You’re wasting your time arguing with these dudes on twitter though. They think they’re making economic arguments but in fact they’re making religious ones. And you cannot hope to disabuse them, for you cometh not into the House of Coin a true believer.
I agree with this. I think blockchain has real potential, but will likely take several years for maintream economy to really figure out how to use it.
At the moment, I view crypto as a combination of pre-New Deal banks and airport foreign exchange kiosks. It is clear that many people have been effectively fleeced of their holdings by putting it into holding companies that mingled these assets so they are just another unsecured creditor when the holding company runs into trouble. People who forget their key or throw out their hard disk are no different than the Spanish who had their ship sunk with a gold chest on board or a Viking who buried his gold hoard somewhere. It may be difficult to get insurance on crypto, that if lost, could be valued at $1k or $1M.
If you have solid possession of your asset, it is currently clunky to use outside of a handful of Internet portals. For most applications, there are high transaction costs of something that can fluctuate significantly in value hour-by hour, day-by-day. It has a long way to go before it can replace a credit or debit card.
I still think Twitter's peak value is food trucks being able to quickly announce where they are set up and what they are serving. Similarly, crypto's peak value seems to be facilitating the transfer of large quantities of illegal money, especially across borders. However, countries appear to be starting to crack down on some of this, including getting better at tracking the money trail bured in the blockchain.
I agree with you that many of these crypto folks are making religious arguments, Richard. In that spirit, I wrote a piece devoid of all that moral and religious stuff, addressing only economics.
Given how easy it is to get interest on "cash" in money market funds which pay interest and are functionally equivalent in liquidity, I'd add that as an argument for traditional cash. And while I agree that cash/ T-bills are not a good long term investment, a certain amount of cash in a portfolio is valuable for optionality for investment opportunities that arise (in addition to cash that supports living expenses).
Noah, Love your writing. I learn a lot from reading your posts.
Your argument that "Scarcity creates value" is a myth isn't convincing for me. So writing this comment to get a bit more elaboration from you on that.
As a first order effect, you are right. Case in example -> Webpage is like digital real estate but since it's digital it doesn't need to be limited , ergo there can be infinite webpages that can be created by anyone .
But second order effect of that is it pushes scarcity to one layer above -> "Which web pages do I want to visit now" . Ergo answer is Search engines , of which there are limited and mostly dominated by google. So we just pushed Scarcity from Stuff (pages) to Attention (how to find them) .
Same happens with Social media feeds. Creating digital content is free. But it just pushes scarcity to the feeds (attention).
But we have seen in both above cases scarcity is where most value is captured. In fact it's where most value is captured if you make other parts of the value chain abundant.
I think you're talking about how value creates scarcity! Good stuff is rare because it's hard to produce. But it usually doesn't work in the opposite direction; simply producing less stuff doesn't make it good.
You seem technically inclined: the perfect scarcity is a random GUID - the same value is all but guaranteed to never occur until the heat death of the universe. The economic value is 0!
Same with blockchains: there are a large number of nonces that can be discovered through mining and create valid blocks, and an infinite amount of "genesis blocks" that can start a different chain.
In all cases, the value does not come from digital scarcity but from other participants reaching a "shared information" consensus (they agree, you agree that they agree, etc.).
Superb comment, Emil! Happy to see someone in this comments section who is more technically informed.
Blockchains are most useful when they allow decentralized parties achieve consensus without a central entity. I.e., to keep track of who has how much currency in the modern world, we require a bank. With Bitcoin, we just need code and self-interested humans (which humans are!).
The ability to achieve decentralized consensus, in itself, is a novel solution, which I do believe has some intrinsic value.
After all, "scarcity in itself creates value" was never a Bitcoin thesis!
I wrote some economic arguments against this piece by Noah, and I'd deeply appreciate your thoughts on it.
I believe you're actually agreeing with Noah in a sense--scarcity in itself does not produce value, but if there's value at the base, it can direct greater and more focused value elsewhere!
I do think, however, that "scarcity in itself produces value" was never a core Bitcoin or crypto thesis. The thesis has more to do with adoption--since only a tiny % of the world currently is into the space, as more people enter and see use-cases, with time, value will rise. So it's really going back to supply and demand.
If you're interested, I'd love to hear your thoughts on this rebuttal piece I wrote. It responds to this article using economic arguments. It touches on the flaws of Noah's scarcity argument, too.
Very clear and fair explanations. My understanding of Bitcoin is that its best use case is as “digital gold”, not really as digital currency. Do your critiques in the Misconception 1 section still apply to this argument?
Noah, do you think the hard-money people might also be wrong about gold itself, in claiming it has intrinsic value?
I remember being taught in school that gold is valuable because it's both scarce and beautiful, which means rich people can make it into jewelry to show their status.
That seems wrong to me. I don't see how the color of gold is objectively more beautiful than the color of silver or copper. Isn't it more correct to say that there's a social consensus that gold is the most beautiful metal, because it's the metal that rich people wear?
People somehow believe we can simply move to a deflationary regime and all else will remain equal. OR they don't understand that ending borrowing would instantly plunge us into the worst depression this country has ever seen.
Someone argued to me the other day that an ideal system is one where people pay cash for cars or fully fund the startup costs for a business out of their own cash savings.. It blew my mind that people don't seem to understand how lending greases the wheels of the economy. For example if people couldn't borrow money to buy cars, car sales would plummet, workers would be laid off, and there would be a cascade of negative effects throughout the economy.
Maybe this is me just being frustrated and cynical, but more and more I feel like people who describe themselves as "savers" are just hoarders trying to convince themselves and others that their hoarding is morally superior actually.
Gold has a number of unique properties that make it useful as a currency: it's got very high density (I think higher than any other metal that was known until the 20th century), which makes it hard to fake, it's easily divisible because it's soft, it doesn't tarnish or decay, and it has a distinctive appearance.
None of that forces it to be a currency, but it does mean that in societies where gold exists, it's a more natural social equilibrium than other things.
When it comes to something like cryptocurrency, there's the same basic dynamic. The value (if it remains stable) comes from a social consensus, but that consensus is easier or harder to create on the basis of the qualities of the cryptocurrency itself.
A non-tarnishing electrical conductor is also valuable as an industrial commodity. But that is not its primary driver. Ultimately, people like decoration and so gold has historically been excellent for decoration, so jewelry etc. You could wear it as an ornament but also use it as a currency (Viking/Anglo-Saxon gold armbands, Indian and other women with gold jewelry as portable wealth, etc.). It was also easy to melt but had a high specific gravity so it could be differentiated from many other base metals. It did not tarnish or rot so was excellent for currency where the issuer and users could understand quality control of the coinage of the realm as well as having something unchangeable over time (shipwrecks have gold coins like new after centuries underwater in mud). That is why debasing gold coins with lead was so heavily frowned upon, because it undermined the entire trust system in national and inational commerce if you have to check every individual coin or bar for every transaction.
