issuing institutions (governments) in form of interest. Interest (and not taxes!) serve to milk people.
And what happens if this system is driven against the wall by the ruling class involved? Nothing! The participants take care to re-establish exactly the same structures and go over to business as usual literally. Banks are bailed out, the economy is saved, but the bill people pay with more work for less salary under a barely controlled inflation.
It is easy to translate these conditions from microeconomic to macroeconomic, and ultimately to global relationships.
Tulips and the market for modern art
At this time Bitcoin entered the game. It fulfills all requirements you have at a modern banking system. It can store wealth and that value can be transferred from one to another. But contrary to gold it offers even more options. You can transfer that value over borders in nearly no time and with acceptable side costs. You don’t need someone to save it for you in a vault. There is not a single issuing entity. And the best is: You are the owner of the value you created with your work. After exchanging your income from fiat money to a digital currency like Bitcoin the value is by far more inflation-proof than any paper money can be.
Of course, Bitcoin and other cryptocurrencies are going through a period of suffering from high volatility, which makes them useless as a global currency. The exchange rate goes up and down and people holding Bitcoin feel like on a rollercoaster for years already. And this ride was faster than all economic rollercoaster before. Mistakes have been made, things worked out completely different than expected, but on the other hand, big developments have been achieved in less than ten years of Bitcoin’s invention. I am firmly convinced that the moment of mass adoption will come soon, volatility will calm down after a (high) phase of fiat to digital currency conversion. The Lightning Network will play the decisive role in this development. Then Bitcoin will be the payment processor and digital currency it is supposed to be.
Meanwhile, the establishment is calling it fraud, Ponzi scheme, and bubble from the sideline. Some faction saw the problem of scalability to compete with payment processors like Visa, Western Union, Paypal, UnionPay, Alipay or Google Pay. But those are only payment processors. Payment processing is a byproduct of Bitcoin and the Lightning Network is capable of nearly infinite scaling at low-to-no-costs. Bitcoin’s real competitors are gold and currencies. While gold is a commodity storing value, currencies are representations of values issued by states.
Bitcoin was considered as an empty investment bubble in the last years and compared with the Tulip bubble in the 17th century or the price bubble with investments in modern art in the 1980th. I don’t like both comparisons at all, because Bitcoin has a “real use case” that is to value by far higher than a popular decoration for your home, which can be grown in masses in a short period (inflation!) or modern art, where beauty is in the eye of the beholder (subjectivity). Tulips are subject to the pork cycle, of course, a temporary high demand led to an inflationary production and eventually into a speculative bubble, and modern art may have a hypothetical scientific value for art history or for a person’s personal development, but it stays a kind of far-fetched and very subjective value.
Bitcoin has a clearly defined use as digital currency, which makes value digitally accessible, transformable and transferable with an elimination of any third party. The last part is crucial. Bitcoin cannot be confiscated or expropriated easily. It depends on an open ledger but eludes control. Bitcoin gives the control over wealth back to the user and eliminates the options of third parties to participate in the equivalent to ones work.
The only comparison I see which leads in the right direction, that Bitcoin is some kind of misinterpreted dot-com bubble. End of the last millennium (does anyone but me still use this term?) investors bought stock shares of any company, which had “dot com” in its name, without they (the investors) had any idea or at least a blurred insight into the options of the new technology called “the internet”. The parallels to Bitcoin 2017 are obvious. I remember an ice tea company rebranded as “Long blockchain” and their market value tripled!
Blockchain-Hype is the real bubble, not Bitcoin
The basic assumption that Bitcoin’s underlying technology blockchain is actually the main value, is already wrong! The investors at the end of the year 2000 saw a technology (internet) and tried to invest in companies to forecast winners of that technology. With extremely limited knowledge, they tried to identify Facebook, Twitter or Amazon even before they were founded. That aiming is wrong, but from an investor’s point of view, it made at least sense. But they never tried to invent the internet a second time to compete with it, or?
