S2F models are the ideal way to predict the price of any commodity asset or precious metal, as they perfectly reflect a supply and demand intersection. S2F calculates the price of an asset by dividing the total supply by the annual increase in supply, or flow. Despite S2F models theoretically accurately reflecting movements in supply (scarcity) over time and scarcity’s impact on the price of an asset, S2F models are rarely used by investors outside of the crypto sector. While a great tool in a perfectly predictable world, it is impossible to accurately calculate a result using such a model. Take gold for example - no one can know how much gold is mined each day, and no one knows how much sits in vaults around the world. Any estimation would be a wild guess, making the S2F model great in theory, but impractical in real life… unless applied to Bitcoin. Bitcoin was the first asset with a capped supply, and the ability to see the exact flow of supply, all viewable on the blockchain. For the first time, the S2F model had the perfect asset to track.

S2F predicts the price of Bitcoin on any given date by dividing the total supply of Bitcoin, divided by its annual flow. The total supply of Bitcoin was 21 million, though it is estimated that around 2 million of these coins have been lost over the last decade, bringing this number to around 19 million. Annual flow is the number of Bitcoin mined in the year. This can be calculated by multiplying the block reward (6.25 BTC) by the number of blocks mined in a day, multiplied by 365. For more information on how mining works, see a previous article here. The supply divided by annual flow should show the price of Bitcoin, according to the S2F model.

Bitcoin enthusiasts rallied around this model, especially after proving accurate up until the 2021 bull market. The S2F model served as a note of certainty for investors in such a volatile asset – a graph that had been true so far, suggesting that it would probably continue to be true in the future. Unfortunately, that trend has ended. Today, the Bitcoin S2F model suggests that the price of Bitcoin should be about $100,000, and yet the price sits just above $20,000. What happened to the S2F model, and does it still have merit as a price prediction tool in the future?

As with most other growth asset classes, Bitcoin has been dropping over the past few months as a result of the dreary economic conditions rolling in. Bitcoin itself has been hit with wave after wave of problems. From poor government policy written by politicians with no understanding of Bitcoin, to interest rate hikes, and billions of dollars of liquidations, the Bitcoin market has dropped to its 2017 highs, something that has never happened before in the Bitcoin market. The question must be asked, what is the driving force behind the price of Bitcoin? The S2F model says that scarcity should be the largest driving force behind price, and yet economic outlook has overshadowed this fact to decrease the price of Bitcoin well below its fair value. The Bitcoin S2F model has proven inaccurate, not because of its failure as a model, but because of investors’ failure to understand the asset. Treated as a speculative tech stock by wall street, as a pyramid scheme by politicians, and as a get rich quick grab by day traders, Bitcoin is facing a reputation crisis. One might think that an asset such as Bitcoin that is immune to inflation and to poor economic policy by central banks should be the safe haven asset of every investor in the world during these economic times, but the truth is that most Bitcoin investors know little about the underlying technology that makes Bitcoin an attractive investment. As a result, Bitcoin is often treated, even by many sophisticated investors, more so as a speculative, volatile asset that can result in short-term profits, rather than a long-term hold that grants unique benefits to asset holders. The failure of the S2F model serves not as a sign of Bitcoin’s imminent failure, but as a sign that Bitcoin is being looked at wrong by investors and could recover in the coming months. While the worry and fear that came from the recent price drop can cloud the judgment of investors, the S2F price deviation highlights that Bitcoin is an incredibly oversold asset. Confident investors can buy Bitcoin without a worry, knowing the value of the scarce asset they own, while the rest of the world scrambles to make sense of the economy around them. Do not let those clouded by fear change your perception on the value on Bitcoin. If you owned 1 Bitcoin at $60,000, you owned 1/21 millionth of the only true scarce asset on Earth. If you own 1 Bitcoin at $20,000, you still own 1/21 millionth of the only true scare asset on Earth. Pay no mind to the noise, and continue to hold with confidence.

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Maybe you’re sick of hearing about voter fraud on the news. Every four years, half of the country is outraged that their favorite politician lost. Four years later, those accused of committing voter fraud in the last election are the ones accusing the other party. Back and forth, we play a ridiculous blame game amongst our nation, never reaching any conclusions or creating sound voting practices to avoid future fraudulent votes. Blockchain technology holds a potential solution for voter fraud that could rework our election day logistics to create a more secure, accessible, and transparent voting system.

