A fairly new book by Bitcoin enthusiast Bobby C. Lee is titled The Promise of Bitcoin, but the public is still ignoring the challenge of Bitcoin. Bitcoin's mere existence raises many questions. Before the new era of high inflation in the U.S., it was easy for me to ignore Bitcoin and dismiss it as some kind of speculative mania (I wasn't alone. See Nathaniel Popper, Digital Gold, Harper, 2015, xiii). Bobby C. Lee's book changed my mind, but with all due respect, his book is not impartial, and there are parts that superficially appear to be self-contradictory. Exploring these apparent inconsistencies may be the most urgent task at hand. In a previous blog, I cited Robert Prechter Jr. To paraphrase him, if you don't invest, you won't lose money; you'll just miss out on making money. With today's inflation especially, you may not lose money by sitting on the fence, but you will lose wealth if all you have is a savings account. Risk-averse people may want to think long and hard about Bitcoin, but with high inflation being a reality, there are no good options for people who want to hold on to their wealth. I could nitpick at some of the passages in Lee's book for purely academic reasons, as I am usually doing in a blog like this. Because of the plausible case for a rise in the price of Bitcoin, however, the blog you're reading will, I hope, have practical value. Lee is undeniably a successful man, and that may be reason enough to at least check out the parts of this blog where I quote him.
Early in Lee's book, he argued that "Bitcoin was the virtual equivalent of gold" (The Promise of Bitcoin, New York: McGraw Hill, 2021, xxii). I think we should accept his premise for the sake of argument. It may be fashionable to dismiss gold as a "barbarous relic," but there is no denying that gold was money for a long time. Gold sellers, if I recall correctly, regularly say that gold has "intrinsic value." I am no fan of this marketing line. It may seem like a radical, iconoclastic position, but I am not trying to shock anyone when I say sincerely that nothing has intrinsic value. I am a complete subjectivist. I just want to get that out of the way: gold wasn't money for centuries because it had intrinsic value in the literal sense of the word. For the purposes of this blog, the issue isn't important. What is important is that money by definition has value. You can call truly hyper-inflated currency money, but it's really not money anymore; it's just paper at that point. What then gives money value? Again, Bobby Lee has some remarks that we should reflect on. Referring to a Congressional committee hearing that occurred in 2018, Lee wrote, "one legislator, Minnesota Democrat Collin Peterson, [likened] crypto to 'a Ponzi scheme.' 'What's behind it?' Peterson asked. What Peterson didn't understand was that for something to be valuable, it doesn't have to be backed by something else. This is a common misconception" (The Promise of Bitcoin, 77). People are familiar with fiat currency and maybe with the gold standard that ended in 1971. Bitcoin is neither of these things, but it's designed to be similar to the gold standard. Lee, if we take him out of context, ironically sounds like someone who is defending fiat money since a common criticism of fiat money is that it's not "backed" by gold or any commodity. Mainstream scholars have for a long time tried to debunk the idea that money has to necessarily be "backed" by something. For example, according to an old textbook,
[T]he feeling still persists in some quarters that pieces of money cannot be "good" or even generally acceptable unless they themselves have an equivalent value for nonmonetary purposes or are kept redeemable in other types of money that have an equivalent value for nonmonetary uses…. [W]e must point out again that this view is erroneous. That token coins, paper money, and other circulating debts can be overissued, and on too many occasions have been, is undeniable. But if their issue is properly limited, they can be given a scarcity value and can circulate at least as satisfactorily as any full-bodied money; in fact, with proper management, their quantities can be adjusted to the needs of the economy better than can the quantities of a gold or silver full-bodied money whose supply often reflects the capriciousness of gold or silver mining. (Lester V. Chandler, The Economics of Money and Banking, Fourth Edition, New York: Harper & Row, 1964, 60)
Much can be said about every sentence in the passage above, but the notion of "scarcity value" is essential to explaining the appeal of Bitcoin. As Lee explained, "The ultimate fail-safe mechanism to making this new currency valuable: Satoshi [the creator of Bitcoin] would release no more than 21 million bitcoins" (The Promise of Bitcoin, 19). At the risk of repetition, if something isn't a store of value, it isn't really money regardless of what the government says. In order for something to be a store of value, its issue must be limited. The passage from the textbook does not say that the "coins" have to be issued by a government. At minimum, Lee implied that Bitcoin could be valuable because the quantity of Bitcoins is limited. His way of thinking is not opposed to what was, at one time, mainstream economics. As we'll see, economists may disagree about whether Bitcoin is properly limited. Everyone can agree that gold is scarce, but under the gold standard, there was disagreement on whether the supply was properly limited. The controversy was a focus of politics for a period in the late nineteenth century when some people were demanding an end to price declines (Hyman P. Minsky, Stabilizing an Unstable Economy, New Haven: Yale University Press, 1986, 257). The "clamor" only ended because of "an upsurge in gold production, following the invention of the cyanide process" and some fortuitous new gold discoveries (Chandler, The Economics of Money and Banking, Fourth Edition, 472 & 473).
