Rock, paper, Bitcoin

Author: Philipp Mattheis |
Photo: Christoph Kienzle
The hype is over, but Bitcoin still has the potential to revolutionise our financial system. The future of our money is more open than many think

One of the most unusual means of payment was on the Yap Islands in the Pacific. So-called Rai stones served as money. They had a diameter of up to four metres and weighed several tonnes. On the archipelago, however, stones of this kind do not occur at all. They had to be transported with great effort by canoes from the Palau Islands, 400 kilometres away. And so there was a natural shortage of Rai stones. One could say that the stone money was minimally inflationary, perhaps even deflationary. After all, you couldn’t just form a Rai stone out of the rock every day and bring it to the Yap Islands.

But how could people pay with a currency that weighed several tonnes? In a society where there was no writing? By consensus. If one of the stones changed owners, the inhabitants of the island gathered together and co-operatively confirmed the transaction, whereby the stones were not physically moved. The system worked wonderfully until 1871, when a cunning Irish-American captain named O’Keefe came to Yap. With his big ships he brought along a lot of round stones and caused inflation. The islands’ economic system, which had been stable for centuries, collapsed within a few months.

During the tulip mania, tulip bulbs became highly sought-after objects of speculation in the Netherlands – until the bubble burst in 1637.


The currency system of the Yap Islands, writes Saifedean Ammous in his book “The Bitcoin Standard”, resembles the principle of the blockchain and the elaborate process with which Bitcoin transactions are generated or “mined”. As with the Rai stones, users determine who owns which Bitcoin by means of a consensus mechanism. “The Bitcoin Standard” has become the bible of the so-called Bitcoin maximalists – purists who believe that the only truly functioning application of blockchain technology is money. Money that does not need a central bank and that is a deflationary alternative in a world where the debt spiral is accelerating. For – as the history of the Rai stones shows – money must be rare in order to be valid.

Dollars and the like: the real bubble?

If the cheap-money game that central banks play gets out of control, hyperinflation threatens.

But wait a minute: Isn’t Bitcoin already dead? After all, the price of the cryptocurrency has fallen by around 80 per cent since its high in December 2017. Today Bitcoin is quoted at around 5,000 US dollars. The cryptocurrency has largely disappeared from the media. Many consider it an example of a classic speculative bubble, similar to the tulip mania of the 17th century in Amsterdam, the dot-com bubble of the late 1990s or the real estate crisis of 2008. An irrational exaggeration in which greed overrides reason. Bitcoin is dead, some say. For the 349th time. The web page 99bitcoins.com collects Bitcoin “obituaries” published in the press. In fact, Bitcoin is more alive than ever, its proponents say.

What really boomed in 2017, though, and then collapsed again were the so-called altcoins – freeloaders of the boom, who often did not have much to do with the original idea of the Bitcoins. Often the word “blockchain” was enough to multiply a coin. Most of these cryptocurrencies – and there are over 2,000 of them – have lost 95 to 99 per cent of their value to date.

For Bitcoin maximalists, this development isn’t the only aberration. They go much further: The real problem is our current financial system, they say. The balance sheet totals of the European Central Bank and the Federal Reserve Bank have quadrupled in the past ten years, to over four trillion euros or US dollars. Central banks use this unimaginable sum to buy government bonds from governments that are heavily indebted, after making election promises that were far too generous – promises that have to be kept after the election. “Quantitative easing” is the technical term – actually intended as a short-term measure after the financial crisis to prevent a recession.

Whether dollar, euro, yen or yuan, the world’s central banks are flooding the markets with new money, which is quickly entering the economic cycle thanks to extremely low interest rates. Quite a few experts believe that the next step is to introduce nominal negative interest rates. After all, central banks no longer have any other means of responding to the next recession. Money will then officially be worth less because there is simply too much of it. In principle, we already have negative real interest rates today, because inflation is eating up our savings faster than interest accrues. Negative nominal interest rates would only be the next logical step.

More money in the economic cycle can mean more economic growth. If productivity then rises faster than interest rates, governments’ debt mountains can be elegantly reduced. But savers pay the price: their money will be worth less. And if the game with cheap money gets out of hand, i.e., if the economy does not grow as fast as new money is created, hyperinflation threatens.

Most citizens still don’t notice much of all this. However, they notice that real estate prices and share prices have been rising steadily since the financial crisis and that their money shrinks when it’s in their savings account. If they own real estate or stocks, they are happy. Many others, however, realise that it has become almost impossible for them to afford their own home, even as double earners.


A blockchain is a kind of immutable digital journal that records, for example, transaction histories. In the blockchain, each new data record (block) is mathematically confirmed by all users involved in the blockchain. It is inseparably linked to previous blocks (chain). Neither its content nor its order can be changed if it is attached to the blockchain. A blockchain is stored simultaneously and locally (decentralised) on the servers or computers of the participating users. This can be a few selected (private) or very many (public), as with the cryptocurrency Bitcoin.


Bitcoin: dream or nightmare?