Why do voter fraud allegations occur? What do these instances have in common? It is often said that votes have been cast by people unable to vote, be it noncitizens, dead people, or fake individuals that had an identity fabricated to gain an extra say in the choice of candidate. Additional measures to prevent this possibility, like voter ID laws, are often controversial due to their potential for Jim Crow type abuse. Claims of fraud are often non-substantiated, with only a handful of actual voter fraud allegations leading to arrest, but mistrust of America’s elections is nonetheless exacerbated. Whether or not there are large scale operations fabricating votes and swaying elections, it seems prudent and necessary to restore faith in our elections to create a more unified nation.

An technologically enabled election process would be more secure than the one used today. It is difficult to think of a single company that still relies on pencil and paper to do business, but government always lags behind innovation. A ballot, once filled in by the voter at a voting booth, runs through a machine that logs its information, and the ballot is stored in a box for potential recounting. In 2016, there were 230 million ballots cast. Surely, there exists potential for extra slips of paper to go missing or added to a box by a political agent. Mail-in ballots pass through the postal service, reaching the hands of dozens of workers on its path to be counted. Blockchain could provide maximum security and integrity of each vote cast, removing any shred of possible ballot tampering. A user who casts a vote through a blockchain voting system can be sure that their vote will not be changed and will not be touched or tampered by any individual.

Imagine a system where every US citizen eligible to vote is given an NFT worth “1 X year election vote.” A voter could transfer said NFT to whichever politician they want to see elected. Come election night, the person with the highest count wins. These NFTs, minted by the US government, are impossible to replicate or tamper with. Any question on voter eligibility would be auditable, with a record kept on the blockchain of each citizen given an NFT visible to the public. This system could easily protect the privacy of any voter, by not publicly recording who they voted for, but rather whether an individual was given the opportunity to vote. Thousands of ballot counters would no longer be staying up through the night to tally votes, and recounts would be unnecessary. A perfectly auditable and public system that still maintains the privacy of a voter can be accomplished through blockchain voting.

This improved election process would also be more accessible than the one used today. Every year, Americans take the day off work, close their local town halls or schools, and stand in line to enter the voting booth. An incredibly inefficient process such as this could be improved through blockchain. Much like shopping, work, and even doctor appointments can be done at home, so could voting. Any voter could cast their “NFT ballot” from home. Arguably, this might increase voter participation, as it lowers the effort needed to cast a ballot, a win for a democratic republic like the United States that seeks to hear the voices of as many citizens as possible. Those citizens that do not have access to electronic devices at home can simply log in on a publicly available computer, such as those available at libraries.

How might this impact international election sentiment? While any democratic nation should adopt a blockchain voting system to once and for all solve the issue of voter fraud, what about nations that actively suppress their citizens’ votes? North Koreans must love the Kim family; Kim Jung Un received 100% of the votes cast in the latest election. Right? Blockchain serves primarily as transparency in whichever setting it is used. In non-transparent elections, how might blockchain serve a role? While no tyrannical dictator will ever allow for a true, auditable election, adoption of these measures abroad could serve to pressure those leaders. Any step taken by the free world towards freedom and democracy comes at the expense of tyrannical leaders working to suppress their people. Not only would blockchain technology work to make our own elections more efficient, more secure, and more trustworthy, but would serve as a groundbreaking step in the fight for freedom and democracy worldwide.

How do we move towards a safer, more secure, and more accessible voting system? There are still several hurdles to cross before these measures can be adopted worldwide. In 2018, West Virginia piloted a mobile voting application called Voatz, with the goal of increasing voting accessibility. One major problem with Voatz was the issue of identity verification. Doesn’t that bring us right back to the voter ID debate? Creating a program that can verify the identity of hundreds of millions of Americans, accounting for document typos, name changes, address changes, death certificates, etc. is a daunting task. Many of the same issues that create the possibility for voter fraud today might still arise with these scenarios, and more. Denial of Service attacks also pose a threat to a digital voting system. Whichever blockchain is chosen to host a nation’s elections will be fronted with unimaginable traffic all at once. A blockchain that can handle this kind of traffic would be expensive and difficult to make and maintain. If the voting software crashed on election day, then what? Even if it could be done, a foreign attacker could create millions of server requests on the UI side of the program, to crash any NFT wallet provider that would hold the NFT votes. What happens if your vote is inaccessible on election day? These problems, and many more that might arise are enormous hurdles for any blockchain election advocate to overcome. With innovation comes hardship. Nonetheless, the potential for a blockchain voting system is an interesting topic in the digital world and could serve to prevent voter fraud across the globe in the future.

