Bitcoin as new monetary system

Started by alexfernandes, Aug 21, 2022, 10:17 AM

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alexfernandesTopic starter

At the heart of any monetary system are three components: money supply, funds transactions and money ownership.
In a traditional financial system based on fiat (fiduciary) money, it looks like this:

    The funds supply is the amount of money in circulation. Money is issued by the state as a result of emission, but simply - it prints banknotes and mints coins.
    Transactions - money transfers. Transactions are carried out by trusted financial institutions - banks at the behest of their customers. Accounting for transactions avoids the "double spending problem".

    Ownership of funds. Banks keep records of the balances of their customers' accounts. Only the clients themselves can manage the money in their bank accounts, banks only fulfill their transfer orders. So, banks are required to verify the identity of the account holder. Control over this is carried out by the state in the person of its institutions and bodies (central banks).

As you can see, this monetary system is completely monopolized by the state. The state issues money (makes an issue) and controls commercial banks in which clients' money is stored. Also, the state, represented by the central bank and law enforcement agencies, can exercise control over all transactions of bank users. Don't be deceived by the so-called. "Banking secrecy", de facto the state can receive in one way or another any data about clients of financial institutions and their transactions. In addition, the judicial authorities of the state can seize the money in the accounts of bank customers. And in some cases, this even happens out of court — banks simply "freeze" receipts on customer accounts on suspicion of their illegality (for instance, "laundering of illegally obtained proceeds").

In fact, the state has monopolized the sphere of interpersonal relations. After all, the main function of funds is nothing more than the establishment of relations between people in the form of the exchange of goods and services.

Bitcoin creator Satoshi Nakamoto wanted to end this government monopoly on funds and financial relations. In his article "Bitcoin: The implementation of the P2P currency with open source" (Bitcoin open source implementation of P2P currency), which he published on February 11, 2011 on the P2P Foundation web forum, Satoshi directly points out the shortcomings of the existing monetary system - we are forced to trust central banks that print surplus funds and thereby devalue the currency; we have to trust the commercial banks that hold our money.

He gives an instance of how cryptographic protection of information (data) put an end to centralized interference in privacy.

    "The time has come for us to do the same with money," Satoshi concludes.
    "With an e-currency based on cryptographic proof, without the need to trust a third party intermediary, funds can be secure and transactions easy."

Obviously, according to the plan of Satoshi Nakamoto, Bitcoin was supposed to become an alternative to our current financial system and put an end to the monopoly of state central banks on the issue of money, and commercial banks on transactions and storage of money.

Bitcoin, at its core, became the first decentralized monetary (financial) system. What are the three main components of this system based on?

    Money supply - the number of recorded bitcoins * in circulation is controlled by algorithms (protocol). The issue of bitcoins is predetermined by software and is limited to 21 million coins. Nobody can interfere in this process. The decision to change the emission can only be made by consensus of users.

    Transactions are carried out personally by members of the Bitcoin network using pseudonymous Bitcoin addresses. Accounting for transactions in the blockchain and the consensus mechanism avoids the "double spending problem".

    Ownership of funds. Only the owner of the private keys of the corresponding bitcoin addresses can dispose of bitcoins. In this case, the identity of the owner is not controlled.

Important! The state, represented by its institutions and bodies, does not have the ability to interfere either in the issuance process or in the transactions of Bitcoin users, or limit their possession of funds (arrest accounts, etc.).

Thus, a technology has been created that can put an end to the state monopoly on funds and its circulation. Of course, due to the inertia and extreme conservatism of the financial sector, this process will not be fast. But it is running and hardly anything can stop it.

History knows a lot of examples when revolutionary inventions changed the traditional way of life and destroyed monopolies, including state ones. In the 15th century, the printing press, invented by Johannes Gutenberg, ended the monopoly of monasteries on the dissemination of information - the process of replicating books was much more efficient than copying them by hand. At the beginning of the 20th century, the automobile broke the horse-drawn monopoly on land transportation. And the Net, which appeared at the end of the same 20th century, destroys the monopoly of the media (press and television) on news - they spread much faster and more efficiently on the network.

