diff --git a/claims/is-bitcoin-currency.md b/claims/is-bitcoin-currency.md index 44a23e3..4bd241a 100644 --- a/claims/is-bitcoin-currency.md +++ b/claims/is-bitcoin-currency.md @@ -17,6 +17,7 @@ Since bitcoin is [deflationary](../concepts/deflationary.md) it encourages hordi 1. Diehl, Stephen. 2021a. ‘The Non-Innovation of Cryptocurrency’. 7 July 2021. https://www.stephendiehl.com/blog/non-innovation.html. 1. ———. 2021b. ‘The Intellectual Incoherence of Cryptoassets’. 7 November 2021. https://www.stephendiehl.com/blog/crypto-absurd.html. 1. ———. n.d. ‘The Case Against Crypto’. Accessed 17 February 2022. https://www.stephendiehl.com/blog/against-crypto.html. +1. Eich, Stefan. 2018. ‘The Currency of Politics’. The Political Theory of Money from Aristotle to Keynes. 1. Gerard, David. 2017. Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts. David Gerard. 1. Kolchinski, Alex. 2022. ‘Crypto Is an Unproductive Bubble’. Alex Kolchinski (blog). 18 March 2022. https://alexkolchinski.com/2022/03/18/crypto-is-an-unproductive-bubble/. 1. Krugman, Paul. 2018. ‘Bitcoin Is Basically a Ponzi Scheme’. The Seattle Times 30. diff --git a/concepts/fiat-money.md b/concepts/fiat-money.md new file mode 100644 index 0000000..8b9bba4 --- /dev/null +++ b/concepts/fiat-money.md @@ -0,0 +1,13 @@ +# Fiat Money +The contemporary monetary system where [money](money.md) is issued by the state via a [central bank](central-banks.md) without any backing by physical [commodities](commodity.md) such as precious metals. The prefix "Fiat" money is an esoteric name sometimes used in historical scholarship but rarely in practice, instead because of its ubiquity typically money is synonymous with "fiat money." + +Colloquially the legitimacy of the [currency](currency.md) is from being declared by "fiat", thus the namesake. In practice the legitimacy of a national currency comes from both a collective social contract about the rule of law and its utility to fulfil the properties of [money](money.md), price stability, and capacity to spur economic growth. + +Fiat money notably has a *variable supply* since the central bank can expand or contract the money supply through various means such as adjusting lending terms of commercial banks, quantitative easing, and modifying interest rates. These activities are the primary mechanisms by which price stability and [inflation](inflationary.md) targeting are implemented. A dynamic money supply is a core principle of [Keynesianism](keynsian-economics.md). + +See also [dollar](dollar.md) and [central bank](central-banks.md). + +## References +1. Varoufakis, Yanis. 2021. ‘What Is Money, Really? And Why Bitcoin Is Not the Answer (Even If Blockchain Is Brilliant & Potentially Helpful in Democratising Money)’. Yanis Varoufakis (blog). 2 August 2021. https://www.yanisvaroufakis.eu/2021/08/02/what-is-money/. +1. Eich, Stefan. 2018. ‘The Currency of Politics’. The Political Theory of Money from Aristotle to Keynes. +1. Corradi, Fiammetta, and Philipp Höfner. 2018. ‘The Disenchantment of Bitcoin: Unveiling the Myth of a Digital Currency’. International Review of Sociology 28 (1): 193–207. https://doi.org/10.1080/03906701.2018.1430067. \ No newline at end of file diff --git a/guide/index.md b/guide/index.md index 7744639..1b53168 100644 --- a/guide/index.md +++ b/guide/index.md @@ -15,6 +15,7 @@ Understand the terminology used to describe crypto and web3. * [Money](/concepts/money.md) * [NFT](../concepts/nft.md) * [Private money](../concepts/private-money.md) +* [Fiat money](../concepts/fiat-money.md) * [Deflationary asset](../concepts/deflationary.md) * [Sound money](../concepts/sound-money.md) * [Ponzi scheme](../concepts/ponzi-scheme.md) diff --git a/notes/market-fundamentalism.md b/notes/market-fundamentalism.md index a494210..2a75b88 100644 --- a/notes/market-fundamentalism.md +++ b/notes/market-fundamentalism.md @@ -20,10 +20,11 @@ In episode #2 of the series, Rufus Pollock and Stephen Diehl explore a common in The trader or market fundamentalist view likely represents a majority of interest and activity in crypto. The ideology encompasses the viewpoint that crypto is about **making money** i.e. that crypto investing and trading can make those who engage in it a lot of money. More deeply it is the view that the unfettered and unregulated nature of crypto-markets is a good thing and represents a "freer" and better form of financial markets. Rufus and Stephen 'steel man' the market fundamentalism position, exploring four key claims: -1. Unregulated markets allow companies to so what they're supposed to do: maximize returns to shareholders. -2. Markets