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Stable coins maintain their pegged value through algorithmic issuance of tokens. While the tokens trade based on traditional market supply and demand, the issuing body (Tether, Circle, Luna) adds or removes tokens to stabilize the price. When the crypto market has a red day, investors flock to stable coins to avoid further losses, waiting to jump back into their original investments once they have bottomed out. On these red days, demand for stable coins is hot, and the price might increase by a small amount. The issuing body would then issue additional tokens to stabilize the price.

Stable coins are not always pegged at $1. Several projects seek to back their tokens with decentralized blockchain assets, most commonly Bitcoin or Ether. On-chain collateral for their currency removes any speculation or doubt that the issuing body has full backing for their currency. This is important for investors, as falsified collateral reports have been published in the past. Tether, issuer of UST, the largest stable coin to date, was fined $41 million by the CFTC after it was discovered that they only had enough collateral to back their tokens about 25% of the time. On-chain collateral would be visible and transparent to any investor.

Terra was one of the first issuers to back their stable coin, UST, with on-chain digital assets, using their token Luna. It is important to note that Terra also had several billion dollars in Bitcoin collateral on the side. Their stable coin UST was pegged at $1, but in periods of demand for stable coins, the price might rise to $1.01. At this point, investors in Luna can convert their Luna for UST. This increases the supply of UST, which will help bring down the market price back to $1. The investor can then sell the UST at $1.01, making 1% on the transaction. The brilliance of the TerraUST/Luna conversion is that investors are incentivized with an arbitrage opportunity to regulate and maintain the stable coin’s price. In the Terra ecosystem, no issuing body increases or decreases the supply of UST; rather the market does so itself. Investors trust that this self-correcting cycle will hold up their stable coin.

On May 10th, the price of UST fell from $1 to $0.62, a shock to the cryptocurrency community. In the following days, it fell further to less than a cent. For the last six months, crypto lending platform Anchor offered a 20% yield to investors who bought UST and lent it on the Anchor protocol. This move was meant to be a marketing campaign by Terra, hoping to draw in new customers. Such a high return led to countless investors flocking to UST, hoping to be rewarded with such a high yield. This opened the door for a dramatic attack, being likened to George Soros’ attack on the Bank of England.

Terra held several billion dollars worth of Bitcoin in collateral for its UST stable coin. An attacker borrowed $3 billion in Bitcoin and bought about $1 billion in UST. The attacker then started selling the UST very quickly, destabilizing UST and dropping it below the $1 peg. Terra sold more and more Bitcoin as the price of UST dropped, hoping to restabilize the price. However, this caused the Bitcoin market to tank as well, with so many coins entering the market. The attacker then bought back their Bitcoin, essentially “short selling” Bitcoin for a huge profit. As a result of the attacker dumping $1 billion in UST on the open market, other market participants lost faith in the stable coin and their promised 20% yield, causing a massive bank-run on UST, with almost all holders attempting to sell. As a result, the attacking party made off with a huge gain on their short sale of Bitcoin. UST and Luna are now worth practically nothing, as investors lost faith in the tokens.

While on-chain collateral for stable coins was a widely anticipated development for the crypto community, the Terra attack shows two important lessons for investors. First, the attacker relied on the widespread panic and subsequent bank run on UST once its price was low enough that investors lost faith. Stable coins with larger market caps, and therefore larger liquidity pools, are harder to manipulate. While no stable coin issuer can simply increase their market cap at will, investors and issuers alike should see the benefits of more established projects, understanding that smaller cap projects are riskier investments, as they are prone to similar attacks. Second, the irresponsibility of Do Kwan, founder of Terra, is greatly responsible for the bank run that occurred on his token. Kwan, an energetic and eccentric entrepreneur, is also a shady businessman, who began his career with an algorithmic stable coin project named Basis Cash in 2020, which also failed to maintain its $1 peg. Kwan’s 20% yield Anchor marketing campaign was unsustainable from the start and was designed to be a Ponzi scheme. Kwan paid investors their 20% yield with money from new investors, taking advantage of investors for his own company’s gain. The unrealistic expectations of investors led to their exaggerated fear when the coin dropped, causing the bank run and crash of UST. Investors need to be wary of unrealistic returns and conduct research on the individuals they are trusting with their money.

