Interesting piece, Dave. But, you left out the optimistic vision entirely!
Societies run generally better on fiat systems; the economic data is fairly clear on that. In an average year, fiat economies have slightly higher growth and significantly less volatility than hard money economies, including less volatility in inflation (something hard money advocates rarely recognize).
But the flaw in fiat systems is that they historically end in disastrous failure. They are great, great, great, great, great, and then absolutely spectacularly bad. The flexibility they offer is valuable and helpful during economic volatility, but they are too tempting to abuse, so they end in runaway inflation and debt crises. The US hasn't had one in a while, but people are worried we're getting there, what with the limitless explosion of debt, rising political volatility, the weaponization of fiscal/trade/payments policy, and the disastrous state of DC. And those end-state catastrophes are terrible for people, both short-term and long-term.
If bitcoin grows large enough to offer a viable alternative to the fiat system, by way of its existence, it could create a natural curb on the excesses of fiat abuse. Right now -- particularly in the US -- there is no real force for restraint on fiat abuse because there is no viable alternative. So we trip along slowly ... or, recently, quickly ... until it's too late. A robust alternative might constrain the US from being too egregious in its monetary and fiscal policies and, as such, allow society to reap the benefits of having a flexible fiat system without us ever stepping over into the abuse-failure case. And if we still can't resist the temptation to abuse the fiat system, well then, at least we have an alternative.
Matt, I really hope you are right and there is a Mahayana "middle way" ... but I just don't see how Bitcoin can become enough of a cudgel to "make" governments do anything differently without that same scenario having governments move heavily against it.
I get the history lesson and the belief that all economies have historically failed, but I don't think there are many cases of fiat systems that failed whilst their governments and populations plodded merrily along -- and thus, what you're really talking about is the collapse of *the state* not the currency. Because without a currency to tax, buy armies, and redistribute as services (none of which I believe will happen with Bitcoin), I don't see how the government exists at all.
*You* may have an alternative. I'm not sure a family on food support in Alabama has an alternative.
I also hope that the fact that BTC exists forces current elites to act more prudently with increased transparency as opposed to BTC accelerating the downfall of the Western society. Obviously there are many issues with the current fiat system, the internet allows for easy amplification of flaws (true, false, or exaggerated). But one cannot argue with the great gains of the enlightenment period as highlighted by folks such as Hans Rosling, Steven Pinker, Matt Ridley, and Deutsch's Beginning of Infinity. Therefore it is easy to imagine much worse abuses of power than currently observed.
I also agree with Dave, that it would be a difficult balance to strike that the current system still operates (provide stability society for technological and knowledge growth) but BTC exists and provides a store of value that prevents the negatives of a fiat system. That coupled with the fact that those heavily invested in BTC may start actually rooting for acceleration of a downfall of the current system. It may even be unconscious, obviously once heavily invested incentives color the emotions and interpretations of world events. Therefore one who began as a benign HODLer simply holding BTC as a hedge hoping for the Mahyana middle way, finds himself reading more and more conspiratorial internet takes and memes, then they actually start sharing this content that is extremely negative of the current system. Then eventually, the current system does take harsh actions to try and prevent this movement from growing as it is causing real strain. That may be harsh regulations, harsh taxes, or even attempts at banning. Perversely this action by the State would almost justify earlier extreme predictions from the HODLers but it was actually cause by those with financial incentives to actually promote/cause downfall of a current system. The current system is far from perfect, yet it is complex with many checks and balances and was forged over decades/centuries during the enlightenment period that has provided so many gifts to mankind.
Correlation is not causation, and there a million other factors, but the findings in those charts align with what I would say is common sense:
a) Growth would be similar under both regimes but more volatile under a less flexible monetary policy in the short-term;
b) Inflation could be more volatile under a gold standard, as harder monetary policy collides with the vagaries of nature and credit cycles.
I didn't mention, but generally believe, that over time fiat systems lead to lower growth as the official sector on the margin crowds out the private sector, and I think that's hinted at in the data too.
All that said, I probably overstated the clarity in the data :). It's probably more "suggestive" than "fairly clear."
