To me and many others, bitcoin is not a technical revolution as much as it is a triumph of political and economic incentives. ~ Two Bit Idio

Systems like Ethereum (and Bitcoin and NXT, and Bitshares, etc) are a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdictionless entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus. ~ Vitalik Buterin

In Part I, we took a look at “What Bitcoin Isn’t” where all the usual comparisons and analogies regarding Bitcoin were shown to be poor fits in explaining what the phenomenon really is, ending on the obvious next question:

What Is Bitcoin, Then?

Money is one of those “aquarium characteristics” of life. Aside from worrying about our bills or investments, the general structure of “money” is a background medium that underpins everything, and, for the most part, we don’t really pay attention to it. Other examples are the base utilities like electricity and running water.

As we live our lives in these “aquariums,” we don’t really question the nature or the delivery mechanisms of these structural/cultural mediums we’re immersed in unless they stop working or they undergo a radical change.

A Brief History of Monetary Innovation

What we are experiencing today is a technological innovation that is moving the nature of money itself from one form to the next, and that is something that has only happened a few times throughout recorded history. It is because we are talking about a fundamental restructuring of the nature of money, and not an asset bubble occurring within the confines of the prevailing monetary system, that we can apply the “this time is different” label to Bitcoin.

Centralized, opaque, and debt-based, money is being disrupted by decentralized, open-source, competitive crypto-currencies.

This disruption has occurred out of necessity given the irreparable harm central bank policies have inflicted on the citizenry over the last century, reaching what can only be considered a crack-up crescendo of targeted inflation, QEternity, ZIRP and NIRP, the war on cash, and capital controls over the last 10 years. The most fitting label for all this is Chris Martenson’s “financial repression.”

During the era of debt-based money/fiat currency, whenever an asset bubble occurred, “this time is different” was never actually different. Galbraith’s observation from the Part I bears repeating:

The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets. (emphasis added)

But as mentioned in Part 1, Bitcoin is not a debt-based bubble. Leverage doesn’t account for the majority of the price action, at least not yet. As I write this, CBOE futures went live this week. Also, most exchanges are offering margin, and a lot of traders are dumb enough to try using it, but that is not the driving factor pushing Bitcoin adoption. These emerging stories of people mortgaging their homes to buy bitcoin are “newsworthy,” and thus still sporadic. Debt would be a driving force of the bubble when it’s systemic.

Looking at Bitcoin as a technology shift, there have only been a handful of really big shifts in money throughout history. We had barter, then either money-then-debt, or debt-then-money.

Anthropologist David Graeber (Debt: The First 5,000 Years) makes a case that contrary to conventional theory, barter did not beget money, but rather debt in the form of obligations came first. This was the first true abstraction of deferring present consumption into future value. Owing somebody something, whether it was returning a favor or, later, some symbolic representation of that favor, and that was the progression toward “money.”

Graeber’s larger point is that debt, the first big monetary innovation after barter, has been used ever since by a small minority of people to enslave the rest of the populace.

It’s a compelling argument. In either case, aside from subsequent innovations such as the creation of the banknote, which facilitated transmission of value at a distance, and double-entry accounting, nothing much has happened in the structural shape of money since the last big innovation which was the rise of fractional reserve banking.

Everything since then, from various fiat currencies to credit cards to the magnetic strip or PIN chips have been variations on a theme, the theme being debt is money. As long as the various modern welfare states continue to spend more than they receive, they have to keep creating and monetizing more debt in order to keep the wheels on the system as a whole.

Crypto-Currency Is Not Debt

Crypto-currency is built on mathematics, open-source, consensus, and decentralization. These attributes combine to give us a monetary system with defining characteristics which set it apart from the current, fiat-based model:

Inelastic

It’s inelastic because, as we all know, there is only a set amount of coins that will ever be created. This is in stark contrast to the supply of money in fiat terms. As somebody jokingly tweeted the chart I included from Part 1, “Wow look at that bitcoin price! Oh wait, that’s the chart of the money supply.”More on this below.