At Bitcoin, everything is supposed to be different: When the mysterious founder Satoshi Nakamoto published the white paper more than ten years ago, he (or she, or they) set the maximum number of Bitcoins at 21 million. Every transaction that takes place in the network must be confirmed by the participating users or computers. Since this costs a lot of energy, there are new Bitcoins as a reward. But as the number of Bitcoins increases, so does the difficulty of creating new Bitcoins. Around 17 million of these are currently in circulation. The connection is simple: Growing demand with limited supply leads to price increases.

So while the money created by the central banks is steadily losing value, Bitcoin is rising. Deflation triumphs over inflation. The algorithm watches over everything. A state, a central bank or a commercial bank is not necessary in the Bitcoin system. Bitcoin also allows people in developing countries access to the financial cycle. Around two billion people currently have no bank account. This means that they are dependent on cash and have to pay high fees if they want to send money. Bitcoin – the new, fair money of tomorrow?

Absolute nonsense, interject critics, such as the economist Nouriel Roubini. He believes that sooner or later Bitcoin will end up at zero. He compares the currency with a gigantic Ponzi scheme that makes a few nerds and fraudsters rich. The global financial elite expresses itself in a similar way. Investor legend Warren Buffett says Bitcoin is a hoax, that the currency’s intrinsic value is missing.

But the ranks of critics are not closed. In 2017, Jamie Dimon, head of the US bank JPMorgan Chase, also described Bitcoin as fraudulent. Two years later, however, in February 2019, the bank put its own blockchain-based currency into circulation.

Cryptocurrencies were also a topic at this year’s spring meeting of the International Monetary Fund (IMF). Christine Lagarde, managing director of the IMF, warned that Bitcoin & Co. could “shake the system”. It’s a warning that, at the same time, serves as a knightly accolade for cryptocurrencies: Lagarde’s statement shows how seriously cryptocurrencies are now being taken.

A new, digital gold standard?

Cryptocurrencies as a game of chance: today, nobody knows what will become of Bitcoin & Co.

Nevertheless, there are a number of practical problems. When Bitcoin peaked at $19,000 at the end of 2017, it took up to ten minutes to validate a Bitcoin transaction. The network was congested. But who wants to wait ten minutes at Starbucks to pay for a coffee? Bitcoin is not suitable for processing many transactions. In technical terms, this means scalability. While the cryptographic network can process 4.6 transactions per second, the Visa credit card system has a capacity of 1,700.

Since the beginning of 2018, the Lightning Network has been providing a remedy. Those who frequently buy their coffee in the same café, for example, open a payment channel there. Only after a certain period of time is the channel closed and the data fed into the blockchain. The development also stands for the stability and elasticity of the crypto-enthusiasts: behind Bitcoin there is no company and no financier. The decentralised cryptocurrency is an open-source project that is constantly changing and lives on the enthusiasm of its fans. There are currently 32 million Bitcoin wallets, i.e., digital storage locations for the currency. But nobody knows how many participants are behind them – each user can own several wallets. Despite the improvements, several problems remain unsolved: A Bitcoin transaction consumes ten times the power of a Visa transaction. Users have to use more and more computing power to compete for new Bitcoins. They solve mathematical problems and take part in a kind of lottery. At peak times, the network consumed as much energy as all of Greece.

This is another reason why author Ammous compares Bitcoin less with the money of the future than with “digital gold”. He has a global “Bitcoin standard” in mind – similar to the gold standard of the 19th century. Until the First World War, the currencies of most countries were covered by gold. If a central bank wanted to put more money into circulation, it had to store more gold, and that was only possible by making the country more competitive and producing more goods. High public debt and deliberately induced inflation could not arise. According to Ammous, the 19th century was one of the most prosperous and stable periods in human history. This is debatable. The fact is that the gold standard ended with the outbreak of the First World War. In order to finance the enormous battles of matériel, all warring parties gave up their obligations and went into debt. The consequence was the hyperinflation of the 1920s – and the later world economic crisis, which, as is well known, led to the strengthening of arch-radical political forces.

Bitcoin has what it takes to become our “digital gold”. An ultra-hard currency that will steadily increase in value, while all others – dollars, euros and yen – will lose value. Banks, hedge funds, even central banks will sooner or later put Bitcoin in their portfolios to participate in the price increases, which will drive the price higher. This is still a dream of the future. Bitcoin’s market capitalisation was 90 billion US dollars in mid-April 2019. For comparison: Amazon is worth ten times as much, physical gold almost a hundred times. It is a long way to the gold of the future.


Whenever a transaction takes place at Bitcoin, it must be confirmed by all participants of the blockchain. Once this has been done, a new element is added to the blockchain. This consensus principle makes the blockchain forgery-proof and largely irreversible. There is no need for a central institution to monitor payments. There is a reward system to ensure that the participants in the network make their computing power available. Those who solve computing problems (“proof of work” concept) receive new Bitcoins. However, the difficulty of these tasks increases over time, which is why it takes longer and longer to mine new Bitcoins. An algorithm has set the maximum number at 21 million.