No one really understands Bitcoin [BTC]. I don’t own it and don’t plan to. On the other hand, it’s an excellent gamble for the time being. Up is up. As long as one is confident in an ability to get out in time, it’s like free money. I prefer roulette because you can enjoy a drink while you’re playing, but bitcoin works fine.
One test of whether bitcoin really is a new form of money is to assume the answer is yes and think through the implications of that answer. If bitcoin is money, then a comparison of the exchange rate between bitcoin and dollars (BTC/USD) is reasonable.
With bitcoin at US$8,855 per coin (the price on 1 May 2020), the BTC/USD cross-rate is US$8,855 to 1. Bitcoin was US$52,000 per coin on 22 April 2021. That produces a cross-rate of US$52,000 to 1. If bitcoin is taken as a unit of account and store of value (two parts of the basic definition of money), the dollar has been devalued by 83% in less than one year on a bitcoin standard.
Is there any evidence that the dollar has lost 83% of its purchasing power? If it had, gasoline would be US$18 per gallon, milk would be US$22 per gallon, and gold would be US$12,000 per ounce. None of those prices are true.
In fact, there’s almost no evidence of material inflation in the US economy; the latest data shows core Personal Consumption Expenditure inflation year-over-year (the Fed’s preferred measure) at about 1.6%, not 600% as implied under the bitcoin standard.
In the absence of validation of dollar devaluation, the dollar price gain in bitcoin is not a measure of moneyness; it’s more a measure of speculation, mania, greed, or all three. That mania may continue, and the price of bitcoin may go higher. Still, the price gain is not a precursor to monetary status.
Despite the extensive critique of bitcoin, I wasn’t satisfied with my own analysis until recently. Bitcoin boosters such as Ray Dalio, Paul Jones, Elon Musk, and others are not dumb. They see the bubble dynamics. What else do they see if anything?
Bitcoin as a form of money
Bitcoin has spiked in value from US$7,000 per coin to US$60,000 over the past year. The price may well be higher by the time you read this. It could just as well be lower. Bitcoin is nothing if not volatile. Still, the price spike is undeniable. An 860% rally in one year is world-historic, and the rally is even more extreme if earlier lower valuations of bitcoin are used.
A multiyear chart of bitcoin prices (below) displays the greatest bubble behaviour in history, greater even than the Tulipomania in the Netherlands in the early 17th century:
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| Source: CoinDesk |
You don’t need a PhD in finance to see that bitcoin is a bubble. It’s apparent from the chart. The time series of prices over the past six months has been hyperbolic, almost vertical. If you look at a chart of the Japanese Nikkei Index in late 1989 or the Nasdaq Composite until March 2000, you’ll see exactly the same pattern.
The Nikkei crashed by more than 80% beginning in 1999 and still hasn’t recovered its old high after 32 years. The Nasdaq crashed more than 75% beginning in 2000 and did not recover its old high until April 2015, a 15-year recovery. Bitcoin is positioned for the same kind of fall.
But is it a mania or a rapid price adjustment to reflect supply and demand for what may soon be the universal medium of exchange?
Bitcoin — future money or just a bubble?
The critique of bitcoin is well known. It has no real use case except for money laundering and evading taxes or capital controls. It’s not widely accepted as a medium of exchange. Its extreme price volatility makes it unsuitable as a store of value. That same volatility disqualifies bitcoin as a unit of account.
Bitcoin has no return other than higher prices based on the greater fool theory. You can make money in bitcoin at any purchase price as long as there’s a greater fool willing to pay an even higher price. That system works until it doesn’t.
Bitcoin is a wealth transfer device but not a wealth creation device. Bill Gates is worth US$100 billion because he created trillions of dollars in value through his Microsoft programs and operating systems. Bitcoin is a zero-sum game where one player takes money from another, but no new wealth is created.
Bitcoin is filling the atmosphere with CO2 because most of the ‘mining’ (high-speed computer calculations requiring monumental amounts of electricity for processing and cooling) is done in China where most power plants are coal-fired.
