The Impact of Bitcoin on the Global Economy

by Kyle Bruder

Bitcoin Logo

Bitcoin poses a long term threat to the petro-dollar system, global economic order, and Western dominance over competing empires. Secret dealings and geopolitical prowess by the Allies after World War 2 lead to the US dollar's dominance as the world's reserve currency but how sustainable is the global economy in 2020? The financial crisis of 2008 highlighted just how easily it can find itself wrapped around the axles. Bitcoin may be the answer to some of the problems that threaten the security of everyone on Earth. However, Western powers are lagging in the crypto-currency learning curve compared to the countries they have subjugated over the decades. Could this oversight demote them from rulers of the global economy? Without the ability to sanction and coerce resource rich nations to their benefit, the US and EU face the prospect of years of stagnation and economic regression.

Bretton Woods

After World War 2 in 1944, the United Nations Monetary and Financial Conference decided on fixed exchange rates between the US dollar and the rest of the member nations' currencies. This agreement resulted in the what is known as the Bretton Woods Accord. At that time, the US dollar value was itself pegged to the value of gold with one dollar representing 1/35th ounce of fine gold. This system made the US dollar the de facto world reserve currency even for non UN members, meaning that goods traded internationally would be priced in dollar terms. To determine the price of a good or service in non US currency would require first determining the price in US dollars then multiplying it by the foreign exchange rate.

US and USSR Delegations at the Bretton Woods Conference 1944

US and USSR Delegations at the Bretton Woods Conference 1944
Source: IMF

Bretton Woods Conference - Wikipedia

The Nixon Shock

By the beginning of the 1970s systematic economic problems had emerged in the US economy. European and Japanese exports began to rival the US. Coffers were rapidly draining due to expansions of President Johnson's "Great Society" welfare programs, foreign aid and the cost of the war in Vietnam. Government spending was an order of magnitude larger than the physical gold reserves which, to the rest of the world, exposed a fatal vulnerability in the Bretton Woods system.

As the world braced for a global run on gold (before 1971, US dollars were guaranteed to be redeemable in physical gold), efforts were made to temporarily stave off a complete collapse of the Bretton Woods system amidst a period of global inflation and slow growth known as stagflation. In 1971, very suddenly and without warning, President Nixon announced that foreign governments could no longer exchange their dollars for gold, while implementing domestic wage freezes and price controls. This swiftly closed the "gold window" and effectively ended the Bretton Woods system.

The US Federal Reserve was now free to lend massive amounts of of new dollars (in effect, print new dollars into existence and increase the money supply) to the US Federal government in order to mobilize efforts to mitigate domestic economic problems.

Nixon Shock Headline

On August 15, 1971, President Richard Nixon closed the gold window to foreign countries, meaning they no longer could exchange dollars for gold.
The New York Times

Nixon announces 10% surcharge on all dutiable imports, except those subject to quotas, and says US will cease to convert foreign-held dollars into gold, TV-radio address; notes imports might cost more as result of action but says dollar value will be unchanged for consumers who …

1973 oil crisis - Wikipedia

Nixon Ends Convertibility of US Dollars to Gold and Announces Wage/Price Controls | Federal Reserve History
With inflation on the rise and a gold run looming, President Richard Nixon's team enacted a plan that ended dollar convertibility to gold and implemented wage and price controls, which soon brought an end to the Bretton Woods System.

Nixon, Gold and Oil - Ahead of The Herd

The Petrodollar System

From 1970 to 1975, US crude oil first purchase prices doubled. US domestic production was unable to keep up with demand. Global demand for oil, the most important energy resource of the 20th century, was also in high demand as Europe and Japan had completed their recovery from the devastation of WW2 emerged into a more energy intensive global economy. A crisis began in 1973 when the Organization of Arab Exporting Countries imposed an embargo on oil targeted at nations in support of Israel.