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She writes, “it's also hard not to think of Bitcoin as a big old truck belching out fumes as it's overtaken by faster, more environmentally friendly models. Cryptocurrency exchanges are bursting at the seams with Bitcoin alternatives. Many newer cryptocurrencies use more ecofriendly mining models, which environmentally conscious investors might want to check out.”

Newbury, along with hundreds of other outspoken environmentalists including Elon Musk and Elizabeth Warren, are fearful that Bitcoin adoption could lead to more drastic climate change. The notion that the Bitcoin network, which is the most secure computer network created in the history of the world, is of lesser value than some other coin being shilled on Coinbase is absurd, and completely ignores the inherit value of a secure, decentralized, and private form of money. Nevertheless, energy usage and emissions in Bitcoin are the hot topics in the Bitcoin environmental debate. While it is paramount to be aware of the possible effects of new industries and technologies on the climate, these arguments against Bitcoin are misguided and misleading.

Bitcoin miners secure the network by validating transactions and are rewarded with Bitcoin in return. The financial incentive for miners is to pay as little money as possible to be rewarded with the greatest amount of Bitcoin.

CEO of Foundry, Mike Colyer, said “The Bitcoin network is ruthless in its drive for the lowest cost. Miners around the world are looking for stranded power that is renewable. That will always be your lowest cost. Net-net this will be a big win for Bitcoin’s carbon footprint.”

The concern that most anti-Bitcoiners have on energy consumption is that the Bitcoin network is far too carbon-intensive due how much electricity the network uses. However, very few Bitcoin miners are using energy from nonrenewable sources. In fact, it is estimated that about half of US Bitcoin miners use renewable energy to power their machines. The simple fact is renewable energy is more affordable than nonrenewable for these miners. The exodus of miners from China to Iceland, Canada, and the United States allowed for greater use of geothermal, wind, and nuclear-powered Bitcoin mining operations.

As Colyer stated, it is in the miner’s best interest to use renewable energy. Plans to mine Bitcoin with geothermal energy from untapped volcanos have been proposed in El Salvador and the pacific island, Tonga, the former being a country with Bitcoin as a legal tender, and the latter planning on doing so soon. Tonga is a small nation that has 21 active volcanos. Each volcano can produce 95,000 megawatts of energy at any time. With only 120,000 people living in Tonga, 40,000 megawatts would be enough to power their entire national grid. Lord Fusitu’a, a former member of Tongan parliament, stated that the excess energy would be used to mine Bitcoin. Each volcano could generate $2,000 in Bitcoin per day, all mined from free geothermal energy that was otherwise going untapped. Tonga is by no means a rich nation, so transforming their only natural resource of geothermal energy into income for its people, while also securing the Bitcoin network, shows the incredible opportunity that Bitcoin extends to underdeveloped nations without draining the energy grid. Critics argue that Bitcoin uses too much energy, but they overlook the clear benefit that Bitcoin and Bitcoin mining has. Never was there a method to convert excess energy into money until now. While there are miners that use nonrenewable energy, there is a tremendous incentive for Bitcoin miners to use otherwise wasted geothermal energy, and the mining industry will most likely proceed down this route in the coming years.

With Bitcoin mining quickly moving green using free geothermal energy, another concern with Bitcoin is the large amount of energy that securing the network draws. Estimates rate Bitcoin’s energy usage at less than 1% of the worlds energy usage. While this is a large number, it is misguiding when thrown around as an argument against Bitcoin’s utility. No, 1% of the world’s energy is not an efficient use when dedicated to a worthless internet coin, but Bitcoin is so much more than that. The less than 1% of the world’s energy that Bitcoin takes reflects the most efficient use of energy in the world. Instead of being turned away from Bitcoin for this statistic, you should instead be amazed at what Bitcoin could do for only a small share of the world’s energy consumption.

Think about this:

Bitcoin adoption would remove the need for banks. Banks have hundreds of offices and buildings around the world, and thousands of commuters who drive to and from work each day. The banking industry consumes roughly 260 terawatt hours per year, more than twice the energy that Bitcoin consumes.

Bitcoin adoption would also remove the need for mints, treasuries, and other government organizations that create and store physical money. These buildings draw significant energy, have a massive carbon footprint, and similarly require thousands of commuters to drive to and from work in their gas-powered cars, and use their computers that draw energy. Bitcoin adoption would provide banks and freedom of money to billions of people across the globe, protecting them from government corruption, theft, and irresponsible monetary policy. This humanitarian cause alone is worthy of substantial resources put behind it.

