The magical fairy dust known as Bitcoin is back in the news as its price has soared to a record high in the last few weeks. Currently one bitcoin is worth 35,000 USD, which is close to double its value of a month ago. If last spring, when the Covid panic hit, you decided to get into Bitcoin, thinking it was a safe haven for your money, your return would now sit at 700%. Of course, if you were an early adopter when the price was a few hundred dollars, then you are now quite rich.
Of course, whenever Bitcoin is on the rise, the paladins of cryptocurrency are out evangelizing about the glorious future where currency is no longer controlled by those evil bankers rubbing their hands in their secret lair. Karl Thorburn has been making the rounds on this side of the great divide. Here is a podcast he did with Greg Johnson last week that is worth a listen. Bitcoin is popular among dissidents, because the bankers cannot get you deplatformed from it like they do with credit cards.
One problem with Bitcoin is right there in those huge gains. There are wild swings in its value as people rush in and out of it. Three years ago, Bitcoin had a similar surge then lost half its value over the next six months. A similar boom and bust happened the following year. As a means of exchange, it suffers from the same problem that all commodities suffer. That is, it tends to increase in value over time, but it also suffers from the cyclical tendency we see in these booms and busts.
One reason for this is that all cryptocurrencies are designed around a math problem that gets exponentially harder to solve as time goes on. Put another way, each new coin costs more to produce than the previous coin. If the first coin cost X, the next coin costs x+n with n being the slight increase in cost to produce it. If the first ten coins average out to 10 USD and the next ten are 20 USD, then the average value of each coin has gone up by 50% just by the mere fact of their creation.
Demand for Bitcoin, however, has tendencies that do not always correspond with the supply of Bitcoins. That explains the cyclicality. For reasons that have nothing to do with the inherent value of Bitcoin, demand rises, so the price rises with it. At some point, people with Bitcoin begin to cash in and the price starts to fall, leading to a rush for the exit as we see with any asset bubble. Like hard money, Bitcoin has cyclical tendencies that get increasingly wild over time.
The other problem with Bitcoin, in terms of it replacing dollars or euros as a currency is that it is not actually money. It can be used as a medium of exchange, but only because governments tolerate it for now. Otherwise, it lacks the key attribute that has defined money since the Phrygians started producing coins. It lacks the backing of a sovereign who will enforce its value. Legal tender is an item that must be accepted as payment and that is enforced by a government with a monopoly of force.
Now, this does not mean that things like gold or precious stones cannot be used in exchange, but they are not legal tender unless the government of the jurisdiction where the exchange occurs agrees to it. In the United States, for example, it is illegal to demand payment in gold. The legal tender of the United States is those bits of metal and paper we carry around with us. A check or credit card is just involving a third-party (the bank) to pay the merchant in dollars.
Now the crypto-evangelists always respond to this point by saying that governments can’t do anything about cryptocurrencies. That’s the beauty of them. Because their creation is independent of government and their value is set in the marketplace, the state cannot prevent people from using Bitcoin. They will also note that Bitcoin is anonymous, so the state will have a tough time tracing the source of Bitcoin, even if they try to crack down on its use and possession.
This argument has several problems, one of which should be obvious. The government can simply arrest people for using Bitcoin and throw them into prison. If merchants are told it is unlawful to accept Bitcoin, they stop taking Bitcoin. There is a reason no merchant accepts gold dust for payment. Not even a pawnshop will accept gold as a form of payment and most of them trade in raw gold now. One necessary quality of money is that it be widely accepted for payment.
Governments have a primarily interest in protecting their monopoly on the supply of legal tender. This goes to something called seigniorage. This is the profit the sovereign makes from the issuing of money. In the days of gold coin, the miners of gold brought their bullion to the king’s mint, where it was turned into coins. The value of the coins was more than the value of the bullion. This is one way the king could finance his government, without having to physically control the gold supply.
In modern times, seigniorage has evolved into something else, namely the stability of the money supply, especially in relation to other currencies. A stable money supply makes for stable credit markets. The standing and legitimacy of a government is determined by the stability of its currency. This is why central banks have become the most important institutions on the planet. It is also why the major central banks will never cede control of the currency to cryptocurrency.
Note that stability does not mean fixed. The supply of money in its various forms can expand and contract. When the Fed changes interest rates, they are changing the supply of one or more forms of money. This is done in concert with the European Central Bank within an agreed upon structure. This means the supply of money is stable in that it is predictable. In the Covid crisis, everyone knew the central banks would aggressively expand the money supply in response.
The response to this is usually something about the immorality of government manipulating their currencies to finance debt. While true, the morality of the crypto advocates is not the morality of the people in charge. Since the people in charge have a monopoly of force, it is their morality that matters. The golden rule of power is that no one is ever talked out of retaining power. The United States gives up its control of the currency when someone more powerful takes it away.
There are other problems with crypto that prevent it from becoming anything more than a digital tulip bulb. Money, by definition, is self-verifying. You can examine currency and determine if it is authentic. Crypto requires a third party to validate the coin. That is done by examining its provenance. Each use becomes part of the coin’s validation, so it carries the history of its usage. The argument here is that government cannot access this, but the threat of prison will easily solve this problem.
The bottom line is money is about power. A ruler powerful enough to issue his own coin is powerful enough to enforce its use. The more powerful the king, the more valuable his coin, even outside his realm. This has always been true and will remain true. The reason the dollar is the world’s reserve currency is that the rulers of the American empire are the most powerful and the most predictable rulers on the planet. The Euro is the second reserve currency for the same reason.
That said, crypto is not worthless. For dissidents looking to get around the financial restrictions placed on them by agents of the state, crypto is a solution. If you are looking to invest in a risky asset, Bitcoin is a good play. Over time it will keep going up, but in between it will be a rollercoaster. If you like that action, then crypto is a cheap way to get it. If you want to anonymously fund a dissident, crypto is also a good way to give someone money without easily exposing your identity.
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