Bitcoin Vs Fiat Currency: Which Fails First?

Authored by Charles Hugh Smith via OfTwoMinds blog,

What if bitcoin is a reflection of trust in the future value of fiat currencies?

I am struck by the mainstream confidence that bitcoin is a fraud/fad that will soon collapse, while central bank fiat currencies are presumed to be rock-solid and without risk. Those with supreme confidence in fiat currencies might want to look at a chart of Venezuela's fiat currency, which has declined from 10 to the US dollar in 2012 to 5,000 to the USD earlier this year to a current value in December 2017 of between 90,000 and 100,000 to $1:

Exchange Rate in Venezuela:

On 1 December, the bolivar traded in the parallel market at 103,024 VED per USD, a stunning 59.9% depreciation from the same day last month.

Analysts participating in the LatinFocus Consensus Forecast expect the parallel dollar to remain under severe pressure next year. They project a non-official exchange rate of 2,069,486 VEF per USD by the end of 2018. In 2019, the panel sees the non-official exchange rate trading at 2,725,000 VEF per USD.

If this is your idea of rock solid, I'll take my chances with bitcoin, which currently buys more than 1 billion bolivars. Of course "it can't happen here," which is precisely what the good people of Venezuela thought a decade ago.

Gordon Long and I discuss Fiat Currency Failure (The Results of Financialization - Part IV) in a new 31-minute video. The bottom line is that fiat currencies are debt-based claims on future profits, energy production and wages, claims that are expanding far faster than the real economy and the productivity of the real economy.

In effect, fiat currencies and debt are like inverted pyramids resting on a small base of actual collateral.

If you look at the foundations of fiat currencies, you find loose sand, not bedrock. Massive mountains of phantom wealth have been created by central-bank inflated bubbles, bubbles based not on actual expansion of net income earned from producing goods and services, but on financialization, the pyramiding of debt and leverage on a small base of real assets.

"Free money" that accrues interest isn't free. Eventually the interest eats debtors alive, regardless of the debtor's size or supposed wealth.

Creating "free money" in unlimited quantities impoverishes everyone who holds the currency. In the initial boost phase, the issuance of "nearly free money" to borrowers, qualified or not, generates the illusion of prosperity. But once the boost phase ends, reality sets in and marginal borrowers default, inflation moves from assets (good inflation) to real-world essentials (bad inflation), and creating more "free money" ceases to be the solution and becomes the problem.

Yes, cryptocurrencies are risky--but so are fiat currencies. Illusory "wealth" evaporates, and expanding credit-based "risk-free money" at rates that exceed the rate of expansion of the real economy reduces the purchasing power of all those holding the currency. Eventually trust in the currency, and in the authorities who control its issuance, erodes, and a self-reinforcing feedback loop turns the rock-solid currency into sand.

What if bitcoin is a reflection of trust in the future value of fiat currencies? Those dismissing bitcoin as a fad might be missing the point: trust in the authorities who control the expansion of fiat currencies might be eroding fast in a certain segment of the populace.

And more importantly, they might be right, and everyone who placed their trust in the authorities who control the expansion of fiat currencies ends up holding a handful of sand.

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I'm offering my new book Money and Work Unchained at a 10% discount ($8.95 for the Kindle ebook and $18 for the print edition) through December, after which the price goes up to retail ($9.95 and $20). Read the first section for free in PDF format.

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tmosley The_merovingian Mon, 12/11/2017 - 11:06 Permalink

Bitcoin to fiat is not a good comparison, as one is a particular currency, while the other is a CLASS of currencies.Bitcoin vs Dollars would be a more apt question, as would Crypto vs Fiat. I beleive the two questions have different answers though. BTC will fail before the dollar which will fail before fiat in general which will fail before crypto in general.

