We read an article on the American Hard Assets website with several misconceptions about bitcoins and economics. Many of the fallacies that the author has about bitcoin are also misconceptions that people have about gold and silver, so we were surprised to see this article in a precious metals magazine. I wanted to address these fallacies here.
The article, titled, “Dumb Investment of The Week: Winklevoss Bitcoin Trust,” calls bitcoin a “failure,” with “several inherent flaws.” When going through the flaws, it is clear that the author does not understand a few basic economic principles about value and money.
The author states:
“The most important aspect of the US dollar that gives it value is that you are required to satisfy your tax obligations to the US government using dollars. This fact virtually guarantees dollars will always be in demand, as most citizens and businesses operating in the US will need dollars at some point.”
The author makes the assumption that dollars will always be in demand. Almost every fiat currency which has its supply controlled by the government has collapsed and is no longer used in that country. In fact, the average life expectancy of a fiat currency is 27 years. A good, recent, example is Zimbabwe, where $100 trillion dollars could not even buy a loaf of bread. There was no demand for that currency once the government debased it! The US Dollar is currently the world reserve currency, however as politicians print more and more dollars, more and more countries are losing trust in the dollar and using alternative currencies such as Euro, Yuan, and gold for trade.
Bitcoin is a universal currency. There are more bitcoins outside the United States, than within the US. Bitcoin does not need the IRS or the US government to exist and survive. There are now payroll processors that allow one to get their entire salaries paid in bitcoin. There is no reason to believe that the IRS will not accept bitcoins for taxes if the world continues its adoption of bitcoin.
“A currency also needs to be easy to acquire to make it useful.”
Have you seen how easy it is to acquire and spend bitcoins? Almost anyone can purchase $20 worth of bitcoins in just a few minutes from a place like coinbase.com. There are bitcoin ATM’s popping up all around the world now, making it easy for people to convert their paper money into cryptocurrency.
“Dollars are widely available, and the US government keeps adding dollars to the economy via deficit spending. Deficit spending usually carries with it a negative connotation, but that is not the case. The issuance of a currency also needs to keep up with a growing economy. As the population grows and productivity increases (hence more assets are created), ever more dollars need to be placed in circulation.”
This comment is very surprising coming from a precious metals magazine. What the author is implying is that the government currently controls the supply of money. The supply of money is constantly being expanded so that politicians can fund welfare programs and warfare. As we all know, the supply of money is expanded by printing more of it. The definition of an increase in the supply of money is inflation. Your dollars are losing value year after year through the process of inflation, causing your standard of living to decrease. In fact, this is one of the biggest reasons why people purchase gold and silver in the first place; to protect their wealth from money printing/inflation/political whim.
The US economy grew the fastest in the 1800’s when the supply of money was finite, set by silver, then bimetallic, then gold standard. If the supply is finite and population and innovation grows, then goods become more affordable year after year. The US economy’s growth began slowing down when the government replaced the money supply with a currency backed by nothing that could be printed into infinity based on political whim.
“There is no entity that requires a large group of people to pay bitcoins each year or face jail time.”
The author correctly points out that the value of the dollar is derived from violence. However they makes another very interesting point, that there is no entity that requires people to accept/use bitcoin. That’s one of the things that makes bitcoin so beautiful. People don’t have to be forced to accept bitcoins; it’s a completely voluntary system. Millions of people have begun accepting bitcoins and see value in it all on a voluntary basis. No force was necessary for people to begin using it. Its features, such as the ability to send money anywhere in the world instantly with low or notransaction fees and its finite supply makes it far more appealing than a currency that can be printed into infinity, controlled by political whim, and backed by violence.
The current adoption rate of bitcoin is growing exponentially. One can now buy gold (amagimetals.com), plane tickets (cheapair.com), gift cards to Amazon.com, Target, CVS, Sears, Zappos, and more (gyft.com), a ticket to space (Virgin Galactic), or over stocked goods (overstock.com). PayPal is seriously considering accepting bitcoin soon. So we are currently undergoing a massive deflationary period (bitcoin is up 9,000% over the last 2 years). All of this is happening on a voluntary basis.
“Bitcoins, like gold or silver, have no intrinsic value as a currency.”
This is a very interesting comment, because many people still think that value is intrinsic. If anyone has taken an economics class, they understand that nothing in economics has intrinsic value. It is widely accepted that value is subjective. In fact, one of the last big theories proclaiming that value was intrinsic came from the Karl Marx’s Labor Theory of Value, which the Communist Manifesto derived from. Some people, such as this author, believe that because something has industrial use, its value automatically becomes “intrinsic.” As we have seen, though, its use in industry, just makes people value it more for its uses. That value is subjective.
“While some precious metals, such as gold, can derive some value from industrial applications or for jewelry (particularly in India for cultural reasons) bitcoin has no alternative uses.”
Bitcoin is actually two things, a payment gateway (protocol), and a currency. The protocol actually has many different uses, such as identity authentication (proof of existence), digital insurance, accounting, voting, smart contracts, domain name registration, autonomous corporations, micro-payments, and many other innovations we haven’t discovered yet. The various uses of the protocol are what gives the finite currency (the only currency that can be used on the protocol), value.
There is a word for someone who is scared of deflation. It is called apoplithorismosphobia, and this author has it. It appears that he is missing a few basic economic concepts. With a finite supply of money, prices become cheaper relative to that currency. That means when you go to the store, you can buy more stuff, with less money. That means your standard of living is higher year after year. Who wouldn’t want that? The author states that with prices becoming cheaper, people will hoard (save) their money. We currently live in a world with perverse incentives where people are dissaving (spending more than they are taking in), causing them to file bankruptcy or fail to prepare for retirement. With deflation, individuals will have a greater incentive to save money, live below their means, and preserve their wealth. If you’ve taken economics 101, you also understand that an economy grows from an accumulation of capital (hence why it’s called capitalism), which comes from individuals hoarding (saving) more money. When more people save money, more businesses can invest in capital, which allows them to produce things cheaper, so we can buy things with even less money.
It is interesting to see that several of the arguments used by this author are fallacies that people use against gold and silver. Once one understands bitcoin, they can see that there are many similarities between precious metals and cryptocurrency and the strengths between the two can be used to compliment each other. The technology behind cryptocurrency is revolutionary and should not be underestimated.