The Cryptocurrency Singularity
October 15, 2017: With the input from many readers, I decided to rewrite a version of this blog post. It’s written in a way that you do not need to refer to this article. Read it instead.
The ancient coins are excellent in point of standard; they are assuredly the best of all moneys; they alone are well struck and give a pure ring; everywhere they obtain currency, both in Greece and in strange lands; yet we make no use of them and prefer those bad copper pieces quite recently issued and so wretchedly struck. ~ Frogs by Aristophanes
Around 400 BC, Sparta captured silver mines controlled by Athens and released the slaves. This caused a shortage of silver that forced Athens to issue new bronze coins with a thin plating of silver.
The hoi polloi, noticing the difference, kept the older silver coins and used the mostly bronze coins for every day expenditures. Weighing one coin in each hand, the baker, buying barley from the farmer, chooses to give the lighter one. Before long, the inflated coins became worthless which nobody wanted.
Gresham’s law is a monetary principle stating that “bad money drives out good” — Encyclopedia Brittanica
According to this principle, people will want to use the “bad money” for every day expenses, and keep the “good money” under their mattress. Thus, the “good money” goes out of circulation leaving virtually only “bad money”.
The baker, during one of the many the inflation crises in ancient Greece, kept the “better” coins, and paid with the “worse” coins. The “better” coins then were kept out of circulation.
Gresham’s law is typically used to describe moneys that have the same nominal value but a different commodity value. Take another example: given two coins in circulation whose face value is $1, but one is 80% silver and the other is 20% silver, which one would you hand to the shop keeper?
The point of the law in this context is that people, when choosing between spending two types of money, will want to let go of money that is of less value to them. Loosening the usage of Gresham’s law slightly, you can draw the line towards people wanting to let go of money that is depreciating in value quicker than the other.
Although this principle seems to pertain to metal coins, I think that the effect that is seen in Gresham’s law can be applied to the world of cryptocurrencies.
“No one wants to spend [bitcoin] [to pay for a meal]”, concluded the person I was talking to, who offered a service that allowed restaurants and stores to be paid accept bitcoin.
No one wants to spend [bitcoin] [to pay for a meal]
I had been able to pay for two things with bitcoins: my coffee and a meal. I had not been able to find more stores over the years of checking up on this service.
In spending those bitcoins, it seems the geeky side of me was in driving — I wanted to spend them to encourage the service and the businesses accepting them. However, the non-geeky part of me didn’t feel like spending it. I wanted to keep them because bitcoin has, since its inception, on average increased in value at a about 150% per year. On the other hand, the Pesos in my wallet were decreasing in value at about 3% per year. Even if were the case that bitcoin had not risen in value compared to the Peso, if were both stable enough and degraded slower than 3% per year, I would feel more comfortable keeping more of my money in that form.
Singularity is most popularly known as the point in which AI advances will reach a point where there will be runaway cycle of improvement upon itself. As AI improves itself, it will learn how to become better at improving itself, thus causing the explosion of intelligence.
With cryptocurrencies, I define the singularity to be the point where the cryptocurrency becomes as stable against the US Dollar.
With just a glance, you can see that Bitcoin has becoming more and more stable compared against the USD to EUR and USD to NZD rates. When the singularity is reached, I think people will be more likely to choose to spend their inflationary fiat currency instead of their deflationary cryptocurrency. The longer they choose to keep inflationary money, the more they will lose in purchasing power.
As people value the inflationary fiat currencies less, they will hold less of their wealth in it. Every dollar dumped back into the market means that there will be more in circulation, continuing the downward spiral of inflation. Those who choose to keep their money in inflationary currencies will lose even more of their purchasing power, thus pushing them towards moving their savings to deflationary cryptocurrencies.
My thoughts on this are not original — they stem from an assessment made by the U.S. utility industry about how Solar panels could destroy U.S. utilities. The gist of it is that the more people use solar energy generated off the grid, the more expensive it is for the rest of the customers that are not generating their own energy. As it becomes more expensive for them, they get pressured into jumping ship, further increasing the vicious (or virtuous) cycle.
What Will The Governments Do?
This is the part I find equally fascinating. Will governments around the world begin to make their currency deflationary in order to make it attractive? Will they recklessly outright ban cryptocurrencies without a clue on how to enforce this well?
Will The Singularity Be Good?
No doubt that it will leave certain people with sacks of worthless money. It will not be good for the ones that move later. However, will it be good for the society?
I do not claim to know the answer. What the pundits of inflationary currency usually bring up is the The Great Depression. The most convincing argument I’ve seen is the Alan Watts’ analogy of “inches”:
Do you remember the Great Depression? One day everything was going on all right. Everybody was pretty wealthy and had plenty to eat. The next day everybody was in poverty. What had happened? Had the fields disappeared, had the dairy vanished into thin air, had the fish of the sea ceased to exist, had human beings lost their energy, their skills and their brains? No. But on the morning after the Depression a man came to work building a house, and the foreman said to him “Sorry chum you can’t work today,. there ain’t no inches.” He said “What do you mean there ain’t no inches?” “Yeah” he said, “Yeah, we got lumber, we got metal, we even got tape measures.” The foreman said “The trouble with you is you don’t understand business. There are no inches. We have been using too many of them and not enough to go around.
— Alan Watts, From Time to Eternity
Alan Watts continues on and says “Human beings are so unbelievably stupid, that they confused money with wealth.” He claims that money is a measure of wealth, not wealth itself.
Does it matter though? Can we stop the singularity?
I don’t think we’ll be able to stop this. People will always want to move their money into a form that degrades the least over time. This simple forcing function is the pressure that makes the valves pump.
Knowing that this kind of future may be in store, what kinds of discussions should we be having ?
If Aristophanes were alive today, I wonder if he would write something like this:
The cryptographic coins are excellent in point of standard; they are assuredly the best of all moneys; they alone are mathematically secure and travel weightlessly; everywhere they obtain currency, both here and in strange lands; it is good we make use of them and avoid those bad paper pieces so wretchedly and carelessly printed.
Update Sept 13, 2017: Since publishing this story, there have been many responses spread out through Medium’s comments, Twitter, HackerNews, and conversations in the meat space.
I want to address them all in a format that’d useful to everyone including the ones that thought these but bothered not to bring them up, therefore, you can find them here.
I will also update this blog post to avoid the reader from getting distracted by some of the things I mentioned.
Thank you to Jeffrey A Tucker for making me think about my usage of Gresham’s Law. He pointed out that the effect of the law is there, albeit in a complex manner.