Bitcoin: The Oligarch Privatisation Of Money (Part One)

Solving Bitcoin Paradox through a Paradigm Shift, the Austrian School of Economics and the Confirmation Bias of Bitcoin Believers validating the Oligarch Privatisation of Money.

This newsletter does not represent the views of the author’s employer and is not a financial or investment advice.

It intends to be a psychological, philosophical and systemic approach to the Bitcoin phenomenon to elevate the consciousness levels in the finance industry.

The newsletter is about Bitcoin and should not be generalised as views to the wider theme of Blockchain technology.

The writing of this article intends to be gender-neutral.

St Petersburg Paradox

Paradoxes can lead to crucial changes in the way we understand reality.

One of them is the St. Petersburg Paradox.

Something that bright minds such as Bernoulli — the mathematician best known for his work on fluid dynamics — have dedicated their lives to solve.

?It’s best explained with the following hypothetical casino game.

?We start with $2 in a pot, and we suppose the casino has unlimited resources.

?A fair coin is tossed, and if it lands “heads”, you lose the bet.?

However, the casino allows you to continue playing the game and double the money in the pot each time you lose; $2, $4, $8 and so on.

When the tossed coin lands “tails”, you collect all the money in the pot, and the game stops.

There are a 50-50 change each time the fair coin lands “heads” or “tails”.

Regardless of all possible initial lost bets, eventually, you will win it and collect a large sum of money to compensate for all previous losses.

What is the FAIR VALUE to entering this game?

The logical answer is INFINITY.

The logical answer is also wrong.

We will see how this paradox is solved through a paradigm shift in economics.

?Before that, let’s play a different game!

Bitcoin Paradox

Suppose someone finds a NEW TECHNOLOGY that allows the creation of a digital currency.

?Let’s call it a cryptocurrency and the first cryptocurrency by the name of Bitcoin.

?However, the technology is coded in open source, visible to anyone, and there is no patent.?

?Hence, anyone can copy the idea and create an infinite number of different cryptocurrencies.

What is the FAIR VALUE of one Bitcoin?

The logical answer is ZERO.

The logical answer is also wrong.

This is the Bitcoin Paradox.

What’s going on?!

Paradigm Shifts As Solutions To Paradoxes

Let’s go back to the case of the St Petersburg Paradox.

Although the logical fair value of the tossed coin game is infinity, you would probably not be paying more than what you could afford to lose.

But that is a subjective property.

What you will pay to gamble in this game is different from what someone else would pay.

In economics, this led to the introduction of the Expected Utility Function — a function that will distort the way fair value is calculated, depending on the wealth and risk appetite of the gambler.

It leads to a paradigm shift in the way we understand money.?

The perception of money is not objective but SUBJECTIVE to each individual.

The utility function maps an INDIVIDUAL objective reality to an INDIVIDUAL subjective reality.

Can that explain the Bitcoin Paradox?

Not quite so…

"Logic will never change emotion or perception."―Edward de Bono

With Bitcoin, we are NOT dealing with a subjective understanding of its worth in a single market buy within an infinite number of possible markets.

Bitcoin results from a network effect and game theory that distorts the COLLECTIVE objective reality to a COLLECTIVE subjective one.

The more we have people willing to pay enough money for Bitcoin, the more it will validate the belief of its worth.

And the more the belief of possible EXPONENTIAL future returns is validated, the higher the price people will be willing to pay for Bitcoin.

But how is that precisely determined?

In the same way that utility function was a paradigm shift to solve the St Petersburg Paradox, there is a need for a NEW paradigm shift to solve the Bitcoin Paradox.

What we know is that LOGIG is a BAD PREDICTOR in human decision-making.

Will Bitcoin open a new field in economics?

Austrian School of Economics

A possible school of thought that fits well with the Bitcoin narrative is the Austrian School of Economics.

In particular, around the three main topics:

• Invention of Money
• Regression Theorem
• Subjectivity of Demand

Let’s dive into each one in more detail.

