Why is Bitcoin not of interest to leading economists

Bitcoin is a wonderland

Photo: © Hermsdorf

One of the best-known German blockchain experts explains the future of the new gold standard from the Internet. But it won't replace the euro anytime soon.

Born in Dresden, Jörg Hermsdorf travels constantly through Germany and the world to bring people closer to blockchain and digital money. He is co-founder of the Cologne company BlockChain Service GmbH.

Mr. Hermsdorf, you are considered one of the best technical blockchain and bitcoin experts in Germany. How did you find Bitcoin?

Also through my computer science studies at the TU Dresden and the bachelor thesis. In 2005 I researched security in distributed, anonymous networks and learned a lot about cryptography. I also studied cognitive science, i.e. researching the architecture and functioning of the human brain, and as far as I know there are many similarities between the Bitcoin network and our brain, which in the end is just a decentralized network of neuron connections.

However, I didn't hear about Bitcoin until 2011, three years after its invention by Satoshi Nakamoto and the publication of his white paper - which is considered the founding document of digital, decentralized currencies.

Well, nice play money, I thought at the time. Two years later, however, I had an aha moment: Bitcoin could become something, a real currency with a real economic cycle. Nevertheless, I still had to deal with the economics of Bitcoin for a long time to understand it properly. Bitcoin is the first man-made system in which mathematics, computer science, physics and economics are inextricably linked.

It's like a trip down the rabbit hole in Alice in Wonderland. You start to question a lot of things and see them from a new perspective. The economy, for example, say most mainstream economists, needs some inflation. That would not be possible with Bitcoin. But it actually works without inflation of the money supply, even without monetary policy.

The Bitcoin system has no weak points, cannot be misdirected or collapse. It is an approved, stable system that simply works around the clock and has so far withstood all systemic attacks and attempts at manipulation. Bitcoin is the most secure computer network in the world, which is what makes it so exciting for me as a technologist.

What exactly is your company, CONSERVE BlockChain Service GmbH in Cologne, of which you are a co-founder, doing?

Photo: © SZ-Grafik

We help our customers understand and deal with blockchain and bitcoin. That might sound a bit trivial, but people looking for access to this technology waste a lot of time, often several years. You are absorbing useless or incorrect information. Because so far there is little good literature, but mainly YouTube videos and podcasts and mostly only in English. But they often do not contain any relevant or understandable information for newcomers.

With special workshops, we try firstly to convey a really structured understanding of German and secondly to derive practical solutions for private individuals, companies or institutions. We currently offer all services for the successful implementation of a Bitcoin or blockchain project from a single source in Germany, Austria and Switzerland: consulting, programming and training.

How widespread is Bitcoin now?

Between 10 and 100 million people worldwide own Bitcoin. These are extrapolations, because there is no central registration office. So between 0.5 and 1.5 percent of the world's population. The mean value is currently 50 million users. However, this number doubles approximately every 18 months. In the virtual world, a bitcoin economy of its own is slowly emerging: I can already buy computer power, storage space and programming with bitcoin today. These are the three foundations for digital business models. A global economic cycle of its own is developing from this.

If programmers are based in Zimbabwe or Iran, it's easier to pay for them in Bitcoin than in US dollars. Anyone who has access to the Internet can receive Bitcoin in exchange for their work. So Bitcoin is not just a speculation, but is slowly arriving in the real business world.

In addition, there was a Bitcoin transaction between two countries for the first time in February this year, between Argentina and Paraguay. Many smaller countries have big problems with printed money - so-called fiat money. They struggle with the decline in value and loss of purchasing power. They are looking for alternatives. Going back to gold would be an option, but in the information age it is relatively expensive, slow and difficult to move.

Bitcoin, on the other hand, has no weight and moves almost at the speed of light via cable, radio and satellite - over great distances, to anywhere in the world. If Bitcoin has the same security and value retention properties as gold in the long term, it could be an alternative, becoming a new global standard reserve currency. But maybe that will take another 10 to 20 years.

You hear about hacks on Bitcoin exchanges, digital thefts of huge sums of money, scaling problems and worries about keeping the coins safe. Fast digital payment looks different, doesn't it?

A large, widespread blockchain will always be relatively slow by nature, at least significantly slower than other system architectures. It is more about systemic security, more precisely about the immutability of data. And that has its price. Security or speed? You cannot have the maximum of both at the same time.

