Bitcoin, or Bitter Con?
Nassim Nicholas Taleb, author of The Black Swan and other books on risk and probability is Bitcoin’s nemesis. A one-time supporter of the cryptocurrency he now calls it a “Ponzi scheme.” Taleb recently posted an analytical take-down of Bitcoin using concepts from quantitative finance. He hits hard.
Many features of Bitcoin’s downside are now familiar to the public and Taleb checks them off: Bitcoin wastes energy. Its transactions are slow, costly, and don’t scale to large volumes. “(Y)ou can instantly buy a cup of coffee with your cell phone,” Taleb says, but "you would need to wait ten minutes if you used Bitcoin.” It’s been twelve years after its birth and, still, no prices are invoiced in Bitcoin. “It’s not even a currency at all,” Taleb jabs.
Bitcoin’s underlying blockchain technology, with its immutable ledger of transactions, must continually maintain a “physical presence” into the future. The blockchain is finite with respect to the past but potentially infinite with respect to the future. The whole system depends on the work performed by Bitcoin “miners” who are paid in Bitcoin to update the blockchain. To Taleb, this is Bitcoin’s Achilles heel. The exit of the miners would be a fatal blow.
The “fundamental flaw” of most cryptocurrencies, according to Taleb, is that the miners and the system maintainers make their money “from the inflation of their currencies” rather than from fees processing the underlying transactions. But one cannot predict if future generations will still have enthusiasm for Bitcoin or if its technology will not one day become obsolete. If that comes to pass, and if the miners exit, then Bitcoin’s present value must be zero, Taleb asserts. If Bitcoin reaches that limit, it will hit an “absorbing barrier” from which recovery is impossible. Taleb has crossed the Rubicon. He’s drawn a line against the “Bitcoin is here to stay” narrative.
Taleb’s point about Bitcoin’s putative zero value calls to mind an observation made by economist and gold-standard historian Nathan Lewis about fiat currency. Before about 1870 there were only two kinds of paper currency in the West: those that were convertible into gold and persisted, and those that disappeared. There was no middle ground. Americans have seen two episodes of the Case of the Vanishing Money: the “Continental dollar,” which was issued during the period of the Articles of Confederation, and “greenbacks,” issued during the Civil War. Both were fiat currencies and disappeared entirely. But in the latter part of the 19th century, a third category of currency appeared: fiats that stagger on for generations. Fair to say Taleb does not have this in mind for Bitcoin’s fate.
Put a group of crypto-innovators and central bankers in the same room and both sides will pledge allegiance to something called “sound money principles.” The trick is to get them to define it. There can be no sound money without it being referenced to a fixed weight of gold.
Bitcoin can never be the basis for sound money because it conflates two functions of money: It proposes to be a medium of exchange and the measure of value. It can’t do both simultaneously — at least not in a sound money way. As author George Gilder would put it, money must be “noiseless.” The analogy is to “signal and noise” in electronics. Money must convey the signal or the prices, but if money is not stable it sends along a lot of noise.
Compare to the classical gold standard system where money is the medium and gold the measure. These are distinct things but they come together at the point of convertibility, whenever currency is presented for conversion into gold bullion or vice versa. A gold standard system recognizes that the measure of a thing cannot be part of the thing measured. The ruler that measures the table cannot itself be part of the table. Money measures the value of things but something must measure the value of money. That thing cannot be just another unit of money lest money lapse into a self-referential loop. Bitcoin and fiat currency do that. In the classical gold standard, gold stands apart from money and gives it a definition. Gold makes money noiseless.
To the Bitcoiner, money is something that can be conceived in the intellect by a rational process and then brought to fruition in society. To the classical gold system advocate money is something that emerges in society by custom and is then is presented to the intellect. A gold standard is not something imposed on society like a pre-designed template. It comes forward to us from history as an expression of the human impulse for stable money. Gold is “Lindy.”