In reply to by The_merovingian

tion tmosley Mon, 12/11/2017 - 11:23 Permalink

From the author, Money and Work Unchained

The current conventional-wisdom view of our soon-to-be future is rose-tinted: automation will free millions of people from the drudgery of work, then by taxing the robots doing all the work, we can pay everyone Universal Basic Income (UBI), enabling a life of leisure and artistic pursuit for all. The result: A future of Universal Happiness.But is this accurate? Is this what UBI is actually capable of doing?More importantly, is this what we want?And even more importantly: will this “future” be our best future? Will it account for and manage the practicalities of work, money and automation, given the limits of endless growth on a finite planet? Money and Work Unchained drags the now-popular concept of Universal Basic Income (UBI) from the shadows of Pundit blather into a harsh, illuminating light, and in doing so presents an entirely new view of the future that upends our conventional understanding of work and money.This book lays out a practical pathway that realigns work, money and human fulfillment into a sustainable system that sheds the inequalities and injustices of the status quo in favor of a human-scale way of living 

This may be zh book club / debate worthy =P

In reply to by tmosley

mtl4 TeamDepends Mon, 12/11/2017 - 13:56 Permalink

The sole reason why bitcoin is worth anything at all is because national currencies have been called into question..........trouble is which emperor with no clothes goes down first?!  This all works fine as long as bitcoin's price is rising rapidly but as prices peak the cost of mining will be through the roof and transaction time will become excessive and fungibility comes into question at that point.  

In reply to by TeamDepends

3LockBox jcaz Mon, 12/11/2017 - 10:14 Permalink

Pretty simple concept.Bitcoin could remain stagnant, go down in FIAT or simply rise much more slowly than precious metals in the future.In fact if that begins to happen watch what happens to the herd.And if precious metals become difficult to acquire the herd will be trapped.But that will never ever ever happen...Right?

In reply to by jcaz

RedDwarf Not My Real Name Mon, 12/11/2017 - 14:42 Permalink

My point was very simple, but I guess is was still too difficult for you.  So I'll fully explain it.Just because BTC is currently priced by most people in USD does not mean USD will outlast BTC.  I used gold as an example of that.  Gold will exist until the heat death of the universe and thus will outlast USD even though it is currently priced in USD.  Thus I disproved the original statement that USD / fiat will outlast BTC just because BTC is currently priced in USD / fiat.

In reply to by Not My Real Name

RedDwarf Citxmech Mon, 12/11/2017 - 14:51 Permalink

USD is the world reserve currency.   It is the most common form of denominating value.  That is simply the factual truth.  That does not mean I don't know 'exchanges' exist.All I did was debunk the silly claim that because X is currently most commonly valuated in terms of Y that it means Y will outlast X.How you got from that to lecturing me about EXCHANGES like I'm a child is beyond me.  You're the one proving that you are unable to understand context and scope, not the one schooling me on anything.

In reply to by Citxmech

MrBoompi jcaz Mon, 12/11/2017 - 10:42 Permalink

It's OK to base the value of something on the dollar, as long as the price is allowed to rise accordingly when the dollar is devalued.  This is why bitcoin was popular because the price was not linked into the Fed's monetary system, which tends to control the value of assets if it can.  I think this is why the Bitcoin futures were created, for the Fed to get control of the price.  if the futures market grows to 100x (like gold and silver?) the actual Bitcoin market, which market will control the price?  

In reply to by jcaz

quadraspleen jcaz Mon, 12/11/2017 - 10:54 Permalink

BTC is denoted in ETH and EUR on all of the exchanges I use. And to answer your next question: ETH and LTC are also traded in BTC and ETH respectively. You don't need USD to trade in any of them if you already have your cryptos. And I can also buy AU and AG directly with my BTC too. game over.

In reply to by jcaz

Kilroyishere quadraspleen Mon, 12/11/2017 - 11:01 Permalink

GAME OVER......that is so Broderick War Games.  Sheesh. The proverbial fat lady will sing when you 1's & 0 worshippers convince the population to use what someone has made millions/billions off of to buy their beer after work, Sunday's dinner or a movie ticket.  Then you can say you have done something.  Until then you guys are playing in a high stakes whirlpool with each other.  It'll be a feeding frenzy when the originators dump their stakes, though.  Just as in 1929, investor snowflakes will be literally falling.  Get your corn and watch the show.....

In reply to by quadraspleen

Son of Captain Nemo kochevnik Mon, 12/11/2017 - 10:59 Permalink

"Bitcoin denominated in roubles. Everyone knows "


Well put. Because that is what it will take when the Western CBs pushing the BTC narrative have only paper while the Russians have the GLD as well as the "black stuff" to back it with!....

Behold the only door to go through at this juncture (…), if crypto is to survive!!!

Can't live without them!... Can't live "without them"!!!!

