“Bitcoin is a cryptocurrency released in 2009 by a pseudonymous group or person that went by the name Satoshi Nakatmoto…”.
I worry the above hypothetical quote is a common answer from a bitcoin expert to a layperson that just wants to understand how bitcoin relates to them. I also fear this is how bitcoin experts might introduce bitcoin to our (especially central) banking and economic experts. This type of explanation is problematic because it doesn’t really convey any relevant meaning to the inquirer and it usually is the mark of someone who can be described as a “bitcoin maximalist” who is about to say something that goes against current accepted economic theory as well as historical observations.
In regard to proponents and opponents of bitcoin we can think of two distinct groups, namely, the maximalists (proponents) who can be roughly summarized as ‘Rothbardians’ (which will need and get its own explanation later in this writing) versus the ‘opponents’ made up of central bankers, economists, and academics who perhaps can be quick referenced as ‘Keynesians’. The latter group might not perfectly share the same sentiments between its sub-groups, but they have a general shared distaste for the theories and explanations given by bitcoin maximalists as to why bitcoin is the way of the future and legacy banking and currencies will be left behind.
With those two distinct groups held in mind I think I can explain to the objective (and therefore impartial) observer exactly what bitcoin is and why we haven’t understood it yet, and perhaps as a possible accidental side benefit a dialogue might arise to find what is understandable and agreeable about bitcoin rather than focusing on how it divides the two distinct groups.
If you don’t really know much about bitcoin, or economics, or money, but you have once dared to ask someone who does for clarification to no avail, this writing is meant to speak to you.
If you are standing on one side of the fence of the two factions I described, this writing is meant to make you admit (in face of the impartial spectator) that a more total and balanced perspective between each side is more rational.
This isn’t what the bitcoin maximalist wants to hear because it doesn’t jive well with narrative of serving as the universal currency for our global economy. But its true, by common standard, bitcoin’s finite supply makes it good for savings (at best), but its not good for encouraging a population to spend and consume and therefore produce (or have produced). Common held economic theory suggests few will use bitcoin as a money.
Economists, Keynesians, and central bankers etc. function from a school of thought which believes that a money supply (of a state) should be managed in relation to the economy that the money represents. Central banking practice is therefore the practice of contracting or expanding supply in optimal relation to an expanding or contracting economy.
The Rotherbarian (or Misean) view can be described as running counter to the above perspective. This isn’t a comparison necessarily to the works of these two philosopher, but rather a quick keyword used to generalize the explanation and rationalization from a bitcoin maximlaist as to why bitcoin’s nature as a money is not very ideal.
The Keynesian believes a money supply can be optimally managed and a Rothbardian believes that money should have a predictable finite supply (whether this supply continues to flow at a predetermined rate or at some point no more units will be issued is not a significant distinction for this writing).
From the Keynesian view there is historical and empirical evidence that supports our current banking methods and institution; from the bitcoin maximalist view bitcoin is new and so old methods and observations don’t apply.
A key point bitcoin maximalists like to make is that ‘value is subjective’ and they accuse Keynesians of trying to stabilize the purchasing power of money which is (agreeably) impossible. This is a point about how a chair today might cost $10 (USD for example) today but no one can predict what a chair SHOULD cost in the future since the factors are so complex and rely on knowledge about future technological advance and events. Therefore any attempt to target a supply of money units to create optimal ‘stable’ purchasing power is arbitrary at best and assumed to be detrimental.
It’s an important and valid point, but I’m not convinced that this runs counter to the viewpoint of central bankers, economists, and academics. Furthermore I would suggest its really somewhat of a strawman in the inquiry into the relationship of bitcoin to our current banking system.
What a central banker does, from a central banking perspective, is take the leading most indicators of economic growth or contraction and try to match the supply of currency units to the observed trends. In this sense it is quite empirical and the result, or rather the metric that serves the method, is a % of purchasing power increase or decrease over time. The central bank, in essence, tries to target a slightly inflationary trend, which in effect is believed to entice a population to spend money.
Many advanced economies today use this system with comparatively good success relative to our history and so those that practice these methods and study them are hesitant to accept a narrative about a money from a person or group that holds a premise that these commonly accepted and observably working practices are malicious.
Bitcoin might not be a good money depending on your perspective but there is a certain property it has that makes it very comparable to gold for the reasons we have historically valued gold (at certain times). Here it is important to note that different person from different perspectives have different definitions for what is money and what is good or bad money. Gold has certain industrial uses and it has been used as a jewelry for a long time (and jewelry has been used as a holder of value perhaps at least as long). The significant comparable nature of gold and bitcoin are their expectations as inflation hedges much of which comes from each of them having a relatively (relative to other “hoardable” savings options) predictable supplies (although the underlying mechanisms that govern their supplies are somewhat different in an important way I won’t go into in this writing).
