Bitcoin is a information channel
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Bitcoin is a information channel
By Acrual
Posted December 22, 2019
After my article about “Volatility as information” a few readers asked me what did I mean by “low entropy carrier”. As I was writing about George Gilder’s book “Knowledge and power” applied to Bitcoin, I didn’t feel at the time the need to explain what these fancy words mean.
But let me try to do so as it is for me a very interesting exercise:
For example the realm of physics is a very low entropy carrier of information, what do I mean by that? It means that once you figure out the laws and relations between your measurements and observations, you can infer more laws and then create models that explain the reality. There are little inter-dependencies between observable facts compared to for example what happens in a high entropy carrier such as the human body.
As Gilder says, killing a virus within a human body without destroying healthy tissues is very complex compared to doing certain experiments within the realm of physics because of these inter-dependencies. Consequently, when we take a blood test, from the measurements we can conclude several correlations but hardly ever causation. Trying to do so, we frequently need many more tests. In fact, the more I learn about them, the more I conclude we are absolutely clueless about the human body.
With regards to the economy, the same applies to what Gilder calls the low entropy carrier of capitalism, which are the rule of law, the maintenance of order, the defense of property rights, reliability and restrain of regulation, stability of money, etc…
A low entropy carrier is therefore a channel that carries itself very little information, producing little distortion or external interference in the transmitted message and also allowing the entire message itself to be what Gilder calls “surprise”, entropy, or unexpected information. For Gilder, surprise is the entire point of entrepreneurial activity.
Therefore making the rule of law, maintenance of order, defense of property rights, etc… more predictable, allows to really receive the signal at the other end. In other words, by decreasing the noise in the channel, we are able to get the information that truly matters, by decreasing the “noise” that the powers that be produce via distortion and interference in things like money, regulation, property rights, etc…
Note: All this fancy writing by Gilder (and me) is well supported by an actual theory, the information theory of Shannon (1948), so neither him nor me are making this up!
In the USA economy surprise (crazy start-ups, crazy inventions and improvements of any process within economic activity) is arguably possible even likely. OTOH, the North Korean regime could be argued to be the exact opposite, where the only surprise possible is the last eccentricity of its dictatorial leader thanks to its completely lack of transparency.
Given that money is the information system of the economy, you could say that the USD is currently among the lowest entropy carriers in the world and the North Korean currency likely the highest.
What about Bitcoin?
Bitcoin is currently a very high entropy carrier yet for economic activity, because it is presently full of surprise for most of the world. It is not its lack of transparency but the fact it is hard to figure out. As I argued in my previous post, volatility, mining or its blockchain are some of its interesting features for many, and given that everything about it is mostly surprise, it can’t be a proper information channel of capitalism just yet.
But every podcast, book, every tweet, every article about it increasing its understanding, decreases this entropy Gilder writes about and it is in the process of becoming the lowest entropy carrier of the economy within the next few decades. In other words, in 10 to 30 years time, thanks to its transparency, we will find as many surprising things about Bitcoin as we currently do about the alphabet!
With regards to the current debate on scarcity being Bitcoin’s first price driver, I disagree, I believe the main driver is its understanding, which drives demand, which thanks to the limited supply increases the price.
Keep learning and explaining, it is the best way to decrease Bitcoin’s entropy and to end up turning Bitcoin in the best form of money we have ever seen!