Why Don't The Dollar And Bitcoin Drop To Their Tangible Value (Zero)?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

If we refuse to recognize the high utility value of USD and its global ease of flow, then we will continue to misunderstand the demand for the dollar and its appreciation.

I have covered the many reasons why the U.S. dollar (USD) has strengthened in dozens of posts over the past 5 years, (Could the U.S. Dollar Rise 50%?, January 12, 2011), and I described the positive dynamics of bitcoin last summer in An Everyman's Guide to Understanding Cryptocurrencies (June 13, 2016), back when bitcoin was under $600.

The USD (as measured by the US Dollar Index) has gained almost 40% from 73 in 2011 to 102 recently, and bitcoin recently topped $1,000 (trading at $909 as this article goes to print).

These gains aren’t trivial, nor are they magic. They are the result of basic economic forces: supply and demand, utility, liquidity, capital flows and risk management.

Capital migrates to where it flows with the least resistance, i.e. to forms of capital that are liquid and offer low transaction costs—what I call ease of flow. Capital also migrates to relatively safe havens that are liquid and offer low transaction/holding costs, and to forms of capital with global utility.

Lastly, capital flows to the highest yield/return with the lowest perceived risk.

Given these fundamentals, it isn’t difficult to understand why capital is flowing into USD-denominated assets and bitcoin.

So what do the fundamentals suggest about the valuation uptrends in the USD and bitcoin? Have they topped out and due for a crash, or have they just started their appreciation cycle?

To formulate a coherent answer, we need to consider two things:

1. The foundations of their value

2. The inability of central states and banks to control their currencies and their place in the global economy.

Why Don’t the U.S. Dollar and Bitcoin Have Zero Value?

There’s a fair amount of confusion about why currencies (or in the case of bitcoin, digital commodities that share the utility functions of currencies) that are unbacked by tangible assets such as gold don’t just drop to their tangible value, i.e. zero.

After all, most USD are just digital entries and the rest are just paper. Bitcoin is also just a digital construct with no intrinsic value.

The answer boils down to utility-driven demand.  If, as David Graeber discussed in his book Debt: The First 5,000 Years, notched sticks are needed to pay one’s taxes, then notched sticks are in demand because they have an essential utility; notched sticks acquire value (i.e. become “money”) if you can pay debts (such as taxes) with them.

As long as they retain this utility, they retain the value ascribed to them by the system that recognizes (or demands) payment of taxes in the form of notched sticks.

A notched stick has near-zero tangible value. Its value is entirely a social construct, as a placeholder for the goods and services produced by labor and capital.

It frustrates many observers that the U.S. dollar stubbornly refuses to drop to its intrinsic value, i.e. zero. This peculiar resistance melts away once we understand that state-issued currency ("money") is ultimately a claim on the issuing nation’s wealth and capacity to generate wealth, and on the state’s ability to collect taxes from the residents and enterprises that are generating the wealth.

In other words, the value of state-issued currencies is not based on a tangible commodity such as gold but on the wealth generation capacity of the nation and the state’s power to skim that wealth as taxes, which can then be used to pay state debts.

The state can (and as history shows, often does) abuse its privilege by issuing currency far in excess of the wealth generated by the nation’s people and enterprises.

If the economy generates 10 units of new wealth (surplus goods, services and capital) and the state prints 20 units of new currency, the new currency devalues the existing stock of currency.

If the state issues 10 new units of currency in alignment with economy’s expansion, the issuance will not devalue the existing stock of currency because the new “money” is in essence backed by new wealth in the form of goods, services and capital.

The expectation that fiat currencies (state-issued “money” that is not backed by a store of tangible commodities) should all decline to zero because they have no tangible value makes sense only if we ignore non-tangible sources of value.

The wealth of a nation is tangible, and so is the state’s power to collect taxes to pay its debts.  These are as tangible as gold once we realize that demand creates value, whether we consider it intrinsic or a social construct. In other words, even so-called “intrinsic” value forms of money are, beneath our cultural assumptions, social constructs.