are likeable to evolution; they have no moral quality. -3. Crypto-trading is a public good -4. There is no non-public disclosure about the risks of these assets, everyone is going in with their eyes open that this is the wild west. + +1. [Unregulated](../concepts/regulation.md) markets allow companies to so what they're supposed to do: maximize returns to shareholders. +2. [Markets](../concepts/market.md) are likeable to evolution; they have no moral quality. +3. Crypto-trading is a [public good](../concepts/public-goods-problem.md) +4. There is no [non-public](../concepts/asymmetric-information.md) disclosure about the risks of these assets, everyone is going in with their eyes open that this is the wild west. Rufus and Stephen end their conversation with an analysis of the market fundamentalist position and the associated claims. @@ -31,20 +32,19 @@ Rufus and Stephen end their conversation with an analysis of the market fundamen ## What type of asset is a crypto token? How do we value it? Is there a comparable asset? -* Zero-coupon perpetual bond? -* Currency you wouldn’t want to spend? -* Equity with no cash flows or dividends? https://en.wikipedia.org/wiki/Blue_sky_law -* Commodity with no use value? -* Exchange traded pyramid schemes? -* Derivative contract with no underlying? -* Libertarian performance art split into 21 million pieces https://en.wikipedia.org/wiki/Monte_Carlo_Bonds -* If we value it as a "block box" financial product (ala Nassim Taleb) we find it’s present value can only be zero. https://www.fooledbyrandomness.com/BTC-QF.pdf +* Zero-coupon perpetual [bond](../concepts/bond.md)? +* [Currency](../concepts/currency.md) that discourages spending? +* [Equity](../concepts/stock.md) with no cash flows or dividends? https://en.wikipedia.org/wiki/Blue_sky_law? +* [Commodity](../concepts/commodity.md) with no [use value](../concepts/use-value.md)? +* Exchange traded [pyramid scheme](../concepts/pyramid-scheme.md)? +* [Derivative](../concepts/derivative.md) contract with no underlying? +* [Libertarian](../concepts/libertarianism.md) performance [art](../concepts/art.md) split into 21 million pieces https://en.wikipedia.org/wiki/Monte_Carlo_Bonds +* If we value it as a "block box" [financial asset](../concepts/financial-asset.md) (ala Nassim Taleb) we find it’s [present value](../concepts/present-value.md) can only be zero. https://www.fooledbyrandomness.com/BTC-QF.pdf ## Who is Trading Crypto? * The day-trader in the pub, WallStreetBets demographic. - * [Barrett, Claer. ‘Why Young Investors Bet the Farm on Cryptocurrencies’. Financial Times, 2021.](https:www.ft.com/content/162839aa-0437-478b-a4d4-4a8d7ab71458): - + * [Barrett, Claer. ‘Why Young Investors Bet the Farm on Cryptocurrencies’. Financial Times, 2021.](https:www.ft.com/content/162839aa-0437-478b-a4d4-4a8d7ab71458): > "I’ll either be rich, or wrong." This is how Sam, a 29-year-old cryptocurrency enthusiast I interviewed on this week’s Money Clinic podcast, summarized his strategy for investing the last £2,000 of his savings in a hugely volatile and unregulated asset class. Claiming that he's not a natural risk taker, Sam has never set foot inside a casino or put money on a horse. "To me, that seems stupid, like you’re throwing money away." He has never considered investing in stocks and shares. Being self-employed, he's never paid into a pension or thought about setting up a self-invested personal pension (Sipp). "No one’s ever given me that kind of information," he says. So why is he prepared to risk his spare cash betting on crypto? Sam found out his younger brother had turned a £3,000 investment into £30,000 within four years — money he now intends to use as a property deposit. "I was very surprised and it made me feel a bit stupid . . . why aren’t I doing this?"* * cf low bets in general: tiny but possible asymmetric returns. A regressive tax or distributed lottery. * Quants and Hedge funds @@ -58,11 +58,11 @@ Rufus and Stephen end their conversation with an analysis of the market fundamen ## Why is the Crypto-Can-Make-Me-Money Position So Interesting to Examine? -* Likely represents a majority of interest and activity in crypto (and even DAOs) from the day-trader in the pub up to the wall street trader -* Generally not brought up explicitly as much in the crypto / web3 discussion (for obvious reasons: it is not as substantive or attractive position to espouse publicly) +* Likely represents a majority of interest and activity in crypto (and even [DAOs](../concepts/dao.md)) from the day-trader in the pub up to the wall street trader +* Generally not brought up explicitly