Michael Kendall November 21, 2024 5 Comments

Number go up.  A lot.

 

In April 2021, a friend invited me to attend the H. C. Wainwright Cryptocurrency, Blockchain, and Fintech Conference virtual presentation with Michael Saylor touting bitcoin. I watched the presentation and thought about writing a critique of it, but there was so much wrong with Saylor’s economic assertions underlying his bitcoin case that I didn’t think it was worth the effort required to debunk everything.  At the time, bitcoin was near its all-time high of $67,000 before it began its rollercoaster ride down to $16,000 over the next 20 months. There was discussion then that with a further decline in bitcoin’s price, margin calls could bankrupt MicroStrategy.

Saylor did another presentation this month, November 13-14, at the Cantor Crypto, Digital Assets, and AI Infrastructure Conference. It is a repeat of the H.C. Wainwright presentation turned up to 11.  According to Saylor, future wealth will come not from productive enterprises creating goods and services that meet our needs and improve our lives, but from owning bitcoin’s ether nothingness rebranded as digital capital.  As an added benefit according to Saylor, the U.S. can solve its debt problem through bitcoin ownership.

I completely agree that Satoshi’s vision of Bitcoin and the blockchain have the potential to revolutionize the global financial system—if bitcoin acts as a functional currency for the transaction of goods and services.  The Bitcoin White Paper makes clear that Satoshi meant for bitcoin to be a currency. Its title is Bitcoin: A Peer-to-Peer Electronic Cash System. Cash is often associated with currency. The White Paper further states:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

 

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

There are three requirements for a currency; a means of exchange, a store of value, and a unit of account.  Satoshi expected bitcoin to act as a means of exchange by defining it as electronic cash in the White Paper.  When the public freely accepts a currency as a means of exchange, it by default acts to some degree as a store of value and unit of account—at least compared to no other better available alternatives.  Since bitcoin doesn’t act as a means of exchange, it doesn’t meet the definition of a currency.

In the early days when demand had yet to outstrip its limited supply, bitcoin acted as an electronic cash payment system for goods and services on the Silk Road marketplace.  Though, the goods and services available on Silk Road were somewhat suspect.  Authorities soon shut down Silk Road, but the die was cast that hip, tech-savvy consumers would now use bitcoin to purchase all matter of goods and services.  The furthest it ever got after Silk Road was maybe to buy a bitcoin tee shirt at a crypto conference. In hindsight, relative to today, anyone who in previous years bought anything with bitcoin rather than holding it as a purely speculative asset, should rue the purchase. 

At Cantor, Saylor states that the “(brilliant) idea that’s so profound it shakes the foundation of the economy is that Satoshi figured out a method to store value without a trusted intermediary.” Never mind what Satoshi said in the White Paper about bitcoin as electronic cash for a payment system.  Saylor’s legerdemain inverts bitcoin from Satoshi’s currency payment system into a store of value thesis that supports MicroStrategy’s investment strategy. To do so, he rebrands bitcoin from currency into digital capital¹. Saylor states:

“Bitcoin represents the transformation of our capital from financial and physical assets to digital. What we’ve created is an asset without financial risk² that’s in a currency or stock and without physical risk that’s in real estate or property. That makes it digital capital, not digital currency.”

It’s not just Saylor who has given up on bitcoin as currency.  No one in the crypto world now advocates bitcoin as a currency—including self-proclaimed Satoshi, Craig Wright. A rule of bitcoin: When its stated raison d’etre fails, invent a new one and pretend the original one never existed.

Saylor says his bitcoin thesis will end wars, create a Pax Americana, solve the debt issue, and cement the dollar as the world’s reserve currency³. Trillions of dollars will flow to the U.S. if we own bitcoin through the (Senator) Lummis Bill that proposes the U.S. government buy 1 million bitcoins. Saylor says that the purchase will be worth $16 trillion in 2045.  But why stop at buying only 1 million bitcoins?  Saylor says that if the U.S. government goes “Double Max”  and buys 2 million bitcoins it will be worth $30 trillion in 2045.  But why stop at 2 million bitcoins?  There’s “Triple Max” worth $56 trillion. Finally, in “maybe the greatest deal of all time” the U.S. government can go “Trump Max” and make an undefined purchase worth $81 trillion in 2045. With Trump Max, Saylor says, “we’ll retire all the debt, we’ll be the richest country in the world for hundreds of years, right. It’s very straightforward.” 

Saylor says to get to this bitcoin economic nirvana requires three steps.

• Define the digital asset classes 
• Set sound ethical, economic, and technical guidelines 
• Provide a practical legal method to issue, own, and operate digital assets

A proliferation of Ponzi frauds, scams, hacks, rug pulls, manipulation, wash trades, bankruptcies, offshore entities, rampant criminality, cult personalities, stealth CEOs, money laundering, sanctions busting, terrorist financing, and non-regulation define the crypto Wild West.  Enacting Saylor’s three items is a necessary step to provide order, consumer protection, and a framework for crypto to move forward.  But then Saylor upends his brief moment of economic clarity by stating that when Tether relocates to the U.S., we will solve the problem of how to freely and instantly transfer digital assets between humans and machines worldwide. 