The world is changing! Things that have been habitual for a long time go into oblivion, and new ones come to replace them. So it was and so it will be! And fiat money, as well as the state monopoly on the financial system, is no exception.

In the near future, states will most likely try to mount Bitcoin into the existing monetary and financial system, and not fight it and prohibit it. One way to integrate is by recognizing bitcoin as a reserve asset for storing value (along with gold). But this is only a delay in the change of the financial paradigm.
It is inevitable, because progress cannot be stopped. additionally, fiat money has a lot of disadvantages that Bitcoin lacks. As a technology, it has already essentially taken place, now it's up to mass adoption.

And, even if Bitcoin, for some reason, fails to change the existing financial paradigm, other, more advanced cryptocurrencies will come after it. After all, the world already knows how to do with it.


The state, the state... It is not the state that determines the suitability of any artifact for use in commodity-money relations, but the market. And the serious players on it are the points of maximum concentration of capital, the stock exchange.

Here is the capitalization of some Tesla - it soars by $ 100 million in a week (an example from the bulldozer, but plausible). It seems that nobody  turned on the printing press, there was no emission in the classical sense. But the volume of artifacts suitable for exchange has grown.

Bitcoin is in exactly the same situation right now. Not having time to become a medium of exchange, he became a subject of trade. And the issue of trust has not gone away, you still have to trust the anonymous folk who hold the exchanges.


"The basis of any monetary (financial) system is" not your three components, but exactly one: commitment.

You are required to pay in cash. When you live in a state, then once a month, or once a year, you are obliged to pay this state a certain amount of certain money in the form of tax.

You have to accept funs. Not only in stores, although in stores too. But even if you live in subsistence farming, that very time a month or once a year you must pay a tax - and the state is obliged to accept from you the money that it considers state money.

Due to this state coercion to the obligatory use of money, the monetary system exists.
Bitcoin is not money. Bitcoin is a commodity.

No one and nowhere obliges you to have bitcoin in your pocket once a month, once a year, or once every hundred years in order to pay them mandatory payments - for non-payment of which you can even go to jail.

Nobody and nowhere obliges anyone to accept bitcoin from you in order to pay these mandatory payments.
You might as well have a gold bar in your pocket. Or a rare stamp worth $100,000. But no state will accept it as a tax. You will be told - go, sell for real (state) money, and then pay.

In what case are the arguments about the "new monetary system" appropriate?

In a world where there are no states and taxes. Post-apocalypse. There is barter around, and each seller and each buyer decide for themselves what they exchange for what. They want bitcoin for food, they want gold for clothes.


You say that as if a bubble is formed only out of the blue and after deflating leaves behind only a wasteland.
A financial bubble is a system with positive feedback, in which the depositor's income begins to be largely formed from the investments of subsequent depositors, and not other factors.

In case of exhaustion of new depositors, the connection collapses, and the bubble bursts or deflates. The essence of the bubble is the presence of a strong positive feedback, which at the moment of inflating begins to play a major role in pricing.
This in no way excludes the presence of other factors that affect the price of the asset. A bubble can form periodically in the real estate market, while the price of sq.m. after the bubble bursts, it can be either much lower than the beginning of inflation, or fall to the old level with further growth.
Perhaps you meant by a financial bubble some very specific phenomenon, but here I am ashamed to try to read your thoughts.


The problem of cryptocurrencies is not only in the state. I understand why some states seek to limit this, "invent new rules" in order to control it. And on the one hand, such a policy can have a negative impact on both market participants and states that simply cannot ignore it. There are many problems with cryptocurrencies. However, the state does not always correctly choose priorities. And the government is not always wrong.
I am sure that the topic of cryptocurrency will be relevant for a very long time and it will be interesting where it will lead.