I used to think that Bitcoin was dumb, a scam, and not money; now I don’t. I changed my mind by thinking about my beliefs and ideas about money and asking myself whether they were good ideas that made sense or bad ideas that didn’t. When I realized that they were bad ideas and beliefs that didn’t make sense I changed them.
Nothing in this post is financial advice and I do not know if Bitcoin will go up or down in value. I own some and somewhat wish I had bought more earlier, but given its riskiness I am overall happy with my small allocation to it.
Also, for anyone who doesn’t want to read through what will be very many digressions, I think that Bitcoin is money because other people think it’s money, i.e. the same reason which today makes dollars, euros, and yen money or which made, in the past, a variety of other things money.
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With those caveats out of the way, let us acknowledge that money is a strange phenomenon. It is a very emotional subject that often leads people to erroneous conclusions. Consider for example, income tax refunds. Many people think income tax refunds are good and desirable but in fact they are not. Being excited about an income tax refund is like paying for a $15 item with a $20 bill and then being excited about getting refunded $5 back in change.
Some people will object and say these situations are different, but they are wrong. Actually, they are right but in way that further demonstrates how wrong they are. Getting change after overpaying for something happens immediately, so there is no time value of money involved. Getting change (i.e. a refund) after overpaying your taxes happens over 14 to 66 weeks (depending on when during the year the money was earned, assuming the taxes are due on April 15 of the following year) and definitely involves an opportunity cost on the funds being lent interest free to the government in the interim.
There are some other objections that people will often raise, but they are all wrong too and I don’t have time to discuss them. There is an entire field, behavioral economics, devoted to this subject and I’m only mentioning it as a preface to show how easy it is to come to incorrect conclusions about money due to social, cultural, and psychological factors.
When I first heard about Bitcoin I thought it was weird and that therefore Bitcoin wasn’t money. However, if you look at financial history there is actually nothing unusual about weird things being used as money. Very many weird things have been used as money. Sea shells and beads have been used as money by people in the Americas, Asia, Africa, and Oceania for many centuries. R.A. Radford wrote a famous 1945 paper called The Economic Organisation of a P.O.W. Camp about his own experiences as a prisoner in a Nazi Oflag. Radford gives a very lively account of how cigarettes in his prison camp “rose from the status of normal commodity to that of currency.” Bouts of inflation and deflation, arbitrage, Gresham’s Law, credit and debt—all of the things that typically happen with money happened with cigarettes. It’s not clear to me why Bitcoin can’t be money if sea shells and cigarettes can be.
When I read Satoshi’s whitepaper on Bitcoin I did not (and still do not) fully understand the cryptography used to create the blockchain. This cryptography underpins the proof-of-work algorithm necessary to prevent the problem of double-spending, that is to say of hackers spending a bitcoin and then altering the blockchain so that they can spend the same bitcoin again. I have a vague, childlike understanding of it but not a sophisticated understanding.
But that is also the same level of my understanding of how fiat money is created. I know that what most people consider money, physically tangible objects like paper banknotes and metal coins, so-called M0, is a small percentage of the money supply. I know that M1 and M2 are bigger but I do not know what they are without looking them up.
This also echoes my previous point about weirdness. The system of a proof-of-work blockchain to increase the supply of Bitcoins is pretty weird sounding, but so is the system used in the creation of fiat money. In our fiat money system, when the Federal Reserve (the Fed) wants to increase the money supply it buys debt. Let’s just use treasuries to keep things (relatively) simple. There are treasuries (bonds, bills, and notes), which are promises the government has made to pay dollars in the future to finance spending now. The Fed buys these assets from its primary dealers by crediting the dealers’ correspondent bank accounts with newly created money. Commercial banks, which have accounts at these dealers’ banks, now also have new money, and when they lend to businesses and consumers the new money enters the economy (either as M1 or M2, I’m not going to look it up). When the Fed wants to reduce the money supply all of this happens in reverse as it sells assets: the treasuries leave the balance sheet of the Fed and go back to the dealers and in exchange the amount of money in the economy shrinks.
