Henry Blodget’s Bitcoin Blunder
Addressing the BI’s Assault on Bitcoin
Henry Blodget and crew have taken a couple of swings at Bitcoin this week in the Business Insider.
In these articles, Blodget and Weisenthal make a series of inexplicable leaps with significant logical flaws which I’d like to address. Don’t get me wrong, these common mistakes are often made by people who spend their life in banking, Wall Street and otherwise come from the world of the criminal elite.
Let’s get started with this statement:
“But make no mistake, Bitcoin is not the currency of the future. It has no intrinsic value.”
Weisenthal goes on to explain why the U.S. Dollar has intrinsic value:
“The U.S. Dollar has intrinsic value because the U.S. government which sets the laws of doing business in the United States says it has intrinsic value. If you want to conduct commerce in the United States you have to pay taxes, and there’s only one currency you’re allowed to pay taxes in: U.S. dollars.”
When you get right down to it, the argument is that the only thing which gives a currency its value is its utility. I argue that simple utility is not necessarily “intrinsic” value, but since it’s value I’ll let it slide. The main utility he points to is that the US commands it for tax payment. That is utility and it does add value. Its utility is not limited to payment of taxes however. Its utility comes from the totality of its properties. For example in the case of US cash, it’s also widely circulated and accepted, it has years of momentum behind it and it’s easily convertible to other currencies and commodities.
Much like the U.S. Dollar, Bitcoin gets its value from its utility. While no world government currently accepts payment of taxes with Bitcoin, there are other significant traits of Bitcoin that give it utility (and therefore value).
I’ve said it before but Bitcoin is basically four things and each with its own utility value. Bitcoin is…
- an international currency like the Euro or Yen.
- a precious commodity like gold.
- an account of stored value like your savings account.
- an online network for transfer of value between people, like SWIFT, ACH or simple wire transfers at the bank.
So let’s examine the utility of each use case.
As a form of international currency, Bitcoin’s utility is admittedly at its weakest. There are thousands of companies out there today that accept Bitcoin as a form of payment for goods and services, but these companies are almost exclusively converting those coins to some other currency for payment to their vendors or suppliers. But that brings up a key point to its value as a currency. It’s easily convertible to any other currency.
As Bitcoin gains traction, its utility as an international currency will grow, and as that utility grows, so does the value. The U.S. Dollar’s utility as a currency comes partially from the momentum of time. Bitcoin can benefit from momentum as well with time.
If you’ve researched Bitcoin at all you probably understand how closely it was modeled after gold and other precious metals. The main properties we get from this model is that Bitcoin is…
- scarce — since supply is limited, value will increase with demand
- unable to be printed — price cannot be manipulated to create an artificial bubble/bust cycle — price swings will be true reflection of demand.
- unable to be counterfeited — you can’t just print a fake one out on your printer to pass around
- distributed fairly through mining — newly found coins are distributed widely and dependably leaving no surprise massive influx of new coins.
Since the properties of Bitcoin resemble those of gold, there is utility in Bitcoin much the same as there is in gold. Why would you invest in gold? To hedge against currency debasement, government unrest and economic crisis. Oh, and because they can’t make more of it. For all those same reasons, Bitcoin has utility. For all those same reasons, Bitcoin has value.
Bitcoin is a bank account that you can hide anywhere, take with you in your pocket or copy to a friend across the globe. It’s outside the purview of any government entity. It needs no bank approval. It has no withdrawal and transfer limits. And most importantly, it has no reporting requirements. It’s quite nearly the perfect store of value.
Blodget tackles this argument with the following:
“…Bitcoin is only a ‘store of value’ because, right now, its price keeps going up.”
Bitcoin is not an excellent store of value because the price keeps going up. It’s an excellent store of value because the currency was designed as a scarce commodity causing its adoption to naturally increase value of the currency. When supply is restricted, the demand will effect the value. When this currency is in demand, the price will go up. Therefore, as the currency becomes more mainstream and finds footholds in new markets, the value will continue to rise.
In addition, new laws like FATCA are making it nearly impossible for Americans to bank outside of the USA. Banks are refusing the business of US Citizens for accounts in any currency. FATCA is bad law, but it’s great for Bitcoin. And it won’t be the last bad law to come out of Washington (or Moscow, or Brussels). Laws such as these do nothing other than pump up the utility of Bitcoin and therefore pump up the value of Bitcoin.
But what about the speculative swings in the price of Bitcoin? Won’t that ruin the effectiveness of Bitcoin as a store of value? Blodget thinks so:
“Unlike gold or dollars or other things that have widely accepted utility, Bitcoin’s price is determined entirely by what someone else is willing to pay for it. Right now, because Bitcoin’s price is going up, and Bitcoin is in relatively short supply, people are willing to pay $340 for it. And the ever-increasing demand for Bitcoin will keep driving the price up until people don’t want to buy or hold it anymore.”
No Henry. Bitcoin’s price isn’t determined entirely by what someone else is willing to pay for it. It’s based on the market demand. Sure speculation and hysteria can drive demand to some degree, and when you have low trading volumes, it can swing the price to a large degree. But in the grand scheme of things, the price swings by speculation are blips on the radar over a lifetime. See my article on the true value of Bitcointo see what the price of Bitcoin would be if it took a minor stake in a few real markets. And those prices are absent any speculative bump or hysteria.
Imagine being able to send a 400 troy oz gold bar instantly, over the internet for payment of a service. Barring the invention of transporter technology, it’s not going to happen. But that’s exactly what you can do with Bitcoin. You can immediately send a payment to anyone worldwide within minutes, and do it without the approval of any third party.
I don’t know if you realize this, but banks are getting to be very irritating these days. Just attempt a large wire transfer from of your account to a foreign bank account. Odds of it getting refused are significant. It doesn’t matter if you’re buying your dream retirement property or paying a business expense, it will probably be refused. Have you tried withdrawing or depositing something in the range of $9k a couple times in the span of a few months? Look at getting your account closed.
You may not have personally ran into this yet, but banks are becoming very bad at doing what you are paying them to do. And all of this is happening at the behest of the American government. Guess what? Banks are driving you to use Bitcoin as a transfer network.
With Bitcoin, no one will tell you how much or how often you can deposit or withdraw. They can’t tell you who you can and can’t pay, regardless where they live. Your money is your money and yours to control. In this day and age, there is tremendous utility in that fact. And with utility comes value.
Weisenthal goes on to say about Bitcoin’s intrinsic value,
“Bitcoin? Nada. There’s nothing keeping it being a thing. If people lose faith in it, it’s over.”
I’ve got news for you. If people lose faith in any currency, it’s over. This is not unique to Bitcoin. The U.S. Dollar is in just as much peril as Bitcoin when it comes to “faith”. And if you ask me, the Federal Reserve and the Treasury Department aren’t doing a whole lot to maintain any amount of faith in their currency.
Sure, Bitcoin is new. It doesn’t have the history and longevity of the U.S. Dollar. But its value doesn’t come solely from its momentum. Just like the U.S. Dollar, its value comes from its utility. And there is a ton of utility in Bitcoin.
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