Let's be clear. Money does not have to come from a government. We're going to ignore whether money had to come from a government originally. It would take an entire blog post just to survey an issue like that. The controversy is still, however, of some interest to the nonacademic public. Although investors are forward- looking, views about the past can make people more or less open to Bitcoin. We need to consider the possibility that money never had inherent value, not even in the beginning. If money could have been token coins even in antiquity, then it is difficult to think of reasons why it can't be in the form of digital coins today. Wences Cesares, a major player in the Bitcoin world, held views about money that are radical and even left-wing. According to a profile,
[Cesares] saw that Bitcoin's lack of any apparent intrinsic value didn't matter when looked at against the history of money. The reason gold itself had been used as money was not that it was valuable; it had become valuable because it was used as money. And it was used as money because it did what all good money did: it served as a sort of physical ledger on which society could keep track of who was owed what. Each piece of gold represented a slot on the ledger of all outstanding gold, which anyone could verify by checking the mass and volume of gold. (Nathaniel Popper, Digital Gold, Harper, 2015, 157)
It strains credulity to think that gold at some point in history had no nonmonetary use, so I can't totally embrace radical views like the one above. If money was, from the beginning, just mere tokens made of stuff with no nonmonetary value, then the case for Bitcoin would be stronger since Bitcoin has no nonmonetary use. Bitcoin's lack of nonmonetary value didn't bother Cesares. In fact, he proclaimed, "Bitcoin is the first time in five thousand years that we have something better than gold" (quoted in Digital Gold, 165). I don't mean to dismiss him when I say that his views are like shock therapy. At the very least, we can concede provisionally that money does not have to be issued by a government. Even the now-famous economist Hyman Minsky conceded that "in principle every unit [in the financial system] can 'create' money―the only problem for the creator being to get it 'accepted'" (Hyman P. Minsky, Stabilizing an Unstable Economy, New Haven: Yale University Press, 1986, 69).
One of Cesares's reasons for thinking Bitcoin was actually better than gold is arguably a reason why it is worse. According to him, Bitcoin is "much more scarce" (Digital Gold, 165). Is it good though for something to be more scarce than gold? According to Victoria Chick, "The monetary systems of almost all countries, and now the international monetary 'system' as well, are completely free of ties to gold or any other asset whose physical supply is inelastic. This was seen as an unambiguously progressive step" (Macroeconomics After Keynes, Cambridge: MIT Press, 1983, 307). Lee, however, has a different take on "traditional monetary systems" (presumably fiat money). According to him "This age-old system has grown out of control. Our money is worth less every year, and its value depends on the judgment of bureaucrats who aren't looking out for us. In contrast, bitcoins steadily gain value due to their deflationary nature, which was purposely designed into Bitcoin" (The Promise of Bitcoin, 63). Lee believes that the status quo isn't great (See Digital Gold, 31 for similar views). His book came out before we saw the return of 8% inflation. Even then, he could write, "Even in the current low-inflationary environment, the money I've earned does not buy as much as it did 10 years ago" (The Promise of Bitcoin, xxiii). Let's acknowledge that the system that we have isn't working. What's the alternative? It's a bit surprising that Lee would bring up deflation because, at least before 2021, "deflation-phobia" was widespread. We know that hyperinflation destroys money, but too much deflation also could mean the end of money as we know it. As reporter Nathaniel Popper explained,
Economists who had taken note of Bitcoin … pointed out that the virtual currency actually had built-in incentives discouraging people from using it. The cap on the number of Bitcoins that could ever be created―21 million―meant that the currency was expected to become more valuable over time. This situation, which is known as deflation, encouraged people to hold on to their Bitcoins rather than spend them. (Digital Gold, 219).
