Natural vs Artificial Money and why Bitcoin is the greatest thing to happen for alternative energy. | by Melik Manukyan | Medium

As of late, I have been noticing a new wave of articles and essays being published covering the energy footprint associated with Bitcoin mining. These articles are more or less prepared from the same, old recipe — Each article begins with a brief introduction quickly going over the internals of Bitcoin mining which are then followed by some statistics which paint the industrial-level energy requirements. Sometimes they even compare it to an entire country’s energy consumption! Eventually, they all arrive to the same conclusion of how awful, wasteful, and unsustainable this all is. And they could all not be more wrong.

We need to first understand the different forms or types of money. I believe that all forms of money, both historical and contemporary, can be broken down to two categories — natural and artificial. We should first start by defining these terms.

  1. Natural (adj.)sourcea. existing in or formed by nature (opposed to artificial ):b. based on the state of things in nature; constituted by nature:c. of or relating to nature or the universe:
  2. Artificial (adj.)sourcea. made by human skill; produced by humans (opposed to natural ):b. imitation; simulated; sham:c. lacking naturalness or spontaneity; forced; contrived; feigned:

Based on these definitions, I believe that we are ready to define our two types of money. I have always been a strong advocate for simple, concise definitions for effective communication and understanding; therefore, I will keep them simple.

  1. Natural Money —forms of money that derive from energy.
  2. Artificial Money —forms of money that derive from human will or agreement.

Now that we have the two forms of money defined, we can proceed to understand them in greater detail and their characteristics.

Natural Money

Humans have historically relied on various objects to serve the function of their money, this includes everything from shells to stones to precious metals such as gold and silver. We commonly refer to these as commodity money. Commodity money refer to objects that are believed to carry intrinsic value, for example it is believed that gold carries or contains value in itself.

Over the years, I have seen many attempts at explaining the meaning of intrinsic value. While some came close, I feel that they all fell short in varying degrees. The most common of these explanations is scarcity. While scarcity is a valid answer, I believe that in order for us to truly understand intrinsic value, we must understand why or how something becomes scarce. Scarcity comes from energy or the lack thereof — specifically, the amount of energy that is required to create something.

For example, how is gold created? The short and quick answer is, humans mine it and extract it from the ground. But this is incorrect because the question imposed how was gold created. Gold atoms were created from nucleosynthesis and nuclear fusion some billions of years ago during the formation of our universe and galaxy. These gold atoms eventually found their way into the core of our Earth where we discovered and continue to discover them. The process of synthesizing AU required enormous amounts of energy and as a result, gold is scarce. The scarcity of gold and other precious metals comes from our [human] inability, due to our lack of access to the energy required, to synthesize Gold to this very day. While we have been successful in using modern-day particle accelerators and reactors to actually create Gold atoms, it is an enormously complex process that is not economically practical.

Therefore, we can define intrinsic value as the amount of energy required to create an object with little to no utility, in other words it can be seen as the amount of energy stored within an object or an object’s potential energy. By looking into the nucleus of an AU atom, we see 79 protons and can verify the amount of energy [work] that was required for the creation of that Gold atom; thus the amount of energy “stored.” This is known as proof of work.

On the other hand, goods and services contain utility value as they provide us with utility and perform a function. Where intrinsic value reflects potential energy, respectively, utility value reflects kinetic energy. For example, an employee performs labour (a service; or kinetic energy) for his employer and receives his salary in gold (money; or potential energy). The employee can then take his newly earned gold (money; or potential energy) and go to a restaurant and order some food (a good; or kinetic energy). Economics and markets are simply the transfer and distribution of potential to kinetic energy and vice versa.

Because energy is absolute, money that is directly created from energy should be defined as natural money. Natural money is the better form of money because, not only, is it difficult to create, manipulate, and inflate the supply, but more importantly it provides the counter-balance to utility value as it contains intrinsic value. Economics, after all, is the flow of potential and kinetic energy. Money must have an equal weight to the available goods and services [utility], and therefore, must store intrinsic value and derive from energy.

Continuing, money must not have utility for it will obtain kinetic energy and be used in some degree. Instead, in order for money to have potential energy, money must have little to no utility. Natural money contains intrinsic value or potential energy for as long as we do not have access to the energy required to produce it. Unfortunately just as sea shells and stones lost their value, I do see a time in a distant future in which gold itself loses its intrinsic value or potential energy. Historically, we have repeatedly tried to create gold, but have always failed due to our lack of access to the required amount of energy to produce it. Where the alchemists failed in the past, we will succeed when future humans have access to much greater magnitudes of energy than today and are able to synthesize AU atoms via particle accelerators and nuclear reactors. In such a scenario, we will be able to effectively ‘print’ gold back to its utility value or kinetic energy (jewelry, art, medicine, electronics, etc). But until that time, Gold will continue to remain a good store of potential energy.