1. Invention of Money

Carl Menger (1840–1921), the founder of the Austrian school, was an advocate that money shouldn’t be perceived as a product of a legislative act.?

“Money is not an invention of the state.”―Carl Menger

Although Central Banks currently prints money, that was not always the case.?

Our current perception is an ILLUSION of 100 years of State control, as money was nationalised away from markets, just as railways did.

Menger cites that commodities such as gold were spontaneously created as a medium of exchange between goods & services ― as a result of business relationships, without intermediaries and independent of any state’s central power.

The Austrian School of Economics dismisses the idea that money is valuable only because the government says so, suggesting instead that currencies are given their value by their markets.

One can see why this idea is so appealing to Bitcoin Believers.

2. Regression Theorem

Ludwig von Mises (1881–1973), another critical Austrian economist, proposed the ‘Regression Theorem’, which holds that “no good can be used as a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.”

The original theorem connects the value of a currency traced back to a commodity.

That leads to some disputes within the Bitcoin community, given that Bitcoin is not backed by any commodity.

For the sake of simplification and acknowledging that Mises lived in an era pre-internet, let’s focus on the essence of the Regression Theorem on its CORE IDEA (hint: I’m being sympathetic here with Bitcoin Believers, as usually, this is a counter-argument to justify that Bitcoin has no value ― you don’t have to thank me for this omission :) )

Essentially, the Regression Theorem says that money has value because it had value in the past, regressing to an ORIGIN when it was useful for a non-money purpose.

At the time of Mises’s idea, the thinking was the case of commodities, which have other purposes than money, gold included.

In the case of the dollar fiat currency, although no longer commodity-backed, it preserved its values as we regress to the times when it was backed by gold ― before President Nixon’s ended the Bretton Woods system.

However, in the Austrian view, the rise of fiat money means the central bank can INFLATE the currency at will and thus exacerbate the boom/bust cycle.

Yet another very appealing argument to Bitcoin Believers!

And although a commodity never backed Bitcoin, the fact is that historically, in the beginning, it had virtually zero purchasing power, but it was NOT precisely zero.

When in May 2010, a pizza was bought for 10,000 Bitcoins, it initiated the Paradigm Shift in the perception of its subjective value to enough people to catalyst viral effect.

The rest is history.

?3. Subjective Demand

Last but not least, the “subjective demand” Austrian idea is perhaps one of the most CRITICAL DEPARTURES of the neoclassical school of Economics.

Neoclassic perceive objective “supply-demand” forces in the markets, forcing prices to reach an equilibrium eventually.

Supply-demand is the core of the economic activity and the valuation of services & goods.

One can see it using the scissors analogy, with an interplay between the two blades.

The KEY DIFFERENCE between the neoclassic and Austrian schools of economics is the objective vs subjective meaning of each blade.

To the neoclassical school, BOTH blades are objective, and the demand of the market reflects an objective perception of the supply available and its industrial cost.

The paradigm shift in the Austrian school is that ― although the supply continues to be objective on its value ― the demand is subjective.

That shift is the essence of solving the St. Petersburg Paradox.

Bitcoin Believers take a step further by claiming that BOTH supply & demand are subjective ― although one can also argue there is an objective value in Bitcoin due to its mining energy costs.

I hope you know understand the main three ideas from the Austrian School of Economics that Bitcoin Believers use to validate the meaning of Bitcoin, together with their arguments against fiat currencies and Central Bank ownership.

Yet, the story is far more complex.

The fact is that Bitcoin Believers choose to pick isolated ideas from a school of thought that originated in the 19th century, well before the internet and neuroscience…

Confirmation Bias

In Part Two of this article, I will write more on other proposals to better understand Crytpo Economics.

The main point I want to mention is that the Austrian School of Economics was formulated well back in the past and a different context than the current exponential technology.

Although it brings fresh ideas away from the neoclassical school, the fact is that the three previous concepts are just a fraction of the entire school of thought.

