essays
Reflections on Money
by Kianga Daverington
September 1, 2020
This essay, written by Kianga Daverington of Daverington PLLC , was originally published in January 2020. The piece as been condensed for clarity.
Money is not a physical object like a coin, a bar of gold or a dollar bill. Money is at its core, a technology. It is a human invention designed to solve a specific set of human problems. Consider money, perhaps, in a new way. Think of money as a system for capturing time.
Time is the one thing we each have that is absolutely finite. We are born, we die, and the dash in between is all the time we have.
Think of production. We can usually produce more of some good by adding people to a task (also known as “WORK”). But we are still constrained by time. Whatever we produce is still limited by the amount of humans that can be organized to go into that production. Each of us possesses a limited amount of time available to us individually, so we need to convince or coerce others to add their time to ours if we want to achieve more than we can alone.
Out of this imperative, nations are born.
The most important quality of any particular form of money is how well it preserves the value of time over time. Can you buy the same amount of stuff or more in the future than you can buy today? If yes, congratulations - your money is accumulating time for you and future generations while you relax on the beach. If it takes more and more of a unit of money to buy the same amount of time in the future, well then I’m sorry, but that unit of money is getting weaker and weaker. It’s losing value or said another way – it’s losing purchasing power. The longer you hold it, the less it buys.
In a way, by purchasing goods and services, you are purchasing time. Every product and every service requires time to make and time to deliver - your time and/or someone else’s. The price therefore reflects the collective value of all the time put in. Money is a way we exchange time and move it around from where it is valued less to where it is valued more.
This is where prosperity comes from. It comes out of how well a society, collectively and each person, spends its time. How much time is spent creating and making? How much time is spent consuming? If we make more than we consume, we have something left over called wealth. If we consume more than we make, we are left with debt. You can’t consume what you don’t have, unless someone extends credit. Where does this “credit” come from? Basically –it’s made up.
Too much credit or debt eventually collapses and everyone is mixed up in the collapse.
If we understand that a unit of money represents a unit of time, and we understand time is limited, then a unit in a system of money with unlimited supply cannot have any value. This is the problem we are facing today with the world’s money supply. The supply of money in the world is increasing exponentially as central banks create money by giving loans to national governments, which is where our money comes from.
Our entire world financial system is a powder keg of debt.
National currencies today are known as fiat money, a currency without intrinsic value that has been given its power to be used as money by a government that says it is money by regulation. Wikipedia says, “Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.” Well said, Wiki.
A government’s job of maintaining the value of its national money boils down to a confidence game. On what basis do the people who use that government’s money believe it has value?
What happens to the money and those who hold it when the foundation of that belief begins to crumble?
essays
Bitcoin & The Future History of Money
by Kianga Daverington
January 9, 2020
Kianga Daverington formed Daverington PLLC in 2016. She began her career in the Derivatives practice group at Cravath, Swaine & Moore LLP in New York. In 2017 Daverington began personally trading and investing in Bitcoin and other crypto assets which has led her to focus exclusively on the blockchain and distributed ledger technology sector in her legal practice. She helped the co-founders of a new crypto asset investment firm launch a $140 million liquid crypto fund as the firm's Operations Manager and Counsel. She is a Managing Partner and Chief Investment Officer of the crypto asset management firm Acre of America Partners LP, and works with Acre of America Co-Founder at Frontline Data Services providing data center co-location, cybersecurity and IT managed services to cryptocurrency mining operators.
WHAT IS MONEY
Your most pressing concern right now is not how much money you have, but rather how you have your money. Is your money in the bank? Is your money in stocks? Is your money in pieces of paper under your mattress? Look at the time. Right now, on your computer or phone – it’s whatever o’clock. Do you know where your money is exactly and whose permission you need to access it? Do you know what your money is?
Walk with me and let’s discuss…
For starters, money is not a physical object like a coin, a bar of gold or a dollar bill. These are all just forms of money that people in a society agree to use. Money is at its core, a technology. It is a human invention designed to solve a specific set of human problems. I want you to look at money perhaps in a new way. Consider that money is a system for capturing time. Time is the one thing we each have that is absolutely finite. We are born, we die, and the dash in between is all the time we have.
With everything else that we see or do in the world, we can usually produce more of it by adding people to a task (also known as “WORK”). But whatever we produce is still limited by the amount of work (human time) that can be organized to go into that production. Since each of us possesses a limited amount of time available to us individually, we need to convince or coerce others to add their time to ours if we want more out of life than what we can do or achieve alone. Out of this imperative, nations are born.
