Clink! The coin dropped… I have been turning that conceptual coin between my synapses for the last 48 hours, and here it is. I know what I have been thinking about, and what I want to write about today. I want to study the possible ways to restart business and economy in the midst of the COVID-19 pandemic.
There is a blunt, brutal truth: the virus will stay with us until we massively distribute an efficient vaccine against it, and that is going to take many months, most probably more than a year. Until then, we need to live our lives, and we cannot live them in permanent lockdown. We need to restart, somehow, our socio-economic structures. We need to overcome our fears, and start living in the presence of, and in spite of danger.
Here come three experiences of mine, which sum up to the financial concept I am going to expose a few paragraphs further. The first experience is that of observing a social project going on in my wife’s hometown, Starachowice, Poland, population 50 000. The project is Facebook-named ‘The Visible Hand’ (the original Polish is: Widzialna Ręka), and it emerged spontaneously with the COVID-19 crisis. I hope to be able to present the full story of those people, which I find truly fascinating, and now, I just give a short glimpse. That local community has created, within less than two weeks, something like a parallel state, with its supply system for the local hospital, and for people at risk. They even go into developing their own technologies of 3D printing, to make critical medical equipment, such as facial masks. Yesterday, I had a phone conversation with a friend, strongly involved in that project, and my head still resonates with what he said: ‘Look, the government is pretty much lost in all that situation. They pretend a lot, and improvise a lot, and it is all sort of more pretending than actually doing things. Our local politicians either suddenly evaporated, or make clumsy, bitchy attempts to boost their popularity in the midst of all that s**t. But people… Man, people are awesome. We are doing together things that our government thinks it is impossible to do, and we are even sort of having fun with it. The sense of community is nothing short of breath-taking’.
My second experience is about the stock market. If you have been following my updates since the one entitled ‘Back in the game’, you know that I decided to restart investing in the stock market, which I had undertaken to do just before the s**t hit the fan, a few weeks ago. Still, what I am observing right now, in the stock market, is something like a latent, barely contained energy, which just seeks any opportunity to engage into. Investors are really playing the game. Fear, which I could observe two weeks ago, has almost vanished from the market. Once again, there is human energy to exploit positively.
There is energy in people, but it is being locked down, with the pandemic around. The big challenge is to restart it. Right now, many folks lose their jobs, and their small businesses. It is important to create substantial hope, i.e. hope which can be turned into action. Here comes my third experience, which is that of preparing a business plan for an environmental project, which I provisionally call Energy Ponds (see Bloody hard to make a strategy and The collective archetype of striking good deals in exports for latest developments). As I prepare that business plan, I keep returning to the conclusion that I need some sort of financial scheme for situations when a local community, willing to implement the technology I propose, is short of capital and needs to sort of squeeze money out of the surrounding landscape.
Those three experiences of mine, taken together, lead me back to something I studied 3 years ago, when I was taking my first, toddler’s steps in scientific blogging: the early days of the Bitcoin. Today, the Bitcoin is the big, sleek predator of financial markets, yet most people have forgotten how that thing was born. It was an idea for safe financial transactions, based on an otherwise old concept of financial law called ‘endorsement of debt’, implemented in the second year of the big financial crisis, i.e. in 2009, to give some liquidity to small networks of just as small local businesses. Initially, for more than 18 first months of existence, the Bitcoin was a closed system of exchange, without any interface with any established currency. As far as I know, it very much saved the day for many small businesses, and I want to study the pattern of success, so as to see how it can be reproduced today for restarting business in the context of pandemic.
Before I go analytical, two general remarks. Firstly, there is plenty of folks who pretend having the magical recipe for the present s**t we are waist-deep in. I start from the assumption that we have no fresh, general experience of pandemics, and pretending to have figured the best way out is sheer bullshit. Still, we need to explore and to experiment, and this is very much the spirit I pursue.
Secondly, the Bitcoin is a cryptocurrency, based on the technology designated as Blockchain. What I want to take away is the concept of virtual financial instrument focused on liquidity, rather than the strictly spoken technology. Of course, platforms such as Ethereum can be used for the purpose I intend to get across, here below, still they are just an instrumental option.