It seems like multiple unconnected societies throughout history have decided that gold is cool (eg. medieval Europe, Central America pre-Columbus, Ancient China) so there’s definitely something there that is universally human. I’m not sure that something would actually matter in the apocalyptic scenarios that the gold hoarders like to imagine, especially not shortly after the collapse.
Yeah, the social consensus that gold has value is unusually consistent across places and times.
I guess I'm just objecting to the line that "fiat currencies are bad because nothing gives them value except the shared belief that they have value". You could say the same about gold, or any other non-productive asset.
Except guns. I think weaponry might be the one asset whose value isn't socially constructed. That probably explains why some of the people who like gold like guns even more.
In the future it might but, as you astutely pointed out in a previous post, at the moment it doesn’t trade anything like a store of value, but more like a leveraged play on the Nasdaq index.
I think it's worth reading what economists from the other side have to say. After all, not EVERYONE in the crypto space is relying solely on moral and religious arguments.
I think that Bitcoin will surely serve as digital gold. It might even serve as a currency, but that'll depend on the extent to which it yields real returns for cash hoarders. If you're interested, here's a response to the piece by Noah. I'd love for you to take a look!
I think its worth noting that a lot of Bitcoiners (at least the well-read ones), have actually evolved from calling Bitcoin a payments layer to calling Bitcoin a settlements layer.
Might be worth checking that out.
Plus, I wrote a response to this article which I'd deeply appreciate your thoughts on:
Interesting post just needed clarity on this point "Now there are a few exceptions to this general rule — things that people value because they’ve decided to use them as status symbols in a zero-sum status-signalling competition" What if people decide to value Bitcoin or some digital land, especially rich people and over time it becomes a desirable thing for others who follow after them, no matter the alternatives available in the market.
In regards to Misconception 1: I think its a mistake to compare BTC with cash and most holders would agree. With a block size of 1 MB and a transaction limit of 7 tps, using BTC as fiat is not technically feasible nor desirable. After the whole block-size debate, the matter was settled, and only holders of BTC Cash or BTC SV still view Bitcoin as an alternative to cash - a vast minority. Sure, there are L2 solutions for BTC, but that is not relevant to the core philosophy and investment thesis of Bitcoin. As the meme goes Bitcoin is a store of value, and Bitcoin's most important value proposition lies in its utility as verifiable digital asset with great security. Other digital assets and FinTech innovations are much more suited as alternatives to fiat.
In regards to Misconception 2: I think its a mistake to juxtapose Bitcoin with "the Metaverse" as these concepts have nothing to do with each other. The idea of Web 3.0 is based on the philosophy of Bitcoin, but "the metaverse" concept is related to XR technology, not Bitcoin. Bitcoin is revolutionary, since it was the first asset to provide digital scarcity, verifiability, and immutability in an online world where work and any kind of value really could be copied indefinitely if it was not for trusted intermediaries. Today, Bitcoin is the most secure blockchain network why it is valued much higher than other so-called cryptocurrencies.
This was quite excellent. Pretty much exactly my stance on the subject.
>Giving poor people a few bucks of returns is not worth giving rich people a huge windfall of unearned returns.
I might have added that such a subsidy on the rich's paper savings is also incredibly destructive as it displaces investment in value producing, job producing projects making the poor underemployed or unemployed while at the same time, trimming tax revenues and reducing government services.
Given the potential drop in production, even those receiving the subsidy might end up poorer, all their other assets, losing value. They'll be richer than those not getting the subsidy, but since it will be relative to a lower average, they might end up poorer in absolute terms.
The point is that a stable, insufficiently inflationary currency is not just a subsidy for cash hoarders, it is a subsidy for divestment in production, a subsidy for economic inactivity. It moves the world towards a scenario where everyone is hoarding tokens and no one wants to be the one financing production of something to buy with these tokens.
Your argument makes intuitive sense, but the real question is how significant are the real returns on hoarded currency? The economic evidence against mildly deflationary currencies is actually quite weak.
For example, even Stanford Economist John Cochrane, whom I believe Noah has quoted in his articles, has said that mild deflation isn't exactly earth's reckoning.
If you're interested, do consider reading this response piece to Noah's article. It sheds light on the economic arguments for deflationary currencies:
There's apparently mixed opinion over whether houses are productive assets?
In support of that view:
- Houses are places where work happens. If a factory building in which products are manufactured or a commercial building housing a restaurant can be deemed a productive asset, so too is a home where products are made (sometimes today, frequently in years past), food is prepared, and so on.
- Houses can be rented for income. The ability of an entity (as well as more abstractly, an ownership share of an entity, like a business) to generate income is a key quality of many other productive assets.
- Houses intrinsically provide benefits to humans (and some animals), including shelter from cold, heat, moisture, and winds. Directly providing (some threshold quantity of) human benefits is a quality of some other productive assets.
One can imagine a similar discussion (and debate) over whether cars, trucks, and other moving vehicles are productive assets? And one can make a plausible, highly similar defense that they're included in that category.
Houses are difficult to replace with something else. Tents? So there is fundamental scarcity of houses to maintain or increase their value in desireable areas.
All you have to do is visit a gold mining ghost town to understand that lack of demand dictates whether or not the scarcity means anything at all. Our modern equivalent has been the Rust Belt and coal mining towns where house prices have been very depressed over the past 20+ years compared to growing cities. living where I do, the "housing unaffordability" crisis has been amusing. My house price didn't even double from early 90s through 2020. My house has gone up more in value over the past 18 months than the previous 25 years. In our county, last year the median household income could buy the median house at 3x multiple of median price to income. That has changed some this year so it is about 4x. Even the average house price is only 5x.
Noah, love your posts but I disagree with you on this one. Curious to get your rebuttal to these points:
Misconception 1: Cash is a form of long-term savings
I believe the truth is "unbacked fiat money" is not a form of long-term savings, or, said otherwise, is not a store-of-value. Consider the two forms of money most commonly used in modern history and the two we are most familiar with: fiat and gold. Gold, I would submit, has indeed acted as a form of long-term savings. Over time it has grown its value in fiat terms vs. every fiat currency in history, and has also grown its purchasing power due being able to purchase a relatively stable (total supply of gold grows about 2-3% annually over time) percentage of a growing economy.