We can look back over millennia of human history and observe that the form of money people used was absolutely fundamental to a society’s prosperity or lack thereof, its very survival and the collective progression of human civilization itself.
The most important quality of any particular form of money is how well it preserves the value of time over time. Can you buy the same amount of stuff or more in the future than you can buy today? If yes, congratulations…your money is accumulating time for you and future generations while you relax on the beach. If it takes more and more of a unit of money to buy the same amount of time in the future, well then I’m sorry, but that unit of money is getting weaker and weaker. It’s losing value or said another way – it’s losing purchasing power. The longer you hold it, the less it buys so you better get off the beach and back to work or get a second job to plug that hole! Sound familiar?
When I refer to the concept of buying time it’s another way to talk about the price for goods and services. Every product and every service requires time to make and time to deliver - your time and/or someone else’s. The price therefore reflects the collective value of all the time put in.
WHY THE HOW OF MONEY MATTERS
Money is a way we exchange time and move it around from where it is valued less to where it is valued more. This is where prosperity comes from. It comes out of how well a society, collectively and each person, spends its time. How much time is spent creating and making? How much time is spent to consuming? If we make more than we consume, we have something left over called wealth. If we consume more than we make, we have nothing left over of course. What we have is debt because you can’t consume what you don’t have unless someone extends credit. Where does this “credit” come from? That’s a discussion for another time, but basically –
If we understand that a unit of money represents a unit of time, and we understand time is limited then a unit in a system of money with unlimited supply cannot have any value. This is the problem we are facing today with the world’s money supply. The supply of money in the world is increasing exponentially as central banks create money by giving loans to national governments, which is where our money comes from.
National currencies today are known as fiat money, a currency without intrinsic value that has been given its power to be used as money by a government that says it is money by regulation. Wikipedia says, “Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.” Well said, Wiki.
A government’s job of maintaining the value of its national money boils down to a confidence game. On what basis do the people who use that government’s money believe it has value? What happens to the money and those who hold it when the foundation of that belief begins to crumble?
Enter Bitcoin – the first creation of a scarce digital commodity ever in the form of a virtual coin.
Bitcoin is a system designed to be a new form of money purpose built for the internet age that does not look to any government to maintain its value. Bitcoin is a distributed open-source technology maintained by thousands of independent computers around the world. It was first described in a 2008 paper published anonymously by a person or group using the name “Satoshi Nakamoto” under the title: Bitcoin: A Peer-to-Peer Electronic Cash System.
Bitcoin, the currency, operating on “Bitcoin” (with an initial capital B), the network, may be the most powerful tool on the planet for bottling time and moving it around the world to the highest bidder.
Since governments are not involved in maintaining the Bitcoin system, politicians and their funders cannot screw it up. Bitcoin is independent of governments and free from national politics – it is money available to all the people of the world with radical potential for ushering in a new golden age of global innovation and prosperity. Bitcoin introduces a high functioning and efficient system for capturing and organizing human time the likes of which we haven’t seen since the the 19th century use of a global gold standard, but much improved.
WHERE DOES BITCOIN COME FROM & WHY AM I READING ABOUT IT RIGHT NOW?
The process of creating a bitcoin is called “mining”. People and organizations around the world operate computer equipment connected to the internet on which the Bitcoin open source software communicates with every other computer connected to the internet running the same software. Operating these systems costs money and takes time. There’s the labor cost to design and raw material costs to manufacture specialized equipment – called “miners”, there’s the purchase price of the miners and the installation, and the data center hosting and electricity cost to run and cool the machines for optimal performance.
Since the Bitcoin system requires human WORK to create a bitcoin the security model is based on natural laws of scarcity value linked to human time. In this system called “Proof-of-Work” the bitcoin is a reward to those computer operators who are incentivized to dedicate resources purely for profit. This profit incentive is a crucial element in the game theory mechanics that secure the system without a centralized authority or management.
What are all these computers doing? It’s very simple really.
They are making a record, a record of transactions that is absolutely trustworthy, fixed and immutable because the system does not rely on any single party and no person or group can overwrite the system. Proper record keeping is the basis of civilization, individual liberty and prosperity. In Bitcoin there are no single leaders or individuals who can be bribed, coerced or corrupted to change the functioning of the network in a way that would undermine the confidence of all participants. The system is transparent, updated in real time everywhere all the time. Bitcoin doesn’t change very much. A varied, distributed group of unrelated people must come to a consensus openly and voluntarily and agree in order to implement any changes. Anyone with the necessary computing device can be a participant. No permission or license is required.
The Bitcoin network provides its users with an open transparent trustworthy ledger of transactions. To be clear, this record does not specify the individual names of people transacting on it, nor does it publish the value of its transactions denominated in other currencies.