The bottom line is this:

Every industry in the world uses some of our energy resources on Earth. As citizens of the world, we should be focused not on squashing innovation because it has costs, but on finding the most efficient uses of our limited resources. Bitcoin is the most efficient use of energy ever created and has a built-in financial incentive to use renewable and untapped clean energy sources. While Bitcoin comes with a cost of energy consumption, it is irresponsible to write it off for this reason, as this standard would similarly write off many other important technologies being used in the world today.

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 “James, you should stop mining diamonds, and start mining Bitcoin.”

What is Bitcoin Mining?

In the beginning, there were 21 million Bitcoin in existence, but none were available. For a Bitcoin to be “issued,” a person uses their computer to solve a complex math problem, rewarding them in some amount of Bitcoin. The idea here was to turn the energy the computer consumed to solve the math problem into money. This is referred to as mining Bitcoin.

Just as I might solve a math problem faster than a friend of mine, some computers solve these math problems faster than others. Every computer has a specific “hash rate,” or measure of computational power. The more hash a computer has, the faster it can mine Bitcoin.

When a math problem is successfully solved, the miner will be rewarded with a certain amount of Bitcoin, called the reward. The reward amount varies, based on the “halving cycles.” In 2009, the reward for one of these problems was 50 Bitcoins. Every 4 years (roughly), this reward is split in half. In 2012, the reward became 25 Bitcoins, in 2016 it became 12.5, and so forth. This controls the rate at which Bitcoin can be created.

If I can use my laptop to mine Bitcoin, then why isn’t everyone?

With only 21 million Bitcoin to ever exist, the Bitcoin mining industry is the world’s greatest race. The total amount of computing power directed towards mining Bitcoin at any given time is called the “network hash rate.” The higher the hash rate, the more competitive the race for remaining Bitcoins. On January 1st, 2015, the network hash rate of Bitcoin was .34 exahashes per second (EH/s), with one exahash being equivalent to one quintillion hashes. Today, the hash rate is 188.02 EH/s. In 2015, very few people were mining Bitcoin, and those who did were rewarded handsomely. Today, there is more than 500 times the competition for each Bitcoin remaining.

To beat out the competition, people bought better and better computers, and mined in more efficient ways. In 2009, you could have mined Bitcoin using your laptop, since the hash it could produce would have been competitive against the very small .34 EH/s network hash rate. This type of mining was called CPU mining. Very quickly, however, people saw that using a computer built to play games, watch TV, or do work was not the most efficient way to mine Bitcoin.

Next came GPU mining. GPU mining is like CPU mining, but in this case, the graphics card of a computer was used to solve the math problems. Graphics cards are made to handle immense computing power, as video games have a lot of information being relayed and displayed at any given time. GPU mining allowed people to ditch the non-Bitcoin related parts of a computer and buy only the graphics cards to mine Bitcoin.

Today, the top-of-the-line Bitcoin miners are the ASIC Antminer S-19s. ASIC stands for “application specific integrated circuit,” a computer made for a single purpose – Bitcoin mining. These machines use a special chip that is designed purely for Bitcoin mining, not to run a laptop or play video games. An ASIC Antminer S-19 produces 110 terahashes per second (TH/s), with one terahash being equivalent to one trillion hashes. For reference, CPU miners produced about 1300 H/s, which is equal to .0000000013 TH/s.

Since it takes an exponentially larger amount of computing power to be competitive in Bitcoin mining, how can it still be profitable if the block reward is cut in half every four years?

The answer to this lies in basic supply and demand. During one cycle of four years, the inflation rate, or the supply of new Bitcoin entering the market, is fixed. Let’s use the second halving as an example. In 2015, the block reward for mining Bitcoin was 25 coins. The market became accustomed to this amount of new supply entering the market, and the price moved to the point at which all buyers were accommodated. In 2016, when the reward was halved, a supply shock ensued. Now, there were half as many Bitcoins being mined and entering the market as before. A steady demand and a decreasing supply led to a rise in price. The chart below shows an interesting pattern that supports this statement. About 2 years after a halving, the price rises dramatically, before remaining relatively steady for the remainder of the cycle. While the block reward was cut in half, miners were being rewarded in 12.5 Bitcoins that were worth 10 times as much as they were in 2015. While the number of coins being rewarded dropped, miners made much more money after the halving.

Profitability Variables

In 2022, there are billions and billions of dollars entering the Bitcoin mining industry, as entrepreneurs hope to grab a piece of the remaining supply. A final consideration on Bitcoin mining is the geographical locations in which it is done.