Once we understand that demand creates value, then the source of the demand matters more than our assessment of what is "intrinsic."  There is a built-in demand for stores of value (the time-honored driver of demand for precious metals) but there is an equally built-in demand for means of exchange that offer all the characteristics listed earlier: liquidity, utility, ease of flow, relative safety, potentially high yield with low risk, etc.

Those who focus on the scarcity value of gold to back a currency are overlooking the equally potent means of exchange sources of demand. Scarcity (supply) is only half the equation—ultimately, demand drives value.  If something with zero intrinsic value (notched sticks, paper currencies, digital cryptocurrencies) provides utility value—it can be used to pay debts and taxes, it is liquid, relatively safe and has low transaction/storage costs, etc.—then demand for the currency is what creates its value.

Broadly speaking, any utility value that creates demand for the currency creates value. Creating new currency in excess of the expansion of its ultimate base, the economy of the issuing state, devalues the existing stock of currency. But if demand exceeds supply, the currency appreciates regardless of the expansion of the currency.

This is what frustrates those who keep expecting the U.S. dollar to falter because new dollars are being created in what they reckon are excessive quantities.  But if global demand for dollars exceeds supply, the value of the USD can only appreciate.

This brings us to one of the most confusing aspects of state-issued fiat currency: the reserve currency. I have addressed the unique characteristics of the reserve currency many times, for example: Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012).  What many observers seem to overlook is the utility value of a reserve currency that can support the expansion of debt and currency in the nation that holds reserves of that privileged currency.

In other words, the U.S. dollar is not just the currency Americans need to pay their taxes, or the currency used in the U.S.—it is a form of relatively predictable, highly liquid capital with low transaction/storage costs that is the collateral for the holding nation’s own currency and debt issuance.

Why would any nation hold reserves of USD over, say, reserves of gold?  One part of the answer is global trade and capital flows.

Nations with surplus goods and commodities to sell on the global market will generally find buyers in the U.S. willing to buy the surplus goods and commodities with USD. That trade generates a flow of goods and commodities to the U.S. and a flow of dollars back to the exporting nation.

These dollars have a variety of utility value. They can used to buy other goods and services globally, serve as collateral for loans, earn interest with low transaction costs when converted into U.S. Treasury bonds, and so on. In certain ways, USD offer more utility value than gold or any tangible form of collateral/capital.

If we refuse to recognize the high utility value of USD and its global ease of flow, then we will continue to misunderstand the demand for the dollar and its appreciation.

Bitcoin is quite different from the USD but it, too, has unique characteristics that drive its demand and thus its valuation.

In Part 2: Estimating Bitcoin's Fair Value, we consider the global circumstances that will govern demand for bitcoin and thus its valuation in the global marketplace.

Our analysis shows that it's quite easy to make the argument for valuations higher its current trading price. Far higher.

Click here to read Part 2 of this report; (free executive summary, enrollment required for full access)

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A. Boaty's picture

Sadly, I lost my social constructs in an unfortunate boating accident.

philipat's picture

The other aspect is that, at present, Bitcoin cannot be manipulated which explains why it responds as Gold SHOULD do to extraneous circumstances. This is due to a lack of Bitcoin Futures. Hiowever, this pisses off The Fed and The Treasury who don't like not being in control of their worthless Fiat markets. hence the IRS is already starting to get involved at the margin. I'm guessing that will only continue into the mainstream.

The Blockchain is a thing of beauty and I "get it". BUT, do you really think that Central banks will allow BTC to marginalise their Fiats?

ejmoosa's picture

 "Bitcoin cannot be manipulated."

Do you mean that the Central Banks cannot buy bitcoins and sell bitcoins and manipulate the price?

The Fed alone could buy or sell enough bitcoins to manipulate it with ease.  


How long before there are some paper double and triple Bitcoin ETFs?

philipat's picture

They can but there are no "paper" BTC Futures markets which can leverage purchases by 100/1 like with Gold. At present, with BTC if you want to buy it you need cash. If you want to sell it, you need BTC. CB's and the BIS aren't used to dealing with such FREE markets because they have fucked up everything else.

