Let me start off this piece by saying I am a big fan and proponent of decentralized finance, cryptocurrencies, blockchain, and web 3.0. Also, I believe that our financial “powers that be” including the Federal Reserve Bank have mismanaged our fiscal affairs and abrogated their duties. In other words, defi and cryptos had me at “hello” with the new tech and decentralized premise. But a few Bitcoin advocates need to embrace some truth in advertising behind their digital revolution. The constant promotion and relentless proselytization have me a little concerned. It smacks of desperation, not innovation.
If Bitcoin is as advertised, it will win the test of time.
Let me clarify the good, bad, and ugly of the Bitcoin revolution.
As you might have noticed I like simple titles to my pieces ending with a period. Simplicity is the ultimate sophistication. In that vein, allow me to pose a question?
What is Bitcoin?
Bitcoin has long been referred to as digital gold and replacement currency and a long-term store of value. Cryptocurrencies, like Bitcoin, are the future. And the criticisms levied at gold tend to apply to Bitcoin as well: It pays no interest or dividends, and it doesn’t imitate the performance of more traditional assets. Advocates say Bitcoin, like gold, serves as protection against the systemic abuse of fiat currencies.
Bitcoin assertion #1: it’s a replacement currency for the US dollar. Okay. Noted. Let’s do a little review.
Fiat money (Latin: fiat, “let it be done”) is a type of money that is not backed by any commodity such as gold or silver and is typically declared by a decree, the “let it be done” pronouncement from the government, to be legal tender.
In the strict sense of the definition, the United States dollar can be labeled a fiat currency. But that is where overly simplistic definitions hide the true nature of the beast. Our dollars are according to the printing on the paper “Federal Reserve Notes” or debt decreed to be legal tender. As legal tender, the dollar is the medium of exchange for all debts, public and private. However, that never changes the fact that the US dollar is a “general” debt obligation or note, backed by the United States of America. The US dollar is a promissory note held, exchanged, and transferred as a medium of exchange decreed to be legal tender.
You, me, and 330 million other Americans stand behind the dollar’s debt obligation and our currency’s entire float of promissory notes. Dollars are actually very similar to general obligation municipal bonds which is a type of bond that is backed entirely by the issuers’ creditworthiness and ability to levy taxes on its residents. The dollar by contrast with the average municipal debt offering does not have a maturity date. So in the purest sense, the dollar is a perpetual “general obligation” promissory note.
I am not defending the law that created our dollar nor the Federal Reserve Bank which issues and regulates the promissory notes insurance, handling, and float. I am simply nailing down our terms and definitions to compare them to Bitcoin’s rumored claims to fame.
Can Bitcoin become legal tender? Sure. By US government decree, Bitcoin could become legal tender. Is Bitcoin legal tender? No.
Can Bitcoin become a promissory general obligation note of the US government? Sure. By US government degree, Bitcoin could be an obligation of you and me. But it’s not.
Meaning Bitcoin is not even fiat money. Bitcoin has no government decree or backing.
Can Bitcoin function as a medium of exchange like our dollar? Sure, why not. Think of Bitcoin like a barter item listed on an exchange. But do not get the idea twisted in your brain, the US government is not going to stand by and let Bitcoin takeover currency issuance. Bitcoin will not replace the dollar anytime soon.
Bitcoin assertion #2: it’s a store of value in the face of relentless government printing of paper money and the inflationary reckoning from that printing press. Okay. Store of value. Let’s do a little background study.
Bitcoin is backed by nothing. Not gold, silver, land, tax revenue, or governments.
Bitcoin does not even have an exclusive claim on the “blockchain” technology. And if my really smart friends are right, the revolution of quantum computing knocks Bitcoin completely out of the game unless the crypto evolves. Fortunately, as it stands, quantum computing appears to be a few years away.
Bitcoin’s claims to value are limited issuance or scarcity and it’s trading on the open market with a current bid price. It has a bid price therefore Bitcoin has value. A very accurate and true claim on the Bitcoiner’s part. The chart below (2-2-2022) depicts Bitcoin for the last two years. Bitcoin offers robust 24/7 trading with minimal slippage, a very heady feat in the financial realm.
But without a bid price, does Bitcoin have a derivative value? No.
Gold by comparison can always be used for jewelry because it does not tarnish or diminish over time. Even diamonds diminish over time, gold does not. Also, gold has industrial applications and uses.
To ram home my point about “value”, or “store of value”, diamonds have been a really good store of value over the last 60 plus years. Diamonds are small, portable, and sellable in most parts of the civilized world. Looking back at the Bitcoin chart above, diamonds have never lost 50% of their value in six months.
I remain suspect of the claim that Bitcoin is a store of value. Also, “stores of value” are not prone to intense speculation devolving into feverish bubbles. Stores of value are relatively boring.
Beyond the hype and getting back to our original question. What is Bitcoin?
Crypto stalwart Tyler Winklevoss, co-founder, and chief executive officer of Gemini Trust Co., took to Twitter to assure his 1 million followers.
Hmm? Let’s move on.
Bitcoin is a limited issue token trading between owners with the record of the transaction recorded in a distributed ledger. Bitcoin is more a token than currency or a store of value.
The good news of Bitcoin is that the token trades clean in a robust two-way market. The 50% drop in Bitcoin’s price was very orderly which speaks volumes for the holders and exchange market makers trading the crypto. I am a veteran of the 1987, 1989, 2000, 2008, and 2020 stock market crashes. I am well versed in market disorder in the heat of panic and chaos. Bitcoin performed exceedingly well in its selloff.
The economist Tyler Cowen said it well in a recent Bloomberg article, “This lack of correlation between major disasters and the decline in crypto prices could prove to be good news for crypto in the longer run. For one thing, it shows crypto prices can fall sharply and suddenly without inducing a more general contagion. And while some blockchains have been slow to process transactions, overall the crypto world has taken this major shock in stride.”
Bitcoin now trades in a legitimate two-way market, trading cyclically not like a hockey stick. Please be wary of the “buy and hold” and the “buying the dip” nonsense offered everywhere on the internet and social media. That advice is fool’s gold in your moment of desperation. Please take a moment to read through my posts on Bitcoin on September 16, 2021, October 10, 2021, and November 26, 2021. At the time, I simply read the crowd price action of Bitcoin, nothing else.
Lastly, on Monday, El Salvador’s President Nayib Bukele, who pushed to make Bitcoin legal tender in the Central American nation has made him a crypto celebrity, noted that prices are sure to rise.
Is the President of El Salvador speculating with Bitcoin, or endorsing a legal tender. Hmm?
At Beyond the Hype Media, we told our readers about the peril of Bitcoin at $65,000 with enough time for me to write an article about our recommendation and post it to Twitter, Instagram, and our website with a few extra days for you to execute. We warned Bitcoiners of the bubble and its impending pop!
Bitcoin is not as good as gold as the picture in this week’s masthead suggests. The choice of graphics was meant to be more tongue and cheek. That being said, I believe trading Bitcoin, both long and short, should present quite the harvest over the next few years. I can’t wait for the next Bitcoin buying opportunity. It’s coming!
The chart below depicts our calls on price levels as the Bitcoin drama unfolded. We are not forecasters. We simply read the crowd price action.
Please note, I am not building or offering a trading or advisory business. I am a social scientist writing about cultural issues, trends, and thinking. My theories are being tested in the financial markets as a “proof of concept”. Nothing more. Come along for the ride if you wish. I will do my best to answer your questions and share our insights.
Again, I am a big fan and proponent of decentralized finance, cryptocurrencies, blockchain, and web 3.0.
Stay tuned. Travel safe.