Bitcoin currently defines the maximum of immutability that humans can create in digital space, in cyberspace. But a secure system can be made faster, but it is often no longer possible to trim a fast system later for security.

The hacks of the Bitcoin exchanges that one often hears about are not systemic security problems of the Bitcoin network, but something like individual bank robberies. Many Bitcoin exchanges are currently more like tin huts or kiosk stalls instead of Fort Knox fortresses. And since there are larger amounts of Bitcoin there, they are popular targets for hackers.

Why is it so difficult to solve these problems?

From my point of view, it just takes time. Decentralization is difficult, extremely difficult - the supreme discipline of computer science. In the first phase of systems and networks on the Internet, it was the case that we compromised on security, data protection and privacy in order to make rapid progress.

The aim was to get as many users as possible as quickly as possible. This approach is increasingly falling on our feet today when we think of Facebook and Cambridge Analytica, for example.

In fact, Bitcoin will only become a worldwide and long-term accepted currency alternative if the protocol and network remain secure and censorship-resistant.

What role does the age of the user play in this?

Generation Z, the millennials, don't mind the usability that takes getting used to. You grow up with it. But a lot is being done in terms of user-friendliness in order to reach the older generation - now that the most important problems such as the provision of a forgery-proof, decentralized network have been solved and practicable scaling approaches have become apparent. It was similar with the Internet. Let us think of the standardization of the “SMTP” e-mail protocol, which took place in 1982. But it wasn't until about 15 years later that the infrastructure and software were available for mass distribution of e-mail.

What do you think of attempts - like the company Coinbase - to bring out crypto-based credit cards?

These are bridging solutions between the Bitcoin world and the consumer economy, which is already well and extensively connected to the credit card networks. Similar to how the “modem” was initially a bridging solution between the existing telephone networks and the Internet. However, such a crypto credit card is currently only of interest to those in Germany who already receive most of their income in Bitcoin, but who do their everyday life in euros. Everyone else usually already has a credit card. For most of them, Bitcoin is currently more of a store of value, the digital gold of the future.

Similar credit cards have been around for a long time for physical gold deposits, but they are rarely used. According to "Gresham’s Law", people will always hoard the "better money" - which keeps its purchasing power best over time - and instead spend the "worse money" - which loses its purchasing power more quickly. The euro - which has been in circulation in Germany for less than 20 years - has already lost around 30 percent of its purchasing power since its introduction. Bitcoin, on the other hand, has gained 270,000 percent in purchasing power over the past eight years.

What is it like anywhere else in the world?

In Africa or Latin America there are a lot of people who don't even have a bank account. You also don't get a credit card and therefore no credit card. But almost all of them now have a cell phone. Today around three billion people are connected to the Internet. Now there is a race, for example between Elon Musk and SpaceX or Amazon, to connect the remaining four billion people to the Internet via satellites.

Anyone with an Internet connection can then immediately receive Bitcoin and then use it to pay again, even without a credit card. Soon we will have apps on our smartphones that automatically negotiate prices independently within a budget and buy us the things we need. Bitcoin could thus become a kind of world money on the Internet.

Bitcoin is currently in different phases of monetization at the same time: in some countries more as a store of value and in some countries as a means of payment for international transactions or orders.

Bitcoin dominates the crypto market with around two thirds, the rest are over 1000 other coins. Will they all go away?

I don't think all of the others will go away, but at least most of them will be orphaned. In the long run it is economically quite inefficient if many public protocols compete for the same function - in this case the money function. In a free market the participants will always converge on one standard. At least on the Internet, Bitcoin is already this quasi-standard.

Still, a few other coins will remain, for example as a field of experimentation, but without economic relevance. Bitcoin itself is not “static” either, new properties can be implemented. The only immutable constants in Bitcoin are the limited amount of money of 21 million perfectly divisible units, as well as the anonymous, decentralized, censorship-resistant mining. Everything else is open to debate and can in principle be revised at any time. It is difficult for other coins to catch up with Bitcoin. “Overtaking without overtaking”, as Walter Ulbricht once postulated in the GDR, is completely impossible.

How do you see the future of the global monetary system? Will the national currencies such as the dollar or the euro all give up their place in favor of bitcoin?