In mid 1974 Nixon's administration made a pact with King Faisal Ibn Abd Al-Aziz of Saudi Arabia to exclusively accept US dollars for their oil exports in exchange for exclusive access to modern US military technology. This ingenious scheme, known as petrodollar recycling, allowed the Saudi Kingdom to invest massive excess US dollar revenues from oil importing countries like Germany and Japan into US and British sovereign wealth funds through the financial centers of New York and London.

Nixon and Kissenger with King Faisal Ibn Abd Al-Aziz

Richard Nixon and King Faisal at the Riasa Palace on July 15, 1974
Source: National Archives

U.S. Crude Oil First Purchase Price (Dollars per Barrel)

Petrodollar recycling - Wikipedia

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How Sovereign Nations Pay Their Bills

Many Non-Alligned Movement member states were coerced in to high interest energy infrastructure loans from the International Monetary Fund. These were required to be re-paid in US dollars. If any of these states were unable to make the payments or offer their natural resources in order to get an extension, sanctions and austerity imposed by Western military might were enforced and used compel the rest of the Third World to fall in line. Global demand for US dollars grew in nearly every corner of the globe, once again securing the US dollar as the world's reserve currency.

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Azerbaijani Chairmanship to the Non-Aligned Movement
XVIII Summit of Heads of State and Government of the Non-aligned Movement

Enter Bitcoin

Bitcoin is the original implementation of cryptocurrency. The idea of true digital hard money stems from the cypherpunks of the late 90s who applied the concept of cipher block chaining to the integrity of accounting ledgers. This was at a time when the dot-com bubble was reaching new heights of absurdity but had yet to burst. A decade later in 2009, the wake of the financial crisis of 2008, A mysterious character named Satoshi Nakamoto published the Bitcoin Whitepaper, specifying the protocol.

Because of the nature of the blockchain, the first block, known as the genesis block, must be seeded with data known as the initialization vector. The IV Satoshi used included a headline from January 3rd, 2009 edition of the British newspaper, The Times which reads, "Chancellor on brink of second bailout of banks". The intent and purpose of Bitcoin was thus permanently and verifiably codified into the blockchain and history itself.

Each subsequent block contains a hash of the previous block and must be verified by a majority of verification nodes that exists on the network before adding a new block containing new entries on the ledger. The ledger is distributed across all full nodes such that no one node or group of nodes can compromise its integrity unless they account for more than half of the nodes. This makes the ledger and the balances of the bitcoin wallets distributed, immutable and unconfiscatable. At the time of writing 660,069 blocks have been successfully mined and verified every 10 minutes since the genesis block was mined on January 3rd, 2009.

Unless a majority of nodes vote to change the protocol, there can only be a total of 21 million bitcoins in existence. Bitcoins enter the supply as rewards for successfully mining a block (see below). The fact that the Bitcoin network's supply is globally known finite makes it the hardest money available so far. The Bitcoin protocol is widely seen to have solved the problem that has plagued every currency that came before it; eventually being inflated out of relevance.

Those who had the technical understanding and the resources to marshal this new protocol early on were able to acquire and trade many bitcoins when they had no US dollar value. The ones that HODLed (kept possession of) those bitcoins now command a formidable wealth as the US dollar pricing for bitcoin rose a staggering 146,566% from the peak of its first bull run of $13.50 in 2013 to the all time high (at the time of writing) of around $19,800 in 2020, a mere 7 years. By now anyone involved in the upper tiers of finance recognizes Satoshi's Whitepaper as required reading.

Chancellor on brink of second bailout for banks

The headline used in the genesis block of the Bitcoin blockchain.
The Times

The Bitcoin Genesis Block

A raw hex version of the genesis block.

Chancellor Alistair Darling on brink of second bailout for banks | The Times
Alistair Darling has been forced to consider a second bailout for banks as the lending drought worsens.The Chancellor will decide within weeks whether to pump billions more into the economy...

