“How many divisions does the pope have?”
The question (possibly apocryphal) was asked rhetorically by Joseph Stalin, the iron-fisted dictator, to emphasize the military might of the USSR.
Stalin measured rivals by how many tanks and guns they had. He is long gone now, but people still think about currencies the same way. The value of a currency is backstopped by the power of the state; the more powerful the state, the more benefit the currency receives.
The U.S. dollar, for example, is backstopped by the U.S. military (and a U.S. defense budget that is larger than the next seven nations combined). You can measure U.S. strength in terms of bombers and aircraft carriers.
The logic makes sense up to a point. A country with no military is vulnerable to being attacked, which means an attacker could seize that country’s assets, overturn its legal system, appropriate the means of production, and so on. That would be bad for the currency (obviously).
A country with a powerful military, on the other hand, can guard the homeland, safeguard trade routes, project “soft power” via diplomatic relations, and, when push comes to shove, rely on “hard power” via military threat. All those things are good for the currency.
Then, too, the power of the state ensures government revenue. Governments are funded by taxes, and the ultimate incentive to pay taxes is avoiding prison or the threat of state-sanctioned violence.
If you don’t pay your taxes and get caught, the government can throw you in jail — and if you try to resist, they can taser you or shoot you. If a government lacked this power, the people could ignore their tax obligations and the Treasury would be broke.
Some crypto skeptics use this argument against Bitcoin.
In effect they ask the question: “How many divisions does Bitcoin have?”
Bitcoin, the questioners say, has no ability to enforce contracts with a state-sanctioned monopoly of violence. It has no means of enforcing its will, or defending its territory, or requiring its use for mandatory transactions (like taxes).
So how can Bitcoin have value in the way state-backed currencies do? Where are Bitcoin’s aircraft carriers?
The answer is that Bitcoin doesn’t need aircraft carriers. It is a stateless currency with no need for political power.
Step back and think about the obligations of the state — particularly a state with a large, powerful military (to deter enemies) and a muscular police force (to enforce legal judgements and collect taxes).
Militaries are expensive. So are court systems and law-enforcement measures. A functional nation-state has to fund those things, which means it has to collect revenue in order to get the funding.
In abstract terms, a state has to protect its assets (citizens, property, technology, and so on) and also has to extract revenue from its assets (collect taxes) in order to fund itself.
Bitcoin doesn’t require any of that. The only thing Bitcoin has to “protect” is the integrity of the distributed ledger, a process that is built into the software code. As such, Bitcoin does not require state-backed force to be viable.
Some will ask: “What if Bitcoin is outlawed?”
What happens, in other words, if the state tries to use its monopoly on violence to block access to Bitcoin?
The answer is that, if a state tried to kill off Bitcoin today, it would fail. That ship has already sailed. Bitcoin is too global, and too easily accessible, to suffer a mortal blow from being outlawed.
At this point, trying to outlaw Bitcoin would be like trying to outlaw gold. Acknowledging Bitcoin’s power in such a way would almost function like a public relations announcement: “Bitcoin is a big-enough deal to scare the government — maybe you should own some.”
Yet, Bitcoin is a head-scratcher for many analysts because it has asset properties never before seen in history.
Take the value of gold as a comparison. Gold has value because of its physical properties. It is the only element that is scarce, eternal, and easily usable at room temperature. Gold never rusts, it never goes away, and it doesn’t disintegrate or turn into a poisonous gas.
For basic reasons relating to physical composition and rarity of supply — gold’s physical advantages as a metal — the world gold supply has been accumulating for literally thousands of years, which gives it a very stable asset base. It is physically impossible to add to the world gold supply at a rate above 2% per year. Too much gold already exists, compared to what is being mined.
That is why gold is a “stateless currency,” too. It has nothing to defend other than its advantageous position on the periodic table.
But getting back to Bitcoin, some are flummoxed by the fact that Bitcoin has properties like gold’s — which is why it is nicknamed “digital gold” — while having no physical form.
To see the parallels, you have to think in the abstract.
Bitcoin, like gold, has global circulation and global brand recognition. Try getting the word out on a product, any product, to 150 countries around the world. Think about how challenging that would be, and reflect on the fact that Bitcoin has a 10-year head start.
Then, too, Bitcoin’s integrity is enforced by the distributed ledger, and its limited supply is enforced by mathematics. These are the equivalent of physical properties — like the properties of a precious metal — but expressed in code.
When you put together global brand recognition, the integrity of the ledger, and limitations of supply, you get an asset that demonstrates the key properties of gold without having to exist in physical space.
What’s more, Bitcoin and gold share the power of network effects. Gold is widely accepted as an asset — and has been for thousands of years — because a far-flung network of human beings have awareness of gold and respect for its attributes.
Imagine if gold was the same in every way except nobody had heard of it. The network effect would then be zero, and gold would have no value as a medium of exchange. Network effects are important, even for something as old and venerable as gold. Reversing that logic, we can see the value of the network that Bitcoin has built here and now.
So Bitcoin doesn’t need the power of the state — that is to say, militaries or law-enforcement mechanisms — because it doesn’t have property or revenue streams to defend.
And yet, as a kind of amusing twist, nation-states may one day need Bitcoin.
When the world’s nation-states are done debasing their own currencies to a point of fiscal ruin, and a total loss of faith on the part of the citizenry, a stable medium of exchange could come in handy.
Bitcoin might not in fact “stabilize” until it has taken a fat percentage of gold’s global market share — but there is more than enough room for two stateless currencies in the world, one physical and one digital, and that will be a fun journey.
Originally written by Justice Clark Litle on TradeSmith.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.