Treasuries, incidentally, are subject to something called the debt ceiling. Congress spends more money than it receives in taxes and so the difference must be made up for by borrowing, i.e. issuing treasuries. But then, stupidly, Congress has to do a second step and authorize the payment of the treasuries (i.e. the repayment of the debt) if the total amount of the debt gets too big (i.e. goes over the ceiling). Every so often this system comes close to blowing up in spectacular fashion.
Occasionally you will hear talk of the trillion dollar platinum coin thing, which is a theory that has never been tried (I hope they try it) to get around the debt ceiling. Basically the laws surrounding the issuance of paper banknotes and gold and silver coins are very strict, but the laws surrounding the issuance of platinum coins are very loose; essentially, the law is that the Secretary of the Treasury may mint and issue platinum coins in any denomination. Under this theory, the Treasury Secretary could mint a platinum coin and declare it to be worth some arbitrarily large amount, like a trillion dollars (it does not mean, as some people erroneously think, a coin made with a trillion dollars worth of platinum). This coin would then be deposited with the Fed, which would have the same affect in terms of seigniorage as buying a trillion dollars worth of treasuries, and this numismatic profit would then be transferred back to the Treasury to repay the already incurred debt. Whether this is allowed or not is a matter of dispute.
The preceding three paragraphs, by the way, are the “normal” non-scam system of our regular fiat money. Sure, Bitcoin is weird, but is it really that much weirder? It may be 5% weirder, but it’s not orders of magnitude weirder. And the vast majority of people use fiat money quite happily and successfully without any knowledge of the plumbing that the New York Fed’s Open Market Trading Desk does behind the scenes to make it available in their checking accounts.
I will say, as a tangent, that my knowledge of monetary theory is amateurish but my knowledge of the etymology of fiat is very professional. Fiat is the third-person singular present tense subjunctive mood conjugation of the Latin verb fieri, meaning to be done, often used in a jussive sense, let it be done or let there be. Genesis 1:3, which the King James Bible renders as Let there be light, is in the Latin Vulgate translation Fiat lux (the original Hebrew is יְהִי אוֹר and the Septuagint γενηθήτω φῶς). Fiat money evokes this exact same conjuring out of nothingness: let there be money.
But I can see I am testing my readers’ patience and so I will briefly address a few more objections I originally had to the idea of Bitcoin being money and wrap up. I am tempted to refer the curious for more information on these points to the learned Matt Levine’s Money Stuff but I am afraid that doing so might somehow be securities fraud.
1) Bitcoin famously has a limited supply but it is easy to create other cryptocurrencies. This is true, but looking at the market cap of Bitcoin compared to the market cap of other cryptocurrencies indicates which to take seriously.
2) Bitcoin is for fraud, crime, etc. This is largely false as all transactions are publicly recorded on the blockchain. Physical cash banknotes are better for crime but not as scalable at large quantities.
3) Bitcoin is perhaps not a scam but is adjacent to scams (NFTs, memecoins, collapsed exchanges). Also Bitcoin wastes energy, is bad for the environment, and attracts annoying libertarians. These are largely true but also red herrings. They don’t address whether or not Bitcoin is money.
4) Bitcoin is more a store of value than a medium of exchange. This is true and probably not what Satoshi originally had in mind. This also shows the utility of some of the other cryptocurrencies that have built-in incentives to spend rather than save them.
I cannot pinpoint exactly when I changed my mind about Bitcoin, but I remember an analogy that helped me, although I can no longer find the source. The analogy is frequent flier miles. In one sense frequent flier miles are just a volume discount for flying a lot, but they take the form of a currency that is issued by the airlines in exchange for participating in their economic activity and which can traded for other things. In the case of cryptocurrencies, the Bitcoin miners participate in the economic activity of validating blockchain transactions and are issued “frequent flier miles” except there is no specific airline in charge of issuing them, and then the ”miles” can be traded for any other things that people want.
In any event, those are my thoughts on Bitcoin. Whether you are long or short Bitcoin I wish you good luck.
great post / essay Tony !
-- essays looking .. sharp... !!!! !!!!