This was the best work you’ve done on BTC. I got into BTC in 2014 from disillusionment with the financial system and hopes of something better. Long story short, after a deeper economic education and spending time amongst the Hodlers, I’ve come to realize that the BTC as money narrative is simply absurd. I actually think you’re being too kind to Bitcoiners in this note. They have fully and religiously bought into the narrative that they are offering a more accessible financial system, but deep down they all know they simply seek new bag holders. The one thing I’d add is that not only would BTC as money not work because of its inelasticity, but all on the BTC standard would also be accepting feudalism with a bunch of tech bros at the top…and Michael Saylor as a modern day Mansa Musa
The one great financial bubble in U.S. history was the Civil War - what became known by the people who lived through it as the War of the Rebellion. A country that spent and collected $60 million gold dollars in 1860 would owe 50 times as much "money" 5 years later. Nothing else comes close. For Presidents Trump and Biden to have matched Lincoln's record, the Treasury's current IOUs would have to be 12 times what they are now, and our war dead would have to be equal to the Soviet Union's in 1945 at the end of the war against Germany and its allies.
Yet, somehow, 1866 was the beginning of the rise of the American financial empire, not its end.
Mike, I always enjoy reading your work. Even when we disagree it gets me thinking, questioning my thesis etc. which has value.
a few questions:
How did Bitcoin fail in providing a trust-less transaction?
Are you referring to the Mr Gox price manipulation or some other period of extreme volatility that created a temporary significant barrier to using as means of exchange or the area noted where fees have become a significant barrier to further adoption even use in the example you provided?
There are a number of on exchange measures relating holding period to recent transactions that can help provide some insight into whether HODLers are accumulating or liquidating. Have you investigated that in addition to ETF flows? It could help with analysis of whether retail is being used for exit liquidity.
wouldn’t gold have the same hard cap issues in terms of its maximum mine-able reserve? I realize all hard currencies typically run into some form of Triffins dilemma, so alternatively it really is up to us
BTC bugs to promote a viable use case other than number go up? This is hard because greed does create industry and use case at least for a time. Eg gold rush and shovel manufacturing, ultimately I would assume a surplus of shovels resulted but there had to have been some technological improvement or efficiency discovery in production… perhaps the creation of a different alloy or handle creation that had benefits in the economy elsewhere after the gold bust?
How do halving dates and miner spend, to pay operating expense and taxes, -the inflation component of BTC interplay the deflation component-with halving dates on rewards, and final hard cap of 21mm?
I do agree that levered QQQs carry significant correlation to BTC price returns. But the correlation is not stable and has actually deteriorated over the last 2 years, real interest rates, credit spreads and various measures of liquidity and of course exchange address are also very helpful and more stable factors to regress. A great, serious source is Tim Peterson With Cane Digital. Discussion or even debate between you two could probably provide a lot of value.
Finally if hard cap really does increase instability then why the consistent decrease in volatility and the concavity in log Bitcoin prices series over time? This is getting back to drivers if return sans levered QQQs I think.
Again thanks very much for sharing your thoughts with us, and I hope this received in a curious and constructive way.
Mike, I love you're writing on many topics but I always seem to fail to grasp what you mean when you say certain things about bitcoin. For example:
"It’s amazing to me that 15 years into this “experiment” no one has modeled the game to its conclusion." -- what is the conclusion? Will you model it for us, or point me to where you have in the past?
"a perfectly hard monetary policy with no ability to change supply in response to demand is simply a bubble waiting to burst." -- why? What is the economic theory underpinning this belief? At the very least, it can only be a theory and not proven or provable, because the world has never actually seen a perfectly hard fixed supply asset prior to bitcoin, right? So we can't know for "sure" how this plays out?
Long-term fan here. When discussing the BTC ETF numbers, I believe the commentary may be a bit harsh. I wonder if you replace BTC with Uranium, whether the commentary would remain the same.
Here are the net inflows into BTC after discounting GBTC outflows. They still look really healthy to me and on track to be one of the best ETF launches in history.
For the record, gold ETFs have bled $2B since the beginning of the year.
I agree with you. But, Tether seems to supply enough Tether crypto to keep the Ponzi in Bitcoin going. Personally do not see any intrinsic value in any crypto though they do seem to feed one another. If proper accounting and regulation was instituted I do not believe that any would have value IMO. Also, Crypto exchanges going under seems to support this IMO.
