@ Leon
2025-01-20 14:39:11
**Introduction**
We must rethink how we envision the future. In the short term, things may be worse than we expect, rising inflation, war, and health crises, but this is all part of the fiat dilemma. A system that cannibalizes itself. Yet, at the same time, a new system is emerging.
Bitcoin and Artificial intelligence (AI) will be central to this foundation, providing humanity with the time and tools needed to thrive.
How Technology Drives Deflation
As Jeff Booth so masterfully explains, technology is inherently deflationary. Over time, through free market competition and productivity gains, prices should fall to their marginal cost of production.
Yet, in our inflationary fiat system, productivity gains are eroded by the continuous increase in the money supply, driving prices higher. Instead of allowing prices to approach their marginal cost of production as they should, goods and services become more expensive due to monetary inflation.
This principle, that an expanding money supply reduces the purchasing power of individual monetary units and ultimately undermines wealth creation, was recognized as early as 1517 by Copernicus in the quantity theory of money.
Because bitcoin is limited in supply, productivity gains across the economy can lead to greater wealth for all participants in the system, as the price of goods and services falls to the marginal cost of production over time. Rather than rise due to an increase in the monetary supply. We need Bitcoin to ensure that the productivity gains that drive the economy forward can have a lasting, sustainable impact.
**The Interplay of Bitcoin und AI**
Since the existing system benefits from inflation, market participants are often manipulated into believing that AI is inherently dangerous. While there are significant risks associated with AI, particularly its potential for centralization and manipulation, the technology itself offers great opportunities. The real problem lies in the inflationary monetary system, not AI.
Artificial intelligence is set to increasingly shape the workplace, trade, and finance. Consider the “Magnificent Seven”, a group of tech giants, Apple, Microsoft, Amazon, Alphabet (Google), Meta (Facebook), Nvidia, and Tesla, that all leverage AI as a key driver of productivity.
In 2023, the financial services industry alone invested an estimated $35 billion in AI, with banking leading the charge, accounting for approximately $21 billion. This is particularly relevant to Bitcoin, since it serves as both money and a financial system.
As AI becomes more sophisticated, it will increasingly rely on a digital currency that aligns with its digital nature, such as bitcoin, which offers both scalability and speed through the Lightning Network.
For instance, AI systems could use Bitcoin to facilitate microtransactions in real time, managing their wallets autonomously to process payments for services or data. This would unlock new opportunities for AI applications in sectors like actual decentralized finance (DeFi) and machine-to-machine transactions.
The Lightning Network, as a second-layer protocol built on top of Bitcoin, enables transactions to be settled almost instantly and at low cost. This makes it particularly well-suited for AI applications that require fast and reliable transactions.
While some AI and language models can exhibit programmed biases, AI systems, driven by algorithms and data, should strive to prioritize efficiency, minimizing biases wherever possible. If programmed without bias, AI seeks the best tools for operations and decision-making, and Bitcoin offers an optimal solution, providing both the asset and infrastructure needed for efficient, resilient, digital financial systems.
In addition, AI is likely to also contribute to Bitcoin’s development, with algorithms optimizing mining efficiency, hardware usage, forecasting energy demand, and ensuring more efficient resource allocation, all of which will lead to more effective mining strategies.
**Conclusion**
The synergy between Bitcoin and AI has the potential to enable the creation of more efficient, intelligent and resilient systems. These developments will underpin bitcoin’s role as digital money in a digital world, potentially creating positive second-order effects on global financial markets. The impact will be especially profound in industries such as finance, insurance, robotics, lending, investments, architecture, housing, healthcare, logistics, and others, with effects accelerating over time.
The free market is inherently deflationary, because of productivity gains, things, like housing, should become cheaper over time. Yet, this doesn't happen. Inflationary fiat currencies, like the dollar, lose purchasing power as their supply increases, eroding those gains. Bitcoin offers a framework in which productivity gains can have a lasting, sustainable impact.
Bitcoin, as a disinflationary currency with a fixed supply, preserves the value of productivity improvements, allowing prices to fall to their marginal cost of production. This ensures that efficiency gains lead to greater wealth for all participants in the system.
Moreover, since Bitcoin is accessible, it allows wealth to become more attainable for a wider range of people, enabling general living standards to increase more easily. The interplay between Bitcoin and AI is pretty exciting, and it’s becoming clear that the widespread adoption of AI will drive the widespread adoption of Bitcoin. This is necessary, as only Bitcoin, as a counterbalance to the self-destructive fiat system, can protect humanity from the negative effects of inflation. With the accelerated productivity gains of the AI age, Bitcoin becomes even more crucial as a solution, ensuring that these gains can be preserved and shared more equitably.
**Originally published as the 28th edition of my n ewsletter, Bitcoin & AI:**
https://leonwankum.substack.com/p/bitcoin-and-ai
**Photo Credit**: commonedge.org (An Optimist’s Take on AI and the Future of Architecture)