as much in the crypto / [web3](../concepts/web3.md) discussion (for obvious reasons: it is not as substantive or attractive position to espouse publicly) * The political imaginaries aren’t there - "I just want to make money", "Greed is good" * Consequences and externalities be damned - * Hyper-capitalist + * Hyper-[capitalist](../concepts/capitalism.md) * At the extreme: "Life is nothing but a competition to be the criminal rather than the victim." * However, may actually account for a good portion of the interest and even political/social support for this area * Legitimizing segment especially for regulators ("hey even Goldman Sachs or JP Morgan are involved, this must be a legitimate area / industry") @@ -75,41 +75,41 @@ Rufus and Stephen end their conversation with an analysis of the market fundamen * Now we get to redefine shareholder to mean token holder, without any regulatory baggage from traditional markets. * Line must go up at any cost. * Crypto products are risk assets that have no fundamentals, but that’s not necessarily a problem because you can make money on trading them. - * There other financial products (ETNs - exchange traded notes, OTM put options, volatility swaps) many of which are intrinsically negative-sum and high-risk as well, these are allowed in markets … so why shouldn’t crypto be. + * There other financial products (ETNs - exchange traded notes, volatility swaps) many of which are intrinsically negative-sum and high-risk as well, these are allowed in markets … so why shouldn’t crypto be. * [Credit Suisse defends controversial financial product at the center of the market turmoil](https://www.cnbc.com/2018/02/07/credit-suisse-defends-controversial-xiv-etn-amid-market-turmoil.html) * Markets are likeable to evolution; they have no moral quality. - * Markets are a mechanism likeable to evolution: they select for fitness and success - * If I'm allowed to trade products that are massively asymmetric and disadvantageous to retail traders (individual, non-professional market participants) then I can and I will => it will eliminate those inefficient players (it punishes unfitness and rewards fitness) + * Markets are a mechanism likeable to evolution: they [select](../concepts/price-formation.md) for fitness and success + * If I'm allowed to trade products that are massively [asymmetric](../concepts/asymmetric-information.md) and disadvantageous to retail traders (individual, non-professional market participants) then I can and I will => it will eliminate those inefficient players (it punishes unfitness and rewards fitness) * Even if I know it’s a [greater fool asset](../concepts/greater-fool-theory), if I have access to non-public information and more capital I can (and should) use it and exit before the other fools. - * Some people legitimately did make money trading on South Sea Bubble, Dotcom Bubble, Tulip Mania + * Some people legitimately did make money trading on [bubbles](../concepts/bubble.md): South Sea Bubble, Dotcom Bubble, Tulip Mania * These booms and busts are a natural part of market cycles * Crypto-trading is a public good - * Tokens are an investment product that exists to secure compute cycles for people to run computation on a globally distributed state machine using the market to create game theoretic incentive to run other’s computations as a “public good”. That state machine has an operating cost and that creates synthetic demand for people who need to buy it, at any cost, to run computation on the chain. - * We can treat crypto tokens as a synthetic hedge against the entire class of assets with fundamentals. They're a place to park money in times of loose monetary policy to chase yield when there's nothing else left to buy, because other funds circularly trade this thesis. - * I’m just participating in price discovery of a new asset class. + * Tokens are an investment product that exists to secure compute cycles for people to run computation on a globally distributed state machine using the market to create game theoretic incentive to run other’s computations as a “public good”. That state machine has an operating cost and that creates [artificial demand](../concepts/artificial-demand.md) for people who need to buy it, at any cost, to run computation on the chain. + * We can treat crypto tokens as a synthetic hedge against the entire class of assets with [fundamental value](../concepts/fundamental-value.md). They're a place to park money in times of loose monetary policy to chase yield when there's nothing else left to buy, because other funds circularly trade this thesis. So it may be self-fulfilling. + * I’m