What is money?
Money is a ledger to record how much energy each person can claim within a society.
The primary purposes of money are to store value and provide a medium of exchange. There are measurable criteria for determining the quality of money:
Durability- How long will it last?
Divisibility- What is the smallest unit that can be transacted?
Fungibility- Are all units equally valued? (1 piece of art is not equal to another)
Portable- Can it be easily moved or transported?
Verifiable- How can you confirm its authenticity?
Scarcity- How difficult is it to acquire more? (Needs to be enough for everyone)
Consider testing the following assets for these qualities. Which do you think is the best?
- Gold
- Seeds
- Iron
- Cows
- Homes
- Oxygen
- Diamonds
- Art
What is currency?
Currency is a contract that promises the holder redemption for money. Historically, this was often tied to gold because gold is difficult to move. It’s more convenient to trade the contracts than the actual gold. Today, every country uses fiat currency, meaning you can no longer redeem it for the underlying asset. For example, a £1 note was once a contract for one pound of silver.
What is economic energy?
In simple terms, economic energy is the collective output of a community’s work. Measuring this accurately on a global scale is complex, so here’s a analogy to simplify it:
“Imagine we are inside an empty white building with 10 people on cycling machines, all connected to a large battery. They work for 8 hours, fully charging the battery. Each person earns £10, which they can use to claim energy from the battery—for a hot shower, to charge a phone, or to cook food. The total money in the system is £100, so £10 can only claim 10% of the energy created.”
In this scenario, the cycling machines represent jobs, the battery symbolises the total economic energy generated by work, and the £££ are contracts to claim that energy.
Notice that the total money supply always matches the total energy produced. If each person earns £20, they can still only claim 10% of the energy, as £20 out of a total of £200 is still 10%.
Deflation is the natural state
Prices should naturally decrease over time. Here’s why: Imagine these 10 people get stronger over time. As they gain endurance, muscle, and efficiency, their output increases. They also innovate by creating better cycling machines, using lower resistance cables, and faster-charging batteries.
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Week 1. They can charge the battery 10% in 8 hours. Their £10 can claim 1% charge.
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Week 10. They can charge the battery 50% in 8 hours. Their £10 can claim 5% charge.
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Week 100. They can charge the battery 100% in 8 hours. Their £10 can claim 10% charge.
Over time, the same people can generate more energy in the same 8 hours, increasing the value of £10 as the total energy in the system grows. The key takeaway is that the numerical value of your money doesn’t matter—what matters is your percentage ownership of the total monetary network and the economic energy within it.
Ownership of a monetary network
Each cyclist in the white room gets paid £10. An individual cyclist owns 10% of the monetary network. Now, suppose one of the cyclists is suddenly given an extra £100. The result? Their ownership skyrockets to 50%, while everyone else’s ownership is cut in half, dropping to 5%. The total energy generated by the cyclists remains the same, 5% of the energy from nine cyclists is effectively transferred to the one cyclist with the extra money. To restore their original 10% ownership, the other cyclists must either increase their wealth or reduce the wealth of the lucky cyclist.
This scenario illustrates a key concept: the importance of maintaining your level of ownership over time.
Consider this in the context of owning a house. Let’s say you fully own a house, but each year, 1% of your ownership is quietly taken away. Because the house’s price continues to rise, you might not immediately notice this slow erosion of value. After 50 years, you’ve lost half of your ownership, but it seems like your house has achieved a “5” % annual return. The reality is that the money you’ve earned could have been double if your ownership hadn’t been diluted.
Now, let’s expand this concept further. Imagine a world with 10 houses and 10 people, each owning 10% of the housing market. If a new house is built every year, after 10 years, the supply of houses has doubled. Consequently, the value of each house would be halved compared to a scenario where no new houses were built. This illustrates how increasing the supply of assets—whether houses or money—can dilute the value of existing assets.
In the real world, demand for housing often outpaces supply. This dynamic can make real estate a relatively good store of value. However, it’s important to recognise the limitations of this system for preserving wealth. Beyond the obvious costs of maintenance, taxes, insurance, and local market forces, the mere fact that the supply of houses can increase means you are gradually losing your percentage of ownership in the housing market, and thus, potential value.
Unfortunately, no traditional asset is immune to this type of dilution. Whether it’s real estate, gold, stocks, or currency, ownership tends to diminish over time. Gold is continually mined, companies issue more shares, new companies enter the market, more art is created, and currency is printed—all contributing to the gradual erosion of your share in these assets.
Why is using currency problematic?
Currency itself isn’t inherently bad; the problem lies with its misuse. Scarcity is a critical aspect of money. Imagine if one person had a money printer in the cycling example. They could take 99% of the battery charge without doing any work
Since currency is just a claim for money, the issuer can print as much currency as they want, as long as people trust the issuer has the “gold” to back it. The outcome is an artificial increase in the money supply, diluting its value. The person printing money is effectively taking energy from other participants in the network. This process is called inflation.
Governments use fiat currency because it allows them to extract economic energy from everyone who uses it—essentially a hidden tax. They often deflect blame for rising prices onto greedy companies or supply and demand. GBP is printed 8% annually on average. Roughly every 9 years the supply doubles. The reason retail prices don’t double every 9 years is because most of this money goes into assets.
If you save in currency then your ownership in the network will decrease forever. You need to own assets, especially assets which are hard to replicate. The wealthiest people in the world have extremely limited exposure to cash. The majority of their wealth is in stocks, bonds, property or art. They dont buy these assets to increase their currency. They buy these assets to escape their currency.