Probably not in our lifetime. We are only at the very beginning of the Bitcoin acceptance phase. There is a very long way to go before all national currencies are displaced. The question is rather: what purchasing power will a euro or Bitcoin have in 10 years? I see Bitcoin more as a corrective to counter the fiat currencies when they overdo it with their expansive monetary policy. Bitcoin is simply a new form of the internet. And the Internet has so far neither completely ousted the classic media such as newspapers and radio, nor destroyed the music and film industry, nor ruined all shops. Despite email, people still send traditional letters by post.

However, the internet is forcing every industry to adapt. The Internet is breaking up old, inefficient structures and creating new, more direct connections between people. With Bitcoin, it will soon be the turn of the financial industry and national currencies, which have so far been largely spared by the Internet revolution, for a change.

In other countries people deal with several currencies at once, don't they?

Yes, we Germans are used to using only one currency in everyday life, but in many countries it is normal for people to handle several currencies. It will be the same for us with Bitcoin. There will be situations where we naturally pay with Bitcoin on the Internet, and there will be situations where we will continue to pay with government money, i.e. euros.

The age of state money monopolies is definitely over. There will be people who vehemently reject Bitcoin and others who avoid the euro. Compared to the last two currency changes that we have seen - from the Eastern Mark to the D-Mark and then to the Euro - this will be an unconstrained, soft currency reform that will take many years, maybe decades.

What potential does Bitcoin have in the next ten years?

Personally, I believe that Bitcoin has the potential to rise to the top three of the world's currencies in the next ten years. The major currencies such as the euro and the dollar will certainly stay on the market for longer. It's going to be a slow transition. The choice for or against Bitcoin always remains a voluntary decision of the individual in every country. There will be states that will try to prevent Bitcoin from spreading in their area for as long as possible - such as China, India or Vietnam - and those states that see Bitcoin as an opportunity and use it progressively - such as Japan, New Zealand or Switzerland for example.

Bitcoin is limited in its amount, to 21 million pieces. Couldn't that be a problem?

The statement 21 million pieces is a bit misleading, because a single Bitcoin is perfectly divisible - currently in 100 million sub-units, so-called satoshi. There are even thousandths of satoshi in the Lightning network. So in principle there are enough Bitcoin units for all people and machines. So the number 21 is pretty irrelevant, even a single bitcoin that is perfectly divisible would be sufficient.

In a free market, the prices for services and goods will automatically settle on the amount of money available. In any case, money is only the yardstick for the prices of different goods to one another, for example to express that a smartphone is around 2000 times more expensive than an apple. The specific price, i.e. the number, for the apple or the smartphone is completely meaningless in itself.

The crucial function of money is to communicate the price difference between different goods and services. An economic system in which the amount of money is constantly changing - such as in the euro or dollar - leads to disruptions in the price structure and the economy, even if these interventions are actually well meant. Rather, it is the active control of the financial system that leads to the so-called boom and bust cycles, zombie companies and financial crises like 2008.

Bitcoin is the complete opposite of this, a system in which the amount of money is fixed once and then unchangeable. Similar to the “metric system”, the meter was established as the yardstick for sizes and lengths around 300 years ago and has not been changed since then. It would be very momentous and inefficient for all people to redefine the meter every quarter. With Bitcoin, the economy gets what scientists and engineers have had for a long time: a global standard for their field. An immutable reference for values ​​and evaluations.

Around 2028, around 20 million Bitcoin - i.e. 95 percent of the maximum amount - will be in circulation. The remaining one million will then take 110 years. The last bitcoin will begin to be distributed in 2105 and will be distributed for almost 40 years. There are then only very small amounts, fractions of a Bitcoin, that are added daily. The money supply will then in fact no longer be increased. From this point on, the network is a pure transaction network. Bitcoin is thus serving the demand of many people who want a currency without inflation. Especially in China. Trading in Bitcoin is even forbidden there, but "on the street" is still being traded there. The state cannot effectively enforce the ban even in this rather totalitarian country.

Why does the value of Bitcoin fluctuate so extremely?

In a system without central authority, nobody can fix the value centrally. And since Bitcoin is not a penalty, but is chosen voluntarily by people, the current value always results from supply and demand. Since money potentially affects everyone in the world, a total of seven billion people are currently invited to participate in the determination of the value of Bitcoin. And this process is neither coordinated, predictable nor linear. Even today there are still people who hear about Bitcoin for the first time and start forming an opinion.

