The Institutionalization of Bitcoin
As institutional adoption of Bitcoin accelerates, what happens to the little guy?
Number go up?
Narratives around Bitcoin and its usefulness abound. Is Bitcoin a new form of electronic cash, as the whitepaper said?
Is Bitcoin savings technology? Black market money? White market money? Inflation hedge? Store of value? Digital economic energy? And, now that institutional buyers are coming in droves, what becomes of Bitcoin now?
Will Bitcoin simply be co-opted into the legacy financial system? Will it just be another “number go up” speculative toy for Wall Street bros to manipulate to their unfair advantage?
Will legions of Goldman and Merril quants lever up Bitcoin to the moon, sell naked positions, and do all the usual muckery they’ve done for the last 100+ years?
Maybe.
Perhaps the more important question is, “What is Bitcoin supposed to solve?”
Economic privacy? Protection from monetary debasement? Is it the new gold? A replacement for fiat? A reserve status upon which new fiat schemes can be made?
It’s a lot to unpack.
Terms of art
One of the big stumbling blocks when discussing economics, and especially the economics of Bitcoin past and present, are the terms used.
Terms like value, time preference, supply, demand and inflation are not scientific terms. They are terms of art, much like legal terms are often terms of art.
The problem with a term of art is that it will often have a common meaning, or understanding that may be apposite, or it may be in conflict with the term of art.
“Trust,” for example, may mean a lot of things to the lay person. In a legal context though, “trust” has a very specific meaning:
A trust is a legal relationship created (in lifetime, or on death) by a settlor when assets are placed under the control of a trustee for the benefit of a beneficiary, or for a specified purpose.
It’s easy to see how a conversation around “trust” could get messy.
Let’s take “supply and demand” in the economic sphere as another example. Many a Bitcoiner will say things like, “The Bitcoin supply is limited, therefore the demand will only increase.”
And, in this context, such a saying may or may not be conflating the available quantity of Bitcoin with the desire to purchase Bitcoin and the economic expression of supply and demand.
I think, however, it is very commonly conflating the former with the latter.
Those familiar with the Austrian School will recognize there is fundamentally no such thing as a “supply side.” There are only two demand sides, with each being a “supplier” to the other.
This is not intuitive and yet, this is the correct understanding of the economic term of art “supply and demand.” One might think this an esoteric point and the implications are still problematic.
It is problematic, because such a mismatch in terminology means two sides to a conversation are not discussing the same thing. Or, as the old saying goes, “The biggest barrier to communication is the illusion it has occurred.”
Perhaps a more correct way to express what’s implied by the notion sketched above is, “Because the available quantity of Bitcoin is constrained, and provided more and more people desire to own Bitcoin, the price will go up.”
This may or may not express the same idea and that’s the point. To say Bitcoin’s number-go-up economics is strictly a function of “supply and demand” mechanics is inaccurate, in a purely economic sense.
However, the difference between the two expressions of this idea is stark.
One expresses what sounds like an economic certainty because of inherent market “dynamics,” while the other expresses uncertainty and caveats the number-go-up thesis with a more nuanced causal relationship.
Put another way, one favors heuristic bias, while the other is cautionary.
What does Bitcoin solve?
To hear it from a “maxi” (and, I freely admit to liberal application of this trope), Bitcoin fixes everything. Bitcoin will fix war. Bitcoin will fix inflation. Bitcoin will fix poverty.
To see it told on Twitter, Bitcoin is the closest thing the world has ever seen to a superhero.
For me, “Bitcoin fixes this” is little bait for discussion.
I fully realize such a statement appears outrageous to the lay person. The process of explaining the rationale I hold for the underlying belief is the Orange Pill™, so to speak.
What Bitcoin solves to me likely differs from what others may think. In a sense, I think I gravitate closest to the Saylorian view of Bitcoin, with some caveats.
To synthesize my perspective, I’d say:
Provided the Bitcoin network stays decentralized and secure, Bitcoin provides a narrow path to maintain stability and preserve necessary and desirable institutions, while slowly and progressively realigning market-wide economic incentives without causing catastrophic inflation.
As you can see, it’s not very Twitter friendly. In fact, given that more than half (54%) of Americans read below the 6th grade level, that perspective is out of reach for most.
For a different context, the sentence scores a 25 on the Flesch-Kincaid readability test. This means that sentence is “Very difficult to read. Best understood by university graduates.”
It also places it out of reach of about 80% of the population. And, that’s just the summary.
Not a great start for a revolution, eh?
Decentralized and secure
As long-time Bitcoin contributor and developer Eric Voskuil has said many times, the idea that Bitcoin is permanent and incorruptible is not correct.
Somehow, Mr. Voskuil has become a pariah among many of the current Bitcoin devotees. I, for one, don’t understand it. I certainly value the man’s insights.
I think it would be foolish not to.
