AI and crypto go hand-in-hand. This is something that I discussed a great deal.

But why is this the case? How come crypto is required for AI? The answer to this stems from the changing nature of money. There is a lot more happening that is going to usurp all concepts associated with monetary creation, distrubution, and the inflation/delfation discussion.

Anyone who reads my articles about money knows I point out how many viewpoints (understanding) of money is passe. We have ideologies that are driving the position many take. Sadly, a lot of this dates back 100 years. It is as if the entire digital realm was never created.

AI is only going to accelerate this. We already see what is taking place. The pace of expansion is making Moore's Law look like a snail. For this reaon, the basics of money are changing.

In this article we will go through digitization, inflation, velocity, and elasticity.

It is a world of abundance, something that affects everything at the most fundamental level.

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Why AI Needs Cryptocurrency

Perhaps the best place to start is a common misconception. This was espoused by the great Milton Friedman and is called the quantity theory of money. Basically, it states that an increase in the money supply which outpaces growth in total supply of goods and services will lead to higher prices. Most take this to mean more money = higher prices.

Of course, the reverse would then also be true.

Friedman's analysis breaks down for one simply reason. He wrote in a period where the velocity of money was stable. This is not the case. For decades, the range was level, something that changed in the early 1990s. During that period, the velocity increased, only to peak later in the decade. Since that time, we had a massive drop in the velocity.

As a aside, the velocity of money is the pace at which a monetary unit changes hands over a given period of time.

Thus, if we have a halving of the velocity of money, the money supply could double without a significant impact on prices.

What we need to takeaway from this is speed and units.

Digital Abundance

The topic of inflation also gets highly warped. We will not delve into this other than to say it is impossible in the digital world.

For many, the contemporary idea of inflation is that we arrive at a state where "too much money is chasing too few goods and services". While overlooking the reasoning for this state, it does provide enough of a framework.

What is taking place is a marked shift in the economic understanding of these concepts. The drivers of the past are not relevant.

So why is inflation, as commonly understood, impossible in the digital world?

Basically, the view listed of inflation means we have too many monetary units. Going back to Friedman, it is the quantity versus availability. Hence, it is impossible.

In the digital world, there are no limits in units. Let us take the song Hell's Bells by AC/DC. How many units are available on iTunes before they sold out? This is, naturally, an absurd question. There are an unlimited number.

Because of this, there is no impact upon price. Apple would be elated if someone showed up with $1 billion and purchsed this song repeatedly. After that was done, the next AC/DC fan would get it for the same price.

Thus, the ability for too much money (units) chasing too few goods and services is impossible.

Speed

Under this scenario, there is a limitation. While the number of monetary units is not relevant, the velocity is. Another way of phrasing this is bandwidth.

The ability to download 1B+ songs is based upon the ability to Apple servers to process that many transactions. At the same time, the speed of the site impacts how quickly the song can be reordered. Obviously, this would take a long time, even if it was automated (another key point).

As mentioned above, speeds in the AI world are dwarfing what we saw go before it. Whether this continues is highly debated. That said, for the foreeseeable future, the pace of chips, development, and implementation is only increasing.

What this equates to is an advancing pace in the output of cognative ability. That is the fundamental unit of AI. This is coupled with the ability to handle certain tasks autonomously.

AI And Crypto

The output of cognative ability boils down to compute available. It is affected by the total number of computational units available (servers etc...) and the processing capabilities. Again, while it could change, we see both variables increasing at a significant pace.

What we have is a growing explosion in potential cognitive units built upon the deflationary layer of semiconductors (data and algorithms also factor in).

Elasticity is the ability to adapt to changes in demand. When it comes to money, this is the ability for the money supply to expand or contract based upon economic conditions. Some dispute the validity of elasticity but they are the ones who miss the impact of the business cycle. As Paul Volcker once noted, it is undefeated.

If monetary elasticity has no bearing on price, due to bandwidth overtaking units, what difference does this make?

Here is the root of the AI and cryptocurrency discussion.

Until we reach a post monetary world, there is still a cost to things. People like to get paid for their services. Even as AI agents expands automotion, individuals will want the benefits that come from these services.

This equates to the need for massive monetary distribution. In other words, units become important to meet the growing desires (and needs) of people. To keep up with a pace that is only limited by bandwidth, monetary systems require elasticity to meet the demand.

Let us take chatbots.

Each prompt comes with a cost. Over the past two years the total money spent on prompts exploded. There are tens of billions of prompts being done. We do see the cost per prompt coming down (deflationary) but the volume skyrocketed.

Take this concept and apply it to ten billion AI agents performing a variety of tasks autonomously.

How do you reconcile a system that is experiencing a massive explosion in output, with monetary input having no impact upon price? Then couple this with the fact that declining per unit (of output) prices keep declining, driving even more demand, especially as newer applications are built.

Can you see the commercial banking system handling this and increasing the money supply to meet it? What do you think Jerome Powell thinks of all this?

The answer is clear. Neither is going to factor.

Cryptocurrency is going to be the solution due to its expansive nature. Our monetary system will require expansion and distribution to provide people with cognitive output that people desire.

This is going to be the basis of the entire economy.