It was the best of times in global finance and the worst of times to draw inspiration from Charles Dickens. The global financial landscape has experienced significant changes in recent years, but our current system has actually only been in existence 110 years since the Federal Reserve Act of 1913 and has been through multiple world wars and evolutions from the Gold Standard to Bretton Woods to the 1971 executive order removing the gold standard and the U.S. Petrol Dollar. I highly recommend The Creature From Jekyll Island for those new to this history.
Since 2008’s global financial crisis we have watched what 15 years worth of near free and free money supply at zero interest rates has done to exacerbate asset values in an everything bubble while the pandemic further fueled the income inequality that continues to bring populism and polarization to scary new highs around the world.
Since 2009 in the wake of that last crisis one new global monetary system has emerged and although still very early and volatile and since we are in the midst of another potentially dangerous banking crisis and most people still don’t understand how the incumbent system works and what this new system’s unique differences and similarities are, I thought I would take a stab at illuminating the risks and rewards of both for everyday humans trying to just know what monetary system to spend more time in as the years ahead unfold.
In this post, I will take a compare and contrast look at both the traditional Federal Reserve banking system and the innovative Bitcoin decentralized monetary system. I will discuss how belief plays a roll and to what extent in both systems and also identify what makes each one vulnerable to complete collapse. I am not going to go too deep into the technical or financial engineering designs and certainly this is not in anyway a complete lesson in either, but at the risk of losing the reader, I have done my best to keep it high level and yet deep enough to encourage a further look into both as you look to make wise investment planning decisions in the years ahead.
These two systems are vastly different in their ideologies, processes, and structures. I also personally believe that they both can (and probably must learn to) co-exist . This article compares and contrasts the Federal Reserve banking system and the Bitcoin decentralized monetary system. We will focus on the concept of belief and its role in shaping the reality of these systems, as well as their vulnerabilities and the factors that could lead to their collapse.
The Federal Reserve System: A Centralized Approach (1913-present)
The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. Established in 1913, it operates with the primary goal of promoting stable economic growth, maximum employment, and low inflation. The Fed has the power to create or destroy money, regulate interest rates, and supervise and regulate financial institutions. The US dollar, the world's most widely-used currency, is a fiat currency, meaning it is not backed by any physical commodity such as gold or silver. Instead, its value is determined by the faith and trust people place in the stability of the US government and its economy.
Belief in the Federal Reserve System
The Federal Reserve banking system is based on a combination of government authority and public trust. People believe in the US dollar because it is widely accepted and backed by the world's largest economy. The Fed's credibility is critical in maintaining the value of the currency, as it is responsible for implementing monetary policies that directly impact the economy. In times of crisis, people turn to the US dollar as a safe haven due to its perceived stability.
Vulnerabilities of the Federal Reserve System
Despite the trust placed in the Federal Reserve, it is not immune to vulnerabilities. One of the most significant risks is the potential for hyperinflation, which could result from excessive money printing. This could lead to a loss of confidence in the currency and, ultimately, its collapse. Additionally, geopolitical tensions, a decline in the global status of the US, or a shift in global economic dynamics could also undermine the credibility of the Fed and the US dollar.
Bitcoin: A Decentralized Alternative (2009-Present)
Bitcoin, introduced in 2009 as a peer-to-peer electronic cash system via a 9 page legendary white paper by an anonymous individual or group under the pseudonym Satoshi Nakamoto, is a decentralized digital currency that operates on a peer-to-peer network. It relies on cryptography and blockchain technology for secure transactions, and there is a predetermined maximum supply of 21 million bitcoins. Bitcoin is not controlled by any central authority, such as a government or central bank. Instead, its value is determined by the collective belief of its users and their willingness to accept it as a medium of exchange.
Belief in the Bitcoin Monetary System
The belief in Bitcoin as a viable monetary system is rooted in several factors. First, it offers an alternative to traditional banking systems and the potential for financial freedom from government control. Second, the limited supply of Bitcoin and its deflationary nature make it an attractive store of value, akin to digital gold. Finally, the transparent and secure nature of blockchain technology bolsters the trust that users place in the system. As more and more institutional investors like Goldman Sachs from the existing system start to come around to Bitcoin as an asset this belief will strengthen amongst no-coiners and scale in the coming years
Vulnerabilities of the Bitcoin Monetary System
Bitcoin also faces its share of vulnerabilities. Its price volatility poses a significant risk to its adoption as a medium of exchange, discouraging many potential users. Additionally, the decentralized nature of Bitcoin makes it susceptible to potential regulatory crackdowns and bans by governments, as it poses a challenge to their monetary control. Finally, the potential for technological issues or the emergence of superior alternatives may threaten Bitcoin's position as a leading cryptocurrency.