The requirements for a location to be a profitable Bitcoin mining location depends on the following factors: energy costs, climate, and internet speed.

Bitcoin is exchanging energy for digital currency. A miner wants to make sure that the energy they are spending is less than the currency they receive. In Durham, New Hampshire, energy costs about 18 cents/Kilowatt hour. In Quebec, Canada, the cost is 7 cents/Kilowatt hour. The exchange rate between energy and Bitcoin is clearly more advantageous in Quebec, or any location with a lower cost of energy.

Bitcoin miners, like all computers, can overheat. These miners are built to withstand running 24/7/365, but the heat they generate can have an impact on their efficiency. Miners have adapted to this issue by circulating air inside a mining facility with large fans or airplane engines, but these cost money. Instead, miners look for cold regions to place their miners, so that the computers do not overheat.

Finally, the internet speed is important when mining Bitcoin. Without internet connection, the software cannot run.

Locations that meet these requirements include Canada, Iceland, Kazakhstan, and Wyoming.

The Bitcoin mining industry is a complex whirl of math and energy cost calculations, but it can be boiled down very simply. Bitcoin mining exchanges energy for digital currency, and releases new supply of Bitcoin into the market. While Bitcoin mining continues to be a very interesting and complex practice, miners have been rewarded with one of the most profitable industries of the 21st century.

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As simple as it might seem to create a perfect form of money, humans have been struggling with this task since the beginning of time.

We are in an age of a new monetary system, the first to ever be engineered to perfection. The creation of Bitcoin, or the Bitcoin blockchain, will revolutionize the way the world views money, and the institutions surrounding it. Bitcoin recognizes the failures of past systems and works to create a perfect and sound form of money that acts as a storage of value, a medium of exchange, and eliminates the need for trust in third parties. This article outlines four of the major monetary systems of the world, why they have failed, and how the Bitcoin technology has improved on these weaknesses.

Monetary Systems Throughout the Ages

The Bartering System

In the most basic form of economic transaction, humans began trade through a bartering system. Bartering economies utilize trade of objects or resources in exchange for other objects and resources. A farmer might trade their crops for clothes from a tailor, shoes from a shoemaker, or cattle from a cattle herder. In these economies, two individuals agree to a transaction because they both have something the other wants and deems equal in value to their resources. Bartering systems have worked for thousands of years and still exist today mostly in underdeveloped areas. While it is easy for two individuals to trade resources with no third party involved, there are large issues with the barter system for growing economies.

Problems with the Bartering System

The first issue with the bartering system comes when two parties cannot agree on an equitable trade. Say a farmer wants to trade four bushels of wheat for one cow, but the cow farmer wants five bushels for his cow. What happens then? When two parties cannot agree to a trade they both see as beneficial for themselves, no trade can occur at all.

The second issue is the limit on economic growth that the barter system imposes. Bartering works well in a small, local economy. However, as civilizations began to grow, it was highly inefficient to transact through bartering. The same farmer who wanted to trade four bushels of wheat for a cow, now has offers to receive shoes, clothes, horses, books, candles, and hundreds of other items in exchange for his wheat. The farmer can either accept these trades and have hundreds of objects he does not want or need, or abstain from selling his wheat, putting his farm out of business. There is less incentive for the farmer to contribute to the economy by selling wheat when he cannot get the things he wants and needs in return. On a large scale, barter economies carry immense inefficiencies with them, limiting growth of an economy. Physical resources could not succeed as money, as they failed to offer a universal medium of exchange.

Minted Coins

To improve on the bartering system, currency was invented. Now, instead of trading a cow for a bushel of wheat, people could trade a coin for wheat. The advantage to this is that because a coin could be used to buy any item, it has value to the second party in the trade. Empires around the world adopted the use of coins, often made of precious metals like gold and silver. A monetary system that uses only one type of precious metal in their coins is known as monometallism, though most countries opted for a bimetallist system, where there were multiple types of coins (gold, silver, copper), so as to not exhaust the resources of one type of metal, and to increase stability in the currency by increasing its market cap. More metal means more coins. This system made for more efficient transactions by removing the need for a trade of physical resources, provided a more stable storage of value than livestock or crops, and was easier to transport than physical resources.

Problems with Minted Coins

The minted coin monetary system had a few fatal flaws, that eventually led to its replacement. The first issue was the potential for currency arbitrage.