Fiat currency debasement has created a warped reality where everyone needs to be an investor just to keep up. Not everyone is, or should be expected to be, an investor! Currency debasement has created the conditions for a racket where passive index managers can charge customers on one end (because they "have" to invest to keep up) and free load off of active investment managers on the other to provide a competitive product. The value proposition of passive investing is unbeatable and, left unabated in a status-quo fiat world, I believe will continue to grow as a percentage of total invested assets until price signals deteriorate so much that it disallows well-functioning capital markets.
There is no reason that sound money can't be a long-term store-of-value. If money has a fixed supply, it will be able to buy a constant slice of total economic output. The incentive to invest and seek higher returns will still exist, but the opportunity cost of investing will be raised so that capital is only allocated to ventures that are expected to grow more than the total economy. In today's world, that might increase the bar for investment from -2% (inflation target) to 2% (real economic growth) and result in a more optimal allocation of capital in the economy.
Misconception 2: Scarcity creates value
You argue that scarcity + utility creates value. But in the case of money, scarcity is precisely the thing that gives it utility. This is why gold is the only money that has lasted thousands of years while every single fiat currency has gone out of existence given enough time. Gold has been superior to all other forms of money because it is the most scarce asset that had been discovered or invented...until bitcoin.
There is no natural resource on Earth, including gold, that we have not been able to increase production of over time when incentives have dictated we do so. Not oil, not copper, not lithium, not silver, not gold. Human time and energy is the only, truly scarce resource. Gold has been used as money in part because it is the most difficult to increase production of and, thus, the most sound. That is, until bitcoin came along.
One thing I find helpful when pondering bitcoin is to consider: What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
Hi Zack, I agree with much of what's here. The point on malinvestments and bubbles forming due to artificially low interest rates (a cost to economic efficiency posed by inflationary currencies) is uncharacteristically not mentioned by Noah.
I hope that he responds to your argument, because there's economics in it, too.
If you're interested, I'd deeply appreciate your thoughts on this rebuttal I wrote:
Thanks Ram. I would correct one thing - I didn't say malinvestments were being made or bubbles were forming due to artificially low interest rates (although they may be! I don't know!) but rather inflation and currency debasement. The precise mechanism by which this malinvestment occurs and capital market price signals degrade is via non-investors believing they need to invest to "keep up" and doing so via passive index vehicles.
Interest rates are a separate topic, and I actually believe low interest rates are good for society as they either reveal or force a low-time preference on capital market participants and thus encourage long-term thinking and investment.
> There is no reason that sound money can't be a long-term store-of-value.
Nothing can be a long term store of value because you can’t store value long term in the first place with no consequences. If it was more valuable to save all your money than spend it, there would be no money velocity, and then no economy. (Food producers won’t take your money for food unless they have non-food things to spend it on themselves.)
Saving/investing does work, but only because people aren’t saving all their money all the time.
> What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
Isn’t “programmable” the other leading brand of crypto? Of course, since you can’t reverse transactions you can’t recover from programming mistakes, so its main use case is losing your money to hackers. Regular business bank accounts are programmable too, and have working admin access.
For most people who aren't monks, I don't foresee any problem in finding things worth spending money on. Indeed, it is the same tradeoff we make today, just with a slightly higher opportunity cost of consumption. Daily expenditures (food, gas, rent, entertainment) likely aren't impacted too much in a sound money system.
Where the trade-off between saving and consumption in a sound money system becomes more salient is in consumption of goods that aren't money, but that have acquired a monetary premium since they are being either utilized as a store-of-value in lieu of cash, and/or as a way to protect one's wealth outside the purview of one's state. Second and third homes that never get visited, perhaps in Vancouver or New York or London and owned by wealthy Chinese, come to mind.
So in that scenario, what exactly have you done to earn that increase? There's no such thing as a free lunch. Since cash has no productive utility beyond being a medium of exchange, if you're earning a return on your unproductive cash, who is paying for it?
You've forgone present consumption of goods and services for increased future consumption of goods and services.
"Cash" (money) does (ought to) have another utility: store of value.
The increase in value of your earned and saved money is "paid for" by the productive economy - all the other participants who took risk with their capital in search of an even higher return and successfully grew the capital stock.
Of course, this works both ways. In a shrinking economy your money loses value.
Using sound money encourages participants to have a lower time preference. Knowing that their hard earned money will likely grow in value over time, rather than decrease, increases the opportunity cost of consuming rather than saving.
When society collectively has a lower time preference, interest rates are lower and more long-term investment occurs, which increases the capital stock and decreases prices/inflation (i.e. increases the value of money).
I don't believe lower interest rates is at odds with my previous statement that in a sound money system the bar for investment (opportunity cost of simply holding money) is raised from beating inflation (-2%) to better than economy-wide growth (say, 2%). Interest rates relate to time preference, while opportunity cost dictates the allocation of capital in an economy.
Indeed, I believe the current regime of low interest rates (assuming we revert back to trend of the last 40 years) has created the conditions for enough long-term investment that economic growth has been and may continue to be high enough to allow the fiat standard to persist. This would be a great outcome.
Additionally, I believe low interest rates, paradoxically, cause low inflation. Low interest rates encourage increased investment which feeds through to increased supply which feeds through to lower prices. The Fed (over the last 40 years, largely), by continually lowering interest rates in their quest to achieve 2% inflation, has accidentally created the conditions for it to remain low.
My fear is that if we are now in a regime of persistently high inflation and persistently high interest rates. High inflation and high interest rates are symptoms of a failing system, not low inflation and low interest rates.
No currency has ever deflated its way out of existence...
"The increase in value of your earned and saved money is "paid for" by the productive economy - all the other participants who took risk with their capital in search of an even higher return and successfully grew the capital stock."
This is breaking my brain. Why should you reap rewards for other peoples' risk taking? This is pure rent seeking behavior. I know savers like to believe that saving is an inherently virtuous activity, but I don't understand how you can believe that skimming off the top of other peoples' productive activity while you hoard cash is a moral and just system.
We all reap rewards for other people's risk taking every day. The iPhone I'm typing this on, the cheap, fast internet I'm connected to, the platform we're on (Substack)...all consumer surplus provided by a growing capital stock financed by risk capital and built by entrepreneurs.
When entrepreneurs are successful, they reap the most reward. I don't think they're concerned with savers getting a "free lunch" off of their sweat and tears. And when they fail, they (ideally) understood the risk they were taking (and should be commended for it!).
What do you think passive index investing is today? It is reaping the rewards of other people's risk taking. It has grown so large precisely because of this - it's an unbeatable value proposition to the not-professional investor. Get better returns than the average fee-charging active manager doing the work to price securities without doing the work or paying anyone to do the work yourself.