The Role of Belief in Monetary Systems
Belief is the underlying foundation of both the Federal Reserve banking system and the Bitcoin decentralized monetary system. The value of the US dollar and Bitcoin is derived from the trust that people place in these systems. In both cases, people believe that the currency will hold value and be accepted by others as a medium of exchange. This collective belief is critical in maintaining the stability and value of each currency. When people lose faith in a currency, its value can plummet, leading to potential collapse.
The concept of belief in a monetary system is not new. Historically, the value of currencies has always been based on the trust placed in the issuing authority or the underlying commodity backing the currency, such as gold or silver. The transition from commodity-based currencies to fiat currencies further highlights the importance of belief in determining a currency's value.
Vulnerabilities and Collapse: What Could Trigger a Complete Collapse?
Both the Federal Reserve banking system and the Bitcoin decentralized monetary system have their vulnerabilities. A complete collapse of either system would require a series of events that shake the foundation of the belief that upholds them.
For the Federal Reserve banking system, a complete collapse could be triggered by:
Hyperinflation: Excessive money printing, leading to a rapid increase in prices, could erode the value of the US dollar. A loss of confidence in the currency could result in a downward spiral, causing the currency to collapse.
Geopolitical Shifts: A decline in the global status of the US, coupled with the rise of alternative reserve currencies, could challenge the dominance of the US dollar. This could undermine the credibility of the Federal Reserve and lead to a loss of confidence in the currency.
Financial Crises: Severe economic crises, such as a global recession or a major financial market crash, could weaken the US economy and shake the belief in the Federal Reserve's ability to maintain stability, potentially causing a currency collapse.
For the Bitcoin decentralized monetary system, a complete collapse could be triggered by:
Regulatory Crackdown: Strict regulations or outright bans on Bitcoin by governments could lead to a significant decline in its adoption and usage, potentially causing its value to plummet.
Technological Issues: A critical vulnerability in the Bitcoin protocol, a security breach, or a successful attack on the network could undermine trust in the system, leading to a rapid decline in value.
Superior Alternatives: The emergence of superior cryptocurrencies, whether through technological advancements or increased adoption, could outcompete Bitcoin and reduce its relevance, potentially causing its value to collapse.
Conclusion and Analysis
The Federal Reserve banking system and the Bitcoin decentralized monetary system are distinct monetary systems, each with its own set of advantages and vulnerabilities. The value of both systems is anchored in the collective belief of their users. As long as this belief persists, these systems will continue to function and hold value.
However, the potential for collapse exists in both systems, and it is essential to recognize the factors that could trigger such a collapse. For the Federal Reserve, the risks lie in hyperinflation, geopolitical shifts, and financial crises. For Bitcoin, the risks stem from regulatory crackdowns, technological issues, and the emergence of superior alternatives. Ultimately, the stability of each system is contingent upon the continued belief of its users and their willingness to accept and use the respective currencies.
As an investor or user of these monetary systems, it is crucial to understand their underlying principles and the factors that could influence their stability. By doing so, one can make informed decisions and navigate the complex world of finance with confidence.
The Bet of the Century
As you seek to look for a life-raft for whatever your rainy-day funds or savings or long term liquid positions may be it seems ludicrous to me not to store that value in a system that is truly governed by code and decentralized and immune to the censorship of nation states. Sure countries can ban or regulate or tax crypto and Bitcoin in ways that are confiscatory or otherwise and many probably will in the coming years, but we live in an age where mobility, connectivity, and community are the core values of a global generation of billions of people under the age of 39.
I believe it is inevitable that water (in this case “freedom” ) will continue to find its level and talent will migrate with their assets to the places where friction is less and this makes it very hard for me to imagine a world where Bitcoin ever goes to zero. The bet you are making with your holdings in Bitcoin is a 5-10 year bet that if it doesn’t go to zero that it by shear force of its limited supply (21m total) and demand must then become worth whatever the amount of global economy chooses to containerize itself for transfer and transactional activity over its network. This means an asymmetric risk and return reward for those who add it to their portfolio in some way now. Do your own research as always and this is just my opinion and not investment advice! Good luck out there.
REPLAY (Originally aired FEBRUARY 2021 )