The regulating body who minted the coins set an exchange rate between the two types. For an example, imagine that England makes gold coins and silver coins. England might say that 1 gold coin is equivalent to 20 silver coins. However, the market prices of the metals from which the coins are made deviate from this fixed exchange rate. Individuals would opt to move all their savings into the undervalued metal, as they knew over time, they would make up the difference between the fixed price and the market price. The graph below shows the silver to gold ratio in the United Kingdom since 1300. With such volatile movement in the supply ratios of these two metals, this arbitrage method would be very profitable. Minted coins failed as currency because they did not serve as a stable storage of value.

Gold-Backed Paper Notes

When minted coins failed due to exchange rate arbitrage, many civilizations moved to a gold-backed paper money system. Governments declared that every dollar printed was backed by a dollar of gold kept in reserves, hence protecting the value of a dollar, while removing the inconvenience of carrying physical gold. The gold standard in America lasted from 1879 to 1933, and with it came a stable monetary supply and inflation rate. The gold-backed paper money improved on minted coins by providing easier transportation of money and improved on the arbitrage risk of bimetallist exchange rates.

Problems with the Gold-Backed Paper Notes

The gold standard introduced the element of “trust” into currency. Since the gold stockpiles were not publicly accessible, owners of gold-backed paper money had to trust that the government was backing their monetary supply. As history has shown, trusting the government never goes well. In 1934, the price of gold was set from about $20 to $35 per ounce by orders of the United States government. This increased the monetary supply by about 70% overnight, leading to a significant jump in inflation. Furthermore, the storage of gold is an expensive and dangerous task. Fort Knox, for example, is said to house the gold reserves of the United States. Fort Knox is guarded like a fortress, costing the American taxpayer millions of dollars per year just to protect the monetary supply. Gold-backed paper notes failed as a currency, not only because they were an expensive storage of value, but because it fell victim to centralized control by the US government.

Bretton Woods System

Now we reach out current monetary system, known as the Bretton Woods System. In 1944, the United States dollar was made the reserve currency of the world, replacing the gold standard that preceded it. The government did not want to limit the monetary supply to its reserves in gold, they wanted to make more money to spur the economy and pay off debts. This also gives the United States the power to cut off any party from using the world reserve currency, excluding them from the economy. This can be useful in the event of sanctioning a foreign aggressor but can also lead to an overstep of power by a central authority.

Problems with the Bretton Woods System

The value of a dollar is backed only by the faith that the United States will continue to agree a piece of paper is worth a dollar. With no limits on monetary supply, the M1 money supply has increased more than 150x in 60 years (see graph below). With this has come tremendous inflation. With no value behind the dollar, each dollar printed debases the currency, leading to rising prices. The 2020-2022 section of this graph illustrates this point brilliantly, showing that about 80% of all money created during this Bretton Woods system was created in the last two years.

Hyperinflation in the fiat currency era has destroyed nations. Venezuela, Turkey, and Weimar Germany have all seen economic collapse due to irresponsible monetary policy, leaving their citizens impoverished and starving in the streets. The Bretton Woods Fiat system failed because it left the control of money in the government’s hands. History shows us that doing so can have fatal consequences.

Summary of the Shortcoming of Past Monetary Systems

The bartering system was abandoned because the “money,” being resources and objects, was not an efficient means of exchange, nor storage of value. Livestock die, crops rot, and it became harder and harder to find bartering match-ups.

The minted coin system improved on the barter system by creating a more efficient means of exchange and storage of value. Coins do not rot or die and are easier to carry than wheat or a cow. However, price arbitrage largely led to this system being abandoned due to its inefficiency as a storage of value.

The Gold Standard, being paper notes backed by gold, sought to improve the arbitrage issue of metal coins by backing up each dollar with gold stored by the issuing authority. However, the central authorities themselves engaged in arbitrage and price manipulation, leading in part to the failure of this monetary system, due to the lack of trustworthiness of the “third party,” along with the inefficiency of protecting physical gold storages.

Finally, the current monetary system known as the Fiat System, in which paper money is printed with nothing to back its underlying value, was created to increase the monetary supply to encourage economic growth, and aide in paying off national debt. This system has largely failed due to corrupt and irresponsible monetary supply, leading to inflation that, when accelerating at a fast enough rate to significantly outpace increases in wages, causes the collapse of a society into chaos and poverty. The Fiat system failed for a similar reason as the Gold Standard – the central authority was not trustworthy.