I don't disagree with anything you say, yet I can't bring myself to completely discount the idea that some not-insubstantial fraction of bitcoin millionaires/billionaires are quietly putting their thumb on the scales with politicians and governments and quietly funding save-the-planet type ventures. Their silence may be because 1) crypto money may still have some stigma associated with it, 2) many big philanthropists/planet-savers prefer to be anonymous rather than show off how charitable they are., or 3) some combo of both. IDK how much scale tipping they're actually doing, versus buying lambos and so forth. All I know is that the biggest, most influential money usually talks only in whispers.
lol the moral authority. i just vomited. I hope that your bicycle stash is well over 1% of your NW because if you think there is a less than 99% chance that fiat won't collapse, or some version of that... well i have a bridge to sell you.
I’m interested in Bitcoin because I’m a pacifist and I want to stop funding endless wars. You talk about “who’s going to help people on food stamps under a Bitcoin standard?”, but what about the millions of people who are oppressed and/or murdered because of some bullshit war pretext? “Weapons of mass destruction…” NEVER AGAIN
Sure, maybe the government welfare state will be cut back. But also maybe millions of brown people around the world won’t get genocided every few years. Might be a benefit there, eh?
I’m not sure I see his bitcoin prevents violence in any way. If you want to just not pay taxes yiu can do that and face whatever legal repercussions there are, but BTC doensnt defund anything. In a BTC Moon world the implication is much weaker states which (imo) would actually make regional scale prospects for wars worse. See also now.
Seriously? Paying taxes is natural, and a great rate limiter for wars. To get into a new war, the populace needs to agree to a major tax hike.
In the current system, massive amounts of government bonds are issued, and the Fed either buys them, or pulls strings so they are purchased for the lowest coupon. This is called money printing, and it’s how forever wars can be stealth funded for $7 Trillion dollars without much of a complaint.
OK, I guess I'm just a complete moron who doesn't get how you buying BTC takes it out of the economic system in a way that "sticks it" to the Military Industrial Complex/Endless war machine. Completely hard, non-state money means the state collapses. The more economic activity moves off state currencies, the more unstabel those states become.
If you genuinely believe that BTC 2mm and hyperinflation of the dollar somehow leads to a MORE stable (and theoretically more peaceful) world, I'd genuinely like to read some longform analysis of how you get from here to there. You're essentially arguing for Matt Hougan's "middle way" above, no? That somehow "the fact that BTC exists forces current elites to act more prudently" -- im sorry, I just dont buy this scenario.
I don't think you're really engaging with the thesis here honestly. I am not arguing that BTC *does* anything. I'm postulating the world in which BTC has stratospherically mooned, and what that would may have to look like. I'm not saying BTC MAKES XYZ happen. I'm suggesting that for BTC to be the "Duke of West Hartford" new monetary system that replaces fiat, there are implications that go VASTLY beyond the simple numbers.
If you actually believe we can live in a world with BTC as the default global currency, in which everyone is paid, taxed, and transactions are denominated in BTC, and have that world look *anything* like this one, I don't think we have much common ground.
Which is fine -- you be you. Neither running for office or charging anything.
You don’t think some sort of soft transition is possible at all? $MSTR was able to buy 1% of all coins and the price ~doubled. Surely the Fed could buy 10% (at least) and the price 10x’s? Sure this will mint some Bitcoin billionaires elites and have to share a bit of power, but now the US dollar is fully in the Bitcoin system, backed by this hard asset (as it was with gold before) and won’t be dethroned quite so easily.
While this is just a simplistic pipe dream, Balaji’s lists out many “soft transition” scenarios on his Twitter where the US isn’t thrown into total chaos.
At the end of the day, Bitcoin is just new tech. Humans are very adaptable and will adjust to live with it. Every time new tech comes around, there is a “world is gonna end” scare. You see this right now with AI, and starting to see with Bitcoin as well.
A monetary system run with BTC as its anchor would be akin to operating under a fixed exchange rate. Fixed exchange rate systems force adjustment onto the real economy. Flexible systems adjust via the exchange rate. See Italy under the EUR or Argentina under the currency board. The above doesn’t even begin to touch on what would have to happen for BTC to be usable in the quotidian world. Fun fact: Milton Friedman advocated for floating exchange rates.
Very interesting article. But it seems you didn’t consider new possible forms of governance enabled by the Internet and blockchains technologies. Did you study the concepts of Free Cities (like Prospera) and Network States ?
Sorry if I'm skeptical of a Real Estate project who's primary selling point is they've made $2B for their real estate developers. That just seems like "finding a better island to put my shiny rocks on" rather than actually adressing the sub 50%...