Mike, In assessing BTC I think you have to also take into account the Lightening network - a layer 2 protocol that will allow people to move small amounts of value quickly, securely and inexpensively. Its the Lightening Network that is being built on top of the bitcoin network that will help bitcoin scale. Outside of the US and Europe, most of the worlds remaining monetary systems are terrible. A criticism routinely heard in countries with bad monetary systems and that are using btc is that using and holding bitcoin on a daily basis is problematic because of its volatiliy and cost. Right now Lightening developers are working on ways to move stable coins - USDT or USDC or future US dollar stable coins on the Lightening network. Over time it is possible and maybe likely that, like silver in the 19th century dollar stable coins will be used for everyday purchases and bitcoin, like gold in the 19th century will be used more as a store of value. It seems to me the on-going debasement of the dollar - on average 6-7% per year - will continue to incentivize people to seek very hard assets like bitcoin to protect themselves against that debasement. A protocol that allows you to move both btc and dollar stable coins around the world securely, 24/7, and in the case of dollar stable coins - inexpensively - seems a big improvement on the monetary systems that exist in most countries. I think the protocol seen in this context offers a substantial amount of utility for many people in the world and that looking at bitcoin alone without considering Lightening and the work that is being done by developers to make bitcoin viable leaves out an important part of the bitcoin promise.
It’s very clear that this experimental asset known as bitcoin is great for accelerating the global dialogues around more ethical and fair monetary systems.
It is high time to shake up the status quo around monetary policy that has gradually become distorted and corrupted.
Please have a debate with Lyn Alden or at least Jim Bianco.
1. constrained elasticity - the ability to use collateral to create new supply. the loan creation mechanism of western money keeps incentives aligned, preventing runaway creation of new supply while allowing appraised collateral to underpin commerce
2. legal framework of contract enforcement. contracts without threat of violent enforcement that causes collateral to change hands or balance sheets to suffer impairment is mostly useless. wasting electricity and computing power to run an unenforced ledger is laughably pointless and misguided.
3. transactional efficiency.
while i would concede that todays western fiat does a mediocre job at all these, bitcoin and gold both clearly fail on all fronts.
Let’s say Bitcoin is worthless. But does thinking that - or making sophisticated arguments to support that idea make you money? I think Bitcoin is only worth what someone is willing to pay for it, but I think the same holds true for all financial assets. In some context you could argue that they are all worthless. But who cares. Honestly. Traders trade price, not being right about an idea of value.
Mike, you should really debate Burt Malkiel on a podcast. I heard him on a podcast last week saying passive could get to 95% of the market and it would be fine. And the 5% active traders would still be enough to create a efficient market that always reflected "all publicly known information". Malkiel does not believe passive is distorting markets at all.
Michael, once again you’ve sparked readers latent synapses. Beyond butcoin, to coin a phrase, you’ve presented us with real food for thought regarding spreads between futures and spot prices and the gaming the gaps for real yields. Makes some of us, perhaps, think tangentially of any possible parallels on-going in the now fashionable Treasury “basis trade”. Inquiring minds want to know.
How may that symbiotic relationship foster increased production of Treasury supply ?
Onward, as to Congress “fixing” anything, especially Weights & Measures :) most notably those later delegated to the Federal Reserve, it seems the scales have been “fixed” to benefit the house, Congress and Bipartisan Administrators :)
Thinking back to June 2003, Greenspan’s 1% solution and ensuing historic manic market bubble in “Shelter” assets, and 2007-8 bust thereafter, one cannot help but see today broader markets peaked critical state on the verge of avalanche.
Oh, forgot. There is a good essay that explains destructive behavior in society from a game theory perspective that might just be applicable to bitcoin.
It´s called meditations on moloch. It´s a good read but a bit long but worth the time
The weakest part of the bitcoin paper IMO is that it in no way considered what would happen after adoption by monetary authorities. You need a massive apparatus to ensure people spend the hardest currency on earth, but that apparatus never thinks to just split the chain with new rules that benefit it and mandate you use that instead. Now apply this to wars. "The End of History" is the starting point of BTC.
