Applying Buffett investment philosophy to cryptocurrency.
This article is inspired and informed by George Gilder’s book Life After Google. Not investment advice.
Sir Isaac Newton was, no doubt, a brilliant mathematician and physicist. For these careers he is most celebrated and studied, but one aspect of his scientific career is often overlooked or outright dismissed as foolishness: alchemy. Newton’s rigorous study of turning ordinary metals into gold was much more than a wild goose chase after magic devices. Newton the Alchemist ended up bringing about one of the most incredible economic innovations of his age: the gold standard.
If you’re like me and didn’t know that Newton’s foray into alchemy produced the gold standard, you probably haven’t thought about the fact that the gold standard is less an economic structure and more a monetary informational system, or a way to view the world. This has important implications for the human progress that followed.
All wealth is the product of knowledge. Matter is conserved; progress consists of learning how to use it.
-George Gilder, Life After Google
Being appointed to the Royal Mint in 1696, Sir Isaac Newton used his intimate knowledge of the “chemical irreversibility of gold,” knowledge he gained as a result of his failure in alchemy, to begin building a trusted structure of economic exchange that would accelerate human progress faster than any system previously. No one in the 18th century made better currency than Newton’s Royal Mint, and for that, they were rewarded with cultural dominance.
With a gold-backed British Pound driving the economy, commerce was, for the first time in history, more effective than physical power. This new reality exponentially sped up civilization’s maturation, as evidenced by the beginning of the Industrial Revolution only 80 years after the introduction of the gold standard. New nations rose to power and flourished under a Newtonian system of the world, with economies humming along like a well-oiled machine. Why did they work so effectively? Trust. Gilder illustrates this clearly in his book “Life After Google:”
With the pound note riveted to gold at a fixed price, traders gained assurance that the currency they received for their goods and services would always be worth its designated value. They could undertake long-term commitments — bonds, loans, investments, mortgages, insurance policies, contracts, ocean voyages, infrastructural projects, new technologies — without fearing that inflation fueled by counterfeit or fiat money would erode the value of future payments.
Newton understood that gold cannot be reverse engineered. There is a finite supply of gold that cannot be increased, and it can only be mined for use at a rate that is dependent on the physical capacity of the humans mining it. The Royal Mint bank notes, the British Pound, were merely IOUs for a corresponding amount of gold that was held in the national treasury. Britains, and later leading economies of the world, inherently trusted this system.
Unfortunately, not all advancements last. Economic growth naturally brings about convenience, and that convenience breeds complacency.
153 years after Newton’s appointment to the Royal Mint, the year is 1913. The United States, a young nation finding its place on the global stage, has just created the Federal Reserve, a bureau meant to centrally control the monetary system. Their hope was that the government, in all their collective wisdom, could better serve its citizenry than the gold standard alone. These two conflicting monetary informational structures lived in precarious harmony for just twenty years.
Then, in 1933 under FDR, Congress passed a joint resolution nullifying the right of creditors to demand payment in gold. Why? Americans had been severely burned by the banking system during Great Depression, and had begun hoarding gold, causing the economy to stall. Because of this national distrust, FDR used his own government’s reputation to transition to a fiat-based currency, which would be backed by nothing more than the belief that it is valuable.
Fiat, noun. An arbitrary decree or pronouncement, especially by a person or group of persons having absolute authority to enforce it
For the next 30 years, the US, now the leader of a new globalized economy, walked, jogged, then sprinted down the road of fiat currency, leading to the start of the next wave of human evolution: the Technological Revolution.
Here, 200 years after Newton introduced the gold standard, daily human consumption, by all appearances, radically outpaced Earth’s supply of gold. Convenience became king through the invention of the internet, computers, cellphones, smartphones, and digital monies. Now, not only do we blindly believe the green stuff in our wallet holds value, we also freely give monolithic companies like Google, Facebook, or Amazon the most intimate, day-to-day data of our lives that was previously unavailable to any third party. We are being robbed of our income and the wealth of our data, and we’re doing it willingly.
To many economists, whether expert or lay, the state of global commerce is doomed to continue in a never-ending cycle of boom and busts. How could one expect otherwise when fiat currency holds no inherent value and the citizens of the world are at the mercy of the ambitions of the wealthy? The world has become so small that all the gold in existence would be incapable of sustaining our collective economy. But there is an unchangeable “gold” that exists in our new age of technology that has been severely overlooked, to the detriment of our “Life During Google.” That new gold is code.
Our day to day life is governed by code. Strings of 1s and 0s that make up mathematical algorithms are what power literally everything we depend upon: financial transactions, communication, healthcare, transportation, government, emergency services, identity, etc., not unlike Newton’s gold standard did in the early 1700s. There is a major difference, however. Until 2009, there wasn’t any significant push to make this vast digital wealth available to the general public. That is, until Satoshi Nakamoto set Bitcoin into motion.
Just as Sir Isaac Newton’s study of alchemy led to the gold standard, so has the desire for a “modernized gold standard” led to Bitcoin. Satoshi realized that the legacy fiat system that was birthed in 1913 was advantageous to only one demographic: those in power. The individuals who sit at the top of the economic pyramid profit, while those of us in the middle or lower class contribute our every effort to their profit. We are required to blindly trust in the system — trust that the government, the Fed, the banks, and the elite, have our best interests at heart. Like Newton in the 18th century, Satoshi knew that a system of immutable trust was the one and only solution.
Like gold, Bitcoin has a finite supply and thereby cannot be inflated. Like gold, Bitcoin cannot be mined all at once, or be completely controlled by any one individual. And just as gold is unchanged by the desires of selfish humans, so is Bitcoin unchanged by the whims of banks or governments.
In a way, Satoshi is a modern Newton. They both believed trust is best placed in the unchangeable facets of our economy. Beneath this belief is the assumption that each individual is their own best master. Why should we be required to rely on the government, or the Bank of America, or the Fed to manage our wealth? Each one of these entities is inherently self-interested; you are merely a product for their profit in a self-perpetuating system enabled by fiat.
What if the fiat-dominated, information-saturated world in which we live is destined to fade away? We will need someone — or rather something — in which we can trust that won’t change as arbitrarily as the Fed’s rates. Perhaps Bitcoin is an answer. Perhaps we are sitting on the precipice of break-neck innovation, the likes of which we haven’t seen since Newton instituted the gold standard.
Perhaps Newton was the first Bitcoin maximalist, and the previous 200 years have been an economic detour. If so, how are you going to prepare? What do you think the world will look like should our current system fail? Do you think it’s possible we will revert to some type of Bitcoin-backed reserve, or will we remain in cycles of boom and bust? Let me know in the comments! The future belongs to the prepared.
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