Fiat and crypto actually share the same enemy

Despite severe corrections in multiple asset-markets, steep inflation and unprecedented market-conditions for central banks, many are mocking the Bitcoin-community for Bitcoin not being a hedge to inflation after all, or a save haven in turbulent fiat-markets, now that the value of Bitcoin has submerged USD 20K again, roughly a third from its all time high.

In complement, it is a reflex for many Bitcoiners, when the price is rising, to demand acknowledgment from the fiat-community, inferring the validity of the Bitcoin-premises from its rising price.

But actually this discussion is just as flawed as discussing the stability of the housing-market by looking at the trend of the median house-price.

One simply cannot infer the validity or invalidity of the bitcoin-premises from the trend of its valuation. After all, there are more concurring trends in financial markets than ever, some volatile, others robust, and extremely interdependent in many different and complex ways.

Apart from the Bitcoin-price itself, there is the whole ecosystem around it of exchanges, stablecoins, vehicles for leveraged trading, etc. The price of Bitcoin itself is not even interesting at all, at a fundamental level. It does not ‘tell’ us anything. The changing dynamics of capital allocation are. The Cambrian explosion and proliferation of crypto-technology and -markets is. And this is actually the same dynamic that has been happing in the fiat fintech-sphere, in the last few decades.

From a systemic point of view, Bitcoin and crypto are ‘just’ yet another layer in fintech complexity, added to the system.

It is, from a dynamics point of view, no different than ETFs, CDO’s, and many other synthetic financial derivatives. Of course many Bitcoiners will immediately protest, but the ongoing semantic Bitcoin-debates on ‘store of value’ vs ‘currency’, centralization vs decentralization just don’t settle! That is because they still don’t touch the actual fundamental discussion that should occur below the surface. The perceived ‘crisis’ of our fiat-currency system is still not analysed in a sufficiently precise manner. The ‘diagnostic’ of the systemic problem, is still way too messily formulated, too intuitively biased. It lacks formalism. It lacks a sufficiently abstract analysis. So we’re still actually having semantic discussions, even though we think we’re having fundamental ones.

As many, I certainly would argue that our current financial system can be diagnosed with worrying, severely unhealthy aspects. And that these aspects have become significant in the last few decades, and that they now pose a systemic threat to the global system. That varies from individual aspects like the existence of HFT (with peripherals like Robin Hood as its latest toxic peripheral), to the toxic systemic aspect of increasing passive investment.

But Bitcoin or crypto are not fixing these aspects. In fact they are making things even worse.

Growth

The fundamental dynamic (of the global financial-technological system as a whole) sits at a relatively abstract level. It is an optimization dynamic. The dynamics always optimize towards a state where resistance is minimal. However, there are many states with very little resistance, so more precisely formulated: the system will optimize toward the nearest optimum, given its current state. Makes sense, right?

But the number of ways the system can move towards an optimum depends on the dimensionality of the system. Just think of a wormhole (a shortcut through a higher dimension) and you get the picture. Only, in our current financial-technological system we don’t have just 4 or 5 dimensions, but thousands.

The optimum in the highest dimension is the absolute optimum, more optimal than local optimums. And over time, any system will ‘stumble’, or ‘evolve’ towards ever higher-dimensional optimums, until it reaches the absolute maximal optimum. It is the optimum with the highest dimensionality.

Then the dynamic is saturated. You will officially have a final equilibrium.

But what do you think happens to an optimization dynamic if you suddenly add hundreds of dimensions? What if you add dimensions much faster than the actual saturation-dynamic itself? That means that you increase the saturation-ceiling faster than the saturation-process itself progresses.

One can imagine that it will yield turbulent dynamics of another class than the turbulence that occurs in the system already.

Now we translate back to financial markets. The saturation process of clustering dynamics (of capital allocation) generated by financial exchanges do NOT go on until every transaction goes through a single, unique exchange. That is NOT the ultimate optimum. Given the infrastructure + the profileration of fintech + the associations with the ‘real economy’ + etc, an optimum is to have a number of exchanges, with a number of transactions being done directly (between supply and demand). The current number of exchanges is an optimum. But the more fintech infrastructure we proliferate and associate with the real economy, the different this optimum will look like.

From this point of view, introducing yet another ETF adds complexity just like adding a crypto-coin. Adding new services to the Bitcoin-ecosystem adds complexity just like introducing ESG-funds. In effect, we only ADD to complexity, we add more dimensions to the dynamic system of capital allocation. We introduce more local optimums and we increase the absolute optimum faster than the optimization-dynamic can keep up with.

From an economic utility point of view of settling primary supply and demand, this makes absolutely no sense at all. In making settlement more efficient, we have gone much too far and have created a box of Pandora, filled with synthetic supply and demand. The real economy literally cannot keep up with the IT-driven optimization dynamics.

Economic growth is a pointless term, from a systemic point of view. Systemic growth is the increase of the dimensionality of the complexity of the sytem. And ageing is the saturation process towards it. Just like in biological organisms. Death occurs if the saturation ceiling lowers again, and sinks under its current point of saturation.

The good-old business-cycle

In the pre-Greenspan era, you had these business-cycles. They were part of the organic optimization dynamics of the economy, which are, just like in nature, characterized by these circular movements around an ‘attractor’. The Greenspan-era introduced central-bank policies to (artificially) suppress these cycles. Of course that is not a sustainable strategy because you effectively compromise the economic immune system. So several voices rightfully suggest to ‘let the business-cycle be cyclical again’.

After decades of fintech proliferation, excessive compliance-measures and globalization of markets, that has arguably become more difficult than ever. Complexity is literally in the way, and you cannot beat the associated optimizing dynamic.

So instead of asking how we can fix the system by improving technologies and ‘innovative’ solutions, instead of debating whether Bitcoin is really decentralized or not, instead of pointing at failing Central Bank policies, etc etc, we should ONLY ask ourselves how we can REDUCE COMPLEXITY of the financial system again.

Reduce complexity so much that the business cycle falls back into its cyclicality again.