A world in which your savings are expected to appreciate in value alongside a growing economy is not so different than a world in which your passive index investments are expected to appreciate in value alongside a growing economy to my mind. The primary difference is we cut out the actual rent-seeking racket in the middle - the fees passive index managers charge.
"No currency has ever deflated its way out of existence"
Not true. Consider the case of physical gold; as it became more scarce and valuable compared to the size of the economy, it became used less and less until nations abandoned the gold standard completely during the Great Depression.
Also, near the time of the American Revolution, a shortage of "hard" currency led the colonial governments to try printing their own paper money without the permission of the British government...
Gold still exists as a store-of-value today and you can buy an oz of it on paper for about $1,800 USD and a physical oz of it for about 10-20% more than that if you can find a willing seller.
Its value in USD terms has increased 39% in the last 5 years, 467% in the last 20 years, and 6,649% in the last 100 years.
European nations abandoned the gold standard during WWI so they could print money to finance their war efforts. Not doing so would have put them at a disadvantage against rivals who were doing so. They re-pegged to gold after the war but at a much higher exchange rates.
This period of fiat money-printing and devaluation led to the roaring 20s, where asset prices denominated in fiat went up significantly, followed by the subsequent bust which became the Great Depression. Most European nations again abandoned the gold standard during the Great Depression in order to print money to stimulate the economy.
The U.S. maintained the peg of $26.67/oz throughout WWI and the 1920's but placed an embargo on gold. Then in 1933 they banned the private ownership of gold and issued Executive Order 6102 requiring all citizens to exchange their gold for $26.67/oz. Then in 1934 they devalued the USD to $35/oz, effectively immediately confiscating 31% of the wealth of private citizens that complied with EO 6102.
So, I wouldn't say nations abandoned the gold standard because gold was being used less and less. They abandoned in a round of competitive currency devaluation to finance war, and then again to stimulate during the depression.
If everyone thinks that way, nobody will be paying for it, and everyone will stop earning returns on unproductive cash, and then people will start working and paying for it.
This argument is a little too simplified, it does not quite work that way, unless deflation is like 20% or something.
If you're interested, do consider reading this response to Noah's piece:
“Volatility is inevitable along the path of monetization. A new money cannot go from zero to trillions without upward volatility by definition, and with upward volatility comes speculators, leverage, and periods of downward volatility. The first couple decades of monetization for the network as it undergoes open price discovery to reach the bulk of its total addressable market, should be different than the “steady state” of the network after it reaches the bulk of its total addressable market, assuming it is successful in doing so.”
Value of Bitcoin is not the disinflationary aspect, nor the foreknown rate of it, though those factors help.
It is the non-ownership of the issuance by elite or government entities.
Seignorage is not available in Bitcoin. No government can print it to run a massive military machine, nor can they control it via taxation and interest rates. You can hold it on your own computer and it cannot be confiscated if you have proper safety hygiene.
Bitcoin mining isn't seignorage? (And as for safety, well, I think it'll probably still be vulnerable to rubber hose cryptanalysis: https://xkcd.com/538/ )
Rubber hose cracking - not as much as you think. With lesser amounts, no one would do such a thing. With greater amounts, there are multiple key holders, a majority of which is required to release funds. This can be further modified with maximum release of tokens per diem built on an unchangeable algorithm, etc. Or long-term lockup with a code that is created and hidden by machine until the release date.
Increasingly sophisticated systems can be created, obviously.
It's a bit of a silly argument, like saying banks aren't safe because you could be kidnapped. But I think you're being a bit jokey, so no worries.
I guess it depends on your threat model. The logical defenses against "a robber points a gun at you" is "as long as you're pointing that gun at me, I can't give it to you even if I wanted to" and "you can't ask for what you don't know about". Bitcoin on your personal laptop, to which you know the encryption key, is about as safe as, well, cash in a safe to which you know the combination, but as you've explained, you can work around that with different security methods. (On the other hand, what happens to your Bitcoin if the robber smashes your laptop out of spite?)
Kidnapping for ransom is a different kind of threat model, as are court orders, revolutions, invading armies, and natural disasters...
No, it isn't seignorage. Is gold mining seignorage?
Seignorage applies to the sole issuer of the coin. If there was only one miner permitted, that might be an argument, but it is a competitive field with mining available to anyone, anywhere. That is the opposite of seignorage.
Re 1: Cash was not meant for long-term saving; it doesn't matter if it is inflationary
> Consider a world where cash goes up in value over time — where simply because
> you stuffed some money under a mattress, you can afford more and more
> of society’s production every year. This sounds like a pretty good deal,
> right? In fact, it is a good deal — too good, really.
> In this sort of deflationary world, you’re getting wealth for nothing —
> society is continually transferring you more and more of the fruits
> of its labors in exchange for you doing absolutely bupkis.
You imply as if it is wrong, even immoral, if you get more produced value for the same amount of money over time.
The way I see it this is normal, and we can see it best with computers and electronics - and it is caused by increased productivity.
When producing a computer now costs a fraction of what it cost 50 years ago then of course you can expect to get the more computers now for the same money unit.
This wouldn't be true for products whose production cost wouldn't change for whatever reasons.
Whether Bitcoin can and should be used as cash is a question for longer discussion, but its advantage is exactly in the fact that is protected from manipulation and money-printing by the state.
I don't see anything good about artificial inflation target of any value, I haven't read anything convincing about usefulness of inflation.
It benefits the debtors and state as the biggest one, and it is a form of immoral hidden taxation of all its subjects.
Re 2: Scarcity doesn't create value
True, but Bitcoin is not supposed to be valuable only because it is scarce.
Scarcity and usefulness create value - rising demand for something useful, but scarce, increases its value.
Anything can be a store of value - be it currency, gold or stone rings, and some of these things can be scarce as well.
But not as scarce as Bitcoin (there is final number of Bitcoins), and not as useful as Bitcoin - it is transportable and transferable, robust against central control, relatively anonymous.
For this reason, it could be expected its usage as storage of value will keep on growing, and with the demand growing its value and price should go up.
> But not as scarce as Bitcoin (there is final number of Bitcoins)
If this were true (there were a limited discrete number of bitcoins in the world), that would make it less useful as money. Imagine if there was only one dollar in the world - no one would accept it as currency because they wouldn’t even have heard of it before. That’s called network effects.
It’s not true, because bitcoins can be divided up, so everyone can get some fraction of them. However, it’s also not true because Bitcoin has no natural monopoly and you can always create a new currency with new owners. That will happen if it’s more useful to do it than acquire some from existing Bitcoin owners.