Don't know if it will ever catch on, but I had this idea for a new narrative for bitcoin based on it being a energy-based currency or exchangeable energy credit, which would be a much more optimistic view of the future of bitcoin. Changes how it is used and viewed in the future.
Would make sense to add it to the commodity bucket of a portfolio if viewed as a measure of energy surplus, in the same category as other energy commodities.
I think the idea of "energy currency" is an interesting angle for Bitcoin, for sure, I remember reading that piece when it came out. Thought provoking.
But it doesn't solve the very-low-level issues I'm talking about I dont think. I don't see how Bitcoin solves the 12-15% of the U.S. that experiences food insecurity, for instance. What's the actual solution proposed by Bitcoiners for the bottom 25% that doesn't involve the U.S. government, and how's that goign? Because otherwise, you're just "letting them go"
I agree with you, the endgame you're describing wouldn't be ideal. It's one of the reasons I thought about alternatives because I didn't like what the bitcoin standard narrative would mean for modern society.
I wasn't thinking of it as the endgame scenario where bitcoin becomes the world currency and the elimination of fiat dollars, but more like a niche bitcoin can fill while remaining on the fiat dollar system.
In the energy currency scenario, one of the biggest beneficiaries would be power generation utility companies (mining with excess MW & selling bitcoin on the open market), which could in theory make energy generation cheaper for society as a whole. Dollars would still be needed in that future, and a societal collapse would ruin that ideal future.
Unfortunately I think helping the bottom 25% of society is more of a political question than a bitcoin one.
Interesting piece, Dave. But, you left out the optimistic vision entirely!
Societies run generally better on fiat systems; the economic data is fairly clear on that. In an average year, fiat economies have slightly higher growth and significantly less volatility than hard money economies, including less volatility in inflation (something hard money advocates rarely recognize).
But the flaw in fiat systems is that they historically end in disastrous failure. They are great, great, great, great, great, and then absolutely spectacularly bad. The flexibility they offer is valuable and helpful during economic volatility, but they are too tempting to abuse, so they end in runaway inflation and debt crises. The US hasn't had one in a while, but people are worried we're getting there, what with the limitless explosion of debt, rising political volatility, the weaponization of fiscal/trade/payments policy, and the disastrous state of DC. And those end-state catastrophes are terrible for people, both short-term and long-term.
If bitcoin grows large enough to offer a viable alternative to the fiat system, by way of its existence, it could create a natural curb on the excesses of fiat abuse. Right now -- particularly in the US -- there is no real force for restraint on fiat abuse because there is no viable alternative. So we trip along slowly ... or, recently, quickly ... until it's too late. A robust alternative might constrain the US from being too egregious in its monetary and fiscal policies and, as such, allow society to reap the benefits of having a flexible fiat system without us ever stepping over into the abuse-failure case. And if we still can't resist the temptation to abuse the fiat system, well then, at least we have an alternative.
Matt, I really hope you are right and there is a Mahayana "middle way" ... but I just don't see how Bitcoin can become enough of a cudgel to "make" governments do anything differently without that same scenario having governments move heavily against it.
I get the history lesson and the belief that all economies have historically failed, but I don't think there are many cases of fiat systems that failed whilst their governments and populations plodded merrily along -- and thus, what you're really talking about is the collapse of *the state* not the currency. Because without a currency to tax, buy armies, and redistribute as services (none of which I believe will happen with Bitcoin), I don't see how the government exists at all.
*You* may have an alternative. I'm not sure a family on food support in Alabama has an alternative.
I also hope that the fact that BTC exists forces current elites to act more prudently with increased transparency as opposed to BTC accelerating the downfall of the Western society. Obviously there are many issues with the current fiat system, the internet allows for easy amplification of flaws (true, false, or exaggerated). But one cannot argue with the great gains of the enlightenment period as highlighted by folks such as Hans Rosling, Steven Pinker, Matt Ridley, and Deutsch's Beginning of Infinity. Therefore it is easy to imagine much worse abuses of power than currently observed.