just participating in [price discovery](../concepts/price-formation.md) of a new asset class. * There is no non-public disclosure about the risks of these assets. Everyone is going in with their eyes open that this is the wild west. - * If the market allows manipulation (pump and dumps, insider trading, wash trading) this is public knowledge and it is reflected in the price formation of the assets. + * If the market allows [market manipulation](../concepts/market-manipulation.md) ([pump and dumps](../concepts/pump-and-dump.md), insider trading, [wash trading](../concepts/wash-trading.md)) this is public knowledge and it is reflected in the price formation of the assets. * Institutional investors should be able to leverage their AUM to take high-risk positions just like they are in other private markets. If retail wants to participate with the “sharks” then it’s on them to understand the risks not on the people they’re trading against. The fiduciary mandate of hedge funds is to take positions on behalf of their LPs in beta uncorrelated positions. ## Analyzing the Market Fundamentalism Position * Everything that has been illegal for 80 years is suddenly allowed. Exchanges are basically like bucket shops from the 1920s. Everything is allowed: - * Wash-trading - * Front-running + * [Wash trading](../concepts/wash-trading.md) + * [Front running](../concepts/front-running.md) * Painting the tape - * Insider trading + * [Insider trading](../concepts/asymmetric-information.md) * Arbitrarily halting trading - * Price manipulation and order book tampering + * Price manipulation and [order book](../concepts/order-book.md) tampering * Pump and dumps * Canceling orders arbitrarily - * Refusing cash withdrawals + * [Refusing cash withdrawels](../concepts/counterparty-risk.md) * Offering 125x leverage on options * Clearing house and in-house prop trading are in the same room * Exchanges have their own proprietary trading arm * Trading against their own clients -* Markets work best when we have abundant public information and minimize fraud and collusion in price formation. +* Markets work best when we have abundant public information and minimize fraud and collusion in [price formation](../concepts/price-formation.md) * https://excalidraw.com/#room=6319a3e121dbdb6edf28,0u9Ht45kupjqkHD8kCuUAQ -* We have no idea how much leverage is baked into the entire market, induced by products like unbaked stablecoins which can seemingly produce limitless amounts of unsecured debt products on demand. +* We have no idea how much [leverage](../concepts/leverage.md) is baked into the entire market, induced by products like unbaked [stablecoins](../concepts/stablecoin.md) which can seemingly produce limitless amounts of unsecured debt products on demand. * [Tether minted most USDT to just 2 firms — Alameda and Cumberland](https://protos.com/tether-minted-usdt-stablecoin-crypto-two-alameda-cumberland/) * What does that lead to? * Inequality (money flows to the sharks) @@ -120,13 +120,13 @@ Rufus and Stephen end their conversation with an analysis of the market fundamen * In markets - assuming that markets esp financial markets have some value then undermining faith in them is problematic. Cf the 1920s/1930s which led to much of the market regulations we have today * You may think this is a good if you are anarchist-nihilist * Just because you can trade something doesn't mean it’s good for the world (opium trade, slave trade, asbestos) - * Moral hazard - public is incentivized to take on disproportionate risk expecting a bailout + * [Moral hazard](../concepts/moral-hazard.md)- public is incentivized to take on disproportionate risk expecting a bailout * A deformation of character: we become enslaved to the idea of getting rich quick (cf Salgado). Capitalist alienation -* Terribly pathological form of capitalism that doesn't result in price formation on collective enterprise, goods or services. Funds are betting on financial fantasy castles in the sky detached from any day to day reality of human life. - * What is the purpose of public markets then? -* A captive market for “fictitious commodities” (Marxist term) that is controlled by opaque unregulated market making and an economic cartel. +* Terribly pathological form of [capitalism](../concepts/capitalism.md) that doesn't result in price formation on collective enterprise, goods or services. Funds are betting on financial fantasy castles in the sky detached from any day to day reality of human life. + * What is the purpose of public [markets](../concepts/market.md) then? +* A captive market for [ficticious