“In the long-run we are all dead; it is the short run that counts- but the question is how long will the short-run last?” asked Ludwig Von Mises within the preface of his seminal Theory of Sound Money and Credit; he bluntly answers his own question by blaming statesman and politicians considerably overrating the duration of the economic short-run, which we now appear to be outliving- a diagnosis all too familiar for another round of “quantitative easing” to delay the inevitable fiscal and monetary woes in the wake of the Great Recession (Mises, L. V., & French, D. E.). As of April 2008, the housing-crisis had been quarantined as “subprime contagion,” comprising only about 20.6% of the housing-market ($1.4 trillion); however, like a brewing economic storm, all of the aforementioned elements had yet to be realized, as the housing-crisis erased nearly $19.2 trillion dollars in wealth (2011 dollars) and a loss of 8.8 million jobs, while many millions more became underemployed- all apparently acceptable collateral-damage in addition to another tragic social-cost of central-banking: a growing opioid epidemic. As the labor force participation rate in the United States peaked at 67.3% in early 2000, it has declined at a more or less continuous pace ever since, reaching a near 40-year low of 62.4% in September 2015– all measures conveniently sanitized every quarter by the Department of Labor (Krueger, A. B. (2017). Nearly a decade later, in addition to a massive Treasury Asset Resolution Protection (TARP) bailout totaling over $23 trillion dollars, the Dow Jones Industrial Average is off roughly 9.3% from an all-time high of 26,616- crisis averted? How much has this “recovery” really cost to service the quantitative-easing cure-all, which is basically Fed-Speak for monetizing debt via expansion of the money-supply (The Financial Crisis Response In Charts(Rep.)? The sobering reality is that the real-rate of annualized inflation over the course of the last decade has been approximately 7% per year, while Consumer Prices have soared 160% since 2001, which is exactly why the capital-class typically demands at least a 7% return on investment by any legitimate wealth-manager (Revealing The Real Rate Of Inflation Would Crash The System. (n.d.). Look no further than a grocery-store aisle- a 20 ounce box of Kellogg’s Raisin Bran costed about $1.99/20 ounce box back in 2006- or $0.09 per ounce; in 2019, a 13 oz box of Raisin Bran costs $5.29 for a 13 ounce box, $0.40 per ounce- a 400% increase in price over the last decade (OccupyWisdom).
America has a deficit of trust. As Fed Chair Greenspan once said, inflation is the hidden confiscation of wealth- so indeed, as Von Mises put it, it is the opium of the people administered to them by anti-capitalist governments and parties (Mises, L. V., & French, D. E.). According to Friedrich Hayek, contemporary politics is based on the assumption that government has the right to create and make people accept any amount of additional money it wishes, and so for that same very reason, it will reserve the right; however, Hayek argues a government not ought to be able to take whatever it wants, but be limited strictly to the user of the means placed at its disposal by the representatives of the people and, and to be unable to extend its resources beyond what the people have agreed to let it have, which is not worth overextending beyond finance, infrastructure and education for Wealth of Nations- as argued by Adam Smith (Denationalisation of Money the Argument Redefined). Is government the best custodian of fiscal and monetary policy? Is a truly free-market more responsible than a crony-capitalist, “Revolving-Door” type of government? Are commerce and trade even possible without government? In 1988, cryptographer Timothy C. May, stated “Crypto-anarchy will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation.” Indeed a peer-to-peer electronic cash system without relying on trust in a centralized-authority may be the strong-medicine required in lieu of the QE-withdrawals in order to rebalance a deficit of trust- known today as Bitcoin. In 2009, within an obscure corner of the internet, an anonymous person or persons published a math paper — the “Bitcoin white paper” — solved a problem that had until then stumped computer scientists: how to create digital money without any trusted parties; the key breakthrough was the invention of a cryptographic data model called a blockchain: recall that, at the time, the financial system was experiencing a run on the banking system- the credit crunch was made worse by a lack of clarity around asset ownership (Ludwin, A. (2016, June 06)). The crisis, and its causes, were not lost on the author of this paper; in fact, he or she cited the financial crisis directly by embedding a link to a Times of London article about bank bailouts in the first Bitcoin transaction (Ludwin, A. (2016, June 06)). Originally conceived by Satoshi Nakamoto one decade ago this coming October, Bitcoin is gradually gaining widespread adoption “understood as distributed software that allows