I think you are missing the point on BTC. For regular folks, their historical income have not kept up with goods inflation and asset inflation due to QE and $ printing. Also, they don’t have time and money to analyze and invest in long term investments like rich people. BTC is a rebel against existing establishment taking advantage of regular folks’ wealth. It is a belief system to preserve wealth for those who lost wealth due to corruption of Wall Street and corrupted government. If enough people believe in the system of BTC, it will succeed. If not, it will fail. Yes, it is very volatile but those who believe hold it for very long time and they have benefited until now.
Thought this was very good.
You’re wasting your time arguing with these dudes on twitter though. They think they’re making economic arguments but in fact they’re making religious ones. And you cannot hope to disabuse them, for you cometh not into the House of Coin a true believer.
I agree with this. I think blockchain has real potential, but will likely take several years for maintream economy to really figure out how to use it.
At the moment, I view crypto as a combination of pre-New Deal banks and airport foreign exchange kiosks. It is clear that many people have been effectively fleeced of their holdings by putting it into holding companies that mingled these assets so they are just another unsecured creditor when the holding company runs into trouble. People who forget their key or throw out their hard disk are no different than the Spanish who had their ship sunk with a gold chest on board or a Viking who buried his gold hoard somewhere. It may be difficult to get insurance on crypto, that if lost, could be valued at $1k or $1M.
If you have solid possession of your asset, it is currently clunky to use outside of a handful of Internet portals. For most applications, there are high transaction costs of something that can fluctuate significantly in value hour-by hour, day-by-day. It has a long way to go before it can replace a credit or debit card.
I still think Twitter's peak value is food trucks being able to quickly announce where they are set up and what they are serving. Similarly, crypto's peak value seems to be facilitating the transfer of large quantities of illegal money, especially across borders. However, countries appear to be starting to crack down on some of this, including getting better at tracking the money trail bured in the blockchain.
I agree with you that many of these crypto folks are making religious arguments, Richard. In that spirit, I wrote a piece devoid of all that moral and religious stuff, addressing only economics.
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
I'd really appreciate your thoughts on it.
Good post.
Given how easy it is to get interest on "cash" in money market funds which pay interest and are functionally equivalent in liquidity, I'd add that as an argument for traditional cash. And while I agree that cash/ T-bills are not a good long term investment, a certain amount of cash in a portfolio is valuable for optionality for investment opportunities that arise (in addition to cash that supports living expenses).
Noah, Love your writing. I learn a lot from reading your posts.
Your argument that "Scarcity creates value" is a myth isn't convincing for me. So writing this comment to get a bit more elaboration from you on that.
As a first order effect, you are right. Case in example -> Webpage is like digital real estate but since it's digital it doesn't need to be limited , ergo there can be infinite webpages that can be created by anyone .
But second order effect of that is it pushes scarcity to one layer above -> "Which web pages do I want to visit now" . Ergo answer is Search engines , of which there are limited and mostly dominated by google. So we just pushed Scarcity from Stuff (pages) to Attention (how to find them) .
Same happens with Social media feeds. Creating digital content is free. But it just pushes scarcity to the feeds (attention).
But we have seen in both above cases scarcity is where most value is captured. In fact it's where most value is captured if you make other parts of the value chain abundant.
Would like your thoughts on this.
I think you're talking about how value creates scarcity! Good stuff is rare because it's hard to produce. But it usually doesn't work in the opposite direction; simply producing less stuff doesn't make it good.
You seem technically inclined: the perfect scarcity is a random GUID - the same value is all but guaranteed to never occur until the heat death of the universe. The economic value is 0!
Same with blockchains: there are a large number of nonces that can be discovered through mining and create valid blocks, and an infinite amount of "genesis blocks" that can start a different chain.
In all cases, the value does not come from digital scarcity but from other participants reaching a "shared information" consensus (they agree, you agree that they agree, etc.).
The *shared consensus* is the valuable thing!
Superb comment, Emil! Happy to see someone in this comments section who is more technically informed.
Blockchains are most useful when they allow decentralized parties achieve consensus without a central entity. I.e., to keep track of who has how much currency in the modern world, we require a bank. With Bitcoin, we just need code and self-interested humans (which humans are!).
The ability to achieve decentralized consensus, in itself, is a novel solution, which I do believe has some intrinsic value.
After all, "scarcity in itself creates value" was never a Bitcoin thesis!
I wrote some economic arguments against this piece by Noah, and I'd deeply appreciate your thoughts on it.
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Thank you!
I believe you're actually agreeing with Noah in a sense--scarcity in itself does not produce value, but if there's value at the base, it can direct greater and more focused value elsewhere!
I do think, however, that "scarcity in itself produces value" was never a core Bitcoin or crypto thesis. The thesis has more to do with adoption--since only a tiny % of the world currently is into the space, as more people enter and see use-cases, with time, value will rise. So it's really going back to supply and demand.
If you're interested, I'd love to hear your thoughts on this rebuttal piece I wrote. It responds to this article using economic arguments. It touches on the flaws of Noah's scarcity argument, too.
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Cheers!
Very clear and fair explanations. My understanding of Bitcoin is that its best use case is as “digital gold”, not really as digital currency. Do your critiques in the Misconception 1 section still apply to this argument?
Nope, it might be digital gold! If so, it could rise in value a lot from where it is now.
Noah, do you think the hard-money people might also be wrong about gold itself, in claiming it has intrinsic value?
I remember being taught in school that gold is valuable because it's both scarce and beautiful, which means rich people can make it into jewelry to show their status.
That seems wrong to me. I don't see how the color of gold is objectively more beautiful than the color of silver or copper. Isn't it more correct to say that there's a social consensus that gold is the most beautiful metal, because it's the metal that rich people wear?
The hard-money people want to use a gold standard to force banks to lend less money.
This is spot on. They don't often realize the consequences of essentially ending fractional reserve banking!
People somehow believe we can simply move to a deflationary regime and all else will remain equal. OR they don't understand that ending borrowing would instantly plunge us into the worst depression this country has ever seen.
Someone argued to me the other day that an ideal system is one where people pay cash for cars or fully fund the startup costs for a business out of their own cash savings.. It blew my mind that people don't seem to understand how lending greases the wheels of the economy. For example if people couldn't borrow money to buy cars, car sales would plummet, workers would be laid off, and there would be a cascade of negative effects throughout the economy.
Maybe this is me just being frustrated and cynical, but more and more I feel like people who describe themselves as "savers" are just hoarders trying to convince themselves and others that their hoarding is morally superior actually.
But the hate against deflation has largely stemmed from a very limited historical focus on the Great Depression and Japan in the past few decades...
Economic evidence against deflation is a lot more mixed, actually.
If you're interested, I'd love to hear your thoughts on this response piece. The arguments are economic, not religious or moral.