commodities](../concepts/ficticious-commodity.md) that is controlled by opaque unregulated market making and an economic [cartel](../concepts/cartel.md). * This is great if you're inside the cartel. Not so great if you aren’t. - * Wealth transfer from public to insiders is all but guaranteed by the information asymmetry. + * Wealth transfer from public to insiders is all but guaranteed by the information [asymmetry](../concepts/asymmetric-information.md). ## Concepts Covered * [artificial-scarcity](../concepts/artificial-scarcity.md) diff --git a/notes/neo-metallism.md b/notes/neo-metallism.md index 4f051e8..31051b1 100644 --- a/notes/neo-metallism.md +++ b/notes/neo-metallism.md @@ -18,12 +18,12 @@ In episode #1 of our ongoing deep dive into web3 and crypto, Rufus Pollock and S In this episode, Rufus and Stephen explore the neo-metallist position, dividing the position into core claims and subclaims: -1. The Gold Standard is Good -1a) Managerial Argument: Government/central bank (CB) intervention in the money supply will inevitably lead to inflation. -1b) Philosophical Argument: Government/CB intervention in the money supply is inherently undemocratic. It imposes the will of the few on the many so undermines freedom. +1. The [Gold Standard](../concepts/gold-standard.md) is Good + - 1a) Managerial Argument: Government/[central bank](../concepts/central-banks.md) (CB) intervention in the money supply will inevitably lead to [inflation](../concepts/inflationary.md). + - 1b) Philosophical Argument: Government/CB intervention in the money supply is inherently undemocratic. It imposes the will of the few on the many so undermines freedom. 2. The Bitcoin Standard is Better: -2a) Bitcoin is Like Gold: Bitcoin shares the features of gold which make it a good choice for a currency (or something to peg currency to). -2b) Bitcoin is Better Than Gold: Bitcoin has specific features which make it a better choice than gold for this purpose. + - 2a) Bitcoin is Like [Gold](../concepts/gold.md): Bitcoin shares the features of gold which make it a good choice for a currency (or something to [peg](../concepts/currency-peg.md) currency to). + - 2b) Bitcoin is Better Than Gold: Bitcoin has specific features which make it a better choice than gold for this purpose. Rufus and Stephen then evaluate the neo-metallism position, before ending with a note on trust. @@ -32,7 +32,7 @@ Rufus and Stephen then evaluate the neo-metallism position, before ending with a The term neo-metallism stems from metallism, a school of thinking which relates to the connection between money and some form of commodity. -Neo-metallism argues that cryptocurrencies, and in particular Bitcoin, can and should be the “new gold” - it should be used to fix the monetary supply to the value of this new asset. Just as under the gold standard the value of a given unit of currency (e.g. a pound or dollar) was based on a fixed quantity of gold, neo-metallists argue the value of a unit of currency should be based on a fixed amount of Bitcoin. +Neo-metallism argues that cryptocurrencies, and in particular Bitcoin, can and should be the [new gold](../claims/digital-gold.md) - it should be used to fix the monetary supply to the value of this new asset. Just as under the gold standard the value of a given unit of currency (e.g. a pound or dollar) was based on a fixed quantity of gold, neo-metallists argue the value of a unit of currency should be based on a fixed amount of Bitcoin. @@ -52,15 +52,15 @@ Neo-metallism argues that cryptocurrencies, and in particular Bitcoin, can and s ### Why the Gold Standard: Fiat Money, Sound Money and the Gold Standard -* The Austrian school of economics regards gold as a (possibly only) example of "sound money" because it is immune to government intervention in the supply, effectively by the laws of physics. It cannot be “debased” or changed. (Aside: Of course, governments have found ways to "debase" gold-based currencies -- usually by altering the coinage in various ways). -* Fiat money allows for both variable supply and demand with the goal of maintaining price stability and targeting a desired inflation amount which encourages productive enterprise. Historically, going all the way back to the invention of banking in Florence, there have been examples of mismanaged fiat currencies which have not managed either their supply or demand properly and spun into either deflationary or inflationary spirals and the public lost trust in the notes and their value become illusory. -* The Austrians assert that government intervention in "business cycles" is unnatural because free market forces will