Bitcoin will never be a reserve currency because its capped issuance at 21 million coins makes its price deflationary, which is unattractive to borrowers. Without a bitcoin bond market, there can be no securities in which central banks can invest reserves.
The McLuhan thesis
To advance my understanding, I had recourse to the greatest philosophical genius Canada has produced: Marshall McLuhan.
He’s most famous for his saying: ‘The medium is the message’. Few know what he meant by that. In the 1950s and 1960s, when the TV audience was growing quickly, critics pointed out that TV content was violent, juvenile, simplistic, and they decried the negative cultural influence. McLuhan said that debates over the content of TV were irrelevant. What mattered was the medium itself, not the content.
In McLuhan’s view, TV was a cool medium (meaning the viewer sees a mosaic that requires extensive viewer involvement to complete the picture) rather than a hot medium (where the medium targets one sense and is so overpowering that the participant doesn’t have to do anything except read or listen).
TV was cool while radio was hot because it engaged the single sense of hearing and got inside the listener’s head with no effort by the listener. As an aside, it has frequently been observed that Adolf Hitler was an extremely effective propagandist on radio, but probably would have been viewed as a clown on TV.
McLuhan was clear that the hot/cold distinction and the elevation of medium over content could be applied to any medium from automobiles — which McLuhan called The Mechanical Bride after a painting by Marcel Duchamp — to books, newspapers, money, and more. Andy Warhol gave McLuhan credit for the classic Warhol observation that, ‘In the future, everyone will be world-famous for 15 minutes’. They were both right.
McLuhan on bitcoin
To break my intellectual and analytic dead end on bitcoin, I applied McLuhan to the new money medium. The content part was easy — higher prices, regulation, exchanges, mining, and Tether. What was the medium? And what is the message of bitcoin?
McLuhan’s method was to see all technological change as an extension of the human body. The wheel is an extension of the foot, the lightbulb is an extension of the eye, and so on. He also observed that all new mediums contained old mediums. For example, the automobile was a new medium (replacing the horse) that included an old medium (the wheel and fire).
Thinking of bitcoin as a medium quickly reveals that it is an extension of people’s desire for food and nourishment along with prestige, shelter (another old medium), and things that money can buy. Bitcoin is a new medium that includes an old medium (dollars). Bitcoin becomes an invisible environment that wraps around us and isn’t easily seen or felt.
While everyone is focused on content (the price), they are ignoring the electronic media environment, a kind of security blanket that quickly morphs into a belief system.
Bitcoin isn’t money — it’s an identity
Bitcoin’s invisible environment has huge implications. It means that bitcoin won’t easily fade away like the Lehman Brothers or the Soviet Union. There is no way that bitcoin will replace the dollar as a major reserve currency, but it could displace the dollar (and all major reserve currencies) and cause command currencies to become obsolete like suits of armour or the telegraph.
That kind of displacement can then be the source of disorientation and disorder. It’s not the end of the world. It’s more like TV’s impact on the old Hollywood ‘star system’. We still have movies, but no longer have studio contract stars like John Wayne or Katharine Hepburn.
The medium is the message. Bitcoin is a medium, and the message is an idea. What is focused on — price, use case, liquidity — is mere content and mostly irrelevant. The message is an extension of human reach and scale. Bitcoin is a cool medium that requires extensive involvement of the observer or user to interpret a mosaic of information. This will be highly disruptive to existing forms of money.
It could be a unifying factor, but it could also lead to greed, obsession, dysfunction, and social unrest. Bitcoin can be deflationary when transactions are denominated in bitcoin and highly inflationary when the same transactions are translated into dollars if interoperability grows. Bitcoin could destroy confidence in existing command currency systems without displacing them. It is hallucinogenic in that sense. Every user sees something different.
Bitcoin could be the cause of social disorder and a contributor to the decline of linear, rational civilisation. My solution to this conundrum is to hold some physical gold, which will be more robust to shocks than command currencies. For bitcoin believers, the solution is…more bitcoin.
Keep an eye out for the next article in this series where Jim explores a variety of different money systems, including Special Drawing Rights.
All the best,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.