Mr. Voskuil is very dismissive of the Saylorian view of Bitcoin and its role in global finance. From Mr. Voskuil’s perspective, I think that dismissal is completely understandable.
Not that he’ll ever read this, but I imagine he may well dismiss me as a loon along with Mr. Saylor. However, I think my perspective is reasoned and reasonable.
As the old legal axiom goes, “Reasonable minds may differ.”
The entirety of my thesis presumes the Bitcoin network retains its current integrity. If that should be lost due to state interference, collusion, back door shenanigans, or what have you, my thesis falls apart.
It’s not a foregone conclusion those negative outcomes can’t or won’t occur. I do not possess the depth of technical understanding around Bitcoin to accurately evaluate what the true threat of such an outcome is.
My limited understanding from Mr.s Voskuil’s books says it’s a non-zero, non-trivial risk. That said, I am reliant on men like Mr. Voskuil to conscientiously continue building and fighting for the maintenance of Bitcoin’s decentralization and security.
So much for zero-trust, eh?
I merely point this out up top, because as I said earlier, the rest of my thesis rests squarely on the potentially faulty presumption that the Bitcoin network can and will remain decentralized and secure.
It’s an important caveat.
Bitcoin as a reserve asset
It’s important to define how I am using the word “reserve.”
My usage here is different than the concept of a “reserve” in the banking sense. Which is to say, I do not think Bitcoin (or anything for that matter) can serve as a reserve upon which to issue promissory notes for future redemption.
Leaving aside the mechanics and accounting of reserve holdings relative to claims against those reserves, the incentive in such a structure is to always issue more claims than what is held in reserve, whether by deceit or by design (fractional reserves).
This was true in the wildcat banking era, where everything from sheep to wheat to gold and silver were utilized as reserves for paper claim issuance. Sooner or later though, when one promises to exchange a worthless thing for a valuable thing, if the issuer doesn’t have enough of the valuable thing to redeem, the wheels fall off eventually (bank run).
Instead here, what I call a “reserve” of Bitcoin might be more appropriately called a “store” of Bitcoin. Hoarding is the base term, but it carries a negative connotation I’m not fond of.
It is the most accurate though.
So, what purpose would a reserve hoard of Bitcoin serve? In a truly free market, free banking system, hoarding Bitcoin would not provide any utility at all.
However, in all global monetary systems today, money creation and the concomitant compulsory use laws (legal tender) are by fiat. That power of creation and compulsory use is monopoly controlled by the sovereign (government).
And, in all cases, the sovereign abuses that to the advantage of the sovereign and those that enjoy close economic relationships to the sovereign.
This was laid bare in the 2008 financial collapse with the advent of the fascist concept of “Too Big to Fail” financial institutions. They were not too big to fail, save for the massive economic distortions their unchecked manipulation of OTC derivatives created.
Which meant, allowing them to fail would have caused a cascade of liquidations and failures that would have taken years to recover from, both economically and politically.
So, what the term really meant was the malinvestment from the preceding 40 years of monetary debasement and moral hazard was so metastasized with the “American Way of Life” the Wall Street bros would have found themselves on the chopping block after the economic dislocation that would have followed.
Which leads to the present conundrum I think Bitcoin as a hoarding reserve may fix. One of the unique properties of Bitcoin is it has no theoretical price cap.
One Bitcoin can just as easily trade for $10 as it can for $10 billion. This is a very unique property among assets. Of course, like anything of “value,” that value is subjective. In the case of traditional assets, the subjective value is protection against monetary debasement from the sovereign.
The rough sketch idea being, if you have an excess of legal tender — whether from savings, business profit, even theft or plunder — if the purchasing power of your legal tender is being eroded by the sovereign, the smart thing to do is buy something with that legal tender that rises in nominal value as close to, or superior to the rate of debasement.
Which again implies hoarding.
Modernly how this manifests is people, businesses, insurance companies, finance companies, pensions, and local and county governments all purchase and hold assets they neither want, nor need except for the protection they provide from monetary debasement.
Take, for instance, a local municipality. They take in a certain amount of taxes to fund local operations, like salaries, pensions, equipment purchases, utilities, etc.
If there were no monetary debasement, the accounting would be quite simple. Budget so there is some tax money left over, put that in savings and build that savings up to pay for future liabilities, with a cushion for a “rainy day.”
Monetary debasement makes this impossible.
For, external costs will continue to rise while the currency they hold in savings continues to lose purchasing power. Thus, their problem is two-fold: rising costs and declining purchasing power.
In order to offset this without continually raising taxes, which is politically impractical (impossible beyond a certain threshold), they must instead “invest” in unneeded and unwanted:
- Sovereign debt instruments
- Land/real estate holdings
- Fractional ownership in companies (equities)
Or, they must themselves issue debt instruments to fund operations.
This is “kicking the can down the road,” with the expectation that future tax revenues will be able to service debt and interest payments to bond-holders.
Bitcoin fundamentally alters this arrangement.