for transfer of value using a currency protected from unexpected inflation without relying on trusted third parties;” in other words, Bitcoin automates the functions of a modern central bank and makes them predictable and virtually immutable by programming them into code decentralized among thousands of network members, none of whom can alter the code without the consent of the rest (Ammous, S. (2018)). Scholar, statistician, former trader, and risk analyst, Nassim Nicholas Taleb, likens Bitcoin as the world’s first organic currency as its mere existence is an insurance policy that will remind governments that the last object the establishment could control- currency is no longer their monopoly (Ammous, S. (2018)). A Healthcoin could give us an insurance-policy against an Orwellian future- for not only the future of money but healthcare as well: the future of Bitcoin may merge with Ethereum SmartContracts as a Blockchain for the greater good of humanity. (Ammous, S. (2018)).
Cryptocurrency began long before Bitcoin and Ethereum, even before eGold and HashCash- perhaps as far back as the early 80s or late 70s in the arcades. Borrowing once again from Timothy C. May but this time from his “Untraceable Digital Cash, Information, Markets, and Blacknet” concept as “Anyone a Mint,” he suggests that anyone can essentially become a mint of digital-cash if and when the “customer-shop-mint” relationship is bypassed: meaning that an open-source, decentralized infrastructure could verify and authenticate transactions between individuals or entities without relying on a centralized, third-party authority- people could conceivably create their own cash, or currency, but it must be backed by something or store value. According to Peter Schiff’s Crash Proof, currency must satisfy the following requirements:
- A unit of account
- A store of value.
- Medium of exchange.
- Method of Deferred Payment.
Data is the new oil: it is extracted, collected, refined, studied and, and most of the time, sold without the users-consent- from social-networks like Facebook to electronic medical record companies like Cerner. One of the easiest ways to think about someone creating their own currency is to envision their health-behaviors as a tokenized asset, or store of value- in the not too distant future, individuals may have the ability to record their exercise activity, nutritional intake or vital-stats taken during a healthcare visit, which would value the “fitness” of their token.
Ask a doctor or surgeon how much a procedure will cost- if prescriptions are involved, ask the pharmacist how much the drug actually costs and why insurance is required in order to benefit from discount pricing; health-insurance is now nothing more than a glorified payment-processing system that is unfairly inflated by reckless Medicaid and Medicare government-spending. How can a healthcare system fraught with so much fraud sustain itself without any fiscal discipline or accountability? A unit of account is essential for all forms of economic calculation and planning, and unsound accounting makes economic calculation unreliable and is the root cause of economic recessions and crises (Ammous, S. (2018)). Financial accounting is not only the language of business and production but the “spreadsheet of civilization” as consumers demand the quantity and quality of goods and services produced; so it is the consumer who determines profit and loss for a given company, if and only if, it is accountable- financial accounting forces producers to obey the consumer, communicating whether or not a business is satisfying customers: if a business is successful, it is profitable, and if it is failing, it reports a loss (Mises.org: Socialized Medicine: An Accounting Perspective). However, accounting is impossible without prices to record or if the ledger is tampered, altered or otherwise immutable and also a reason why socialized medicine is theoretically impossible- because buyers do not pay money in exchange for goods or services (Mises.org: Socialized Medicine: An Accounting Perspective). Beginning in the 1940s, government policies distorted the healthcare market, causing prices to rise and denying many Americans access to quality care, with out-of-pocket expenses originally representing 47.6% of expenses in 1960 just 10.5% of out of pocket payments: a moral-hazard has been replaced with a socialized healthcare stop-gap- but at what cost? (Ron Paul Warns “Middle Of The Road In Healthcare Leads To Socialism,” (n.d.)). Without individual accountability there is no personal responsibility to maintain health, which is why 1 in 3 Americans are obese at the expense of the fit; since the 1950s, seven Presidents have tried but failed to repeal the US healthcare system- only a practical solution like a “healthcoin” as a health-insurance cryptocurrency alternative would have any chance of sensibly replacing the $3.2 Trillion US Healthcare system THAT WOULD BE THE 5TH LARGEST ECONOMY IN THE WORLD if it were its own separate country, according to World Bank (Butler, S. M. (2017, February 01)).