In reply to by kochevnik

Herd Redirecti… GUS100CORRINA Mon, 12/11/2017 - 11:40 Permalink

I have said for a long time that the ramp in the S&P + NASDAQ implies a lot of future devaluation in fiatskis.  But the real question is, if Bitcoin is going up because of lack of trust in fiats, why has gold and silver been flat??????  Manipulation, obviously, but that raises the question of what level gold and silver should be at.  And if BTC would have rallied like it has, if gold was up 50% and silver 75% (I say probably not, because a lot of the 'speculative flows' would have gone towards PMs, but it could be that one is for longterm investors and the other is for speculators).

In reply to by GUS100CORRINA

greenskeeper carl Appreciated Ch… Mon, 12/11/2017 - 10:02 Permalink

Both are nothing but confidence games. While I personally think bitcoin will eventually go the way of AOL dialup or Netscape navigator, as 'first one the scene' typenthings don't typically remain around once improvements on the original idea are made, cryptos may well overtake fiat currencies. That's why it's essential that government andCBs destroy them. Will it work when they try? I have no idea, but they will try.

In reply to by Appreciated Ch…

Ghordius greenskeeper carl Mon, 12/11/2017 - 11:53 Permalink


Fiat currency (historic) average age: 40 years

CryptoCurrency average age: Nobody Knows. No History

Crypto-As-Private-Currency? that's easier: Private currencies have an average age of 60 years. but is crypto a "typical" Private Currency? No. It has no "Market Maker" ( /Issuer). so... the question is if it is a currency at all

so... Nobody Knows. It's a New Chapter of Monetary History... perhaps

enjoy the ride

In reply to by greenskeeper carl

SDShack greenskeeper carl Mon, 12/11/2017 - 13:07 Permalink

To add to your post, I predict that not only must the CB's destroy bitcoin, they are actually helping engineer it's rise and fall with the intended purpose of eventually replacing it with a cyrpto of their own design. They have to do this to manage their NWO with NWO currency. The signs are everywhere. The creation of the Euro, the trial of confiscating cash in India, the rise of bitcoin. etc. along with the NWO mandates everywhere.Bitcoin needs to be somewhat entrenched among the masses so that its failure has to trigger a world wide financial crisis. The playbook by the elites is to always use the crisis to inject radical change "to protect the people". They purposely blow an asset bubble until it becomes entrenched with the masses, then destroy it after transfering whatever wealth there is to their own pockets, and insuring they have created debt slaves in the process as well by forcing the masses to use real assets to buy the bubble in the first place.When bitcoin starts to become entrenched in IRA's, 401k's, pensions, etc. that is when you know they will pull the plug. The grand plan has to be to devise a single GOVT replacement, again to "protect the people", so it will roll up Social Security, Medicare, Medicaid, Retirement Accts, Pensions, etc. It's all coming to a head and a reset has to happen, but the "reset" isn't going to be some debt jubilee to protect the masses, but an instrument to enslave the masses once and for all. And if anyone doubts this, then just consider the power of the security state to "make" it happen. If necessary, they will use whatever global war / terrorism false flag is necessary and blame it all on the financial collapse to scare/coerce the sheeple into line. In fact, the sheeple will probably be bleeting for the "govt" to save them.

In reply to by greenskeeper carl

Dwain Dibley MadHatt Mon, 12/11/2017 - 10:36 Permalink

That's exactly right.All this yammering about the evils of "fiat money" when hardly anyone uses it.97% of all commerce is conducted in nothing more than a bank's promise to pay legal tender money they don't have and cannot get.Currently, there is a total of $1.53-Trillion in U.S. legal tender money in circulation around the globe. Of that, $280-Billion is in circulation within the U.S.  Of that, $71-Billion is held in bank vaults. That $71-Billion held in bank vaults backs the $1.9-Trillion in demand deposit accounts, it also backs the $9.3-Trillion in savings accounts, it also backs the billions in credit transactions, from Main Street to Wall Street and all points between and beyond, that occur daily, it also backs all government expenditures.And that, is the reality of Fractional Reserve Banking.You want to end the Fed, take your legal tender money out of the banks and use it instead of the bank debt administered as a line of credit.MONEY

In reply to by MadHatt

Dwain Dibley Citxmech Tue, 12/12/2017 - 12:08 Permalink

Well for starters, the Federal Government is not a state."No state shall coin money nor emit bills of credit nor make anything but gold and silver coin a legal tender in payment of debts"The states are prohibited from making anything but gold and silver coin a legal tender.The states did not make the current U.S. legal tender, and they are not prohibited from using a legal tender, they just can't make their own. 

In reply to by Citxmech