I haven’t really mentioned Bitcoin yet. If you’re largely unfamiliar with Bitcoin, you might not understand why some Internet currency that can’t be physically touched is relevant to a discussion about the incredibly important tool of money. If you’re skeptical, you’re in good company. Most people are skeptical of Bitcoin when first introduced to the concept, and rightfully so: it’s a completely new form of asset. Some try to grasp Bitcoin by relating it to things they’re familiar with like stocks or real estate or dollars. But the truth is, Bitcoin has many more differences than similarities when compared to most traditional assets.

If we are considering all the possible assets that one could purchase, the closest comparison for Bitcoin is gold. Gold has been used as money by humanity for centuries, primarily because it takes an immense amount of work to find more of it: gold is highly scarce. Because of its scarcity, the supply of gold is quite stable which allows it to maintain its value over time far better than other monetary options. Gold is also easily transportable, divisible into smaller units, and difficult to counterfeit, among other features that make it the best form of money

Bitcoin is a technologically improved version of gold, which automatically places it in the running for humanity’s best form of money. This is a hugely bold statement, but before we compare it to gold we must first go over what exactly Bitcoin is.

Bitcoin is a digital form of money that is backed by a globally decentralized network of computing power. Because it is globally decentralized, no single person or entity controls Bitcoin. Millions of people across the world have dedicated their computing power to secure the Bitcoin network. Thus, if there was a power outage in New York City or Tokyo, Bitcoin wouldn’t miss a beat.

This all sounds nice in theory, but how exactly is Bitcoin ‘backed’ by ‘computing power’? The technical details are a bit complex, but simply put, Bitcoin is digitally mined. Much like gold is mined from the earth by spending physical resources, Bitcoin is digitally mined by spending computing power. Here’s how Bitcoin mining works: first, a miner groups various Bitcoin transactions together, verifying that these transactions meet all the requirements of the Bitcoin network (e.g. no bitcoins are duplicated). Then, the miner is presented with a difficult math puzzle. The only way to solve this math puzzle is to guess the answer over and over and over again until she hits on the solution. Whenever a miner solves the puzzle, she submits her solution to everyone else on the network. The rest of the network ensures that the rules of the puzzle have been met and the group of transactions is valid. Once the network provides verification, the miner who solved the puzzle is rewarded in bitcoins and the process repeats. This Bitcoin mining process has been happening for over ten years, like clockwork. At first, it was a small group of people mining on computers. Today, it’s tens of thousands of people across the globe using specialized Bitcoin mining rigs.

Put more simply, the only way for Bitcoin miners to earn a profit is to play by the rules. If a miner submits an invalid transaction, the rest of the network will reject it and the miner will miss out on her reward. Thus, at any given moment, tens of thousands of Bitcoin miners across the world are securing each transaction made with Bitcoin. A single bad actor (or even many multiple bad actors) will simply be rejected by the network, and other miners will earn the reward instead.

That’s a lot to digest if you’re unfamiliar with Bitcoin, so I’ll wrap this up. The takeaways are:

* Bitcoin is a globally decentralized form of money

* Bitcoin is secured by the most powerful computing network in the world

Each of these two facts are potent in their own right. Combined, they create an asset unlike anything humanity has ever seen before.

Talk soon,

Mitch

Inflation is a rise in the average price of all the goods and services across an entire economy. There are only two ways for inflation to occur:

* Dilute money by creating more of it. In this case, prices can rise simply because there is more money. When there’s more money, people can ‘afford’ to pay more for the same goods and services.

* Undo the progress of technology. In this case, prices can go up because goods and services become more difficult to create. When things are more difficult to create, the process takes longer and requires more resources (i.e. money). For example, if the Internet was removed tomorrow, prices would spike because it would take a lot longer to create things. People would have to spend more time and resources to deliver goods and services, and thus would require to be compensated more.

Fortunately, #2 doesn’t happen in the long-run. The arrow of technological progress is forward, not backward. Which means that the only practical way for inflation to occur in the long-run is by increasing the supply of money. However, increasing the money supply does NOT always lead to inflation. In other words, we have the following asymmetry:

* Inflation is always a result of increasing the money supply

* Increasing the money supply does not always lead to inflation

To figure out what drives this asymmetry, we just need to go up one paragraph: ‘the arrow of technological progress is forward, not backward.’ If undoing the progress of technology leads to inflation, then the natural progression of technology will lead to deflation (i.e. the opposite of inflation—lower prices). As technology improves, goods and services take less time and fewer resources to create. When it is easier to produce things, people require less compensation. Thus, technological progress and an increasing money supply are two opposing forces. The stronger of these two forces will determine whether or not inflation occurs. If technological progress is offset by a large enough increase in the money supply, inflation will occur. Otherwise, inflation does not occur: prices will either stay the same or go down.

I’ll leave you with a key question: based on the above logic, what happens to prices if the money supply is never increased?

Talk soon,

Mitch

Bad money loses purchasing power over time, giving people fewer options for how to use their money (and time). Good money allows people to preserve their optionality over time. I can spend my money on college tuition today, or I can put that money under a mattress and spend it on college tuition in 10 years. Bad money is inferior because it removes this optionality. It forces me to earn more money in order to be able to pay for college tuition in 10 years, even though I have enough money to pay for it today.