Imagine people betting on their health and fitness on a decentralized exchange like Augur Project or DAOcasino, writing or selling covered call-options from an Ethereum token in an attempt to generate income-payable from their very own ERC20 token instead of paying never-ending monthly health-insurance premiums that only seem to increase along with higher-deductibles. Adapting optionality for health-insurance coverage, and portfolios for health-care providers, suppose a new type of health-insurance was reinvented as self-assembling pools of individuals categorized according to healthy behaviors and risk-profiles with verifiable data recorded on a cryptocurrency token or smart-contract layer, anonymously but publicly traded on an exchange: healthcare-options could be derived from tokenized-data and priced by algorithmic health-insurance brokers and artificially-intelligent traders, whereby individuals could exercise the right to strike optional health-coverage during terms and conditions specified in the options-contract- after all, health is always subject to change sooner rather than later. Healthcare price-discovery could be optimized with an options-contract instead of traditional health-insurance coverage with anonymized personal health-care data priced on a truly open market by combining Ethereum Smart-Contracts and ERC20 tokens with Hyperledger Burrow.
“Optional” Healthcare Insurance
According to Nassim Taleb, “if you ‘have optionality,’ you don’t have much need for what is commonly called “intelligence,” “knowledge,” “insight,” “skills” and these complicated things that take place in our brain cells- for you don’t have to be right that often: all you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur; (The key is that your assessment doesn’t need to be made beforehand, only after the outcome),” (A Dozen Things I’ve Learned from Nassim Taleb about Optionality/Investing); optionality and taking small bets (with preferably unlimited upside and limited downside) is the best route to prepare yourself for the random events that await you: in preparing for volatility in this manner, you give yourself the chance to not only withstand but to succeed and prosper in a big way (Elyassi-Rad, N. (2016, September 22)). Financial options are contracts between buyers and sellers that give buyers the right, but not the obligation, to buy (a call option) or sell (a put option) the underlying asset at a later date for a predetermined price- should the market not be favorable to the buyers’ “bets,” buyers may decide to let the option expire, that is, not to exercise it; in 1973, Black and Scholes derived a differential equation that must be satisfied by the price of any derivative dependent on a non-dividend paying stock- the Black-Scholes model is a rapid way of calculating the value of a European option (call option denoted below)(Chicaíza, L., & Cabedo, D. (June 2009)) (See Figure 7):
- N(•) is the standard normal cumulative distribution function.
- T – t is time to maturity.
- S is the spot price of the underlying asset.
- K is the strike price.
- r is the risk-free rate (annual rate, expressed in terms of continuous compounding).
- σ is the volatility in the log – returns of the underlying.
As simple as it is in this form, the model depends on very strict assumptions (Hull 2008):
- The stock price follows a geometric Brownian motion with μ and σ constant.
- The short selling of securities with full use of proceeds is permitted.
- There are no transaction costs or taxes.
- All securities are perfectly divisible.
- There are no dividends during the life of the derivative.
- There are no riskless arbitrage opportunities.
- Security trading is continuous.
- The risk-free rate of interest, r, is constant and the same for all maturities.