Introducing Bitcoin

In the early 2000’s, a group of cryptographers (people who use codes and ciphers to protect information), realized that they could make a better monetary system. Following the 2008 recession, which is seen by many as the failure of the fiat monetary system, an anonymous person or group known as Satoshi Nakamoto published the Bitcoin whitepaper, describing the invention of a modern technology called a blockchain, for use as a means of payment and storage of value.

A blockchain is composed of a network, or group of computers, which can be located anywhere in the world. These computers all record the movements of the blockchain’s token, being Bitcoin. Every time a Bitcoin is sent or received, each computer records that transaction in an extensive list, or ledger. These transactions are public, and viewable by all. See the Bitcoin ledger here.

How Does Bitcoin Address the Problems?

Bitcoin addresses each of the reasons the previous four monetary systems failed.

First, Bitcoin is an efficient means of exchange. To exchange Bitcoin, a user simply scans a QR code with the receiver’s address (account) and clicks send. The network of computers records this transaction and moves the Bitcoin to the receiver’s account. No paper bills, no gold coins, and certainly no cows or bales of hay are needed, only a smartphone and an internet connection.

Second, Bitcoin is becoming a better and better storage of value. Bitcoin is simply a series of code, and so long as the network stays live, a user will be sure their Bitcoin is in their account. Bitcoin is hack proof, meaning no one can steal a user’s money, so long as the user keeps their account passphrase a secret. Bitcoin also has a fixed supply, at twenty-one million coins. This means that Bitcoin will not have its value debased by hyperinflation as many Fiat currencies have. While an argument against Bitcoin as a stable storage of value is its incredible price volatility, the growth of the Bitcoin network decreases this risk each day. Any asset with a small market cap is subject to larger volatility, as it takes less capital to move the market. While Bitcoin might have lost half of its value in a few short hours several times in the last few years, it is commonly understood that as Bitcoin adoption grows and market cap increases, volatility will decrease. The market cap of Bitcoin today is $837 billion dollars - if Bitcoin reached an $8 trillion dollar market cap (10x increase), it would take 10 times as much capital to move the market. With adoption, this concern becomes less and less important.

Finally, Bitcoin removes the need for trust in the central authority that issues a currency. Bitcoin needs no government approval or permission for one to use it. No government can change the code of Bitcoin to create more, nor can they manipulate the price. Bitcoin is known as a “trustless” system, meaning there is no need to trust any other party while transacting in Bitcoin, because the code is foolproof.

Case Studies

Fleeing Afghans use Bitcoin to Protect Wealth from the Taliban

The first case study shows Bitcoin’s use case as a form of money that is easy to transport, and resistant to centralized authority seizure. Bales of hay, gold coins, and even large stacks of bills are all difficult to move and can be confiscated or stolen. When the Taliban regained control of Afghanistan in September of 2021, many Afghans fled, fearing the reign of terror that was coming. The banks were closed, and the Taliban set up checkpoints around the country, stealing any valuable items a soon to be refugee might have. Any gold coins, or paper money were taken. Bitcoin, however, served as a safe-haven asset for those wise enough to use it. Individuals who transferred their wealth to Bitcoin were able to flee the country, their life savings safely protected on their Bitcoin wallets. Bitcoin provides the most secure and most transportable storage of value of any asset on the planet. Below shows the Google Trends Interest graph of cryptocurrency in Kabul. Highlighted in yellow is a peak of interest just as the Taliban took over.

Bitcoin on Avoiding Foreign Economic Attacks

The second case study shows Bitcoin’s immunity to manipulation and control by a central authority through its utility as a means of avoiding foreign economic attacks. Fiat currency, or its payment railways (think SWIFT banking system), are controlled by the centralized authorities that create the money being used. The United States government, the creator of the world reserve currency, can decide who is allowed to use their money and payment railways.          

Recently, the United States imposed economic sanctions on Russia, barring them from using US dollars to transact with the global economy. While in this case, it is agreed by Western nations that these sanctions were necessary and good, it is important to remember that the United States could be sanctioned by a foreign country at some time in the future. What then?

To avoid being shut off from the ability to access and transact with one’s money, Russia, or any country in its position, could use the Bitcoin blockchain to keep their economy alive. While the United States might control the payment railways that use US dollars, no one controls the payment railways of the blockchain. Russia is theoretically able to purchase oil, food, supplies, etc. using Bitcoin, skirting the sanctions placed on it by the United States.

Bitcoin’s use case as a trustless and decentralized monetary system is proven through the Russian sanction example.

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