Three years ago, I used data from https://www.quandl.com/collections/markets/bitcoin-data, which contains the mathematical early story of what has grown, since, into the father of all cryptocurrencies, the Bitcoin. I am reproducing this story, now, so as to grasp a pattern. Let’s walse. I am focusing on the period, during which the Bitcoin started, progressively acquired any exchangeable value against the US dollar, and finished by being more or less at 1:1 par therewith. That period stretches from January 3rd, 2009 until February 10th, 2011. You can download the exact dataset I work with, in the Excel format, from this link:
Before I present my take on that early Bitcoin story, a few methodological remarks. The data I took originally contains the following variables: i) total number of Bitcoins mined, ii) days destroyed non-cumulative, iii) Bitcoin number of unique addresses used per day, and iv) market capitalization of the Bitcoin in USD. On the basis of these variables, I calculated a few others. Still, I want to explain the meaning of those original ones. As you might know, Bitcoins were initially mined (as far as I know, not anymore), i.e. you could generate 1 BTC if you solved a mathematical riddle. In other words, the value you had to bring to the table in order to have 1 BTC was your programming wit plus computational power in your hardware. With time, computational power had been prevailing more and more. The first original variable, i. e. total number of Bitcoins mined, is informative about the total real economic value (computational power) brought to the network by successive agents joining it.
Here comes the first moment of bridging between the early Bitcoin and the present situation. If I want to create some kind of virtual financial system to restart, or just give some spin to local economies, I need a real economic value as gauge and benchmark. In the case of Bitcoin, it was computational power. Question: what kind of real economic value is significant enough, right now, to become the tool for mining the new, hypothetical virtual currency? Good question, which I don’t even pretend to have a ready-made answer to, and which I want to ponder carefully.
The variable ‘days destroyed non-cumulative’ refers to the fact that Bitcoins are crypto-coins, i.e. each Bitcoin has a unique signature, and it includes the date of the last transaction made. If I hold 1 BTC for 2 days, and put it in circulation on the 3rd day, on the very same 3rd day I destroy 2 days of Bitcoins. If I hold 5 Bitcoins for 7 days, and kick them back into market on the 8th day, I destroy, on that 8th day, 5*7 = 35 days. The more days of Bitcoin I destroy on the given day of transactions, the more I had been accumulating. John Maynard Keynes argued that a true currency is used both for paying and for saving. The emergence of accumulation is important in the shaping of new financial instruments. It shows that market participants start perceiving the financial instrument in question as trustworthy enough to transport economic value over time. Note: this variable can take values, like days = 1500, which seem absurd at the first sight. How can you destroy 1500 days in a currency born like 200 days ago? You can, if you destroy more than one Bitcoin, held for at least 1 day, per day.
The third original variable, namely ‘Bitcoin number of unique addresses used per day’, can be interpreted as the number of players in the game. When you trade Bitcoins, you connect to a network, you have a unique address in that network, and your address appears in the cumulative signature that each of the Bitcoins you mine or use drags with it.
With those three original variables, I calculate a few coefficients of mine. Firstly, I divide the total number of Bitcoins mined by the number of unique addresses, on each day separately, and thus I obtain the average number of Bitcoins held, on that specific day, by one average participant in the network. Secondly, I divide the non-cumulative number of days destroyed, on the given day, by the total number of Bitcoins mined, and present in the market. The resulting quotient is the average number of days, which 1 Bitcoin has been held for.
The ‘market capitalization of the Bitcoin in USD’, provided in the original dataset from https://www.quandl.com/collections/markets/bitcoin-data, is, from my point of view, an instrumental variable. When it becomes non-null, it shows that the Bitcoin acquired an exchangeable value against the US dollar. I divide that market capitalization by the total number of Bitcoins mined, and I thus I get the average exchange rate of Bitcoin against USD.