And the Gold ETF's are just another false promise designed to take retail demand away from buying REAL metal into more paper products. And as a last resort source of real physical metal when all else fails for the Bullion Banks. BTC can't do that.

business as stusual's picture

Are you aware that the Winklevoss twins are at this moment putting together a Btc. ETF?

aminorex's picture

Yes, the SEC decision is due in March.  That is not paper leverage, however: It is backed 1:1 with actual bit coin deposits.

Perimetr's picture

Nothing like a brainwashed economist explaining how valuable the dollar and bitcoin are . . .

When the industrial nations tell the US that they won't accept our dollar and Treasuries in payment for their finished goods

Exactly how valuable will the dollar be then?

mkkby's picture

Bitcoin will be attacked in multiple ways.  Every bank will come out with their competing brand.  Also, some bank will start borrowing bitcoins and paying interest, then using those for short selling.  Once that happens, get out fast, because it is done.

Herd Redirection Committee's picture

What effect will quantum computing have on physical gold?  Not sure.

What effect will quantum computing have on Bitcoin?  Not sure about that either, but I'm guessing, more than it will impact physical gold!

Gone Galt's picture

Not true.  Bitcoin futures can be had at BitMex with upto 100x leverage.

spanish inquisition's picture

Agreed, it can be manipulated. You just start creating more variations of electronic money. What would bitcoin be at if there wasn't 200 other denominations? As other forms gain utility the demand for bitcoin goes down. Sort of a fiat trickle up theory.

philipat's picture

Methinks you don't understand how futures markets work. But, OK then, if you believe that then Bitcoin will be manipulated just like Gold? Unless, of course, you don't believe that Gold is being manipulated?

spanish inquisition's picture

Your confusing short term manipulation of gold with the long term viability of electronic fiat.

philipat's picture

No, YOU are confusing the short-term performance of BTC with the detrmination of the CB/Fed/BIS/ESF Complex to remain in control at all costs.

I'm just guessing but I think as already suggested by the early IRS responses these Bodies will respond via taxation. Buying and using BTC will be made subject to capital gains taxes, just like other investments.

philipat's picture

But if you mean "electronic Fiat" in the sense that Governmenets will take over the efficiencies of the Blockchain for their paper Fiat purposes, I would agree with you. That is precisely what i see happening.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) philipat Jan 9, 2017 10:27 AM


And this is the problem when discussing something like this, on here. You can just throw together some nonsense... "I think", "they", "can do", "take over", etc, etc.

Push them for any details and you will just be met with further nonsense or deflection.

There is no way you are talking millions of devout Bitcoin users, through-and-through anti-statists into using a statist Blockchain. Full stop.

RedDwarf's picture

You are confused as to what the term 'fiat' means.  I'm tired of running into this amateurishness on ZH, where some minimal level of economic knowledge should be present.  Fiat means by decree.  Government mandated currencies are 'fiat'.  Something like bitcoin is NOT fiat.  No government has used the force of law to define it as currency at the point of a gun.  Something being digital or physical is totally unrelated to the concept of something being 'fiat' or not.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) spanish inquisition Jan 9, 2017 9:51 AM

I think Mr. Charles Smith is one of the better contributors on this site and all the respect in the world.  BUT... saying, comparing USD and Bitcoin as both being "just digital entries" smacks of being trite.  A large part of Bitcoin's utility value is that it fulfills a niche that no other statist currencies do.  Bitcoin exists nowhere and everywhere at once, and that includes the border crossing you are about to travel through.

asierguti's picture

Just like tulips fulfill a niche. In fact they are more beautiful than bitcoin.

business as stusual's picture

Is it possible to transport tulips across international boundaries without the taxman putting the grab on you?

I just can't see walking thru customs with my pants stuffed full of tulips.

