Cryptography and the Changing World Order

What does it mean to own a Bitcoin (BTC) or an Ether (ETH)? Is it money? Is it safe? Is it a fad? Let’s find out.

The inherent value of cryptocurrency is secured with cryptography. Research from Cowan and Tabarrok (2022) does a fine job of explaining this.

For 700 years, there has been an R-rated Indian version of the Romeo and Juliet – The Kamasutra. It is probably the oldest text to introduce the concept of cryptography. Star-crossed lovers learnt to communicate with each other using secretive code language, simple cyphers.

Fast forward to the breakthroughs in cutting-edge cryptography research of the 70s, a two-key system is now the prevalent model to securely communicate across the Internet.

This two-key system consists of a public key and a private key for each user.

The level of security provided by the two-key system makes it so profound in applications that it is essentially what secures your credit cards transactions, ATM transactions, and essentially most of the internet payment gateways out there today.

Another major application is digital signatures. DocuSign uses this system to prove that you are indeed, you.

Applying this digital signature onto a money transaction signals the network that it is verifiably you who wants to send your money.

Transferring money online securely using cryptography is nothing new. It has been around even before Bitcoin.

What the founder of Bitcoin enabled is the codified production of a digital currency on the condition that participants in the Bitcoin network validate and record the transactions securely.

The Bitcoin blockchain essentially stores all of the verified transactions of this digital currency, Bitcoin, since its inception. It is basically record keeping.

It is extremely difficult and disincentivizing to hack this network. Difficult because of the cryptography. Disincentivizing because if Bitcoin is stolen due to the Bitcoin network being compromised, it cannot be spent due to the transaction not being verified by the participants anymore and will drastically diminish in value. This is probably why the Bitcoin network has never been hacked since inception. That’s about 14 years now!

The beauty of this network is that the participants can be anyone, you, me, Tom, Dick, or Harry. Everyone can have the record of the Bitcoin blockchain and everyone can verify transactions on it. It is not exclusive to rulers and heads of countries and banks. Jerome Powell cannot dictate how much Bitcoin can be printed. However, he can print fiat money as he likes.

The definition of fiat money according to Investopedia is this: “Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.”

Paraphrasing in my words, there is nothing tangible that backs the dollar. It is backed by the intangible trust in government.

However, the production of Bitcoin is coded and backed directly by the records kept of Bitcoin transactions. And the reason that is valuable is because it represents a decentralized financial system that is governed by no one. No one can print Bitcoin as they like. The demand from Bitcoin transactions is inherently coded to drive the supply (albeit in a deflationary manner, which is why the price has been skyrocketing for the past decade).

Governments across the world legalize it and adopt it as legal tender because they no longer have to completely depend on the financial system of the USA.

?And this is important because of the Changing World Order.

Since most of us are limited to lives spanning less than a century, our intuitive perspective on the World is rather myopic and limited to this time frame.

Ray Dalio, the head of the World’s largest hedge fund and one of the wisest men on the planet, has deeply studied the past and here’s my simplification of his analysis (Dalio, 2022):

If you were a human being that lived for the past 400 years, you would witness the rise and fall of the following empires:

When you zero in on the dominant empires, here’s what it looks like:

China dominated the World in 1500s, followed by the Dutch in the 1600s, followed by the British in the 1800s and currently the Americans in the 1900s. Notice how this shift in global power dynamics was signalled through wars. That’s right. Empires that commanded the strongest armies, established a sense of global peace and security which was paid for by using their currency as the reserve currency. Currently, the US dollar is the World’s reserve currency. The US dollar of the 1800s was the British pound. The US dollar of the 1600s and much of the 1700s was the Dutch guilder. You get the idea.

Sidenote: The security of the Bitcoin network is paid for by its currency, the Bitcoin (BTC). And so is Ether (ETH), for the Ethereum network. These are the two most dominant, most decentralized cryptocurrency networks in the World right now.

A point of concern in the image above is China’s rise to global dominance in this century. Does that signal an upcoming war to dethrone the US? Does that mean the Chinese yuan will be the World’s reserve currency? Possibly.

In the typical big cycle, the US empire is on the decline somewhere between the phases of ‘Debt Bust and Economic Downturn’ (Think of the financial crisis of 2008) and the ‘Printing Money and Credit’ (Think of the uncontrolled money printing over the last few years).

The next phase is inevitably ‘Revolutions and Wars’.

If you consider this to be over-simplified, take a look at the indicators below which is an average of each of the measures of strength for these dominant empires over the past 400 years:

Feel free to do your own analysis on where the US and China stands on each of these factors. Personally, I’d say we’re about 40-60 years away from the end of US dominance and I don’t think I will ever entertain the idea of having my wealth backed to the Chinese government and its yuan.

I’d rather back my wealth to a decentralized financial system that no government can exercise control over no matter whether they are dominant or not.

On a grander scale, cryptocurrency represents this decoupling of the financial system from the government.

And that is essentially what owning Bitcoin (BTC) or Ether (ETH) means.

In my previous issue, I have written about how you can own your BTC/ETH.

Feel free to get in touch with me if you have any questions. I will be happy to help. If you’d like to further your knowledge, check out the references below on which I’ve based this article.

References (Highly recommend):

1.????Dalio, R. [Principles?by?Ray?Dalio]. (2022, March 2). Principles for Dealing with the Changing World Order by Ray Dalio [Video]. YouTube. https://www.youtube.com/watch?v=xguam0TKMw8&ab_channel=PrinciplesbyRayDalio

2.????Cowan, T., & Tabarrok, A. (2022). Cryptoeconomics. In Modern Principles of Economics (Fifth ed., p. Bonus). Worth Publishers. https://marginalrevolution.com/wp-content/uploads/2022/05/Cryptoeconomics-Modern-Principles.pdf