I can distinguish four phases in that early history of the Bitcoin. The first one is the launch, which seems to have taken 6 days, from January 3rd, 2009 to January 8th, 2009. There were practically no players, i.e. no exchange transactions, and the number of Bitcoins mined was constant, equal to 50. The early growth starts on January 9th, 2009, and last just for 3 days, until January 11th, 2009. The number of Bitcoins mined grows, from 50 to 7600. The number of players in the game grows as well, from 14 to 106. No player destroys any days, in this phase. Each Bitcoin mined is instantaneously put in circulation. The average amount of Bitcoins per player evolves from 50/14 = 3,57 to 7600/106 = 71,7.
On January 12th, 2009, something changes: participants in the network start (timidly) to hold their Bitcoins for at least one day. This is how the phase of accelerating growth starts, and will last for 581 days, until August 16th, 2010. On the next day, August 17th, the first Bitcoins will get exchanged against US dollars. On that path of accelerating growth, the total number of Bitcoins mined passes from 7600 to 3 737 700, and the daily number on players in the network passes from an average around 106 to about 500 a day. By the end of this phase, the average amount of Bitcoins per player reaches 7475,4. Speculative positions (i.e. propensity to save Bitcoins for later) grow, up to an average of about 1500 days destroyed per address.
Finally, the fourth stage of evolution is reached: entry into the financial market, when we pass from 1 BTC = $0,08 to 1 BTC = $1. This transition from any exchange rate at all to being at par with the dollar takes 189 days, from August 17th, 2010 until February 10th, 2011. The total number of Bitcoins grows at a surprisingly steady rate, from 3 737 700 to about 5 300 000, whilst the number of players triples, from about 500 to about 1 500. Interestingly, in this phase, the average amount of Bitcoins per player decreases, from 7475,4 to 3 533,33. Speculative positions grow steadily, from about 1500 days destroyed per address to some 2 400 days per address.
Below, you will find graphs with a birds-eye view of the whole infancy of the Bitcoin. Further below, after the graphs, I try to give some closure, i.e. to guess what we can learn from that story, so as to replicate it, possibly, amid the COVID-19 crisis.
My first general conclusion is that the total number of Bitcoins mined is the only variable, among those studied, which shows a steady, quasi linear trend of growth. It is not really exponential, more sort of a power function. The total number of Bitcoins mined corresponds, in the early spirit of this cryptocurrency, to the total computational power brought to the game by its participants. The real economic value pumped into the new concept was growing steadily, linearly, and to an economist, such as I am, it suggests the presence of exogenous forces at play. In other words, the early Bitcoin was not growing by itself, through sheer enthusiasm of its early partisans. It was growing because some people saw real value in that thing and kept bringing assets to the line. It is important in the present context. If we want to use something similar to power the flywheels of local markets under the COVID-19 restrictions, we need some people to bring real, productive assets to the game, and thus we need to know what those key assets should be. Maybe the capacity to supply medical materials, combined with R&D potential in biotech and 3D printing? These are just loose thoughts, as I observe the way that events are unfolding.
My second conclusion is that everything else I have just studied is very swingy and very experimental. The first behavioural transition I can see is that of a relatively small number of initial players experimenting with using whatever assets they bring to the table in order to generate a growing number of new tokens of virtual currency. The first 7 – 8 months in the Bitcoin show the marks of such experimentation. There comes a moment, when instead of playing big games in a small, select network, the thing spills over into a larger population of participants. What attracts those new ones? As I see it, the attractive force consists in relatively predictable rules of the game: ‘if I bring X $mln of assets to the game, I will have Y tokens of the new virtual currency’, something like that.
Hence, what creates propitious conditions for acquiring exchangeable value in the new virtual currency against the established ones, is a combination of steady inflow of assets, and crystallization of predictable rules to use them in that specific scheme.
I can also see that people started saving Bitcoins before these had any value in dollars. It suggests that even in a closed system, without openings to other financial markets, a virtual currency can start giving to its holders a sense of economic value. Interesting.
That would be it for today. If you want to contact me directly, you can mail at: email@example.com .