Thanks for doing your own research and laying out clearly what you think Bitcoin offers.
All these features of Bitcoin make it an attractive candidate for being a store of value and medium of exchange.
I think you’re mostly right on what features Bitcoin has, but I think you’re mistaken that they make it a good currency.
Bitcoin is scarce. No debate there.
Bitcoin has no counterparty risk. In theory, sure, but in practice as you note in your parenthetical, it will remain intermediated, even if it could deliver some gains.
Bitcoin is durable, portable, and divisible. No debate there.
Bitcoin is backed by real assets. It takes resources to create BTC, but that doesn’t mean it is backed by real assets. Look no further than the US Mint—it takes resources to create and maintain fiat currency.
If BTC has 1, 2, and 3, do those make it a good currency?
BTC maximalists and goldbugs lament printing dollars (if the Fed is achieving its stated goal, the dollar should depreciate against a general basket of products at 2% per year, i.e., it only buys 98% of what it would the previous year). In a world where production is constant, stabilizing the supply of money should be sufficient to deliver a “sound currency” (one that buys the same general basket of products every year, i.e., 0% inflation). But we don’t live in that world; production increases. Thus to deliver a “sound currency,” the money supply needs to increase (albeit not as much as it needs to in order to achieve a 2% inflation target [aside: money demand is also important for these macroeconomic dynamics, but not critical to the discussion here]). A constant money supply (assuming BTC would be used as money) in the face of increasing production will lead to an appreciating currency (i.e., deflation [aside: there are also macroeconomic frictional reasons to prefer inflation to deflation but again, not relevant]). So much for storing value as a “sound currency,” its value is moving! That said, people can plan pretty well under a transparent monetary regime, so we don’t need 0% inflation, we just need a consistent inflation rate (hence the 2% target). If there are real production shocks, it would be nice to implement shocks to monetary policy as well to preserve the nominal economy; it needs to not just be a store of value but also a unit of account. A fiat currency is superior to BTC in this regard. Structural scarcity doesn’t necessarily make for a wonderful store of value that can also be used as a unit of account in the currency context. I agree with Sam Bankman-Fried that BTC can store value in the same way other assets store value. Gold bars store value (we don’t want to use them as currency). Company shares store value (we don’t want to use them as currency). BTC stores value. But that doesn’t stem particularly from its scarcity. The value comes from the beliefs about its scarcity and value; see GME stock in 2021. In this regard, BTC is just another asset in that its value derives from belief, albeit belief that must be cultivated rather than ordered out of the implicit barrel of a gun. But, the stability of its supply hampers its effectiveness as a unit of account in an economy susceptible to real shocks. And the fact that the perceived value of BTC is either as pure speculation (sell before everyone decides there’s no there there) or as the promise of useful currency in the future, differentiates it from other assets that have value even though we don’t think of them as currency. A gold bar can be used for physical things, a company share is a residual claim on the company’s assets. A dollar is backed by fiat/guns. A BTC-that-will-never-be-a-currency may not be completely devoid of value (novelty, medium of exchange in small circles, etc.), but it’s of very limited value or a game of musical chairs. The case for tremendous value and not being a game of musical chairs requires the existence of BTC-that-might-eventually-be-a-currency; because I believe that to be unlikely, you can surmise that I believe BTC to have little value (that doesn’t mean you can’t make -or lose- money trading it!).
Blockchain (and central bank digital currencies [CBDCs]) offer the potential to further reduce frictions and risks in the intermediation structure of money (assuming they get transactions/second to compete, which is a big assumption). BTC gets to ride this wave, so that is good for its prospects as a medium of exchange. But practically, a sovereign will not relinquish its monopoly over the currency; if BTC looks like it will replace the dollar, the sovereign can regulate a market structure into existence that neutralizes the benefits of BTC vs. the fiat currency (see CDBCs, or something to make BTC operate less usefully).
Yes, BTC is as durable as, more portable than, and more divisible than current digital dollars, so that is good for its prospects as a medium of exchange. But as above, I don’t see these as truly unique selling propositions; these are advantages that can be eroded away by improvements to current payment networks.
So overall, BTC offers marginal benefits over digital dollars in intermediation, durability, portability, and divisibility that in the future can be competed or regulated away. It fails as a unit of account since its scarcity is ironically a problem, not a benefit. It stores value based on belief, but the collective belief is on shakier ground than many other assets that store value. It has features, but they’re not enough. IMHO
“Divisibility” is meaningless. Your accounting ledger can use however many decimal places are desired. And unless price tags are denominated in a currency, it doesn’t matter if I have 1,000,000 yen or .0000001 BTC.
And if price tags are written in a currency, it helps to have common items cluster in a clean set of values, preferably near 1, but Xthousand or Xmillion or Xhundreths or Xthousandths etc. can also work.