Today investors interpret blockchain as the big invention, but that’s not true. I do not want to belittle the value of Satoshi Nakamoto’s invention in any way! But the blockchain is a distributed database, and in simple terms, it is and stays a database. The focus switched from Bitcoin to blockchain only because the investors wanted to gain control over a system, which was designed to be independent and secure from being controlled. So what do you do, if you can not own something? You copy it. That is the only reason why we have thousands of blockchains serving thousands of cryptocurrencies, of which only a few have a unique purpose or at least an additional unique use case aside from being a cryptocurrency.
Bitcoin is a protocol. It equals what HTTP (or today HTTPS) is for the internet. It is freely available and the idea to jump on the train, reinvent something by reverse engineering, get patents granted, and eventually be able to claim technology as your invention and own it, is completely wrong. From this greed for control, most cryptocurrencies (insofar as they claim to serve as a means of currency and compete with the use case of bitcoin) are derived. There may be exceptions.
Bitcoin is a payment protocol for processing global transactions with the elimination of third parties, not an investment of commodity which makes an early elite with special knowledge a several sportscar buying USD billionaires.
Perhaps the notion that Bitcoin is completely open-source at the developer level. Ideologically it is a necessary condition for trusting a system that operates without the control of a third party, as well as managing all transactions in an open-ledger decentrally. Bitcoin reminds very strong on Linux, it is a free, the ultimate expandable, freely available and authenticable and with sufficient expertise it is possible to uncover bugs, problems or vulnerabilities.
“The lesson from the Internet is anything that China bans, invest in it.”
As you see Bitcoin is about to change something. It shifts over monetary power from banks, governments, and other institutions to individuals. Governments don’t like it, banks don’t like it either! Banks already earn with asking fees for keeping your money safe. In Europe, you don’t get paid any interest anymore, but you have to pay a management fee. It was cheaper you take your cash from the bank and stuff it into your pillow cover! The truth is that you pay banks to manage your wealth and they get in control of that wealth and participate in it. So banks are paid by individuals for evaluation, custody, transportation of their earnings. Additionally, they are paid interest by the ones they borrow money (your money!) and whose businesses work out. The unlucky ones just lose everything.
- Half of the world’s wealth belongs to the top 1%,
- Top 10% of adults hold 85%, while the bottom 90% hold the remaining 15% of the world’s total wealth,
- Top 30% of adults hold 97% of the total wealth.
Does that match your expectations of a fair distribution of the wealth which represents the equivalent of your labor?
The Generation ’68 wanted to overthrow the establishment and started a revolution. They reached at least a change on a sociological level. Nowadays movements like Occupy Wallstreet and We are the 99% raised only temporary awareness of the problems and then fade away. Quickly forgotten, because their members needed to earn money to make a living. To earn that money they needed to rely on a common accepted financial system. The only financial system they have experience with and they could choose is the actual one we live in. Resistance is sentenced to fail and leads to social and monetary isolation.
“Every society is only three meals away from revolution!”
Various personalities dating back to the ancient Roman society are quoted with the saying above (or a variation of it). They all have in common, that they address the people having not enough to eat are the ones who demand the change. Well, as long people live in a system which provides idea to the majority that they can make a living and are arrested for pretending that they are able to climb the social ladder, and as long TV, internet, social media, and smartphones provide enough entertainment and diversion to bridge the time between two meals, there is no reason to begin — much less to continue — a revolution.
Don’t get me wrong at this point. I may sound like one, but I don’t consider myself as a communist. All communist societies seem to fail and to lead to corruption because of an inherit egoistic and selfish nature of people. The tries to establish communism end all up in an exchange from one ruling class to the next without removing the underlying structures. Maybe in the beginning intentions changed people’s minds, but established structures both external and internal stayed the same — and eventually caught up people’s reality. I just realize that if communism means to create a fair monetary system in which every participant is treated fair and is in control of all his wealth then maybe I am a communist after all.
There is only one way to break that vicious circle: You have to change the system from the inside. Well, it is quite hard to become the treasury secretary, the noteholder or chief of a global leading bank or investment enterprise, world’s biggest hedge fund, a world leader, or to gain enough power to change things top down.