naturally correct supply and demand imbalances and that recessions and manias are both desirable and natural events. +* The [Austrian](../concepts/austrian-economics.md) school of economics regards gold as a (possibly only) example of "sound money" because it is immune to government intervention in the supply, effectively by the laws of physics. It cannot be “debased” or changed. (Aside: Of course, governments have found ways to "debase" gold-based currencies -- usually by altering the coinage in various ways). +* [Fiat money](../concepts/fiat-money.md) allows for both variable supply and demand with the goal of maintaining price stability and targeting a desired inflation amount which encourages productive enterprise. Historically, going all the way back to the invention of banking in Florence, there have been examples of mismanaged fiat currencies which have not managed either their supply or demand properly and spun into either deflationary or inflationary spirals and the public lost trust in the notes and their value become illusory. +* The Austrians assert that government intervention in "business cycles" is unnatural because free market forces will naturally correct supply and demand imbalances and that recessions and [manias](../concepts/market-mania.md) are both desirable and natural events. * The hard monetarist perspective views any intervention in the supply dynamics of currencies as inevitably leading to inflation which is harmful to the free market and commerce. * Milton Friedman famously said, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output." * Centralized intervention in the markets turns economic influence into political power and financial rewards based on non-public information. This in turn is worse than centrally planned economies as it doesn’t allow for accurate price formation of assets and ultimately leads society into a loss of freedom, tyranny and a state of serfdom. * Money should be put in the hands of the free market, not the state. - * Private money is not only desirable, it is inevitable because hard “commodity-based'' money will inevitably replace soft money. Gresham’s law - * Cantillon Effect - Inflation is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary and unfair benefits to people who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings. Inflationary fiat money is thus a tax on people who sell their labor for wages and don’t hold assets and disincentivizes economic activity, encourages financial speculation, and results in market consolidation. + * Private money is not only desirable, it is inevitable because hard “[commodity](../concepts/commodity.md)-based'' money will inevitably replace soft money. Gresham’s law + * Cantillon Effect - [Inflation](../concepts/inflationary.md) is not simply an average rise in prices. Prices do not rise proportionally or simultaneously. This results in arbitrary and unfair benefits to people who have not created any economic value and detriment to others who have not destroyed anything of economic value by destroying savings. Inflationary fiat money is thus a tax on people who sell their labor for wages and don’t hold assets and disincentivizes economic activity, encourages financial speculation, and results in market consolidation. ## Steel-Manning the Neo-Metallist Position @@ -77,7 +77,7 @@ Bitcoin is Better * Bitcoin serves the three functions of a currency: 1. It can be a unit of account in that it’s a standard and divisible unit of measurement of market value (i.e. it can be used to signal what something is worth). 2. It can be a medium of exchange in that we can use it as an intermediary instrument to transact for goods and services. - 3. It can act as a store of value in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss. + 3. It can act as a [store of value](../concepts/store-of-value.md) in that it (at least ideally) retains its purchasing power over time, such that we can retrieve the value of our investment at a later date without making a significant loss. * Bitcoin shares three other important characteristics with gold: 1. Scarcity: Bitcoin is artificially scarce, just as gold is naturally scarce. There is a hard limit of 21 million coins baked into Bitcoin’s design. This makes it inherently deflationary, just like gold. 2. Universality: Bitcoin shares gold’s “universality” due to its prominence in the crypto sphere. Just as gold is the standout element suited to peg currency to, so Bitcoin is the only standout cryptocurrency due to it being the original and most prominent. @@ -91,12 +91,12 @@ Bitcoin is Better 'The Gold Standard is