Inflation here refers to a degradation of purchasing power of a (nation’s) currency which would cause a savvy investor or saver to seek a savings shelter in a non-inflationary or deflationary asset. From a basic view, historically gold is said to have increased in value since it is relatively scarce, and when state or fiat money is overprinted this naturally causes people to seek out gold. If we expect bitcoin to play this role then this removes the pressure for it to be a “good” money as it can still simply serve as an inflation hedge without being frequently transacted with.
Some will argue that gold has a type of intrinsic value other than speculation since it has other uses and so bitcoin can’t serve the same role since it has no floor on its value. But bitcoin does have other uses than sending value and I suspect it is not a stretch for both Keynesians and Rothbardians to admit that one of gold’s attractive features as an inflation hedge is that it is not very useful otherwise. This trait could be said to protect gold from unpredictable demand shocks therefore keeping it inline with a predictably issued “commodity money” (I believe Saifedean Ammous supports this point and I would add a quote if I came across it).
We start to debark from the division between the viewpoints when we look at bitcoin’s strength as an inflation hedge and why we might value it like how we valued a certain aspect of gold historically but there is still compelling need from the bitcoin maximalist view to explain how and why bitcoin will become relevant as a money beyond just speculation and savings. Even the impartial layperson will ask, “If bitcoin is not useful as a money or for anything else than how can it be valuable?”
To someone that can’t answer that, bitcoin’s increasing price suggests it is on route to become the terrible phenomenon we call a bubble (which has no perfectly accepted defined meaning in this sense). And there are plenty of examples in our history of these kinds of price bubbles that people like to cite. It is quite plausible then for the impartial observer or the Keynesian that bitcoin could be one of those things that irrational exuberance pumps “to the moon” only to crash and disappoint all those that in hindsight are considered “dumb money”.
Bitcoin maximalists therefore must provide a counter-narrative-even if they themselves don’t really understand how bitcoin will become money in a way that would satisfy and extend currently accepted and practiced economy theory.
The real problem here is not a certain stability of the purchasing power of money. Unbeknownst to these two groups the problem to be solved is the international stability of respective national currencies (the Euro could be considered a nation in this sense).
Given this premise we resolve these differing views (and support our premise) by highlighting the favorable parallel outcomes of three situations. The first in which bitcoin is the universal currency of the world, the second being a scenario (perhaps without bitcoin even existing) where central banks perfect the optimization of supplying currency units in relation to the economic demand for the units, or a third scenario in which central banks manage the supply of their currency units in relation to bitcoin’s price.
That is a packed paragraph and the crux of our inability to understand bitcoin and so I will unpack it and I believe this will help many people understand bitcoin.
Consider the price trend of a commodity, for example bananas, in China versus the United States. If the bananas become more expensive in today’s centrally banked economy can we tell if that change in price is because bananas suddenly got more or less scarce versus whether or not the US dollars or Chinese Yuan supply’s increased or decreased?
In this case the cause of the change in the price signal the markets are giving about bananas is unclear.
In contrast, if bitcoin was the only currency in the world (or some other currency was the only currency) then a difference in the price trends of bananas in different parts of the world would be expected to be a function of their supply and demand rather than local political intervention in the supply of the units of the respective currency used.
What is less easy to see and not palatable for Rothbardians is that an optimally managed money supply produces the same effect. Keynesians might agree to this to an extent but of course both groups will ask, “What do you define as optimal?” and Rothbardians will ask with the implication that optimal money supply is in fact impossible to define and implement.
This is where we lose the bitcoin maximalists, especially those rooted in Rothbardian and Austrian economic schools of thought, because their response to the impossibility of defining objective value or an optimal money supply is to fix the supply for eternity (ie bitcoin). This perspective seems coherent but I think rather it is a justification of a view and that a more complex explanation should not invoke the rights to call Occam’s razor without inquiry (just because I offer a complex explanation doesn’t mean it should be ignored for a simpler one).
George Selgin, who is a relevant economist for being cited by one of the suspected founders of bitcoin (and for other reasons), makes the suggestion that money supply served in relation to production factors rather than a basket of commonly purchased good prices would result in a money supply that is more optimal than the latter currently used method. This suggests, at least from the observable Keynesian perspective, that there is a gradient of quality in regard to the optimal money supply.