Several factors play a role in the apparently extreme fluctuations. On the one hand, the benefit in a network increases exponentially with every additional user. Of course, this exponential behavior has to be reflected in the value somehow. If you are interested in this in detail, you will find a free webinar on this aspect on our website.

On the other hand, there is a special feature of Bitcoin every four years, the so-called halvings, in which the amount mined every day is halved. The next time this will happen in May 2020, which means that instead of the previous 1800 Bitcoin per day, only 900 will be added. That doesn't sound so wild at first, but there is no other free market in the world in which supply is so drastically scarce from one day to the next.

In financial circles one speaks of the so-called stock-to-flow factor, which doubles every four years with Bitcoin together with a halving. So here we also have an exponential process. The Bavarian Landesbank recently published a comprehensive study on this aspect and compared Bitcoin with gold. Gold's stock-to-flow factor is growing much more slowly and has taken millennia to reach today's factor, which Bitcoin will reach next year. Bitcoin is going through this scarcity process at record speed, and our human brains are not very good at understanding such exponential processes.

Thirdly, there are of course still unforeseeable, macro-economic events that can currently influence the Bitcoin price in one direction or the other in the short term, since Bitcoin does not yet have the liquidity and market depth of the very big currencies.

Aren't the fluctuations also a question of perspective? Maybe the Bitcoin doesn't fluctuate at all, but the euro?

Yes, it's like the earth and the moon. In everyday life we ​​always assume that the moon rotates around the earth because we only have this one perspective. In truth, however, the earth and moon rotate around a common center of gravity, a point in empty space that we cannot see. Similarly, one has to imagine an invisible economic center around which the various money systems revolve. If you look at Bitcoin from the euro perspective, you think: The Bitcoin price fluctuates enormously! If you look at the euro from the Bitcoin perspective, you think: The euro price fluctuates enormously! In truth, it is the shifts between the two opposing systems that we are observing.

As a tip, I therefore recommend everyone not to concentrate on the daily price of Bitcoin, but on a moving average - for example that of the last 200 days. Or you just look at the respective annual lows. This gives you a much clearer picture:

2012: $4

2013: $65

2014: $200

2015: $185

2016: $365

2017: $780

2018: $3200

What do you think of the new Facebook currency Libra?

Libra is not a new currency. It is a digital basket of currencies made up of dollars, euros and yen. Coins and tokens are then developed as a payment system. Seen this way, Libra is more of a competitor to PayPal than to Bitcoin. The aim of Libra is to develop a digital currency that is as stable as possible for the euro and dollar.However, it is not a decentralized system like Bitcoin and thus inherits the system-related weaknesses of the fiat money system. But we have to wait and see if Libra actually comes. At the moment the start has been postponed to the end of 2020.

What do you advise an investor to do? Should he buy cryptocurrencies to diversify his portfolio, and if so, how much?

I am a technologist and not an investment advisor. What I can only advise is to learn and understand Bitcoin. The coin is bought quickly and lost much faster. Serious literature on this is now available, albeit often only in English. You shouldn't start with a full bitcoin either, but with small satoshi amounts. Very few people buy a complete gold bar, but rather smaller units. Bitcoin is by no means just for high earners.

We offer free webinars to get you started, as well as a 6-hour workshop in which we take people by the hand and guide them through the process. Details can be found at: blockchain.conserve.de


The interview was conducted by Ulf Mallek.

Literature tips from the expert Jörg Hermsdorf on the subject of blockchain
"Bitcoin money: A story about the discovery of good money in Bitdorf" by Michael Caras. Although it comes as a short children's book, it is the best way to get started for most adults.

In addition, one should consider "The Bitcoin Standard: The Decentralized Alternative to the Central Banking System" by Dr. Read Saifedean Ammous, which was recently also available in a German translation. Very strong arguments are presented here as to why Bitcoin is the only realistic alternative to the central bank money system.

If you want to dive deeper into the rabbit hole afterwards, I recommend “Ludwig von Mises for everyone: The uncompromising liberal (economist for everyone)” by Professor Thorsten Polleit. Here you get a good introduction to economic teaching.

Jörg Hermsdorf was born in Dresden in 1979. He studied computer science at the TU Dresden, worked as a programmer, also at Audi and VW, is co-founder of a cloud services company and has been a blockchain consultant since 2014. He became co-founder of Conserve BlockChain GmbH in 2018.