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) asierguti Jan 9, 2017 10:23 AM

Anyone bringing up "Tulips" when discussing modern currencies gets a complimentary "Retard Prize" agreed?

Raffie's picture

You talk about Bitcoin when the topic has nothing to do with Bitcoin.

So you get a prize too.


Dragbin gets the Bitcoin Zipperhead prize, for hanging his dick out his fly to take a leak, and yanking the zipper up without stowing the gear away.

Like a permanent tattoo, only different.

Like a blow job from a hooker with chipped teeth. 

RedDwarf's picture

Tulip bulbs are not fungible.  Each one is unique.

Tulip bulbs can make more tulip bulbs.  They are unlimited in supply.

Tulip bulbs are not divisible.

Tulip bulbs are not durable.

I could go on, but this comparison of tulip bulbs to BTC is so fundamentally flawed that no one who is not just an ideologue or ignorant could make it.

The central planners's picture

Please share with ur how the regular people will do to trade bitcoins when the blockchain reach the terabytes in size?

RedDwarf's picture

I don't know, nor do I care.  While I am a developer, I'm not a bitcoin developer.  I do know there are strategies being looked at.  Eventually they'll figure it out, or BTC will fail.  If I was to guess though I would bet on some variant on a few powerful systems running the full blockchain and most people running off of a recent trusted reference point and/or local nodes.

floomby's picture

The reason we are talking about tulips is there was a bubble in tulips in the early 1600s that is famous, the tulips had little utility but the price got way inflated. A classic bubble, critical thinking that should be performed when evaluating the tenability of something like bitcoin.

toknormal's picture

The difference is that traders can "take delivery" of Bitcoin on the same platform that it's traded. (i.e. an electronic one).

The reason that precious metal's monetary function is fatally broken is that they are no longer liquid on the primary trading platform. Pre 20th century, a gold coin operated as an efficient bearer token, able to transfer both ownership and possession in the same trade in a physical market. This is no longer the case. As an "instrument", precious metals diverged into a paper asset which was liquid and a physical one which was limited supply. Both attributes are needed and there's no way to reconcile them any more for gold.

A true bearer instrument (which is where metals derive their monetary premium or 'intrinsic value') has these two properties co-incident. Bitcoin therefore picks up where gold left off as a far superior asset on an electronic platform which is where the bulk of the world's trade is now carried out.

philipat's picture

China is in the process of fixing that, especially as Western metals get sucked into the Asian Black hole? If the Fed gets audited, that might be very interesting?

And doesn't that ignore the .GOV obvious response wrt taxation? If you make a capital gain via either buying or selling BTC OR by spending BTC at a rate higher than when you purchased it, doesn't that require payment of a capital gains tax? And do you really believe that .GOV (All bankrupts) is going to ignore the opportunity? Especially when it interferes with their Fiat Ponzi?


toknormal's picture

I don't quite understand your point.

What's the point in investing in a capital asset if not to make a capital gain ?

anarcode's picture

No they can't. If they did, the current holders would trade for another crypto whose value would rise proportionally. The end result would be a higher crypto market cap and increased mindshare.

The USD marketcap is about 3150 times larger than BTC so there's no match yet. However, the trend is favouring cryptos and eventually there will be a tipping point and that's going the be the collapse that's been predicted so many times. We're still many years away from that and my uneducated guesstimate says that it'll happen when BTC's cap reaches about 20 to 30%. In todays Dollars, that's about $3 million per BTC.

Raffie's picture


Looking like a stock market to me, even has Margin Trading and much more.

Ya, the government prints money, uses money to buy mass amounts of bitcoin to spike the price then big sell off. Just like the stock market.

I like Bitcoin but still looking at it,  'certain' peeps in these forums think Bitcoin is bullet proof and it is not.

I think if someone has stock and want to keep playing in the Casino should drop some of their holdings into Bitcoin for more diversity.

As humans we are flawed and that is why we can never make anything perfect.




Dragbin been watching Charleton Heston in The 10 Commandments reruns way too much - again.

See prophetic pronouncements below.

