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Thursday, September 10, 2015

Bitcoin: A Bloodless Revolution

I have written here about economics, government, the corruption of power and revolution. I spend a lot of time reading and thinking about the symptoms of a system in decline. History tells us that no matter how good a system is, it will ultimately be co-opted by those few people who are the best at exploiting its rules. Humankind has always prospered on the backs of the working class. The masses are the engine of material prosperity.


Those in power ultimately have no obligation to the masses. At some point, their power becomes so entrenched that they forget about sacrificing for the greater good. This is not conjecture or opinion. This is an historical fact.


Einstein famously said: “Insanity: doing the same thing over and over again and expecting different results.” Are we doing anything different this time around? Has our global civilization made some fundamental shift that puts us beyond the reach of history? I suspect not yet.


There are two fundamental changes that could make the difference this time around:

  1. We are now all part of a single interconnected global economic system
  2. We have computer algorithms capable of surpassing human capabilities
The first change means that we are capable of fixing or destroying our system on a global scale. Something we’ve never been able to do before. The second point suggests that we no longer need to leave major economic decisions in the hands of humans.


Every time I pondered ways in which we could take back an economic system that has become increasingly corrupt, I came up with the same answer -- revolution. Most revolutions are messy, protracted and bloody affairs. Nobody really wants one, so they endure the status quo for as long as they can. Since I couldn’t see a way to avoid a revolution, I started to think about the possibility of a bloodless revolution.


To my knowledge, there has never been a true bloodless revolution. Even England’s hand-over of India came at some human cost. The Glorious Revolution of 1688, which saw the removal of King James had minor violence followed by even more death. Could it be possible to engineer a truly bloodless revolution?

What if…

As I see it, the main problem is that extremely wealthy people have the ability to use their wealth to create additional wealth in a way that has no impact on the real economy of regular folks. For a better understanding of this, just read this post. What would happen if us regular folks started converting our liquid assets to bitcoin? Bitcoin is the first successful attempt at what has come to be called a cryptocurrency. The main hallmark of bitcoin is that there are no intermediaries to tamper with transactions or supply. It is algorithmic and the code is open source for all to see (i.e. transparent). You can read more about bitcoin here.


Let’s play out one possible scenario. Suppose that millions of average folks with under $100,000 in savings were to move their savings into bitcoin. As this movement takes hold, the price of bitcoin starts to go up. Suddenly, early holders of bitcoin receive newfound wealth. Before long, wealthier individuals start moving larger portions of their wealth to bitcoin in order to diversify their portfolios. This will drive the price up even quicker.


The effect of people all over the world switching their holdings to bitcoin will be the decline in value of other currencies. This will also encourage better tools and supports for bitcoin such that people will be able to transact even more seamlessly than they can now. During the global transition to bitcoin, there will be new winners and losers. Fortunes will be disrupted. As with any major market correction, some people will suffer more than others.

The Net Effect

Some of the same rich and powerful people may still be rich when the dust settles, but they will find their power significantly curtailed. As George Gilder points out, $5.3 trillion worth of currency is traded daily. This is approximately 25 times the amount of goods and services. This means that far more wealth is being created (and lost) by manipulating currencies that real economic activity.


A bitcoin economy eliminates anyone’s ability to manipulate the currency regardless of their power and wealth. It is hard to even imagine the direct and indirect effects of this, but one thing is certain: nobody will ever again be able to cut your wealth in half by doubling the money supply. Digital currencies can be held online or offline in as complete security (maybe more) than your bank. Banks could decide to give you a haircut by confiscating 30% of your money, which seems increasingly likely in Greece. If you hold a digital currency, nobody can touch it without your permission.

Other Possibilities

If this sort of algorithmic solution can work for economic security, what other areas where human power corrupts can we implement it? Open source programmatic solutions to social, environmental and resource issues could be next. This does not need to be big brother. Smart people working together can come up with good solutions.


Every time a new system goes online, there will be new winners and losers. If the system is properly designed, those who are doing the most good for society will be the winners. If the system is not properly designed, we can fix it incrementally like we do other software. The key is these changes will be transparent. With open source, there can be no backroom manipulation to trick people into compulsory sacrifices for the benefit of the few.

What I propose is not intended to bring equality to capitalism. Capitalism is based on human nature and it works because it creates a space for people of all levels of ambition and drive. There may come a time at which our level of technology precludes anything close to full employment and we will need to rethink capitalism. For now, what we need to do is make sure that all capital is working for the markets we all live in and not some metaphysical currency or derivative market that is only for the ultra rich and powerful. I dare to dream!
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