This was the best work you’ve done on BTC. I got into BTC in 2014 from disillusionment with the financial system and hopes of something better. Long story short, after a deeper economic education and spending time amongst the Hodlers, I’ve come to realize that the BTC as money narrative is simply absurd. I actually think you’re being too kind to Bitcoiners in this note. They have fully and religiously bought into the narrative that they are offering a more accessible financial system, but deep down they all know they simply seek new bag holders. The one thing I’d add is that not only would BTC as money not work because of its inelasticity, but all on the BTC standard would also be accepting feudalism with a bunch of tech bros at the top…and Michael Saylor as a modern day Mansa Musa
The one great financial bubble in U.S. history was the Civil War - what became known by the people who lived through it as the War of the Rebellion. A country that spent and collected $60 million gold dollars in 1860 would owe 50 times as much "money" 5 years later. Nothing else comes close. For Presidents Trump and Biden to have matched Lincoln's record, the Treasury's current IOUs would have to be 12 times what they are now, and our war dead would have to be equal to the Soviet Union's in 1945 at the end of the war against Germany and its allies.
Yet, somehow, 1866 was the beginning of the rise of the American financial empire, not its end.
Mike, I always enjoy reading your work. Even when we disagree it gets me thinking, questioning my thesis etc. which has value.
a few questions:
How did Bitcoin fail in providing a trust-less transaction?
Are you referring to the Mr Gox price manipulation or some other period of extreme volatility that created a temporary significant barrier to using as means of exchange or the area noted where fees have become a significant barrier to further adoption even use in the example you provided?
There are a number of on exchange measures relating holding period to recent transactions that can help provide some insight into whether HODLers are accumulating or liquidating. Have you investigated that in addition to ETF flows? It could help with analysis of whether retail is being used for exit liquidity.
wouldn’t gold have the same hard cap issues in terms of its maximum mine-able reserve? I realize all hard currencies typically run into some form of Triffins dilemma, so alternatively it really is up to us
BTC bugs to promote a viable use case other than number go up? This is hard because greed does create industry and use case at least for a time. Eg gold rush and shovel manufacturing, ultimately I would assume a surplus of shovels resulted but there had to have been some technological improvement or efficiency discovery in production… perhaps the creation of a different alloy or handle creation that had benefits in the economy elsewhere after the gold bust?
How do halving dates and miner spend, to pay operating expense and taxes, -the inflation component of BTC interplay the deflation component-with halving dates on rewards, and final hard cap of 21mm?
I do agree that levered QQQs carry significant correlation to BTC price returns. But the correlation is not stable and has actually deteriorated over the last 2 years, real interest rates, credit spreads and various measures of liquidity and of course exchange address are also very helpful and more stable factors to regress. A great, serious source is Tim Peterson With Cane Digital. Discussion or even debate between you two could probably provide a lot of value.
Finally if hard cap really does increase instability then why the consistent decrease in volatility and the concavity in log Bitcoin prices series over time? This is getting back to drivers if return sans levered QQQs I think.
Again thanks very much for sharing your thoughts with us, and I hope this received in a curious and constructive way.
Mike, I love you're writing on many topics but I always seem to fail to grasp what you mean when you say certain things about bitcoin. For example:
"It’s amazing to me that 15 years into this “experiment” no one has modeled the game to its conclusion." -- what is the conclusion? Will you model it for us, or point me to where you have in the past?
"a perfectly hard monetary policy with no ability to change supply in response to demand is simply a bubble waiting to burst." -- why? What is the economic theory underpinning this belief? At the very least, it can only be a theory and not proven or provable, because the world has never actually seen a perfectly hard fixed supply asset prior to bitcoin, right? So we can't know for "sure" how this plays out?
Thanks in advance!
Long-term fan here. When discussing the BTC ETF numbers, I believe the commentary may be a bit harsh. I wonder if you replace BTC with Uranium, whether the commentary would remain the same.
https://farside.co.uk/?p=997
Here are the net inflows into BTC after discounting GBTC outflows. They still look really healthy to me and on track to be one of the best ETF launches in history.
For the record, gold ETFs have bled $2B since the beginning of the year.
I agree with you. But, Tether seems to supply enough Tether crypto to keep the Ponzi in Bitcoin going. Personally do not see any intrinsic value in any crypto though they do seem to feed one another. If proper accounting and regulation was instituted I do not believe that any would have value IMO. Also, Crypto exchanges going under seems to support this IMO.