Incredibly, Lee also wrote, "I won't debate here the necessity of a little inflation. Most economists would agree that a little inflation boosts economic growth by ensuring consumers purchase goods before they become more costly in following years" (The Promise of Bitcoin, 48). If "a little inflation" is good, then how can Bitcoin ever be "an alternative to our current monetary system" (Promise of Bitcoin, 73)? With all due respect, it's difficult to reconcile all of Lee's statements. Lee, I suspect, is being too diplomatic. He doesn't want to argue, but he, I strongly suspect, doesn't himself believe in the necessity of what politicians now call "stable inflation." I think or maybe just hope that the real Lee is the one we see on p. 106. Here, he wrote, "even under normal circumstances, money loses its value too readily." He doesn't believe that "a little inflation is good for the economy," but he can see why people say that. I too can understand why people fear deflation, but Bitcoin may not even lead to the intolerable deflation that many fear. Even a Keynesian economist admitted that given time, "the constraints of an inelastic money can be surmounted, as history attests: substitutes for gold were created ― first notes (originally claims on gold), then bank deposits (claims on coin at first, then notes). Finally a wide range of financial intermediary debt (claims on bank deposits) has contributed to liquidity" (Victoria Chick, Macroeconomics After Keynes, 307 & 308). Bitcoin arguably isn't even deflationary in the sense that the supply of it actually declines. The deflation that people often fear-monger about is the kind that happened during the Great Depression. That deflation actually involved the quantity of money falling by a lot. The quantity of Bitcoins need not ever fall, so, narrowly speaking, Bitcoin is not deflationary.
"[E]veryone can create money; the problem is to get it accepted" (Hyman P. Minsky, Stabilizing an Unstable Economy, 228). According to Lee, "By the end of 2019, more than 15,000 businesses were accepting bitcoin" (The Promise of Bitcoin, 243). According to Nathaniel Popper, in 2013, practically no one was promising to accept Bitcoin (Digital Gold, 220). In a previous blog post, I wrote about Modern Monetary Theory or MMT. According to MMT, we use the U.S. dollar because it is backed by taxes. We want dollars because at least some of us have to give dollars to the government. Taxes, according to the theory, aren’t funding anything because the government issued the dollars in the first place. Whether he was familiar with MMT or not, Popper understood that ultimately the dollar was backed by something—taxes, so it wasn’t true when Bitcoin defenders said that the dollar wasn’t backed up by anything. Bitcoin is still at a disadvantage because it is unequivocally unbacked, but at least some businesses are signaling that they will accept it as payment for goods or services.
Unlike fiat money, Bitcoin can't be "printed"; its supply is "inelastic." We know that a money or currency with those properties can have disadvantages. As long as the fiat system was tolerable and without major disadvantages, people could ignore Bitcoin as being too drastic. They could afford to be lazy and complacent. A little over a decade ago, some "hard money" commenters were sounding alarm bells about potential inflation, but by mid-decade, even some in that camp had to admit that the inflation never came: "In the U.S., … inflation has been disappearing as fast as good manners. In 2014, consumer prices were approximately flat. And that is despite a 400% increase in the Fed's assets ― the nation's money foundation ― over the last six years" (Jaclyn Frakes, ed., When the ATMs Go Dark, Delray Beach: Bonner & Partners, 2017,108). The lack of inflation under fiat money hurt the case for Bitcoin:
[O]ne of the fundamental premises that had driven Bitcoin's popularity seemed, increasingly, to have been disproved. Many early Bitcoiners, particularly in the libertarian camp, had believed that the Federal Reserve's efforts to stimulate the economy in the wake of the financial crisis, by pumping lots of new money into banks, would devalue the dollar and lead to high inflation….
This idea made a scarce asset like Bitcoin or gold look like a safer bet than holding dollars. But in late 2013 none of the fears about inflation had been borne out. In fact, the problem facing the American economy was not inflation, but deflation… (Digital Gold, 286)
In 2022, we find ourselves in a drastically different situation. It's bad news for the U. S., but what is bad for the country is not apparently bad for Bitcoin. Even before the great inflation of 2021 manifested itself, Lee could write, "Just remember, whatever paper currency you have, whether it's a US $100 dollar bill, a 500 euro note, or a 1,000 Swiss franc, the most value it will ever hold is today. Every month or year that passes by, it will be worth less and less" (Promise of Bitcoin, 243). Sadly, I think he's right. He made a good case for Bitcoin, and the recent inflation has made his case stronger by reminding the public about the disadvantages of fiat money.
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