So you need to create an alternative which inconspicuously becomes a wide accepted payment and value system to disempower the financial establishment. If it is created by users for users and protected from being taken over, it has the potential to change the world bottom top. Not from inside and exposed to the seduction of corruption, or dictated from the top, but started over from the bottom of the ground — money build up again from the scratch, governance by the users through their valuation and acceptance. The perseverance and inconspicuousness will help such a system to achieve a worldwide breakthrough. Do you know one?
Bitcoin’s approach is different — a monetary system built up from the scratch!
You remember interests as a problem? The theories about the use and meaning of interest are as numerous and varied as the criticism of charging interest at all. Both date back to ancient times and are judged similar in different ideological and religious systems. Almost all of them had in common that they consider the raising of interest to be bad and limit it to external groups and/or in height. According to current interest rate critics, charging interest is constantly widening the gap between rich and poor. In addition, economic and debt crises arise regularly and periodically, which in worst case culminate in armed conflicts — both locally and globally.
Interest rates lead to needing for growth, exponential growth in public debt and hidden interest rates, which are inherent in all products and thus lead to a general increase in prices for the end consumer. In simple terms: Interest finances the lives of a few very rich through the labor of many poor. The current interest system is often compared to a Ponzi scheme. Ironically, this is an expression many bankers use to describe Bitcoin.
Of course, on any kind of monetary system you can install a layer, which includes charging interest, but from its principles and coding Bitcoin does not know interest and is currently undertaking a global transformation process to return value of fiat money to the ones who created due to their labor in the first time. This principle is realized by minting new coins combined with rewarding the work of verifying transactions. Even if new Bitcoins are only brought in circulation to a restricted group in the beginning, there is no reason for this group to hoard Bitcoin in the long term. It brings no interest! Also, there is no need to control Bitcoin’s inflation because there is none. So-called whales can influence the exchange rate by putting more or less volume on the free markets. Even if Bitcoin is held back in large quantities to drive up the exchange rate, one doesn’t get interest and compound interest for the idle capital.
Liquidity and investment are thus promoted — even if that is not the case at the moment. (Keyword: HODL. HODLing is based on speculative motives, which is a temporary counterweight to the market power of institutional speculators. Hoarding does not work the long-term and damages the valuation of Bitcoin as a whole. It will be cut back if the Lightning Network cares for Bitcoin’s mass adoption.) Please keep in mind, that Bitcoin is in a fiat-to-digital conversion phase.
In its function as a currency, you can exchange your fiat money for Bitcoin. At the base, Bitcoin becomes a global banking system under the control of its users (primary function) and, moreover, a value storage and transfer system — free of third parties’ interest, driven by fees.
What will the global regulators do?
A G20 summit of the Finance Ministers and Central Bank Governors just ended. Main topics discussed were global trade restrictions and an impending trade war, but also the regulation of cryptocurrencies and ICOs.
“We call on international standard-setting bodies (SSBs) to continue their monitoring of crypto-assets and their risks, according to their mandates, and assess multilateral responses as needed,” G20 leaders said in the communique.
That means they watch, but actually, don’t take action. This will not be easy in the future either, because it will be difficult to agree on a common approach.
If bitcoin is once too big to fail, you can only try to control and regulate the fiat-to-digital conversion process by controlling the trading platforms and markets places. Extensive efforts are already being made worldwide to reach that goal. But decentralized platforms are on the way and the first global banks are already established, which help in a crypto-friendly way to convert fiat to Bitcoin.
What shall the establishment do? They can not really regulate Bitcoin. They can not effectively forbid it. They can not completely block or ban it. That was similar like expropriate people openly. One thing is certain: Bitcoin’s future depends to a large extent on its mass adoption. And Bitcoin is well prepared for this — other cryptocurrencies, especially the ones not supported by the Lightning Network, are not. They only play a temporary role in the fiat-to-digital conversion process.
If people start to abandon the government issued fiat currencies more and more and use the digital and free currencies instead even the most effective weapon of the establishment will eventually fail: Their ignorance.