How it started: Satoshi’s Bitcoin White Paper
How it’s going: Michael Saylor is the face of Bitcoin
Since 2017 when I first looked at Bitcoin, I have warned that bitcoin is a flawed currency and the Bitcoin system, based on a fixed supply currency, cannot sustain itself. It takes time for others to catch on because a monetary standard of reference is the least understood subject in economics. Very few understand it. That includes economists, the Fed, Wall Street, and most gold proponents. None of the popular economic schools of thought promote it. It requires an accurate understanding of gold’s unique role as the monetary reference, the numeraire as Jude Wanniski described it. It’s a subject that this website has covered in depth.
The economic establishment has demonized gold and gold standards for the last century because a gold standard prevents the debt based monetary manipulation that defines our global fiat system. Whether by intention or ignorance, economists prop up the fiat system with indecipherable economic gibberish that muddles true understanding. This gives cover for our Fed and politicians to fund our debt based perpetual useless wars and unsustainable spending policies that benefit the few at the expense of the many. In return, economists receive prestigious academic and government positions, approval and adulation from the financial media, and undeserved acclaim–including Nobel Prizes–despite the constant error of their economic prognostications.
Bitcoin was supposed to be the antidote for the collapsing fiat system, but its fixed supply makes it highly deflationary. Its value is unstable and flawed by deflation as much as fiat is flawed by inflation. The Fed at least has control over the supply of dollars and thus its value. By adjusting dollar supply, Greenspan’s Fed kept the dollar’s value fairly stable at around $350/oz of gold for two decades. This was the Great Moderation that befuddled economists cannot explain. With bitcoin, there’s no leeway for value stability. The Bitcoin protocol fixes bitcoin’s supply permanently on autopilot. (Sure, Bitcoin Core could change the protocol to alter its fixed supply, but then we’re discussing a different bitcoin.)
What I recognized with bitcoin in 2017–and hasn’t changed eight years later other than to become more obvious–is that a viable monetary system can’t exist with a fixed supply currency. Throughout history, no significant organized economic system has ever existed with a fixed supply currency. There is a common belief that bitcoin’s infinite divisibility negates its fixed supply. It doesn’t. Each satoshi has the same relative value as each bitcoin. The same as a penny has to a dollar. Just like the number of pennies in circulation has no affect on the value of the dollar, neither do the number of satoshi in circulation affect the value of bitcoin. If the value of a bitcoin goes up 100%, the value of a satoshi also goes up 100%,
As described in the Bitcoin White Paper, bitcoin (BTC) is a currency for the Bitcoin protocol’s digital payment system and blockchain. Now that it’s obvious that no one actually transacts to any significant degree with BTC, the narrative has transitioned to bitcoin is not a currency but digital energy, digital commodity, digital property, or digital whatever. The bitcoin rule of thumb becomes: when the original thesis collapses, invent a new one.
A currency can only do 3 things. Lose value, gain value, or remain stable in value. This remains equally true for a digital currency—the same as for paper currency. A currency is not wealth, it’s the measurement of wealth. A stable monetary standard is the only means by which to measure wealth. Therefore, a currency’s most important attribute is as a unit of account. Gold acts as a monetary unit of account—a monetary standard of reference—and always has. Gold’s value has remained stable over millennia. You can link any currency, including a digital currency, to gold and its value will remain stable, as good as gold. There’s an argument that we’re now in the digital age, bitcoin is digital, and therefore gold is an anachronism. This misses the point that a monetary standard’s only role is to maintain stable value. Our digital world hasn’t offset gold’s stability of value. Gold’s stock to flow, that cements its stability of value, remains the same now as it has for centuries. The digital age reinforces gold’s stability of value. Technological advancements allow the decreasing stock of underground gold to be mined at the same rate it was found centuries ago by a lonely miner with a pick and shovel.
The real argument is not the digital age, but how well a currency acts as a unit off account. A currency’s other two attributes–a store of value and means of exchange–are inferior attributes if the currency doesn’t act as a unit of account.
Fiat is inflationary and bitcoin is deflationary. Both monetary systems are doomed to eventual failure. BTC is little used for the transaction of goods and services, so bitcoin has already failed for what it was created for–a digital currency. Since it doesn’t act as a transactional currency, the narrative for bitcoin has transitioned away from BTC as the fiat replacement currency. The main narrative now seems to be, price go up so buy BTC before price go up more. Michael Saylor is the most vocal advocate promoting bitcoin as an asset whose sole function is for price to go up. As bitcoin’s currency flaw becomes more obvious to investors and the general public, his main obstacle is coming up with a rational and believable explanation for why this is so.
BTC’s only utility now is as a volatile speculative asset. A speculative asset can’t also act as a currency. Bitcoin requires currency transaction fees to offset its halving mining rewards. Since it doesn’t act as a currency that creates transaction fees, the fixed supply bitcoin system cannot sustain itself as the halving protocol progresses.
In 2032 the bitcoin mining reward will be a fraction of a bitcoin. At today’s BTC price and mining reward, it’s already unprofitable for miners to mine bitcoin. Miners are pivoting away from mining bitcoin to backing AI. The Bitcoin system is beginning to implode on itself. To counter this decline, proponents like Michael Saylor, Tom Lee, and Cathie Wood routinely make outlandish predictions for BTC’s price. A constantly rising bitcoin price is the only way the system can sustain itself. The wild predictions are also necessary to keep HODLers HODLing. HODLers are the bagholders for exit liquidity.
An alternative narrative is that bitcoin will evolve into a global in-demand currency; it just takes time. That Bitcoin is still in its infant stage. Meanwhile, according to its vocal proponents, bitcoin is supposed to rise to $1,000,000–and theoretically it has to for the halving reward system to sustain itself. It’s axiomatic that investors will hold a currency rising in value for its appreciation rather than spend it on transactions. Without transactions, bitcoin is not a currency. It’s a speculative asset with no functional utility. The result is a fixed supply currency Catch-22. A currency that has to rise in price to sustain itself can’t act a currency. The only demand for bitcoin then becomes that its price will rise for no reason.
How bitcoin got this far and its price this high requires the story of Tether. But that’s another post.