I received a comment this morning challenging my contention that Bitcoin should be thought of as a foundational asset for the crypto-based monetary system.
With Bitcoin topping $11,000, arguments like this continue to be made by gold-bugs (of which I’m one) and hard-asset enthusiasts because they make fundamental errors in their analysis of Bitcoin.
And it’s important, in my mind, to counter those arguments to help the community refine its response to them rather than simply dismiss them.
The Bitcoin/Gold Conundrum
Like gold, Bitcoin should sit at the bottom of the crypto-version of John Exter’s inverted pyramid which describes the monetary system.
The comment can be found here in full. The commenter means well, but misses a fundamental point that most hard asset enthusiasts miss about Bitcoin and cryptocurrencies in general.
I’m going to break it down step by step because I believe it’s a perfect illustration of how one wrong assumption can lead to a wrong conclusion.
Comment: Why do you think gold belongs to the bottom of exter’s pyramid and diamonds/gemstones are found near the top…?
First, gold belongs at the bottom of Exter’s Pyramid because it is the only asset in that mix that has zero counter-party risk. Everything else is secondary.
So, to begin the argument in earnest, do Bitcoins have counter-party risk? No.
No one can issue Bitcoins that someone else, by Bitcoin’s very nature, has a claim to.
You may pledge your Bitcoins as collateral for some other transaction, but that transaction, say a loan denominated in Bitcoins, is what has counter-party risk, not the Bitcoin itself. Just like gold.
So, it could qualify as a reserve asset like gold. Okay, step #1 completed.
[Comment continues:] …that is because gold has certain physical properties that are intrinsic to its values while diamonds/gemstones don’t have… from ancient times until modern times… the properties of gold like good conductivity of heat and electricity… resistance to corrosion and oxidation… high malleable.. it makes physical gold to be ACTUALLY useful… diamonds and gemstones don’t have all these properties.. although diamonds is still useful for making into extremely strong diamond cutters…
However, many things have zero counter-party risk, for example diamonds. But diamonds are terrible mediums of exchange, as he points out. The rest of this portion of the comment does a credible job of explaining gold’s rise as money and satisfying Mises’ Regression Theorem.
But the diamond-cutter argument applies to gold. Gold is more fungible than diamonds. But gold is not fungible compared to the dollar or Bitcoin.
Money is liquid. You can receive it now and immediately exchange it for something else.
Property that isn’t money has time-risk. Finding a buyer of your non-money property is the risk of losing value in the transaction.
This is the fundamental problem with barter. It’s why gold no longer satisfies, except in specific situations, as a good medium of exchange.
Bitcoin has tremendous liquidity when you realize that 10 minutes to fully clear a transaction is stupendously fast compared to the three days behind the scenes that the average credit card transaction takes.
The Digital Road Not Taken
Now onto the next portion of his argument:
as for bitcoins… it doesn’t have ACTUAL use… so it is more useless compared to diamonds/gemstones…
This is where so many hard asset enthusiasts go wrong. Bitcoin does have actual use. We wanted something like Bitcoin to use as money before it existed.
There was latent demand for a digital asset with its properties. We wanted something better than the dollar, so someone, Satoshi Nakamoto, created it.
That latent demand for a money like Bitcoin imbued it with value from the moment the software started building the blockchain.
Bitcoins are encrypted packets of information.
Do encrypted packets of information traversing the Internet not have use? Yes.
If they don’t, then why do we send them? We wouldn’t.
If we do, then they must have value.
So, it follows, that certain types of encrypted packets will potentially have more value than others. In this case the signed, hashed, confirmed and stored packets represented by the nine-year old Bitcoin blockchain has a lot more value than literally most of the information on the internet.
So, we have the perception of value, we have zero counter-party risk all we lack is use.
Does anyone use Bitcoin? Yes. This is self-evident.
That is its ACTUAL USE.
Bitcoin came into existence to solve the very modern problem of centrally-issued debt-based monetary units and the corruption of our society those monetary units engender.
And it had to do so better than gold.
The World Bitcoin Could Make
All of those things make it a foundation for a new monetary system. This is not to say gold will not be part of this system or that there can be only one system.
In fact, as we move forward I expect to see the nascent crypto-system and the current debt-based one merge. Gold alongside Bitcoin and other Bitcoin-like coins with strong blockchains and hashing networks will form that foundation.
Commenter Concludes: in the worst case scenario if we have global nuclear fallout and whatever remaining humans degenerate back into stone age days where we resort to barter trade for survival… then nobody will want bitcoins while gold/silver will STILL survive…
of cos.. the worst case scenario may never happen… or at least not in a few centuries… then bitcoin may well survive all the other kinds of crisis…
so… I don’t agree that bitcoins can substitute gold/silver…
As for post-Nuclear War, if conditions change that radically then the value of everything changes radically.
In this case, there is no ‘financial system,’ Exter’s Pyramid or the like.
There is survival and not even gold is useful until civilization and the division of labor are sophisticated enough to support such concepts.
Bitcoin is the money we are choosing to take human society to the next level. If we don’t get there all of this is moot. QED.
At which point the cycle starts all over again.
* * *
I want to thank “wacky” for his thoughtful comment, even if I disagreed with it. That is the point of forums like this, discussion in order to clarify truths.