An attempt for more neutral stance on viewing Bitcoin’s problems
Some background: I have economics, finance and econometrics background, been living in a multi-currency life style for more than a few decades, due to frequent long stay in different countries.
My favorite Bitcoiner is not Saylor, not Max Keiser, not Saifedeanm, but Jordan Peterson. IMO he has the right attitude of what a Bitcoiner should have: Skeptical but going in with reasonable positivity while looking for truth.
This month we witnessed one of the largest and fastest crash in crypto history with the fall of Terra, partly because the community used FUD to dismiss any concerns on the fundamentals of the UST peg mechanism, until a deliberate attack finally broke its peg.
I would split the most hardcore Bitcoin community into a few groups: Developers (be it for wallet, loan service, bitcoin core, privacy focused etc); Cypherpunks; Influencers; Investors (including miners)
Some of their roles are overlapped, Jack Maller for example would be developers and influencer, while Saylor would be an investor and influencer.
My intend here is to remind or inform Bitcoiners at all level should always remain skeptical at the FUD targeting Bitcoin, specifically there are several points that seems often dismissed by influencers.
Bitcoin sound money argument is highly debate-able. It is a non government issued fiat money, or asset with no intrinsic value.
Let’s forget the Bitcoin standard, or what all influencers have you convinced at the moment and focus on what exactly is sound money.
It isn’t just that gold is what used to limit nations to issue money and devaluing it all.
Intrinsic value of gold means that if there is indeed a global reset, the value is not completely wiped. (Of course, then food/water/medical supplies are probably more valuable than everything else by then.) Thus the sound money claim has some sort of intrinsic value backing them.
At one of the height of China’s political movement in 1958, a lot of chinese melted any metal they could find in order to achieve the 5 years plan: “overtake the UK and catching up with the US), but at the end most if not all metal are wasted due to the poor grade.
On the other hand, South Koreans donated all the gold they had proactively to the government in 1998, hoping it would pay off some of the IMF debt that South Korea has taken on and couldn’t pay back.
Many Bitcoiners used troubled nations such as Venezeula as an example of Bitcoin performing. That is however, really because Bitcoin is functioning as a store of value, backed by the fact that the rest of the world are not in complete crisis, like the global reset that many in communities are concerned about.
Without an intrinsic value, a global reset can literally wipe bitcoin value to oblivion, it being a non government issued fiat money.
If we take a look at history of money, fiat does seem to “die” but more often than not are simply rebased or become part of another fiat. Germany for example had Papiermark, which suffered from hyper inflation and rebased into Reichmark, which then became Deutsche Mark, then split into several more until we reached EURO.
Bitcoin’s own death spiral
Bitcoin does have a death spiral mechanics, which would not only significantly damage its value, but also its security (Hashpower).
Miners and more financial tools used against Bitcoin like Microstrategy is using could lead to a sell off spiral if Bitcoin falls to a certain price point.
Bitcoin does not have a kill switch button and will keep on making new blocks, however the network would be hammered, which further sinks Bitcoin’s value even if there’s no 51% attack, thus a death spiral.
This is particularly dangerous to miners. While investors and hodlers can sell off at a loss, miners cannot liquidate their miners, building lease etc, they cannot scale down easily after scaling up and signing contracts.
As currency highly dependent on faith in it and the system, a lot of effort would be needed from the community to build up confidence in its ability to store value again which would be extremely difficult to do.
The market cap has grown to a staggering high, and so does the compound effect of a collapse. This risk may never goes away as attack could be from big banks, foreign government sponsored etc.
Central banks have mechanics to halt any sell off and reestablish faith in the model, which may or may not work.
Take a look at what happened to RUB after the mass sell off due to sanction, it has just reached 2 years ATH against USD in just 3 months after the sell off. By locking capital outflow and securing trade with RUB, Russia saved RUB.
Argentina and Turkey both attempted the same and still failed to control the rapid depreciation from sell off.
Notice the key isn’t what central banks are doing by rate control, but to reestablish faith and utility in the currency itself, the market force would save the currency.
Fiat currency, like crypto are largely speculative driven and works through market’s confidence, demand and supply.
Inflation is not a killer, an unworkable currency is.
A lot of arguments attacking USD for its huge debt, stimmy checks, and that the high inflation is unbearable and that they must move ahead of inflation to survive.
Take a look at the chart below. Don’t forget Japan had deflation majority of the period.
Bitcoin being a lot less inflationary and limited supply does not automatically become a better money than fiat.
In a world where fiat money are interexchange-able, a weaker currency may not necessarily a negative, as it entirely depends on the import/export market. Similarly EU is also failing against USD.
This is also why currency war has always been brought up, money had been weaponized for decades of globalization, currency manipulation has constantly be on topic against RMB for example.
I have plotted a 2 year chart for all the currency I have shown above against USD (a 5 years chart would basically render all volatility for fiat pairs as flat line).
By now this should be obvious how and why Bitcoin cannot function well as money.
It has no innate method to reduce volatility, there is very little potential to be used for international trading with bitcoin as the currency, unless with special terms and conditions that may very difficult to execute.
Something that some Bitcoin companies seems to be trying, is with mechanics like refunding the value appreciation if Bitcoin value were to go up before product is shipped. (https://foundationdevices.com/passport/)
Saifedeanm’s dream of a bitcoin standard and that it would absorb all monetary energy. But Bitcoin volatility alone in some ways legitimize fiat money to exist, even if only for trading against bitcoin all while government can enforce the population to use fiat.
Another way to view this is looking at them as vehicle trying to go further, fiat is constantly losing fuel, different car got different acceleration rate and fuel optimized rate, but they all *attempt* to get to the destination nice and smoothly.
Bitcoin as a car would be like ultra refined car that you own a special track with total control of, it can have top speed and get to destination fast, but you do not have any control on speed and therefore little prediction as to when to leave the house to get to destination at the time you want.
The only ideal situation to adopt bitcoin is that one can and able to withstand the unpredictability, or if bitcoin is better than the native currency (including safety of fund etc)
Volatility is coded in due to fixed emission of supply and no governance.
Bitcoin does work through ponzi
Government issued fiat really isn’t all that different from a ponzi, there’s a strong misconception that central banks have a lot control over its value, especially when Bitcoiners constantly attacking FED and their balance sheet etc. But all they do really is have an impact on speculators’ and investors’ confidence. (well, those with big funds)
However the difference is that fiat money works more of a tool than a literal store of value, at times it is used as a weapon even like predatory exchange rate manipulation.
Bitcoin’s risk is that, at least currently, without a mean to stabilize in value, it cannot function well as money (from the angle of being a tool to generate wealth), and that it must capture value through ponzi.
What “capturing monetary energy” is just Ponzi in a fancier wording.
So exactly why am I an investor of Bitcoin
Despite everything I have listed above, I truly believe in Bitcoin’s potential in becoming a very powerful money that focus on decentralization, security, self custody and durable, instead of transaction itself.
While the value may never be stabilized, it would be difficult to imagine even a 90% correction would literally break the bitcoin network. I am humbled by the power and faith of the bitcoin community.
The intention of this article is not to dismiss Bitcoin as money, but that it is important to build based on truth, often times I see many are overselling Bitcoin which may or may not be intentional.
Self-sovereign requires critical thinking, and we must avoid becoming a community of echo chambers.
*welcoming any criticism or comments.