Monetary value vs Intrinsic value
Because currency loses value over time, people look for safer places to store their wealth, like real estate. This is one reason the price of houses keeps going up—they’re much harder to “create” than currency. It makes sense to invest in property, but the downside is that it becomes harder for the next generation to afford a home.
This causes assets to have two values. Intrinsic value which is its utility and monetary value which is its use as a store of value. Gold for example has low intrinsic value and high monetary value. Water has high intrinsic value but low monetary value.
This situation also turns people into reluctant gamblers. Many of us buy stocks in our pensions for retirement. For example, if the value of money drops by 8% each year, you need an 8% return on your investments just to break even.
Imagine you’re using a ruler that keeps shrinking every time you measure something. That’s what it’s like trying to measure the value of companies with money that’s constantly losing value. This is why when you look at the stock market, like the S&P 500 above, the gains you see are often just a reflection of money losing its worth over time, not necessarily the companies getting better. Since the 2008 financial crisis the S&P 500 has risen from $800 to $5,600. All of that growth is a lie. It’s the money losing value not the stocks increasing in value.
What is Bitcoin?
Bitcoin is a digital money that operates on a decentralised network, using a technology called blockchain. Unlike traditional currencies, Bitcoin isn’t controlled by any single entity. Instead, it relies on a distributed network of computers to manage and verify transactions.
Key Features of Bitcoin:
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Scarcity: Bitcoin has a fixed supply of 21 million coins. This limited supply means that unlike traditional currencies, which can be printed at will, Bitcoin’s value isn’t diluted over time. If you own Bitcoin, your share of the total supply remains constant.
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Security and Decentralization: Bitcoin operates on a decentralised network, meaning no single organisation controls it. This decentralised nature makes it highly secure and resistant to censorship. Since its inception in 2010, Bitcoin has maintained a continuous and reliable operation without any central authority.
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Global Accessibility: Bitcoin can be sent to anyone, anywhere in the world, at any time. With just an internet connection, you can transfer Bitcoin without the need for banks or intermediaries, making it especially valuable in regions with unstable currencies or restrictive financial systems.
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Durability: Bitcoin, being entirely digital makes it infinitely durable as long as the digital infrastructure exists.
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Divisibility: A single Bitcoin can be divided into 100 million smaller units known as satoshis. This high level of divisibility makes Bitcoin versatile for both large transactions and micropayments, which is something traditional money struggles with.
How Bitcoin Works:
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Transactions: Bitcoin transactions are recorded on a public ledger called the blockchain. This ledger is accessible to anyone, ensuring transparency and preventing fraud.
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Mining: Bitcoin is created through a process called mining, where powerful computers guess complex mathematical problems. This process secures the network and controls the release of new Bitcoins, following a predictable schedule.
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Custody and Use: Although direct Bitcoin transactions on the blockchain can be slow and expensive, particularly for small amounts, most users will interact with Bitcoin through intermediary layers and custodial services. These services manage the technical details, simplifying the process of buying, storing, and transferring Bitcoin…
Why Consider Bitcoin?
Bitcoin represents a new paradigm in money. Its fixed supply, decentralised security, and global accessibility offer a robust alternative to traditional currencies. By owning Bitcoin, you can protect your wealth from inflation and government interference, while participating in a rapidly growing and evolving financial ecosystem. As Bitcoin becomes more widely adopted, its value and utility are likely to increase, offering a stable and secure option for preserving wealth.
The Dangers of Bitcoin.
It’s essential to recognise the inherent risks associated with Bitcoin. Understanding these dangers is crucial for anyone considering getting involved with this digital asset.
Volatility: The Unpredictable Rollercoaster
One of the features of Bitcoin is its extreme volatility. Unlike traditional currencies or even stocks, Bitcoin’s price can fluctuate wildly within short periods. A single tweet or news event can send its value soaring or plummeting by thousands of dollars. This volatility makes Bitcoin a highly speculative investment, where substantial gains can be wiped out just as quickly. For those unprepared for these drastic swings you will panic sell.
Security Risks: The Threat of Hacking
While Bitcoin transactions themselves are secure due to blockchain technology, the platforms and wallets where users store their Bitcoins are not immune to hacking. High-profile exchanges have been targets of massive cyberattacks, resulting in the loss of millions of pounds’ worth of Bitcoin. Once stolen, recovering Bitcoin is nearly impossible due to its anonymous nature.
Moreover, in the UK, investors lack access to Bitcoin ETFs (Exchange-Traded Funds) that are available in other regions such as the USA, Canada, Brazil, Hong Kong, Australia, Switzerland, Germany, and the UAE. These funds allow individuals to invest in Bitcoin like a stock, with the added security and custody managed by professional entities for a small fee.
Irreversibility of Transactions: No Safety Net
Another danger of Bitcoin is the irreversible nature of its transactions. Once a Bitcoin transaction is confirmed on the blockchain, it cannot be undone. This lack of a safety net means that if you accidentally send Bitcoin to the wrong address or fall victim to fraud, there’s no way to reverse the transaction. In traditional banking systems, mistakes or fraudulent transactions can often be corrected, but with Bitcoin, what’s done is done.
Proceed with Caution
While Bitcoin offers exciting opportunities, it also comes with substantial risks For those considering getting involved with Bitcoin, it’s essential to approach it with caution, fully understanding the dangers involved. Bitcoin may represent the future of digital currency, but it’s not without its pitfalls. Balancing the potential rewards with these risks is key to making informed decisions in the world of cryptocurrencies.