I also agree with Dave, that it would be a difficult balance to strike that the current system still operates (provide stability society for technological and knowledge growth) but BTC exists and provides a store of value that prevents the negatives of a fiat system. That coupled with the fact that those heavily invested in BTC may start actually rooting for acceleration of a downfall of the current system. It may even be unconscious, obviously once heavily invested incentives color the emotions and interpretations of world events. Therefore one who began as a benign HODLer simply holding BTC as a hedge hoping for the Mahyana middle way, finds himself reading more and more conspiratorial internet takes and memes, then they actually start sharing this content that is extremely negative of the current system. Then eventually, the current system does take harsh actions to try and prevent this movement from growing as it is causing real strain. That may be harsh regulations, harsh taxes, or even attempts at banning. Perversely this action by the State would almost justify earlier extreme predictions from the HODLers but it was actually cause by those with financial incentives to actually promote/cause downfall of a current system. The current system is far from perfect, yet it is complex with many checks and balances and was forged over decades/centuries during the enlightenment period that has provided so many gifts to mankind.
« Societies run generally better on fiat systems; the economic data is fairly clear on that. » Interesting ! Do you have any source on this ?
Although this piece is obviously biased, in one way the two charts in it showing inflation and GDP growth are helpful: https://www.moneyandbanking.com/commentary/2016/12/14/why-a-gold-standard-is-a-very-bad-idea
Correlation is not causation, and there a million other factors, but the findings in those charts align with what I would say is common sense:
a) Growth would be similar under both regimes but more volatile under a less flexible monetary policy in the short-term;
b) Inflation could be more volatile under a gold standard, as harder monetary policy collides with the vagaries of nature and credit cycles.
I didn't mention, but generally believe, that over time fiat systems lead to lower growth as the official sector on the margin crowds out the private sector, and I think that's hinted at in the data too.
All that said, I probably overstated the clarity in the data :). It's probably more "suggestive" than "fairly clear."
I don't disagree with anything you say, yet I can't bring myself to completely discount the idea that some not-insubstantial fraction of bitcoin millionaires/billionaires are quietly putting their thumb on the scales with politicians and governments and quietly funding save-the-planet type ventures. Their silence may be because 1) crypto money may still have some stigma associated with it, 2) many big philanthropists/planet-savers prefer to be anonymous rather than show off how charitable they are., or 3) some combo of both. IDK how much scale tipping they're actually doing, versus buying lambos and so forth. All I know is that the biggest, most influential money usually talks only in whispers.
lol the moral authority. i just vomited. I hope that your bicycle stash is well over 1% of your NW because if you think there is a less than 99% chance that fiat won't collapse, or some version of that... well i have a bridge to sell you.
nice article. "longterm institutional allocators, and the random car wash attendant who took a flier in ***HIS*** IRA hoping to get lucky."
Great article, very interesting take on all this.
I’m interested in Bitcoin because I’m a pacifist and I want to stop funding endless wars. You talk about “who’s going to help people on food stamps under a Bitcoin standard?”, but what about the millions of people who are oppressed and/or murdered because of some bullshit war pretext? “Weapons of mass destruction…” NEVER AGAIN
Sure, maybe the government welfare state will be cut back. But also maybe millions of brown people around the world won’t get genocided every few years. Might be a benefit there, eh?
I’m not sure I see his bitcoin prevents violence in any way. If you want to just not pay taxes yiu can do that and face whatever legal repercussions there are, but BTC doensnt defund anything. In a BTC Moon world the implication is much weaker states which (imo) would actually make regional scale prospects for wars worse. See also now.
Seriously? Paying taxes is natural, and a great rate limiter for wars. To get into a new war, the populace needs to agree to a major tax hike.
In the current system, massive amounts of government bonds are issued, and the Fed either buys them, or pulls strings so they are purchased for the lowest coupon. This is called money printing, and it’s how forever wars can be stealth funded for $7 Trillion dollars without much of a complaint.
OK, I guess I'm just a complete moron who doesn't get how you buying BTC takes it out of the economic system in a way that "sticks it" to the Military Industrial Complex/Endless war machine. Completely hard, non-state money means the state collapses. The more economic activity moves off state currencies, the more unstabel those states become.
If you genuinely believe that BTC 2mm and hyperinflation of the dollar somehow leads to a MORE stable (and theoretically more peaceful) world, I'd genuinely like to read some longform analysis of how you get from here to there. You're essentially arguing for Matt Hougan's "middle way" above, no? That somehow "the fact that BTC exists forces current elites to act more prudently" -- im sorry, I just dont buy this scenario.