Bitcoin: A Peer-to-Peer Electronic Cash System
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

FAQ - Bitcoin

The Hash Race

Bitcoins are mined by pools of validation nodes which attempt to guess a hash determined by a pseudo-random string of numbers appended to the hash of the block contents, known as the nonce. Think of it as a number of variable length that is mathematically related to the verified blockchain such that nodes can verify the integrity of correct attempts by other nodes. The difficulty (length of the nonce) is programmatically adjusted every 2016 blocks. Each mining node will attempt to guess using brute force (guessing every possible answer one at a time). The first node to solve the puzzle is rewarded with bitcoin.

As US dollar pricing of bitcoin rises, so does the competition among the mining pools and, thus, the mining difficulty. The difficulty can be measured as the rate total hashes per second. Early in the blockchain bitcoin was awarded to nodes running 1 hash per second, a rate that could easily be handled by almost any computer manufactured around 2010. In 2020 the difficulty is measured in tera hashes per second (1 trillion hashes per second), a rate that can only be achieved by creating massive arrays of ASICs (application-specific integrated circuits). The bigger the array, the higher rate can be achieved. The days of mining bitcoin on your spare laptop are long gone.

Bitcoin Mining Operation in Mongolia

A measurable fraction of all the computing power on the Bitcoin network is on these shelves.
Photo: Stefen Chow

Cambridge Bitcoin Electricity Consumption Index (CBECI)
The Cambridge Bitcoin Electricity Consumption Index (CBECI) provides a real-time estimate of the total electricity consumption of the Bitcoin network. The CBECI is maintained by the Cambridge Centre for Alternative Finance (CCAF) at Judge Business School, University of Cambridge.

Blockchain Charts
A relative measure of how difficult it is to mine a new block for the blockchain.

What is a Bitcoin Node? Mining versus Validation - SitePoint
Bruno Skvorc explains the concept of nodes in Bitcoin, exploring the difference between mining and validation.

Nonce Definition
Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.

Energy Export

It has been argued that the energy costs should be factored into the intrinsic value of bitcoin. Whether or not energy costs are driving the price of bitcoin to its current levels, bitcoin mining has become a convenient energy export for nations under economic sanctions. Venezuela, for example, was denied withdrawal of gold bullion from the Bank of England. With a debased currency it is not possible to pay for the building and maintenance of critical infrastructure. If a country in that situation had reserves of bitcoin instead of gold, moving the $1.7 billion worth of value from one wallet to another could be achieved in a single transaction that would complete in less than 10 minutes would cost less than $15 and could not be stopped by any less than half of the roughly 10000 full nodes operating on the network. What's more is the funds could be distributed to infrastructure funds just as easily.

The Three Gorges Dam in China

The Three Gorges Dam in China, the world's largest power station since 2012.

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Bloomberg - Maduro Stymied in Bid to Pull $1.2 Billion of Gold From U.K.

US and EU Paralysis

Non-western governments are already aware that bitcoin's viability of replacing the US dollar as the world's reserve currency are increasing with every passing day. Some have made it their priority to mine and acquire bitcoins to build up their national reserves. The US and EU, however, are in a sort of catch 22. Joining the race could be perceived as capitulation, an optic that could accelerate the rush of not only national governments, but global elites and international investment institutions, into a buying frenzy. If they continue to write off bitcoin as a passing fad, Western powers will not only loose their geopolitical dominance over the rest of the world, but they may begin a new era of global trade with nothing but irreconcilable accounts containing balances of unusable currency, essentially worthless data on computers in an unknown location.

As the US dollar looses ground as the world reserve currency with each international blunder from The Bay of Pigs to the Vietnam War to 9/11 to the Middle East wars to the massive bail-outs in the wake of the 2008 global credit crunch, the rest of the world (an overwhelming majority by several metrics) has been at the mercy of the petro-dollar system with the Non-Alligned Movement member states bearing the brunt. Bitcoin will even the playing field for not only major world powers, but will allow such granular sovereignty such that small upstart communities may remain indefinitely independent from empire and implement their own respective styles of governance without financial interference.

Bitcoin Geopolitics

Contributed by Kyle Bruder on Dec. 9, 2020, 11:53 p.m.
Last updated on Jan. 19, 2021, 10:51 p.m.