Crack can be a problem for some people.  

Draybin Deffercon III's picture
Draybin Deffercon III (not verified) philipat Jan 9, 2017 9:45 AM

....once again, Bitcoin's success does not depend on what "they" allow.  And truly I say unto you that Bitcoin is invincible.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) philipat Jan 9, 2017 9:55 AM

Seeing that you took so long to post on a Bitcoin article, I was getting worried about you, Draybin. Are you OK? You're not your usual Bitcoin spastic self. Have the blackmail picture people come after you or something?

philipat's picture

That was Draybin Defecate III I think? AKA fonestar...

RedDwarf's picture

The blockchain innovation itself is guaranteed to revolutionize the future of transactions, but no specific implementation of that technology is invincible.  Quantum computing has the potential to fundamentally challenge the strength of modern prime number based cryptography for example.  Furthermore your odd phrasing in your second sentance sounds 'religious' to me.  That is not a helpful tone to take.

Raffie's picture

You're a funny little squirrel ain't ya.

I will rename Bitcoin to Titanic!

Unsinkable I tell you.

Dude, relax ok? You are here hoopin and hollering all the freaking time about Bitcoin when the topic has nothing to do with Bitcoin. If you got the facts and you have said your peace then move on ok? Don't want to see your account get nuked.

Just saying.



U4 eee aaa's picture

I believe it can be manipulated but only by the old fashioned method. Vomit inducing pump and dump.

The central planners's picture

Just a couple of days with the centrals banks being shut down and lets see how the supply and demands work out.

flaminratzazz's picture

From another blog…

The essential 21st Century conflict is between the rationers and the producers. This is not a class conflict, that is the fallacy that the left has fallen into for over a century. It is a conflict between a system of bureaucratic collectivism and a society of individuals. It is not a conflict between the rich and the poor, the majority of the rationers are either rich or close enough to it. Their charges may be poor, but the representatives of their victim groups invariably become rich. The rationer camp is funded by some of the wealthiest men and companies in America who agree with its premise that we need to ration everything from children to jobs to food to carbon emissions.

This is a fundamental philosophical conflict between those who believe in a free society and those who believe in a managed society. It is not simply a conflict between capitalism and socialism, many of the capitalists are on the side of the rationers because they agree with them or profit from the rationing. It is a conflict that predates the American Revolution, a conflict that became inevitable with the rise of the supercity and the closing of the frontier…

The reason i pasted this is b/c I never looked at things this way.

JRobby's picture

The same reason people trust the GOV and the MSM

They don't know better and do not enlighten themselves with independent learning and thinking.

flaminratzazz's picture

I always looked at the "givers" aka .gov and the "takers" aka big biz and welfare queens, against the producers and didn't consider the middle men in the equation.

 sucking up their huge skim while handing out the rations,


vq1's picture

That's interesting perspective. Have you read Rousseau?

"no man has authority over his fellow men"

In "discourse on inequality" he writes about civil man vs savage man. Savage man does not require anything from anyone else, completely self sufficient. As soon as we became civil man, the inequality of power was inevitable.

Justin Case's picture

Mainly due to laziness and the interest in useless social media, a distraction. News is hardcore and social media is soft and fun, easy on the brain to digest. TPTB know this and I've experienced this as well on lunch time discussions with coworkers. They like to talk about sports, hockey or soccer etc.

One time I was discussing 9/11 and that the buildings were in free fall. That it was impossible for building 7 to implode on it's foot print when it was never hit by aircraft. I said that this was a demolition not caused by the aircraft impact.

The guy called me a tin foil hat conspiracy therorist, grabbed his tray and left red faced in fury. He's a hockey fan and can talk hockey 24/7. He also gets bits of news from MSM on the TeeVee. Short attention people today like rapid fire news and then don't have time to rationalise it or question it. A sort of overload of information in rapid succession. Bits of the story are retained and then they feel all knowledgable in the current events of today. The news rarely does any follow ups or corrections to previous broadcasts even if they were wrong.