Today I’m going to share a piece by Charles Hugh Smith, which if you’ve never read, you might like, because he cuts through the crap and tells things in a no-nonsense manner. I’ve read a few of his early books, and he was instrumental in my early days of seeing through the facade and deception of modern finance and money. In this piece, he explains the fours ways cryptocurrencies are the biggest monetary innovation in 400 years.
“Charles Hugh Smith is a contributing editor to PeakProsperity.com and the proprietor of the popular blog OfTwoMinds.com. He is the author of numerous books, including Why Everything Is Falling Apart: An Unconventional Guide To Investing In Troubled Times.”
You can also follow him on Twitter
As always, do your research and use your discernment. Any financial decisions you make is all on you.
By Charles Hughes Smith, October 31, 2017
Centralized banking and all other forms of intermediary rentier skims are presented as solid. If history is any guide, these supposedly solid entities may well melt into air.
The short answer is that cryptocurrency is the first major innovation in money in 300+ years, back when central banks first emerged in the late 1600s as centralized clearing houses for international payments and sole issuers of national bank notes/currency.Why is bitcoin considered such a big deal? Why has it grabbed so much mind-share, and why is it skyrocketing? And why is the cryptocurrency sector going bonkers?
(Those who trace central banking to the Bank of Amsterdam’s founding in 1609 might say it’s the first major innovation in 400 years.)
Why is it an innovation? There are four basic reasons:
1. It’s a form of private-sector issued money. It is not issued or controlled by any government or central bank.
2. It is structured in a completely different manner than conventional central-bank issued currency: it is a digital form of money that is issued as payment for those who maintain the database (the blockchain) on their privately owned computers. Since the blockchain is distributed over numerous computers, it is decentralized and distributed rather than centralized.
3. It enables trusted transactions between parties without requiring the services of an intermediary, i.e.a bank which acts as a trusted clearing house for transactions.
4. In the case of the first cryptocurrency, bitcoin, its issuance of tokens (coins) is limited by its design to 21 million coins. No central authority can issue more bitcoins, nor does the structure of the bitcoin blockchain allow for further issuance.
To grasp the significance of these four characteristics, we have to go back to the early history of modern capitalism. My longstanding recommendation is to start with Fernand Braudel’s 3-volume history, Civilization and Capitalism, 15th-18th Century:
Many of the functional pieces of modern capitalism were private-sector innovations, starting with banking and credit (some of which was borrowed from Arab traders). In the good old days of the 1500s, if the King of Spain wanted to finance a costly voyage around the world (Magellan’s circumnavigation in 1519-1522), he turned to private-sector lenders.
Insurance, stock markets, futures markets and options were all private-sector innovations designed spread the risk and reward of ventures such as trading voyages to the Spice Islands.
Since so many ships were lost at sea, backers sought insurance for the losses, and the trade in shares of the ship’s cargo and the insurance against its loss enabled a lively trade in these financial instruments that were the rough equivalent of modern-day options.
When a merchant vessel was seriously overdue, the value of the shares of its cargo plummeted as investors gave up hope of earning their hoped-for return. So some enterprising traders paid watchers to scan the shoreline for incoming ships matching the description of the overdue ships.
Should the overdue ship appear off the coast of France, runners would hurry to Amsterdam to inform the trader who would then promptly scoop up cheap shares of the cargo, scoring huge profits when the ship docked a few days later, cargo intact.
The rate of expansion of private-sector innovations is much higher than those of centralized authority. Centralized authority must act deliberately, and in consultation with all the various power centers of the society and economy. Disagreements can incapacitate the system for years or even decades.
The private sector, in contrast, is a free-for-all of a multitude of players with an enormous range of ideas, schemes, scams, risk appetites, insider knowledge (i.e. asymmetric knowledge), capital, expertise and so on, all networked through a fast-expanding spectrum of media and exchanges.
This private-sector ferment is on display in the cryptocurrency space. Scams and brilliant innovations are shoulder to shoulder in a fast-moving mob. No wonder so many players and traders want to join the mob and figure out some competitive advantage or gain some asymmetric knowledge, knowledge which can be as simple as the understanding that hard forks aren’t bad for bitcoin, as so many feared, as each new iteration claims to improve some aspect of bitcoin’s functionality.
Over 100 hedge funds and other institutional players are muscling into the market, anxious to scale in and scale up before competitors grab market share.
If we compare the market cap of all cryptocurrencies, currently $178 billion, with the total financial assets of the global economy ($300+ trillion) and real estate ($200+ trillion), we get a sense of “early days.” Bitcoin’s market cap of $100 billion wouldn’t even show up as a thin line on this chart of global financial assets:
Here is a one-year chart of bitcoin:
As Marx presciently noted, capitalism melts all that is solid into air. (All that is solid melts into air.) Centralized banking and all other forms of intermediary rentier skims are presented as solid. If history is any guide, these supposedly solid entities may well melt into air.