Good' -* This position stems from the Austrian school of economics. It is a fringe economic position and not one supported by most economists. +* This position stems from the [Austrian](../concepts/austrian-economics.md) school of economics. It is a fringe economic position and not one supported by most economists. * The Managerial Argument - * Moderate inflation is actually positive: it encourages spending which stimulates the economy (this is the crux of Keynesianism). + * Moderate inflation is actually positive: it encourages spending which stimulates the economy (this is the crux of [Keynesianism](../concepts/keynsian-economics.md)). * Moderate inflation is far preferable to the alternative of the gold standard, as the gold standard is inherently deflationary. * The Quantity Theory of Money states: MV = PY where M = money supply, V = velocity of money in circulation, P = price level and Y = real GDP (i.e. goods and services transacted in the economy). If M remains fixed, as it must under the gold standard, then increases in real GDP will inevitably lead to a fall in the price level. - * This is problematic because it leads to hoarding. Under deflation prices fall, so it is always rational for me to hoard rather than spend my currency as much as possible, as it will be worth more tomorrow than it is today. This in turn takes yet more money out of the supply, risking deflationary spirals which threaten economic productivity - if no-one wants to buy anything then we can’t fund economically and socially productive activities. + * This is problematic because it leads to hoarding. Under deflation prices fall, so it is always rational for me to hoard rather than spend my currency as much as possible, as it will be worth more tomorrow than it is today. This in turn takes yet more money out of the supply, risking deflationary spirals which threaten economic [productivity](../concepts/productive-asset.md) - if no-one wants to buy anything then we can’t fund economically and socially productive activities. * While excessive inflation is bad and governments/central banks have made errors in the past, this has been rare. Historically most have quite easily kept inflation under control. * The flexibility offered by the ability for governments/central banks to intervene is highly useful, and worth the risk of error. Most obviously, they can stabilise in the face of shocks, for example, a pandemic. This was the reason we switched to fiat currency in the first place. * Paper money was issued as an emergency measure in Spain, during the conquest of Granada (1482-1492). @@ -111,22 +111,22 @@ Bitcoin is Better * Bitcoin cannot function as a medium of exchange. The transaction throughput is so small that it doesn't work as a global system of currency - it can't process transactions fast enough.This is inherent to the proof-of-work process Bitcon uses to verify its transactions. This incapacity is therefore baked in. * Bitcoin does not appear to hold potential as a store of value given its extremely high price variance. * Gold, on the other hand, has historical precedent as a store of value in economic insecurity; its price has proven to be better insulated from broader economic dynamics than many other asset types. - * If Bitcoin were to behave as a store of value it would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen. + * If Bitcoin were to behave as a [store of value](../concepts/store-of-value.md) it would have to abandon hypervolatility, and there is no easily identifiable economic mechanism for this to happen. * 'Bitcoin Functions Better Than Gold' * Bitcoin being digital does not mean it is without its costs. - * The extraction, transport and storage costs associated with gold are outweighed by massive Bitcoin mining costs. The “proof-of-work” mechanism used to validate transactions and undertake mining for Bitcoin requires a huge amount of electricity (costly and environmentally damaging). This verification process creates significant friction around transactions - the system is very slow, particularly when lots of people are using it. - * Bitcoin, unlike traditional commodities, has a negative price elasticity of demand - demand goes up with price, not down. For this reason, Bitcoin looks like a speculative bubble, which at some point will inevitably crash. + * The extraction, transport and storage costs associated with gold are outweighed by massive Bitcoin mining costs. The [“proof-of-work” mechanism](../concepts/consensus-algorithm.md) used to validate transactions and undertake mining for Bitcoin requires a huge amount of electricity (costly