It is the third scenario described in the previous section that resolves the differing views without breaking the Rothbardian axiom or truth that money supply cannot be optimal targeted: if central banks value target bitcoin by managing the supply of their money in relation to an internationally created bitcoin price then the supply would be optimal managed the same direction Selgin professes.
This is a significant observation but again, its not easy to understand the truth of this and why it is so.
The suggestion of the comparison will make both groups jump in disbelief. This is because to justify their unbalanced view they had to create a narrative that negates and invalidates the side’s perspective. But if an impartial observer can see the limited frame from which each side is viewing from then this might compel both sides to concede to certain key agreeable points.
We need to consider a future in which bitcoin maximalists are correct to the point that bitcoin’s value grows too high and fast causing central banks and bankers to fear for their economic livelihood and relevance. We can ask if there is any thing the Keynesian’s can come up with as a counter response and the answer is something that the Rothbardians and bitcoin maximalists alike fear. In fact it is bitcoin’s, gold’s, and finitely supplied money’s kyrptonite: well managed centrally banked money.
Here the definition of well managed shares the same goal as current central bank mandates but the goal is achieved by way of a different mechanism. Instead of targeting domestically designed price indexes each central banks heads meet at an emergency summit and decide to collectively enter coalition to supply their respective currencies in such a way that their currencies prices run stable as possible to bitcoin.
Remember bitcoin is not a good money but it is better than gold for what we historically valued gold for-an inflation hedge. When our currencies lose their purchasing power we naturally seek better alternatives and this is primarily where we should expect bitcoin’s maturing value to come from (which might be seen as slightly different that its bootstrap or fully mature phases).
But since central banks can and do in fact target inflation by manipulation of the supply of currency units they do in fact have a mechanism to target bitcoin’s value. The Rothbardian view doesn’t disagree with this and the Rothbardian should find it completely agreable to suggest. It is the bitcoin maximalist that believes central banks will be put into this scenario of self preservation and anyone that has even a basic understanding of how central banks function must agree that the mechanisms for such a counter strategy are in place.
The bitcoin maximalists and Rotherbardians are left to argue that central banks, bankers, the state influence, and the citizenry invested in the domestic currency will simply allow the currency to fail and be supplanted by bitcoin when they have a perfectly actionable counter response.
This counter response effectively ends the degradation of purchasing power that the Rotherbardians claim is one of the implied strengths of bitcoin and the more nations that improve the stable relationship between their currency and bitcoin the less demand there is for bitcoin’s gold like properties as an inflation hedge.
In short, and if you only take away one thing from this writing let it be this: if bitcoin’s price starts to skyrocket from a multinational perspective you can expect a coalition of major banks to enact this collective strategy.
By now the layman reader with not much previous knowledge of economics, money, or bitcoin can understand why some economists will hold that Satoshi may have been a good programmer but wasn’t a good economist (interestingly often programmers will knock Satoshi’s coding skills suggesting it wasn’t his primary profession while touting his genius in economics). The accepted academic view is going to be strong in the mainstream than the movement of now rich early adopters that otherwise control the narrative of why bitcoin is valuable.
For some it is clear Satoshi didn’t understand economics or money and that the project is limited. Some believe that bitcoin needs to be changed dramatically and some believe that a new coin will supplant because of its lack of utility (ie use-cases.)
But consider the scenario in which central banks issue currencies with supplies that cause them to hold perfect value stability with bitcoin. Such a state or centrally issued money would no long have the domestically caused inflation which differentiates purchasing power from other money with comparative relations. That is to say that any fluctuations in the price of bananas in China versus bananas in the United States would, like a scenario in which bitcoin was the only currency in the world, cease to be in part a function of local political intervention in the supply.
That central banks can and probably would (if their relevance was threatened) manage their money supplies in a way that would effectively remove politically caused distortion in local prices describes a scenario to the same favorable end as a world in which there is only one favored currency. This scenario is not a universal stability of purchasing power but the removal of distortion from the price signals our markets give which allow us to optimally distribute commodities based on their respective supply and demand.
From this re-solving perspective Satoshi’s implementation of a an e-currency, which is admittedly limited as an actually circulating money, still threatens to be the catalyst to bring about Ideal Money as described by John Nash which is the result of the end political intervention of the supply of money rather than what is often misappropriated as another foolish proposal to create money with stable purchasing power over time.
It is from this observation that by genius or dumb luck it can be said that Satoshi’s apparent misapplication of economic theory is quiet curiously auspicious. And I predict that as bitcoin’s market cap begins to encroach on gold, the narrative of bitcoin will turn towards a dialogue on whether or not it can serve as the premise to Nash’s argument.
