Bitcoin and Virtue Part 1: Prudence

I’ve been involved in Bitcoin one way or another for about 6 years now and it’s never been lacking in drama. Exchange hacking, Darknet markets, Scaling debates, altcoins, ICOs and, of course, price volatility have all been a part of Bitcoin in that time and it’s very easy to get caught up in any/all of those things without seeing the big picture. In this series, I hope to tell you why Bitcoin is good for the society at large and how I think Bitcoin, by acting as sound money, will change the world for the better.

The main way I’ll do that is by examining Bitcoin in relation to the classical cardinal virtues. In today’s article, I’ll examine how Bitcoin, and sound money in general, encourages the virtue of prudence.

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Fiat Money

Almost all money used today (USD, EUR, JPY, CNY, etc) is fiat money. That is, creation of the money is dictated by some central authority. This means, in general, that fiat currencies can and do get inflated. Largely, this is because entitlements and benefits are popular but taxes are not, so politicians tend to inflate through deficit spending. This is a lot like charging money on your credit card, but not having to pay off the principal for 30 years or so.

This means that a dollar today will not have the same purchasing power as a dollar 10 years from now. This makes sense since inflation is the act of increasing the money supply. In other words, we live under a monetary system where the ultimate supply of the currency is at best unknown and at worst uncapped.

Bitcoin, on the other hand, has a capped, known supply. There will never be more than 21 million BTC. This is even better than traditional sound money like gold as the potential supply of gold is unknown.

Ultimate supply may seem an esoteric economic fact, but in actuality, money supply has enormous second and third order effects beyond degrading the purchasing power of the currency.

Time Preferences

Fiat currency, because of its inflationary property, encourages spending. Spending money now vs. later changes the mentality of people in a particular way. Specifically, they are less motivated to be prudent with their money.

Now in of itself, spending money to get some good or service is not a bad thing. That’s how markets work. When inflation enters the picture, however, the motivation to spend increases and thus, the demand for goods increases. This means that in general, goods and services become more expensive. The preferences change so that people are more motivated for things now vs. things later.

Since saving is discouraged in a fiat system, there is less planning. In a fiat system, there is a preference for living day-to-day rather than planning a life many years from now. The typical mentality found in people with short-time preferences is YOLO (you only live once) without much regard for tomorrow.

Sound money, and Bitcoin in particular, motivates people to plan and save. Most Bitcoiners I have met regret most purchases they’ve made with Bitcoin because unlike fiat, Bitcoin increases in utility and value. People that were once living paycheck-to-paycheck now look at investment horizons of 10–20 years.

Bitcoin encourages people to be wiser with their money, to think before they spend, to plan ahead and not act so much on impulse. In other words, Bitcoin encourages the virtue of prudence.

Role of Prudence

Bitcoin encourages thinking through the actual consequences of spending and other decisions. This means that as more people own Bitcoin, more people will have a longer-term outlook. This means that more people will be planning for possible ways to make the future better, which leads to cooperation. Groups of people cooperating to make a better future is exactly what makes civilization possible.

In other words, Bitcoin creates alignment between individuals to improve the future. Contrast that with the government budget situation in almost every country. Almost all budgets are deficit spending, meaning that they get goods and services now in return for debt paid by future generations. Sound money creates motivation to treat the future like an investment to be made instead of a resource to be raided.

When Prudence Lacks

When a society lacks prudence, what happens is that the society collapses or goes into chaos. It’s not a coincidence that the average lifespan of a fiat currency is only 27 years. Usually, war is what devastates a country as governments do not have the natural restriction of money in a fiat system. The problem right now is that money and state are inextricably linked. Sound money, like Bitcoin, is the way to unlink them.

Civilized society depends largely on the virtues of its citizens, prudence chief among them. Without prudence, planning for a shared future becomes impossible as most people simply don’t think much about it. Bitcoin and sound money encourage prudence and change the incentive structure toward future-orientation.

Conclusion

Bitcoin decouples money and state. Bitcoin can thus be sound money. Sound money motivates people to be more prudent. As a result, civilized society can be planned for and improved upon instead of made worse through neglect or ransacking future generations.

Bitcoin is good for society because sound money aligns people’s preferences toward building a better future.

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