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Gold has a number of unique properties that make it useful as a currency: it's got very high density (I think higher than any other metal that was known until the 20th century), which makes it hard to fake, it's easily divisible because it's soft, it doesn't tarnish or decay, and it has a distinctive appearance.
None of that forces it to be a currency, but it does mean that in societies where gold exists, it's a more natural social equilibrium than other things.
When it comes to something like cryptocurrency, there's the same basic dynamic. The value (if it remains stable) comes from a social consensus, but that consensus is easier or harder to create on the basis of the qualities of the cryptocurrency itself.
A non-tarnishing electrical conductor is also valuable as an industrial commodity. But that is not its primary driver. Ultimately, people like decoration and so gold has historically been excellent for decoration, so jewelry etc. You could wear it as an ornament but also use it as a currency (Viking/Anglo-Saxon gold armbands, Indian and other women with gold jewelry as portable wealth, etc.). It was also easy to melt but had a high specific gravity so it could be differentiated from many other base metals. It did not tarnish or rot so was excellent for currency where the issuer and users could understand quality control of the coinage of the realm as well as having something unchangeable over time (shipwrecks have gold coins like new after centuries underwater in mud). That is why debasing gold coins with lead was so heavily frowned upon, because it undermined the entire trust system in national and inational commerce if you have to check every individual coin or bar for every transaction.
It seems like multiple unconnected societies throughout history have decided that gold is cool (eg. medieval Europe, Central America pre-Columbus, Ancient China) so there’s definitely something there that is universally human. I’m not sure that something would actually matter in the apocalyptic scenarios that the gold hoarders like to imagine, especially not shortly after the collapse.
Yeah, the social consensus that gold has value is unusually consistent across places and times.
I guess I'm just objecting to the line that "fiat currencies are bad because nothing gives them value except the shared belief that they have value". You could say the same about gold, or any other non-productive asset.
Except guns. I think weaponry might be the one asset whose value isn't socially constructed. That probably explains why some of the people who like gold like guns even more.
In the future it might but, as you astutely pointed out in a previous post, at the moment it doesn’t trade anything like a store of value, but more like a leveraged play on the Nasdaq index.
I think it's worth reading what economists from the other side have to say. After all, not EVERYONE in the crypto space is relying solely on moral and religious arguments.
I think that Bitcoin will surely serve as digital gold. It might even serve as a currency, but that'll depend on the extent to which it yields real returns for cash hoarders. If you're interested, here's a response to the piece by Noah. I'd love for you to take a look!
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
I think its worth noting that a lot of Bitcoiners (at least the well-read ones), have actually evolved from calling Bitcoin a payments layer to calling Bitcoin a settlements layer.
Might be worth checking that out.
Plus, I wrote a response to this article which I'd deeply appreciate your thoughts on:
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Some economic arguments for Bitcoin, in the place of religious ones.
I just want to know what will happen to my Bored Apes.
They will continue to be bored
I hope your rabbits aren't bored.
I spend most of my time thinking about how to keep them entertained...
Interesting post just needed clarity on this point "Now there are a few exceptions to this general rule — things that people value because they’ve decided to use them as status symbols in a zero-sum status-signalling competition" What if people decide to value Bitcoin or some digital land, especially rich people and over time it becomes a desirable thing for others who follow after them, no matter the alternatives available in the market.
That's possible, and of course that will happen for a few lucky NFTs.
Also consider the case of "fine art" and collectibles such as old baseball cards.
Great read as always.
In regards to Misconception 1: I think its a mistake to compare BTC with cash and most holders would agree. With a block size of 1 MB and a transaction limit of 7 tps, using BTC as fiat is not technically feasible nor desirable. After the whole block-size debate, the matter was settled, and only holders of BTC Cash or BTC SV still view Bitcoin as an alternative to cash - a vast minority. Sure, there are L2 solutions for BTC, but that is not relevant to the core philosophy and investment thesis of Bitcoin. As the meme goes Bitcoin is a store of value, and Bitcoin's most important value proposition lies in its utility as verifiable digital asset with great security. Other digital assets and FinTech innovations are much more suited as alternatives to fiat.
In regards to Misconception 2: I think its a mistake to juxtapose Bitcoin with "the Metaverse" as these concepts have nothing to do with each other. The idea of Web 3.0 is based on the philosophy of Bitcoin, but "the metaverse" concept is related to XR technology, not Bitcoin. Bitcoin is revolutionary, since it was the first asset to provide digital scarcity, verifiability, and immutability in an online world where work and any kind of value really could be copied indefinitely if it was not for trusted intermediaries. Today, Bitcoin is the most secure blockchain network why it is valued much higher than other so-called cryptocurrencies.
Cheers,
Tobias
Finally someone from the other side with some nuance! Thanks Tobias.
If you're interested, I'd deeply appreciate your thoughts on this response piece I wrote:
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Curious though--why do you say that L2s are not relevant to the core thesis of Bitcoin?
Thanks! Sure, I will give it a read. Well, L2 is just a layer additional functionality, Bitcoin is valuable regardless as digital gold
This was quite excellent. Pretty much exactly my stance on the subject.
>Giving poor people a few bucks of returns is not worth giving rich people a huge windfall of unearned returns.
I might have added that such a subsidy on the rich's paper savings is also incredibly destructive as it displaces investment in value producing, job producing projects making the poor underemployed or unemployed while at the same time, trimming tax revenues and reducing government services.
Given the potential drop in production, even those receiving the subsidy might end up poorer, all their other assets, losing value. They'll be richer than those not getting the subsidy, but since it will be relative to a lower average, they might end up poorer in absolute terms.
The point is that a stable, insufficiently inflationary currency is not just a subsidy for cash hoarders, it is a subsidy for divestment in production, a subsidy for economic inactivity. It moves the world towards a scenario where everyone is hoarding tokens and no one wants to be the one financing production of something to buy with these tokens.
Your argument makes intuitive sense, but the real question is how significant are the real returns on hoarded currency? The economic evidence against mildly deflationary currencies is actually quite weak.
For example, even Stanford Economist John Cochrane, whom I believe Noah has quoted in his articles, has said that mild deflation isn't exactly earth's reckoning.
If you're interested, do consider reading this response piece to Noah's article. It sheds light on the economic arguments for deflationary currencies:
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Yes! Unearned returns! Being in the know or in the right place at the right time shouldn’t be what makes you rich in society.
But this happens in today's inflationary system and will happen in a deflationary one, too, won't it?
> First, some productive assets like houses
Very surprised to see that your example of a productive investment is a house.
There's apparently mixed opinion over whether houses are productive assets?