Mike, In assessing BTC I think you have to also take into account the Lightening network - a layer 2 protocol that will allow people to move small amounts of value quickly, securely and inexpensively. Its the Lightening Network that is being built on top of the bitcoin network that will help bitcoin scale. Outside of the US and Europe, most of the worlds remaining monetary systems are terrible. A criticism routinely heard in countries with bad monetary systems and that are using btc is that using and holding bitcoin on a daily basis is problematic because of its volatiliy and cost. Right now Lightening developers are working on ways to move stable coins - USDT or USDC or future US dollar stable coins on the Lightening network. Over time it is possible and maybe likely that, like silver in the 19th century dollar stable coins will be used for everyday purchases and bitcoin, like gold in the 19th century will be used more as a store of value. It seems to me the on-going debasement of the dollar - on average 6-7% per year - will continue to incentivize people to seek very hard assets like bitcoin to protect themselves against that debasement. A protocol that allows you to move both btc and dollar stable coins around the world securely, 24/7, and in the case of dollar stable coins - inexpensively - seems a big improvement on the monetary systems that exist in most countries. I think the protocol seen in this context offers a substantial amount of utility for many people in the world and that looking at bitcoin alone without considering Lightening and the work that is being done by developers to make bitcoin viable leaves out an important part of the bitcoin promise.
Me thinks this lady protests too much.
It’s very clear that this experimental asset known as bitcoin is great for accelerating the global dialogues around more ethical and fair monetary systems.
It is high time to shake up the status quo around monetary policy that has gradually become distorted and corrupted.
Please have a debate with Lyn Alden or at least Jim Bianco.
I think money needs three essential properties:
1. constrained elasticity - the ability to use collateral to create new supply. the loan creation mechanism of western money keeps incentives aligned, preventing runaway creation of new supply while allowing appraised collateral to underpin commerce
2. legal framework of contract enforcement. contracts without threat of violent enforcement that causes collateral to change hands or balance sheets to suffer impairment is mostly useless. wasting electricity and computing power to run an unenforced ledger is laughably pointless and misguided.
3. transactional efficiency.
while i would concede that todays western fiat does a mediocre job at all these, bitcoin and gold both clearly fail on all fronts.
A lovely write-up. I wish you had compared to tulip bulbs, too, as an alternative.
Let’s say Bitcoin is worthless. But does thinking that - or making sophisticated arguments to support that idea make you money? I think Bitcoin is only worth what someone is willing to pay for it, but I think the same holds true for all financial assets. In some context you could argue that they are all worthless. But who cares. Honestly. Traders trade price, not being right about an idea of value.
Excellent analysis (also style points for forcing me to search the meaning of "tally sticks").
Mike, you should really debate Burt Malkiel on a podcast. I heard him on a podcast last week saying passive could get to 95% of the market and it would be fine. And the 5% active traders would still be enough to create a efficient market that always reflected "all publicly known information". Malkiel does not believe passive is distorting markets at all.
Michael, once again you’ve sparked readers latent synapses. Beyond butcoin, to coin a phrase, you’ve presented us with real food for thought regarding spreads between futures and spot prices and the gaming the gaps for real yields. Makes some of us, perhaps, think tangentially of any possible parallels on-going in the now fashionable Treasury “basis trade”. Inquiring minds want to know.
How may that symbiotic relationship foster increased production of Treasury supply ?
Onward, as to Congress “fixing” anything, especially Weights & Measures :) most notably those later delegated to the Federal Reserve, it seems the scales have been “fixed” to benefit the house, Congress and Bipartisan Administrators :)
Thinking back to June 2003, Greenspan’s 1% solution and ensuing historic manic market bubble in “Shelter” assets, and 2007-8 bust thereafter, one cannot help but see today broader markets peaked critical state on the verge of avalanche.
Oh, forgot. There is a good essay that explains destructive behavior in society from a game theory perspective that might just be applicable to bitcoin.
It´s called meditations on moloch. It´s a good read but a bit long but worth the time
https://slatestarcodex.com/2014/07/30/meditations-on-moloch/
The weakest part of the bitcoin paper IMO is that it in no way considered what would happen after adoption by monetary authorities. You need a massive apparatus to ensure people spend the hardest currency on earth, but that apparatus never thinks to just split the chain with new rules that benefit it and mandate you use that instead. Now apply this to wars. "The End of History" is the starting point of BTC.