Thanks for doing your own research and laying out clearly what you think Bitcoin offers.
I think you’re mostly right on what features Bitcoin has, but I think you’re mistaken that they make it a good currency.
Bitcoin is scarce. No debate there.
Bitcoin has no counterparty risk. In theory, sure, but in practice as you note in your parenthetical, it will remain intermediated, even if it could deliver some gains.
Bitcoin is durable, portable, and divisible. No debate there.
Bitcoin is backed by real assets. It takes resources to create BTC, but that doesn’t mean it is backed by real assets. Look no further than the US Mint—it takes resources to create and maintain fiat currency.
If BTC has 1, 2, and 3, do those make it a good currency?
BTC maximalists and goldbugs lament printing dollars (if the Fed is achieving its stated goal, the dollar should depreciate against a general basket of products at 2% per year, i.e., it only buys 98% of what it would the previous year). In a world where production is constant, stabilizing the supply of money should be sufficient to deliver a “sound currency” (one that buys the same general basket of products every year, i.e., 0% inflation). But we don’t live in that world; production increases. Thus to deliver a “sound currency,” the money supply needs to increase (albeit not as much as it needs to in order to achieve a 2% inflation target [aside: money demand is also important for these macroeconomic dynamics, but not critical to the discussion here]). A constant money supply (assuming BTC would be used as money) in the face of increasing production will lead to an appreciating currency (i.e., deflation [aside: there are also macroeconomic frictional reasons to prefer inflation to deflation but again, not relevant]). So much for storing value as a “sound currency,” its value is moving! That said, people can plan pretty well under a transparent monetary regime, so we don’t need 0% inflation, we just need a consistent inflation rate (hence the 2% target). If there are real production shocks, it would be nice to implement shocks to monetary policy as well to preserve the nominal economy; it needs to not just be a store of value but also a unit of account. A fiat currency is superior to BTC in this regard. Structural scarcity doesn’t necessarily make for a wonderful store of value that can also be used as a unit of account in the currency context. I agree with Sam Bankman-Fried that BTC can store value in the same way other assets store value. Gold bars store value (we don’t want to use them as currency). Company shares store value (we don’t want to use them as currency). BTC stores value. But that doesn’t stem particularly from its scarcity. The value comes from the beliefs about its scarcity and value; see GME stock in 2021. In this regard, BTC is just another asset in that its value derives from belief, albeit belief that must be cultivated rather than ordered out of the implicit barrel of a gun. But, the stability of its supply hampers its effectiveness as a unit of account in an economy susceptible to real shocks. And the fact that the perceived value of BTC is either as pure speculation (sell before everyone decides there’s no there there) or as the promise of useful currency in the future, differentiates it from other assets that have value even though we don’t think of them as currency. A gold bar can be used for physical things, a company share is a residual claim on the company’s assets. A dollar is backed by fiat/guns. A BTC-that-will-never-be-a-currency may not be completely devoid of value (novelty, medium of exchange in small circles, etc.), but it’s of very limited value or a game of musical chairs. The case for tremendous value and not being a game of musical chairs requires the existence of BTC-that-might-eventually-be-a-currency; because I believe that to be unlikely, you can surmise that I believe BTC to have little value (that doesn’t mean you can’t make -or lose- money trading it!).
Blockchain (and central bank digital currencies [CBDCs]) offer the potential to further reduce frictions and risks in the intermediation structure of money (assuming they get transactions/second to compete, which is a big assumption). BTC gets to ride this wave, so that is good for its prospects as a medium of exchange. But practically, a sovereign will not relinquish its monopoly over the currency; if BTC looks like it will replace the dollar, the sovereign can regulate a market structure into existence that neutralizes the benefits of BTC vs. the fiat currency (see CDBCs, or something to make BTC operate less usefully).
Yes, BTC is as durable as, more portable than, and more divisible than current digital dollars, so that is good for its prospects as a medium of exchange. But as above, I don’t see these as truly unique selling propositions; these are advantages that can be eroded away by improvements to current payment networks.
So overall, BTC offers marginal benefits over digital dollars in intermediation, durability, portability, and divisibility that in the future can be competed or regulated away. It fails as a unit of account since its scarcity is ironically a problem, not a benefit. It stores value based on belief, but the collective belief is on shakier ground than many other assets that store value. It has features, but they’re not enough. IMHO
“Divisibility” is meaningless. Your accounting ledger can use however many decimal places are desired. And unless price tags are denominated in a currency, it doesn’t matter if I have 1,000,000 yen or .0000001 BTC. And if price tags are written in a currency, it helps to have common items cluster in a clean set of values, preferably near 1, but Xthousand or Xmillion or Xhundreths or Xthousandths etc. can also work.