Talk soon,

Mitch

A money is scarce if it is difficult for anyone to get more of it. As soon as a single person has easy access to new money, that money is no longer scarce. If a money is impossible to create for 99% of the population, but easily accessible to 1% of the population, it will be a poor form of money. Over time, the 1% will slowly acquire more and more money for themselves. Each time this new money is added to the system, all pre-existing money loses some of its value. Eventually, the people whose money is being devalued will realize it and seek a better form of money.

Let’s take an economy of 10 people where there are 100 total seashells used as money. Each person owns 10 seashells, including myself. Seashells are really hard to find for everyone except for Sally, who has figured out where all the seashells wash up on the shore. Over the next week, Sally finds 100 new seashells. As a result, Sally goes from owning 10% of all the money up to 55%. Everyone else goes from a 10% share of all the money down to 5%. Going forward, the prices of goods and services will be different than if Sally had never found those 100 seashells.

This is one of the key distortions that occurs in an economy with non-scarce money: prices of goods and services change even when the underlying supply and demand (i.e. value) of these goods and services remains constant. The purpose of money is to allow for the free-flow of goods and services with as little friction as possible. Non-scarce money adds friction by making the prices of goods and services more difficult to interpret. Did the cost of a college education go up because it’s in higher demand? Or simply because the money we use to pay for it is less valuable than it once was?

Non-scarce money creates opacity in information and allows for some people to play by different rules than others. Scarce money provides universal transparency where everyone is playing under the same set of rules.

Talk soon,

Mitch

Money has been used by humans for thousands of years. It’s purpose is to allow a free-flowing exchange of goods and services across large populations and complex societies. Money allows me to sell my furniture, using some of the proceeds to buy a new shirt while storing the rest of the proceeds away for a rainy day. Without money, I would have to trade one of my goods or services directly with the owner of the shirt. This could be quite challenging. For example, if I offer my furniture for a shirt, that’s a bad deal for me. But if I offer my apple for the shirt, that’s probably a bad deal for my trading partner. Money solves this problem, because I do not need to own whatever it is my trading partner ultimately wants. I just need to own money. Then, the trading partner can use the money to obtain whatever she wants, whether that’s buying an apple today or saving up to buy a car in five years.

Money moves us from a world where trade is clunky and challenging, to one where it is quite easy to trade with people whom we don’t know at all. Simply put, money is the grease that allows the economic machine to run with minimum friction.

Humans have used many different forms of money over time. We started with seashells, beads, and feathers, but ultimately discovered that these forms of money could be manipulated quite easily. Let’s take a village that uses 10,000 seashells for its money. The first problem is local—a bored kid can spend his summer in the nearby ocean finding more seashells. If it’s really easy to find more seashells, the value of the pre-existing 10,000 seashells will quickly be diluted. The second problem is with outsiders. Perhaps someone from a much larger village comes along with 20,000 new seashells. He immediately gains immense economic power, while everyone’s pre-existing seashells (i.e. savings) instantly become much less valuable.

In short, the value of seashells as money is too easily distorted. Societies that used seashells as money eventually collapsed and/or moved to a better form of money. The surviving societies were those using a better, less easily distorted form of money, such as precious metals. The gold standard (pun intended) of monetary metals is, of course, gold. Gold makes for strong money because it’s value has proved nearly impossible to distort over time. You can’t just stumble upon a bunch of gold while walking along the beach. To find new gold, lots of resources are required to attempt to mine it, and even then there is no guarantee that you’ll find anything.

To summarize, money is lubricant for an economy. Anything can be money, but over time societies gravitate towards better forms of money. A bad form of money will eventually be distorted because (1) it can easily be gamed, and (2) it pays handsomely to do so. This distortion will unfairly damage people who hold the bad money, and it will warp the prices of goods and services. Conversely, a good form of money allows for a fair society whereby the only way to get more money is to earn it by providing value to other members of society. In theory, it would pay handsomely for someone to find a way to distort good money. However, the beauty of a good money is that it is impossible (or nearly impossible) to game, to the point where it is much easier to just earn the money by providing goods and services that other people value.

Talk soon,

Mitch

When I finally saw these things that changed the way I view the world around me—things that most others don’t yet see—I felt this burning inclination to (1) help others understand these revolutionary concepts, and (2) continue to develop a better understanding for myself. On The Brink is my attempt to accomplish these two things.

In tackling these two goals, the most exciting part and the most challenging part is the same: most people don’t understand money or the economic system. This is exciting because those who figure it out gain a huge long-term advantage and help move humanity toward a better system. It is challenging because in order to truly understand these subjects, one has to ignore much of his or her preexisting notions about money and economics. The topics that I’ll discuss range from messy (economics) to completely new and without comparison (Bitcoin). Thus, I will attempt to start with first principles and build upon a foundation of understanding from there.

I am always open to feedback. If you see inaccuracies or if you disagree with something I write or say, please don’t hesitate to reach out. If writing this letter leads me to have a completely different viewpoint a year from now, then so be it. The ultimate goal here is to inch closer to the truth, even if that truth is inconvenient to my current beliefs.

Talk soon,

Mitch