Each transfer is visible for all to see, for all time. Accordingly, it’s actually one of the worst tools a person can use to launder money and commit crimes. Every move is traceable and the technology available to law enforcement for interpreting transaction data to track down and arrest bad actors using the Bitcoin network keeps getting better and better.
In the years since the Bitcoin network was launched on January 3, 2009, this one innovation has spawned thousands of alternative virtual coins that use different technologies and have alternative use cases and serve a variety of functions within their related systems. These are referred to as altcoins.
The supply of bitcoin is programmatically LIMITED like human time. 21 million only. The supply of new bitcoin generated by the network decreases over time according to a pre-set schedule. Every four years, the supply released is cut in half. This is called the halving (or halvening) and the next one looks to take place about three months from now.
So far in 11 years just over 18 million bitcoin have been created, and the last bitcoin is projected to be mined around the year 2140. It’s estimated that 4 million bitcoin may be inaccessible to their holders and lost forever leaving ~ 14 million bitcoin available today for circulation. However, the amount actually available for purchase at any given time is much less than 14 million because a huge portion of the bitcoin supply is held by people who were involved at the very beginning when bitcoin had no tradable value in national fiat currencies. These Bitcoiners, or “O.G.s”, had a vision of the future where money was free of government control, free from abuse, devaluation and corruption. They are HODLers – Bitcoin’s holders of last resort. Many believe all fiat currencies are heading to a value of zero and that we will see a systemic collapse of the post WWII financial order - a global monetary system reset this decade. HODLers do not value their bitcoin holdings in dollars, they value their dollars in bitcoin.
WHAT IS A BITCOIN WORTH?
Bitcoin is not only valuable today because of what someone else may pay for it tomorrow. It is valuable in our increasingly all-digital world because it is transferable along the internet. There are no third parties involved, no bank or custodian is holding your bitcoin and verifying who you are and what business you have with others with whom you wish to transact all while charging you the earth for the privilege. The Bitcoin network has been challenged, attacked from without, attacked from within and has proved itself so far to be reliable.
The price of a bitcoin when measured day to day can be extremely volatile because this is still a very new and emerging technology (some in the media like to talk about bitcoin busts being equal to the Dutch Tulip Bulb craze, but this is false). Overall, on longer time frames we can see a slow steady increase in adoption reflected in bitcoin’s value today relative to other forms of world money.
WHY BITCOIN MATTERS
We live in especially frightening times right now and we can observe pervasive signs of crisis in trust and a collapse in civilian confidence beginning with the 2008 global financial crisis. Not many of us knew it at the time, but government officials have said we were hours away from total systemic collapse. What happened was an old fashion run on the bank by other banks and a collapse in confidence among banks around the world causing the entire financial system to freeze.
There are signs that something similar may be happening right now as demonstrated by the Federal Reserve Bank of New York needing to issue hundreds of billions of dollars of new liquidity in the form of over-night and short-term loans to financial institutions starting in September of last year. The Fed is scheduled to being withdrawing that emergency liquidity from the market in mid-January.
But fear not! There were a few lifeboats on the unsinkable Titanic. And it is fortunately the case for us that we have a means of escape should the unthinkable happen.
In 2009 the Bitcoin network started operating with little fanfare. Only a handful of people even knew it existed. I think of them as the stewards of humanity’s collective rebuke and response to pervasive and systemic abuses by central authorities.
A “run” on Bitcoin is not possible. There are no bank holidays. Bitcoin never closes. It is always available anywhere and everywhere. If you have a few words memorized, you can go anywhere in the world, get a new computer, and wherever you are generate the private keys to unlock and use your bitcoin. The parameters of the system have been set by computer code, and as the system grows larger and more valuable the harder it is to change those parameters in any way that would harm the system. The power to operate and change Bitcoin is distributed among the many – kind of like democracy.
Those who use Bitcoin are simply agreeing that they find the system valuable and trustworthy for their needs. More and more people around the world agree on this with each passing hour and that is what a bitcoin is “backed” by. The more people who adopt and use the Bitcoin system, the more valuable it has become and will become in the future. This is the same reason any system of money has value – by agreement and because of the trust of its participants.
In 2008 I was a derivatives and commodities trading lawyer at Lehman Brothers and had a front row seat on the front line of the kickoff event to the greatest financial crisis since the Great Depression.
Could it happen again?
Well, we are going to find out. What is different this time is bitcoin and the Bitcoin system. We have an alternative. We have a choice in how we HOLD OUR MONEY, so hodl on for dear life.