In support of that view:
- Houses are places where work happens. If a factory building in which products are manufactured or a commercial building housing a restaurant can be deemed a productive asset, so too is a home where products are made (sometimes today, frequently in years past), food is prepared, and so on.
- Houses can be rented for income. The ability of an entity (as well as more abstractly, an ownership share of an entity, like a business) to generate income is a key quality of many other productive assets.
- Houses intrinsically provide benefits to humans (and some animals), including shelter from cold, heat, moisture, and winds. Directly providing (some threshold quantity of) human benefits is a quality of some other productive assets.
One can imagine a similar discussion (and debate) over whether cars, trucks, and other moving vehicles are productive assets? And one can make a plausible, highly similar defense that they're included in that category.
Houses are difficult to replace with something else. Tents? So there is fundamental scarcity of houses to maintain or increase their value in desireable areas.
All you have to do is visit a gold mining ghost town to understand that lack of demand dictates whether or not the scarcity means anything at all. Our modern equivalent has been the Rust Belt and coal mining towns where house prices have been very depressed over the past 20+ years compared to growing cities. living where I do, the "housing unaffordability" crisis has been amusing. My house price didn't even double from early 90s through 2020. My house has gone up more in value over the past 18 months than the previous 25 years. In our county, last year the median household income could buy the median house at 3x multiple of median price to income. That has changed some this year so it is about 4x. Even the average house price is only 5x.
Noah, love your posts but I disagree with you on this one. Curious to get your rebuttal to these points:
Misconception 1: Cash is a form of long-term savings
I believe the truth is "unbacked fiat money" is not a form of long-term savings, or, said otherwise, is not a store-of-value. Consider the two forms of money most commonly used in modern history and the two we are most familiar with: fiat and gold. Gold, I would submit, has indeed acted as a form of long-term savings. Over time it has grown its value in fiat terms vs. every fiat currency in history, and has also grown its purchasing power due being able to purchase a relatively stable (total supply of gold grows about 2-3% annually over time) percentage of a growing economy.
Fiat currency debasement has created a warped reality where everyone needs to be an investor just to keep up. Not everyone is, or should be expected to be, an investor! Currency debasement has created the conditions for a racket where passive index managers can charge customers on one end (because they "have" to invest to keep up) and free load off of active investment managers on the other to provide a competitive product. The value proposition of passive investing is unbeatable and, left unabated in a status-quo fiat world, I believe will continue to grow as a percentage of total invested assets until price signals deteriorate so much that it disallows well-functioning capital markets.
There is no reason that sound money can't be a long-term store-of-value. If money has a fixed supply, it will be able to buy a constant slice of total economic output. The incentive to invest and seek higher returns will still exist, but the opportunity cost of investing will be raised so that capital is only allocated to ventures that are expected to grow more than the total economy. In today's world, that might increase the bar for investment from -2% (inflation target) to 2% (real economic growth) and result in a more optimal allocation of capital in the economy.
Misconception 2: Scarcity creates value
You argue that scarcity + utility creates value. But in the case of money, scarcity is precisely the thing that gives it utility. This is why gold is the only money that has lasted thousands of years while every single fiat currency has gone out of existence given enough time. Gold has been superior to all other forms of money because it is the most scarce asset that had been discovered or invented...until bitcoin.
There is no natural resource on Earth, including gold, that we have not been able to increase production of over time when incentives have dictated we do so. Not oil, not copper, not lithium, not silver, not gold. Human time and energy is the only, truly scarce resource. Gold has been used as money in part because it is the most difficult to increase production of and, thus, the most sound. That is, until bitcoin came along.
One thing I find helpful when pondering bitcoin is to consider: What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
It would probably seem like bitcoin seems today.
Hi Zack, I agree with much of what's here. The point on malinvestments and bubbles forming due to artificially low interest rates (a cost to economic efficiency posed by inflationary currencies) is uncharacteristically not mentioned by Noah.
I hope that he responds to your argument, because there's economics in it, too.
If you're interested, I'd deeply appreciate your thoughts on this rebuttal I wrote:
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
Thanks Ram. I would correct one thing - I didn't say malinvestments were being made or bubbles were forming due to artificially low interest rates (although they may be! I don't know!) but rather inflation and currency debasement. The precise mechanism by which this malinvestment occurs and capital market price signals degrade is via non-investors believing they need to invest to "keep up" and doing so via passive index vehicles.
Interest rates are a separate topic, and I actually believe low interest rates are good for society as they either reveal or force a low-time preference on capital market participants and thus encourage long-term thinking and investment.
I will read your rebuttal and respond over there!
> There is no reason that sound money can't be a long-term store-of-value.
Nothing can be a long term store of value because you can’t store value long term in the first place with no consequences. If it was more valuable to save all your money than spend it, there would be no money velocity, and then no economy. (Food producers won’t take your money for food unless they have non-food things to spend it on themselves.)
Saving/investing does work, but only because people aren’t saving all their money all the time.
> What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
Isn’t “programmable” the other leading brand of crypto? Of course, since you can’t reverse transactions you can’t recover from programming mistakes, so its main use case is losing your money to hackers. Regular business bank accounts are programmable too, and have working admin access.
For most people who aren't monks, I don't foresee any problem in finding things worth spending money on. Indeed, it is the same tradeoff we make today, just with a slightly higher opportunity cost of consumption. Daily expenditures (food, gas, rent, entertainment) likely aren't impacted too much in a sound money system.
Where the trade-off between saving and consumption in a sound money system becomes more salient is in consumption of goods that aren't money, but that have acquired a monetary premium since they are being either utilized as a store-of-value in lieu of cash, and/or as a way to protect one's wealth outside the purview of one's state. Second and third homes that never get visited, perhaps in Vancouver or New York or London and owned by wealthy Chinese, come to mind.
If you have a fixed supply of money and a growing economy, wouldn't that *require* each existing unit of money to appreciate in value?
Exactly, yes. Which would mean that "cash" (money) would be a form of long-term savings.
So in that scenario, what exactly have you done to earn that increase? There's no such thing as a free lunch. Since cash has no productive utility beyond being a medium of exchange, if you're earning a return on your unproductive cash, who is paying for it?
You've forgone present consumption of goods and services for increased future consumption of goods and services.
"Cash" (money) does (ought to) have another utility: store of value.
The increase in value of your earned and saved money is "paid for" by the productive economy - all the other participants who took risk with their capital in search of an even higher return and successfully grew the capital stock.
Of course, this works both ways. In a shrinking economy your money loses value.
Using sound money encourages participants to have a lower time preference. Knowing that their hard earned money will likely grow in value over time, rather than decrease, increases the opportunity cost of consuming rather than saving.
When society collectively has a lower time preference, interest rates are lower and more long-term investment occurs, which increases the capital stock and decreases prices/inflation (i.e. increases the value of money).