Of related interest:
My labor-backed cryptocurrency community economy: A Radically Beneficial World: Automation, Technology & Creating Jobs for All
If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
At readers’ request, I’ve prepared a biography. I am not confident this is the right length or has the desired information; the whole project veers uncomfortably close to PR. On the other hand, who wants to read a boring bio? I am reminded of the “Peanuts” comic character Lucy, who once issued this terse biographical summary: “A man was born, he lived, he died.” All undoubtedly true, but somewhat lacking in narrative.
I was raised in southern California as a rootless cosmopolitan: born in Santa Monica, and then towed by an upwardly mobile family to Van Nuys, Tarzana, Los Feliz and San Marino, where the penultimate conclusion of upward mobility, divorce and a shattered family, sent us to Big Bear Lake in the San Bernadino mountains.
The next iteration of family took us to the island of Lanai in Hawaii, where I was honored to join the outstanding basketball team (as benchwarmer), and where we rode the only Matchless 350 cc motorcycle on the island, and most likely in the state, through the red-dirt pineapple fields to the splendidly isolated rocky coastline. In 1969-70, this was the old planation Hawaii, where we picked pine in summer beneath a sweltering sun.
We next moved to Honolulu, where I graduated from Punahou School and earned a degree in Comparative Philosophy (i.e. East and West) at the University of Hawaii-Manoa. The family moved back to California and I stayed on, working my way through college apprenticing in the building/remodeling trades.
I was quite active in the American Friends Service Committee (Quakers) and the People’s Party of Hawaii in this era (1970s).
I next moved to the Big Island of Hawaii, where my partner and I built over fifty custom homes and a 43-unit subdivision, as well as several commercial projects.
Nearly going broke was all well and good, but I was driven to pursue my dream-career as a writer, so we moved to the San Francisco Bay Area in 1987 where I worked in non-profit education while writing free-lance journalism articles on housing, design and urban planning.
Within a few years I returned to self-employment, a genteel poverty interrupted by an 18-month gig re-organizing the back office of a quantitative stock market analyst. I learned how to lose money in the market with efficiency and aplomb, lessons I continue to practice when the temptation to battle the Monster Id strikes.
Somewhere in here my first novel was published by The Permanent Press, but alas it fell still-born from the press–a now monotonous result of writing fiction. (Seven novels and I still can’t stop myself.)
I started the Of Two Minds blog in May 2005 as a side project of self-expression, and in an unpredictable twist of evolutionary incaution, that project has ballooned into a website with about 3,500 pages that has drawn almost 20 million page views.
The site’s primary asset may well be the extensive global network of friends and correspondents I draw upon for intelligence and analysis.
The blog is #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. I am frequently interviewed by alternative media personalities such as Max Keiser, and am a contributing writer on peakprosperity.com.
End conventional bio; bits and pieces
My work does not fit into any ideological box; indeed, I view all ideologies as obsolete and misleading. I doubt this is a surprise to you if you’ve read the blog.
My lifelong avocations include bicycling, gardening, guitar, camping in the American West, cooking, carpentry and fitness, all of which are reflected in the blog.
I would re-write the bumper sticker “New York, London, Paris, Hilo” as “Shanghai, Kyoto, Bangkok, Paris, Hilo.” Many people wonder where I live; I split my time between the S.F. Bay Area and the Big Island, though I visit friends and family on Oahu as often as possible.
Our heritage is Scots-Irish (County Down), English and French; via marriage the family inlcudes Hispanic-American, African-American and Asian-American members. I think the word is polyglot.
Our military history: grandfather, U.S. Navy, 4-stack destroyer U.S.S. Lea (DD-118), Pacific/China, 1920-22; father, U.S. Navy, LST, Pacific Theater, 1945; uncle, Army Air Force, 1943-44, 25 B-17 missions over Europe; stepfather: Career U.S. Air Force, retired as Lt. Colonel, served in U.S., Europe, Vietnam and Korea.
Measured in terms of money I am not rich, but measured in friendships, health and output, I feel very wealthy indeed. I like my work and feel there is purpose in the blog’s independent critiques of the Status Quo and in the positive view I have of the next iteration of our economy and society.
I lead most of my life in the real world, and as a result my time online is extremely limited. This is why email to this site is read but may not be acknowledged. I regret the limitations but I receive thousands of emails a year and am only one 60-year old person with many other duties and tasks.
In my experience, good luck is rare; the default setting is rejection, disinterest and failure. I concur with Winston Churchill, who held that “Success consists of going from failure to failure without loss of enthusiasm.” That more or less sums up my biography.
Miscellaneous Notes and Tools
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