The combination of Bitcoin’s low available quantity coupled with its zero-trust, egalitarian access network and (theoretical) immutability make it an ideal hoarding instrument to fulfill the objectives currently served by the aforementioned “assets.”
This is just one example. Reflect on the fact that, in America today, over 40% of single family homes are rentals. Which begs the question, why do so many people own houses they do not need to live in?
The answer is simple: Income and expected appreciation.
Put another way, the rate of monetary debasement is so great, someone who has the credit worthiness, the liquid capital (or both) is willing to take on the risks and responsibilities of owning an otherwise depreciating asset they don’t need in order to preserve some semblance of their purchasing power over time.
The knock-on effect of this is, monetary debasement artificially removes housing units from the market.
One can only speculate, but if those landlords were given an opportunity to instead save and/or increase their purchasing power over time by buying and hoarding an asset with no-counterparty risk, no depreciation risk, and indeed, no storage costs, wouldn’t that seem a better deal?
The same is true at the small business level, as it is true at the large corporate level. As Mr. Saylor has pointed out, in order to survive and thrive long-term as a S&P500 company, it requires an extraordinary effort.
Continual debt cycling, stock buybacks, acquisitions and despite all the shenanigans, 493 of the S&P500 companies were not able to keep up with the massive amount of monetary debasement that occurred during and after 2020.
Meaning, they’re all slowly going broke. So, those companies are forced to:
- Cut costs
- Degrade quality
- Reduce workforce
- Increase prices
All of which cause a “doom loop” where the further and further down the economic chain you go, the worse off those on the lower end of the economic ladder become.
In essence, in the absence of the very desirable and hoard-able Bitcoin reserve asset, the price of everything must rise to account for monetary debasement.
But, if hoarded as savings, Bitcoin instead becomes an asset where debasement can be safely shunted, while slowly allowing for utility assets, like homes, to depreciate.
Likewise, companies can refocus on quality and attracting customers because they are no longer constrained by rising prices and declining purchasing power, because their Bitcoin holdings are instead providing a debasement hedge.
Indeed, even a central bank itself could benefit from Bitcoin on their books, rather than the toxic assets they are currently holding to infinity.
Meaning, Bitcoin as a reserve hoarding asset harms no one.
Even those who do not, or cannot hold Bitcoin will benefit from declining costs across the economy. Moreover, even a small hoarder will benefit the same as the large hoarders, just at a lower scale.
Sovereign abuse
This, of course, presumes the sovereign will continue to debase fiat. I think, as a purely historical matter, this is a high-probability assumption.
The beauty of Bitcoin hoarding is, it requires no major change to the system writ large. Meaning, we don’t need a violent overthrow and rebuilding process.
Current fiat systems are already well integrated into the global economy. Taxes can still be collected. Groceries can still be bought. Busses will run, cargo will be delivered and life in this amazing, fragile, inter-connected, electrically dependent world we have collectively created can continue.
There will be no need for draconian austerity measures. No bread lines. No riots in the streets. No banking collapses. Just a slow-grind shift away from the catastrophic mistakes of the sovereign and the central banks for the last 50+ years.
Will it end the security state overnight? No.
Will it solve all political problems overnight? No.
Will it prevent geo-political tinkering for the benefit of the defense industry overnight? No.
Will it solve the health crisis overnight? No.
Will those things gradually become better, less relevant, less profitable and less common?
I think so.
Conclusion
Number-go-up is often mocked for the personalities that promote it. Those folks often can see no further than a life of leisure, while peacocking with a Lamborghini.
I think this grossly underestimates what number-go-up might truly influence and change. I appreciate the idea that a faction of the Bitcoin republic is hostile to institutional participation.
The true vision of the cypher-punks certainly did not envision Bitcoin becoming an asset to heal and repair a very dysfunctional and broken monetary system.
Their clarion call is directed exclusively on a censorship-resistant medium of exchange, which is, of course a noble pursuit. Not all of us live in a country that allows for freedom of expression, transaction, or even movement.
Yet, in the grand scheme, many of those regimes only exist through tacit or explicit support from countries that do enjoy those freedoms internally. Likewise, the incentive to destabilize and interfere in foreign relations is also a readily observable response to sovereign debasement.
Not to mention, if Bitcoin is truly valuable as a hoard-able reserve, and can remain censorship resistant to its ownership, then it can also help serve to lift those up in even the most draconian nations.
I think this is a hopeful and promising narrative.
Not just for Bitcoin, but for everyone. As I said, I think it is a narrow path and requires the network remain decentralized and secure.
I’m willing to take the risk. I don’t see any other options.
These are just my opinions. I’m not a financial advisor, this isn’t financial advice, and always DYOR. Following any of these ideas might cause you to lose all of your money. I am 100% serious about that. I like tinkering with this stuff, but I’m on record acting like a total baboon. Invest accordingly.
Until next time, be safe, be smart and be sure to tie the camel.