For the intents and purposes of a proposed “healthcoin” prototype, it is important to focus on two specific variables of option pricing: time to expiration and volatility; when either of these two variables increases, the value of the option (call or put) increases as well – both variables are key elements defining uncertainty, which is typically considered as a negative element in investment decision making (Hull 2008) (Chicaíza, L., & Cabedo, D. (June 2009)). Maintaining the definition previously provided for financial options, a real option is similar but applied to a real, tangible, or intangible asset, rather than a financial underlying asset: a real option is the right, but not the obligation to undertake a business decision (Chicaíza, L., & Cabedo, D. (June 2009). Since an option is merely a form of insurance or “hedge,” alternative concepts were first presented by Stew Myers (1977) when he posited that some corporate assets, especially growth opportunities, could be viewed as call-options: some investment opportunities grant the right, but not the obligation, to take specific operating action in the future or as Bowman and Hurry (1993, p. 761) explained it: “despite the of formal option contracts, they allow a similar pattern of investment behavior to occur,” (Chicaíza, L., & Cabedo, D. (June 2009)):
Concordantly, “real options represent choices (strategic or tactical) under conditions of risk and uncertainty about tangible and intangible (knowledge-based) assets (as compared and contrasted to financial assets) that encompass timing, selection and sequencing attributes of significance for the entity that may choose to exercise those options or not (individual, society or company);” an option isn’t merely a financial instrument insofar as it can be applied to insuring-risk against healthy decision-making or behavior (Carayannis, E. G. & Sipp, C. M., (2013)). Option valuation differs from the valuation of other assets in that risk and uncertainty are key factors: both volatility and time to expiration greatly impact the value of an option- it is how uncertainty is captured and included in the valuation model that has since then interested managers translating options into the physical world lead to the development of real options (Carayannis, E. G. & Sipp, C. M., (2013)). One of the lines of research referred to in the proceeding section is the relationship between option contracts and health-insurance operations; however, the financial options-markets created in the nineties constitute an alternative to the traditional coverage method- the reason is probably very simple: options-contracts and insurance and reinsurance operations are conceptually very close to each other as noted from the Chicaíza, L., & Cabedo study (Chicaíza, L., & Cabedo, D. (June 2009)):
- Both are hedging operations: options cover agents against unexpected changes in prices, while insurance covers agents against unexpected contingencies (accidents, illness, etc.).
- A premium must be paid: for both options and insurance contracts a premium must be paid. The buyer (options) / insurance (insurance) must pay a premium to the writer (options) / insurer (insurance) in order to obtain the desired hedge.
- Compensation: when an unexpected situation arises, compensation must be paid. If, for example, an accident occurs, the insured will receive compensation. If an unexpected change, the buyer will execute the option and receive an amount (compensation) equivalent to the difference between the strike price and the market price. In any case, if the unexpected situation does not arise, both the insured and the buyer lose the premium paid.
- Hedge period: timing of both insurance and option operations is relatively short. Despite the fact that the time horizon of insurance can be set in years, it is always possible to unilaterally withdraw from the contract; the insurance company may be required to increase the premium, or demand that the agent objectively is not able to fulfill. Alternatively, the agent may decide to pay the premium and thus withdraw from the insurance contract. Similarly, options may be established for long periods, but options are seldom entered into a financial year.
The Chicaíza & Cabedo studies outlined two scenarios for a given use-case of a covered-call option mitigating health cost risk in lieu of conventional health-insurance; in the first figure, the scenario on the left suggests that the incremental change in cost of healthcare is inversely proportional to any insurance coverage whatsoever, whereas the second scenario on right in the below figure outlines the accumulated costs of individual healthcare cost mitigated by insurance (Chicaíza, L., & Cabedo, D. (June 2009)).
Obviously, with health-insurance there is a maximum cost incurred by the individual (as depicted by the right side of the figure)- or “in nominal terms, the total cost will be deductible plus the cost of the premium paid to the insurer at the beginning of the year; if the risk has not been insured, the individual must assume the total cost of treatment, which, in the situation represented in Figure 1 is higher than the cost when it is insured” (Chicaíza, L., & Cabedo, D. (June 2009)).