So you think that BTC will lead to more wars (which take huge funding) but less food stamps (which take huge funding). Seems like cherry picking.
If the government can’t infinite money glitch themselves into wars, the amount of wars go down. (You argue food stamps as well)
If elites need to pass a “let’s invade Iraq, vote for this $7T tax increase” bill it’s a lot less likely to happen.
I don't think you're really engaging with the thesis here honestly. I am not arguing that BTC *does* anything. I'm postulating the world in which BTC has stratospherically mooned, and what that would may have to look like. I'm not saying BTC MAKES XYZ happen. I'm suggesting that for BTC to be the "Duke of West Hartford" new monetary system that replaces fiat, there are implications that go VASTLY beyond the simple numbers.
If you actually believe we can live in a world with BTC as the default global currency, in which everyone is paid, taxed, and transactions are denominated in BTC, and have that world look *anything* like this one, I don't think we have much common ground.
Which is fine -- you be you. Neither running for office or charging anything.
You don’t think some sort of soft transition is possible at all? $MSTR was able to buy 1% of all coins and the price ~doubled. Surely the Fed could buy 10% (at least) and the price 10x’s? Sure this will mint some Bitcoin billionaires elites and have to share a bit of power, but now the US dollar is fully in the Bitcoin system, backed by this hard asset (as it was with gold before) and won’t be dethroned quite so easily.
While this is just a simplistic pipe dream, Balaji’s lists out many “soft transition” scenarios on his Twitter where the US isn’t thrown into total chaos.
At the end of the day, Bitcoin is just new tech. Humans are very adaptable and will adjust to live with it. Every time new tech comes around, there is a “world is gonna end” scare. You see this right now with AI, and starting to see with Bitcoin as well.
A monetary system run with BTC as its anchor would be akin to operating under a fixed exchange rate. Fixed exchange rate systems force adjustment onto the real economy. Flexible systems adjust via the exchange rate. See Italy under the EUR or Argentina under the currency board. The above doesn’t even begin to touch on what would have to happen for BTC to be usable in the quotidian world. Fun fact: Milton Friedman advocated for floating exchange rates.
Very interesting article. But it seems you didn’t consider new possible forms of governance enabled by the Internet and blockchains technologies. Did you study the concepts of Free Cities (like Prospera) and Network States ?
Sorry if I'm skeptical of a Real Estate project who's primary selling point is they've made $2B for their real estate developers. That just seems like "finding a better island to put my shiny rocks on" rather than actually adressing the sub 50%...
Don't know if it will ever catch on, but I had this idea for a new narrative for bitcoin based on it being a energy-based currency or exchangeable energy credit, which would be a much more optimistic view of the future of bitcoin. Changes how it is used and viewed in the future.
Would make sense to add it to the commodity bucket of a portfolio if viewed as a measure of energy surplus, in the same category as other energy commodities.
https://furballfinancial.substack.com/p/bitcoin-isnt-digital-gold-its-an
Also did a podcast with Jeremy Schwartz about it:
https://open.spotify.com/episode/6C50LhRVNu88vhlRUJA09n?si=BPyKkOV7Qa2OpMNMoUVOFQ
I think the idea of "energy currency" is an interesting angle for Bitcoin, for sure, I remember reading that piece when it came out. Thought provoking.
But it doesn't solve the very-low-level issues I'm talking about I dont think. I don't see how Bitcoin solves the 12-15% of the U.S. that experiences food insecurity, for instance. What's the actual solution proposed by Bitcoiners for the bottom 25% that doesn't involve the U.S. government, and how's that goign? Because otherwise, you're just "letting them go"
I agree with you, the endgame you're describing wouldn't be ideal. It's one of the reasons I thought about alternatives because I didn't like what the bitcoin standard narrative would mean for modern society.
I wasn't thinking of it as the endgame scenario where bitcoin becomes the world currency and the elimination of fiat dollars, but more like a niche bitcoin can fill while remaining on the fiat dollar system.
In the energy currency scenario, one of the biggest beneficiaries would be power generation utility companies (mining with excess MW & selling bitcoin on the open market), which could in theory make energy generation cheaper for society as a whole. Dollars would still be needed in that future, and a societal collapse would ruin that ideal future.
Unfortunately I think helping the bottom 25% of society is more of a political question than a bitcoin one.