Energy, Money, and Technology: How Bitcoin Fits In
The advancement of humanity has always centered around these three pillars.
In this issue, I delve deeper into why I chose to focus my newsletter on energy, money, and technology. I will divide these topics into three sections, relate them to Bitcoin, and summarize my key takeaways.
The First Pillar: Energy
Energy is the base layer of all functioning systems. Your body needs energy to survive and function. The electronic device you are using to read is powered by electric energy. Buildings, cars, trains, ships are all powered by some form of energy. Every time a better way of extracting and utilizing energy is invented, humanity makes a significant improvement in quality of life.
Those who are capable of extracting and distributing energy have been rewarded handsomely by society. Oil and gas companies are tremendously wealthy because they extract fossil fuels and distribute them in easily usable forms (petroleum and natural gas) to society, providing significant economic value. Here are two points to show you how wealthy oil & gas companies are from a historical perspective of the US:
John D Rockefeller, the founder of Standard Oil, was worth 1.5% of the US Gross Development Product (GDP) in 19371. Jeff Bezos, one of the wealthiest person alive today, is worth around 0.56% of the US GDP by my calculations. In relative terms, Rockefeller was even richer than Bezos.
Standard Oil was split into 34 entities in 1911. Even after the split, some of those companies such as ExxonMobil and Chevron remain the largest companies by revenue today.
Governments are well aware of the importance of oil, which is why oil is regularly a factor in key geopolitical decisions. One of the most well known decisions is the petrodollar agreement in the 1970s, whereby Saudi Arabia (and other OPEC countries) sell their oil exclusively in US dollars in exchange for US protection and cooperation2, which helped cement the US dollars as the global reserve currency. In other words, energy was a key factor in creating the money system we know today.
The Second Pillar: Money
Money is the lubricant which fabricates all economic activities. I think of money as a unit of measurement of the resources you have accumulated. For our ancestors, resources meant the meat they hunted, the spears they crafted, the fur coats they created to protect them from the cold. For many of us today, resources mean the digital numbers shown on your bank accounts, or the assets you own, priced in some form of fiat currency. Generally speaking, you accumulate money by spending time and energy into creating a surplus of goods or services which people are willing to pay you for. In other words, money is a store of energy. You could call it financial energy. The hope is to store this energy (value you created) to exchange for other goods and services in the future, such as buying a house (goods), or going on a vacation (services).
Money has evolved over thousands of years since humans started transacting with each other: from bartering, to seashells, to precious metals such as gold and silver, to today’s paper money, or what we call fiat currency. Under the gold standard, the value of the USD was deterministically fixed; after the Bretton Woods Agreement, USD was fixed at $35 per ounce of gold3. In 1971, President Nixon terminated the gold standard, meaning fiat currencies are no longer backed by anything and they float freely against one another. As of July 2024, gold is trading in the $2,300-2,400 range, a 65-69 times increase from the Bretton Woods agreement. While tempting to think that gold has “greatly increased in value”, I believe it is more appropriate to think that fiat currencies have “greatly decreased in value”.
A reminder: the current financial system we live in (from when President Nixon terminated the gold standard in 1971) is less than 55 years old, a tiny speck in the thousands of years of history of money. Your parents or grandparents may be older than the current system! As such, it is not unreasonable to expect money to continue to evolve, largely due to the progression of technology.
The Third Pillar: Technology
Technology enables the evolution of everything, including energy and money. While it is easier to understand how technology has improved energy (for example, the invention of the steam engine), the improvement of money via technology is less intuitive. Some examples include:
The continuous development of coin minting techniques enabled the mass adoption of gold and silver coins, which were used in past empires such as the Roman empire.
The invention of paper and printers enabled the creation of paper currency.
The invention of telegraph allowed centralized entities to instantly update transactions, which created central banks.
The widespread adoption of the internet has led to the adoption of digital fiat currencies; money that is fully online and managed by banks.
The takeaway here is: money is always improved upon by technology, and humans always adopt the improved form of money. Always.
Where Bitcoin Fits In
I believe Bitcoin is the epitome of sound money. For the first time ever, we have a form of money that is enabled by technology, and made secure by energy.
By design, Bitcoin, as a form of money, is superior. Not only does it meet all the basic requirements of money: durability, portability, fungibility, it is superior when it comes to scarcity and divisibility. In terms of scarcity, there will only ever be 21 million bitcoin. It is also highly divisible; bitcoin is denominated in Satoshis or sats, and 1 bitcoin is equal to 100 million sats. Divisibility is important in facilitating accurate and fast payments. For example, no one wants to pay for their restaurant meals in gold because it is hard to physically divide gold into a small amount (I will dive deeper into gold, bitcoin and other forms of money in a separate article).
Bitcoin is a protocol created based on cryptography, a highly secure technology, with the goal of eliminating the need to trust any third parties to manage transactions." The design of bitcoin is also relatively simple and transparent; anyone can read the whitepaper published by Satoshi Nakamoto on bitcoin.
The Bitcoin protocol is based on proof-of-work, which means people spend energy to verify Bitcoin’s transaction history. In simple terms, this means it is nearly impossible to alter the history of what has happened on the protocol, making bitcoin reliable, neutral, and free from manipulation. Bitcoin is the first money system that is made secure by global and neutral sources of energy.
There are many other reasons why bitcoin can play a pivotal role in the future of money. At the same time, bitcoin should not be conflated with other cryptocurrencies because most of them do not have the same characteristics and because bitcoin has a robust network that makes it secure.
Closing thoughts
Our civilization advances fundamentally by discovering better ways of creating and utilizing energy, and channeling the surplus of energy into creating a surplus of goods and services (improved upon by technology). Money is merely a means of facilitating the transfer of energy between individuals, or in other words, our daily economic activities.
We have used different forms of money throughout history, but we always converge on the improved form of money. The current financial system has gotten us to where we are today, but has repeatedly shown signs of failure for a variety of reasons. Bitcoin is improved money, and it will likely be a cornerstone of our future money system.