I will describe more on the OTHER ideas from the same school that Bitcoin Believers choose to ignore.

There are two main reasons for that:

• Bitcoin Community does not have the intellectual wisdom, humility and self-mastery to create a new economic framework; see more here.
• Bitcoin Believers fall fool for the “Confirmation Bias”, searching for pieces of evidence to support their beliefs.

On top of that, one can also argue that the Austrian Economic School is one of many alternatives to neoclassical school.

We also have complex economics or even neuroeconomics as other alternatives, some considering game theory and network effects more aligned with the Bitcoin phenomenon.

“The first principle is that you must not fool yourself, and you are the easiest person to fool.” ―Richard Feynman

And yet, Bitcoin Believers rarely associate Bitcoin with any of those alternative schools of thought.

I have briefly described some of that here.

I don’t think anyone can claim to grasp Bitcoin’s understanding fully.

Bitcoin is this thing that no one really knows what it is about, but people believe it will save us all ― and why so many people fool themselves believing in that narrative.

Yet, one can’t find the right answers until we develop the right questions.

And paradoxes are ingenious ways to formulate those right questions.

Thank you for reading this newsletter.

(to continue next week…)

Tip Of The Week

Paradoxes and Paradigm Shifts don’t resort to economics only.

Economics is nothing more than a Science of Human Decision-Making.

Our private and professional lives are equally full of paradoxes.

Take the example of a successful person who has achieved what she always wanted.

But in that same achievement, she feels TRAPPED in her success & commitments.

Does this resonate with you?

The feeling that your success is something to dream of to others, but deep down, you know your achievements have to lead you to a trap.

What’s next?

“Oh, there is nothing that can be done here. I just need to accept and be happy with what I have...”

Are you?

Let’s be clear here.

This is NOT a call to give up on your commitments.

The call is to ask yourself…

“What is the question that I’m not asking myself?”

In the same way that the St. Petersburg paradox is solved,? so is your Success Paradox too.

From economics to our lives, our thinking sometimes gets trapped into paradoxes.

They simply reflect the way we perceive the world and ourselves.

And that perception is subjective, not objective.

So I’m asking you again…

What is the question that you are not asking yourself?

If you want to learn more on how to solve your Success Paradox, book a free call with me here:

https://cal.mixmax.com/nunoreis/15_introduction

Alternatively, feel free to DM for more information.

Remember: You are doing the best you can for NOW, not forever.

It’s okay if you got it wrong.

Your choices have always been the best choices available at the time.

The trap is when your subjective perception of reality doesn’t change.

Nuno Reis

Former Bitcoin believer turned into a Bitcoin sceptic.?

Disclaimer: Opinions expressed here are my own.

References:

1. “Competition and Entrepreneurship” by Israel Kirzner, 1973
2. “Competition is for losers”, Peter Thiel talk, https://www.youtube.com/watch?v=3Fx5Q8xGU8k
3. “Competition and Entrepreneurship”, https://www.youtube.com/watch?v=DFq05Z7_Dyk
4. “An introduction to Austrian Economics” https://www.youtube.com/watch?v=WsMbzsmOHAM
5. “The history of Austrian Economics, Part I”, https://www.youtube.com/watch?v=doDnXWc8Iyo
6. “Austrian Economics & Bitcoin”, https://medium.com/efficient-frontier/on-austrian-economics-and-bitcoin-15051a28820d
7. “Austrian influencers of Bitcoin”, https://fee.org/articles/the-austrian-influences-on-bitcoin/
8. “What Gave Bitcoin its value?”, https://fee.org/articles/what-gave-bitcoin-its-value
9. “Austrian Economics & Bitcoin”, https://www.youtube.com/watch?v=Vti1jkhEDoA
10. “Neuroeconomics and the Future of Decision Making”, https://www.youtube.com/watch?v=f-PMjnxFIFg
11. “Debunking Economics and Why Bitcoin Will Fail With Steve Keen”, https://www.youtube.com/watch?v=b0VtAuD0Dvs

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