Bretton Woods

The Nixon Shock

The Petrodollar System

How Sovereign Nations Pay Their Bills

Enter Bitcoin

The Hash Race

Energy Export

US and EU Paralysis

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.

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.

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.

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.

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.

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.