It is well known that Tether has been legitimately accused of running every financial illegality listed above—except for yet going bankrupt. Tether is the poster child for everything wrong with crypto.  In its ten years of existence, Tether has yet to provide an audit of its assets that supposedly back the tethers it issues—despite repeated promises to do so.  If as suspected, Tether issues unbacked tethers out of thin air along with other risk-based backing, there is zero chance Tether can ever withstand a legitimate look into its financials. Tether is far more likely to crash the crypto market than sustain it as Saylor advocates. 

To get to Saylor’s three-step rule of law framework requires reordering the crypto space.  The frauds, scams, and Ponzi coins that can’t support legitimate financials required by SEC regulation will disappear along with billions gambled on them.  The price of bitcoin is not immune from stablecoin and unregulated exchange fraud. The last bitcoin crash occurred during the major collapses of Terra/Luna, FTX, and Celsius and the bankruptcy of Genesis and Blockfi.  Saylor seems to presuppose a transition to regulated crypto will seamlessly occur with nary a tremor to bitcoin. The more likely scenario is that regulation will cause a crypto crash that will flow into financial markets. For that reason, it will likely never happen. Big crypto is too corrupt to fail.

Saylor’s extremely professional presentation of his bitcoin thesis may sound reasonable.  There’s certainly no lack of confidence on Saylor’s part.  But here’s why Saylor’s bitcoin thesis will never happen.

Saylor sees bitcoin as unique digital capital, commodity, energy, money, gold, property–or whatever digital resource he terms it at any given moment–whose protocol scarcity requires an ever higher price to meet his thesis demand.  Assuming there’s true price discovery, this is valid for any scarce unit in high demand whether it’s a Van Gogh, baseball cards, vintage items, Beanie Babies, or bitcoin.

The flaw is that fixed supply turned bitcoin from a currency into a speculative asset.  Bitcoin proponents recognize this because they all have redefined bitcoin as non-currency. It’s readily observable that no one uses bitcoin to transact for goods or services. Bitcoin’s terminal problem then becomes: mining can’t sustain the protocol absent a functional currency.

Think of it this way.  In 2150, the bitcoin reward goes to zero.  What keeps bitcoin going when there is no longer a mining incentive?  Transaction fees were supposed to offset the declining mining reward, but that required bitcoin to act as functional currency—an idea Saylor states is dead. We don’t have to wait 125 years for the mining incentive problem to occur, it’s already happening. At the 2022 $16,000 bitcoin price, miners were going bankrupt.  With every halving, the price of bitcoin has to perpetually go up to support mining that keeps the blockchain protocol running.  As the mining reward approaches zero, bitcoin’s price has to go to infinity, theoretically.

It’s the mining reward that ultimately drives bitcoin’s price higher, not Saylor’s demand thesis relative to its fixed supply. While bitcoin has utility as a transferrable digital store of value, there is currently no true price discovery. The unregulated fraud that Saylor wishes to eliminate, prevents true price discovery and distorts all crypto pricing. Yet, Saylor’s bitcoin thesis completely rests on bitcoin’s scarcity demand reflecting a true price.

By 2032 the mining reward will already be a fraction of a bitcoin. Bitcoin’s constantly declining mining reward requires an exponentially rising bitcoin price to sustain the system. It gets worse with every subsequent halving. Since bitcoin doesn’t act as a functional currency, bitcoin will reach a limit where mining can’t sustain the protocol.

Saylor has a talent for stating questionable economic propositions⁴ in a calm, soothing, authoritative high-pitch tone delivery that sounds reasonable in the moment. He’s the Music Man selling bitcoin instead of trombones. With the gravitas of his stated MIT background, elevated MicroStrategy valuation, and supporting bitcoin price, Saylor currently has the wind at his back for his thesis. Bitcoin frenzy and the madness of crowds may support Saylor’s thesis for some time, but it can’t last. IMO, the denouement will come sooner rather than later.

I’m not saying the Bitcoin protocol can’t work.  Only that it can’t work with fixed supply that negates a functional currency.  Sustaining Bitcoin requires a functional currency and its transaction fees to offset the declining mining reward.  Bitcoin is open source. Anyone can build on the Bitcoin protocol a bitcoin that acts as a functional currency.  And I think I know how to do it.

 

 

1. Saylor has also defined bitcoin as digital energy, digital gold, digital money, digital commodity, and digital property.  Bitcoin is actually a failed system for digital cash and electronic payment that turned into a purely speculative asset with limited utility and no true price discovery.

2. Some might define a history of 75% to 90% declines in bitcoin’s price as financial risk. But in Saylor’s view, where he states bitcoin is going to $13 million per coin by 2045 as the base case,  “every bitcoin you don’t buy today is going to cost you $13 million.”

3. Saylor says inflation is 13.3% and bitcoin is the best hedge against this chronic dollar devaluation.  Yet, he also says bitcoin will cement a chronic inflationary dollar, that requires a bitcoin hedge, as the world’s reserve currency. Inferred is that bitcoin both protects against dollar instability while creating dollar stability. They both can’t be right. 

4. Like gold will slowly demonetize.  What will cause gold to lose its thousand-year history of stable value and its role as a unit of account, the monetary standard of reference?