This leads me to Bitcoin and why I believe Bitcoin to be the perfect natural money. While Bitcoin is only an abstract mathematical construct, it is a lot similar to gold in that it is directly created from energy and cannot be created any other way. AU is created from nuclear fusion and BTC from hashing SHA-256. Just as we can verify the energy required to create gold by looking into its nucleus, we can verify Bitcoin by reviewing its cryptographic hashes. Both Gold and Bitcoin provide us with a proof of work that was done to create them. There is no sound alternative to proof of work.

I say that Bitcoin is the perfect natural money because it is only a mathematical construct. What I mean is that, one day humans will reach the energy requirements to be able to print gold and manipulate even greater physical fabrics and plains, but they will never be able to ‘print’ Bitcoin. The reasons for this is its issuance policy and more importantly a network property referred to as difficulty. What this variable [difficulty] does is it that it rebalances and adjusts the required amount of energy (hash-rate) needed to mine a valid block and issue new Bitcoin based on the current amount of energy. This means that no matter how much energy you throw at the network, it will become increasingly more difficult and costly to create new Bitcoin. The intrinsic value or potential energy in Bitcoin will never the exceed the amount of energy humanity has access to. Thus, Bitcoin is the perfect natural money.

Artificial Money

The other form of money is artificial money. While natural money is created from raw energy, artificial money relies only on human will and agreement which is entirely relative. Just as we have had various forms of natural money, there are various forms of artificial money which includes, but is not limited to fiat or government money, promissory notes, and credit. Artificial money is not dependent on an absolute property such as energy, but and as a result will always end in what I like to call inflationary death spirals or more commonly known as hyperinflation. This is due to the low or 0 cost of energy required to produce it. Such scenarios, result in a loss of trust or faith in the ‘social fabric’ or ‘agreement’ that created this form of money in the first place.

In artificial monetary systems, we effectively replace potential energy found in natural money with a promise of future kinetic energy. Due to artificial money’s lack of a proper counterbalance to kinetic energy, there will always be counterparty risk to the recipient of such money for he must have faith that his promise of future kinetic energy will be honoured by kinetic energy at a later date. In our modern day economies, we are essentially providing and trading goods and services for the promise of future goods and services.

In my opinion, creating large-scale economies on artificial money is entirely flawed as it will always gravitate towards hyperinflation. Because we cannot guarantee the fulfillment of future energy, over time, we will find ourselves extending our promises of future kinetic energy (money and debt) with even greater promises (more money and debt) until we can no longer honour these promises; at which point the entire system fails.

Human will and trust is simply not a good substitute for natural energy. This is why Gold has remained relevant for most of human civilization, and why we continually find ourselves facing economic crisis in modern times.

Bitcoin, a natural incentive for alternative energy

As stated before, natural money is better than artificial money. For a society or economy to reach sound money, money must derive from an absolute property such as energy rather than a relative one such as human agreement. Energy can be objectively measured and calculated whereas human agreement cannot. This is vital for us to be able to measure goods and services and counterbalance their kinetic economic energy.

Returning to the case of Bitcoin and its ever increasing thirst for energy — there are currently a plethora of articles being published about its supposed unsustainability and how it can potentially lead to an energy crisis. I completely disagree. In fact, I believe, it is the single greatest thing that has ever happened to the green or alternative energy revolution on the single notion that Bitcoin acts as a natural economic incentive for the production of cheap energy. In turn, this will fuel investment and rapid development in alternative energy sources.

Bitcoin miners are essentially competing with one another in the production of Bitcoin. These processes require enormous and continually increasing amounts of energy, specifically cheap energy to maximize profits. In the early days, Bitcoin mining started in residential zones consuming expensive utility electricity. Over time, we saw this trend gravitate toward more cost-effective sources of electricity; after all, when we have access to cheaper electricity, we can thwart more energy at the Bitcoin network and maximize our profits. Today, Bitcoin mining is largely done in industrial-grade warehouses and data centers strategically located in areas with access to large amounts of cheap electricity.

As Bitcoin miners continue to compete with one another, they will continue to gravitate towards cheaper and cheaper sources of electricity, specifically hydro, nuclear and solar plants. Eventually, we will reach a time when we have exhausted all energy resources that are currently available to us today; at which point we will have no other choice, but to begin investing into further development of cheap or renewable energy. This will fuel and incentivise the building of large-scale solar and nuclear power plants while we vehemently invest in further research and development to increase efficiency.

Bitcoin mining provides us with a natural economic incentive to pave the way for alternative energy. Today, we try to stimulate the development of alternative energy via government programs and subsidies and to an extent through marketing and advertising campaigns. These are simply not good enough and it is why we are failing to kickstart this revolution. There is no greater motivator for humans other than economic benefit and incentive.

We must burn through all of the world’s available or accessible energy to be forced to create anew, there is no other way. Over the next 10–20 years, I’d love to see the Bitcoin network grow to consume 100x more energy than it does today; perhaps then the world will be powered exclusively by hydro, solar and nuclear energy.

To conclude, it is important for us to understand the dichotomy between money and goods and services; and the exchange of potential and kinetic energy in human economies and output. For sound money to exist, it must derive from an absolute property such as energy. I look forward to the Bitcoin age, and with it, the alternative energy revolution.