and environmentally damaging). This verification process creates significant friction around transactions - the system is very slow, particularly when lots of people are using it. + * Bitcoin, unlike traditional commodities, has a negative price elasticity of demand - demand goes up with price, not down. For this reason, Bitcoin looks like a [speculative](../concepts/speculation.md) [bubble](../concepts/bubble.md), which at some point will inevitably crash. * States can synthetically stimulate demand for a single, fiat currency by demanding tax in this currency, ensuring the whole system works and that the value of such currency can never drop to zero. In other words, there is a clear mechanism to guard against value bottoming out. The same cannot be said for cryptocurrencies such as Bitcon. * Bitcoin no longer shares gold’s uniqueness. * Lots of new “alt coins” - new alternatives to Bitcoin - are being minted, meaning the cryptocurrency market is now crowded with competitors. * High numbers of different coins also creates inflationary effects - the very thing stores of value are intended to guard against. * Single currency systems were adopted as these are significantly more efficient. A single price in a single currency allows far easier exchange of goods. Having multiple issuers of currency adds friction to trade, as one must convert the value of a given object between currencies before exchange can take place. - * The history of large issuances of private money isn't good.These systems are subject to fraud and a general breakdown of trust. If any bank can issue its own banknotes, how does one know which bank is reliable and which isn’t? + * The history of large issuances of private money isn't good.These systems are subject to fraud and a general breakdown of trust. If any bank can issue its own [private bank notes](../concepts/private-money.md), how does one know which bank is reliable and which isn’t? ## A Final Note on Trust -* In the world of Bitcon, and blockchain more generally, replacing interpersonal trust with cryptographic verification mechanisms is seen as positive; we no longer need trust: in states, governmental institutions or one another. +* In the world of Bitcon, and [blockchain](../concepts/blockchain.md) more generally, replacing interpersonal trust with cryptographic verification mechanisms is seen as positive; we no longer need trust: in states, governmental institutions or one another. * The problem with trust is that when you get rid of it, it's very hard to get it back. If crypto were to fail we would risk a large-scale general reduction in trust. Even if it were to succeed, it would likely lead to a significantly diminished role for trust at a broader level. -* At the root of trustless blockchain technologies are assumptions about human nature, which have significant implications for how we approach vital questions of social cooperation. +* At the root of [trustless](../concepts/decentralization.md) blockchain technologies are assumptions about human nature, which have significant implications for how we approach vital questions of social cooperation. * There is evidence that high trust of strangers correlates with positive economic and social outcomes. * Aside from its impacts on Bitcoin’s potential as a gold substitute, the issue of trust has serious ramifications for how we govern our societies. @@ -155,6 +155,7 @@ Bitcoin is Better 1. Bemanke, Ben, and Harold James. 1991. ‘The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison’. In Financial Markets and Financial Crises, 33–68. University of Chicago Press. https://www.nber.org/books-and-chapters/financial-markets-and-financial-crises/gold-standard-deflation-and-financial-crisis-great-depression-international-comparison. 1. Bernanke, B. S. (2004). Essays on the Great Depression. Princeton University Press. 1. Eich, Stefan. 2018. ‘The Currency of Politics’. The Political Theory of Money from Aristotle to Keynes. +1. Corradi, Fiammetta, and Philipp Höfner. 2018. ‘The Disenchantment of Bitcoin: Unveiling the Myth of a Digital Currency’. International Review of Sociology 28 (1): 193–207. https://doi.org/10.1080/03906701.2018.1430067. 1. Green, Russell A. "Gold Standard or Fool’s Gold? Should the US Consider Returning to the Gold Standard?." Issue Brief 02.23. 16 (2016). 1. Ammous, Saifedean. 2018. The Bitcoin Standard: The Decentralized Alternative to Central Banking. Hoboken, New Jersey: Wiley. 1. Sanz Bas, David. 2020. ‘Hayek and the Cryptocurrency Revolution’. Iberian Journal of the History of Economic Thought 7 (1): 15–28. https://doi.org/10.5209/ijhe.69403.