“Satoshi Nakamoto” is the pseudonym for the person who created Bitcoin (b. 2009). Whoever Satoshi is, it’s a good guess he entered adulthood after 1971. That was the year in which the link between the U.S. dollar and gold was severed. It marked the end of a long stretch of history in which the major powers organized their financial affairs on the gold standard system. Since that time, the value of all currencies has been in flux with each other, sometimes more and sometimes less, but always without an objective definition of their relative value that only gold can impart. They are fiat currencies and their value is whatever the public says it is at any moment in time. Nassim Taleb got his start on Wall Street trading currencies in a world like this. Like Satoshi, he never experienced a fixed-value system. Both developed their skills in a world where floating currencies are a given, a background condition.
Both Nakamoto and Taleb think of currencies as though they were a cluster of rogue planets, digital and physical, revolving around each other on random courses, with the smaller ones falling away and the larger ones trying to assert pull over the others. This is not a planetary system in which a star holds the bodies revolving around it in harmonious order. Currencies need a gold Polaris.
Here’s a thought experiment: what would Bitcoin look like today if the circumstances of its birth had been different? What would be its purpose if it was conceived in a world where all national currencies were defined by fixed exchange rates? Would its value likewise be fixed against the others or would it choose to float against a background where no other currency changes value?
Gold used in monetary affairs is a means to an end, the end being a fixed-value currency system. Only gold can do this. No other commodity in history has come close. Gold is not a commodity among other commodities. It measures the value of other things but no other thing can measure the value of gold. If there’s some wobble in gold’s stability, so be it. It’s still good enough to do the job. Columbus set sail 530 years ago. At night his crews took readings from the North Star. Tonight’s night sky is slightly different from the one they saw, but the North Star can still be used to chart a course.
Gold inescapably comes up in debates about Bitcoin. These tend to degenerate into fruitless arguments that tend to take the form of: “My digital asset is better than your physical asset.” The two sides talk past each other. What’s missing is any effort to analyze gold as the organizing principle of a “gold standard system,” with the emphasis on the last word. Put the word “gold” aside. Instead, analyze the structure and the mechanisms of a rules-based currency system. Find out how it works. In a free e-book, Nathan Lewis describes five different ways of constructing a gold standard system. It’s an operator’s guide showing which buttons to push and levers to pull. One option doesn’t require the currency to have one ounce of gold in the vault at all! That system is described in The American Thinker here.
Crypto-geeks tend to look upon themselves as revolutionaries but ironically there are traces of a gold standard system in their midst. Gold’s influence peeks through here and there. For instance, Bitcoin is produced by entities called “miners,” a term that mimics gold mining. Its champions talk about Bitcoin as “digital gold,” implying they want some of gold’s luster to rub off. And Bitcoin’s hard cap on supply — it’s limited to exactly 21 million coins — is a nod to the importance of scarcity, one of gold’s defining characteristics.
Elsewhere in the crypto-community, there are things called “stable coins,” which are cryptocurrencies tied to an underlying asset, typically a national currency, like the US dollar. The parallels to gold and to stable money are evident. Stable coins are telling us that “stability” is a virtue of money, that most cryptos don’t have it, and that the user can control risk by buying a coin whose value is tied to the dollar. What they don’t see, of course, is that the dollar itself is unstable; still, their idea is that a currency should be backed by something that’s not itself but convertible into it. This is nothing other than a page taken from the gold-standard playbook. Other stable coins use gold and silver as the underlying asset, which seems to have promise but hasn’t gotten traction. The metals are typically converted into either tokens or fiat currency for online transactions.
Even though Bitcoin comes off as an exotic technology, it really hasn’t escaped gold’s gravitational pull. Whether you’re a champion or critic, when talking about Bitcoin gold is used as a reference and benchmark. It’s used to illustrate points pro and con. One wonders who is measuring whom? In the end, gold cannot be excluded from conversations about new forms of money. It’s entailed in the idea of stable money.
James Soriano is a retired Foreign Service Officer. He has previously contributed to the American Thinker on monetary affairs.
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