I don't believe lower interest rates is at odds with my previous statement that in a sound money system the bar for investment (opportunity cost of simply holding money) is raised from beating inflation (-2%) to better than economy-wide growth (say, 2%). Interest rates relate to time preference, while opportunity cost dictates the allocation of capital in an economy.
Indeed, I believe the current regime of low interest rates (assuming we revert back to trend of the last 40 years) has created the conditions for enough long-term investment that economic growth has been and may continue to be high enough to allow the fiat standard to persist. This would be a great outcome.
Additionally, I believe low interest rates, paradoxically, cause low inflation. Low interest rates encourage increased investment which feeds through to increased supply which feeds through to lower prices. The Fed (over the last 40 years, largely), by continually lowering interest rates in their quest to achieve 2% inflation, has accidentally created the conditions for it to remain low.
My fear is that if we are now in a regime of persistently high inflation and persistently high interest rates. High inflation and high interest rates are symptoms of a failing system, not low inflation and low interest rates.
No currency has ever deflated its way out of existence...
"The increase in value of your earned and saved money is "paid for" by the productive economy - all the other participants who took risk with their capital in search of an even higher return and successfully grew the capital stock."
This is breaking my brain. Why should you reap rewards for other peoples' risk taking? This is pure rent seeking behavior. I know savers like to believe that saving is an inherently virtuous activity, but I don't understand how you can believe that skimming off the top of other peoples' productive activity while you hoard cash is a moral and just system.
We all reap rewards for other people's risk taking every day. The iPhone I'm typing this on, the cheap, fast internet I'm connected to, the platform we're on (Substack)...all consumer surplus provided by a growing capital stock financed by risk capital and built by entrepreneurs.
When entrepreneurs are successful, they reap the most reward. I don't think they're concerned with savers getting a "free lunch" off of their sweat and tears. And when they fail, they (ideally) understood the risk they were taking (and should be commended for it!).
What do you think passive index investing is today? It is reaping the rewards of other people's risk taking. It has grown so large precisely because of this - it's an unbeatable value proposition to the not-professional investor. Get better returns than the average fee-charging active manager doing the work to price securities without doing the work or paying anyone to do the work yourself.
A world in which your savings are expected to appreciate in value alongside a growing economy is not so different than a world in which your passive index investments are expected to appreciate in value alongside a growing economy to my mind. The primary difference is we cut out the actual rent-seeking racket in the middle - the fees passive index managers charge.
"No currency has ever deflated its way out of existence"
Not true. Consider the case of physical gold; as it became more scarce and valuable compared to the size of the economy, it became used less and less until nations abandoned the gold standard completely during the Great Depression.
Also, near the time of the American Revolution, a shortage of "hard" currency led the colonial governments to try printing their own paper money without the permission of the British government...
Gold still exists as a store-of-value today and you can buy an oz of it on paper for about $1,800 USD and a physical oz of it for about 10-20% more than that if you can find a willing seller.
Its value in USD terms has increased 39% in the last 5 years, 467% in the last 20 years, and 6,649% in the last 100 years.
European nations abandoned the gold standard during WWI so they could print money to finance their war efforts. Not doing so would have put them at a disadvantage against rivals who were doing so. They re-pegged to gold after the war but at a much higher exchange rates.
This period of fiat money-printing and devaluation led to the roaring 20s, where asset prices denominated in fiat went up significantly, followed by the subsequent bust which became the Great Depression. Most European nations again abandoned the gold standard during the Great Depression in order to print money to stimulate the economy.
The U.S. maintained the peg of $26.67/oz throughout WWI and the 1920's but placed an embargo on gold. Then in 1933 they banned the private ownership of gold and issued Executive Order 6102 requiring all citizens to exchange their gold for $26.67/oz. Then in 1934 they devalued the USD to $35/oz, effectively immediately confiscating 31% of the wealth of private citizens that complied with EO 6102.
So, I wouldn't say nations abandoned the gold standard because gold was being used less and less. They abandoned in a round of competitive currency devaluation to finance war, and then again to stimulate during the depression.
If everyone thinks that way, nobody will be paying for it, and everyone will stop earning returns on unproductive cash, and then people will start working and paying for it.
This argument is a little too simplified, it does not quite work that way, unless deflation is like 20% or something.
If you're interested, do consider reading this response to Noah's piece:
https://nanithemoney.substack.com/p/economic-misconceptions-of-the-anti
So much of modern crypto reminds me of ancient burned offering rituals. Maybe this is scratching at something deeply human and necessary.
As the plumage of a peacock proves its fitness,
The hashes prove the crypto brother.
Interesting arguments. I’m quoting a counter-argument from https://www.swanbitcoin.com/a-look-at-the-lightning-network/ :
“Volatility is inevitable along the path of monetization. A new money cannot go from zero to trillions without upward volatility by definition, and with upward volatility comes speculators, leverage, and periods of downward volatility. The first couple decades of monetization for the network as it undergoes open price discovery to reach the bulk of its total addressable market, should be different than the “steady state” of the network after it reaches the bulk of its total addressable market, assuming it is successful in doing so.”
Ironically, the history of De Beers illustrates how diamonds are a perfect example of Veblen goods that are artificially scarce : )
They created the demand out of thin air and then artifically restricted supply. https://www.theatlantic.com/international/archive/2015/02/how-an-ad-campaign-invented-the-diamond-engagement-ring/385376/
The big question is if NFTs can follow this same path in the coming century. What is the cartel that will restrict the supply?
Bitcoin is NOT deflationary.
It is disinflationary. Very different.
Value of Bitcoin is not the disinflationary aspect, nor the foreknown rate of it, though those factors help.
It is the non-ownership of the issuance by elite or government entities.
Seignorage is not available in Bitcoin. No government can print it to run a massive military machine, nor can they control it via taxation and interest rates. You can hold it on your own computer and it cannot be confiscated if you have proper safety hygiene.
Those are the more critical values.
Bitcoin mining isn't seignorage? (And as for safety, well, I think it'll probably still be vulnerable to rubber hose cryptanalysis: https://xkcd.com/538/ )
Rubber hose cracking - not as much as you think. With lesser amounts, no one would do such a thing. With greater amounts, there are multiple key holders, a majority of which is required to release funds. This can be further modified with maximum release of tokens per diem built on an unchangeable algorithm, etc. Or long-term lockup with a code that is created and hidden by machine until the release date.
Increasingly sophisticated systems can be created, obviously.
It's a bit of a silly argument, like saying banks aren't safe because you could be kidnapped. But I think you're being a bit jokey, so no worries.
I guess it depends on your threat model. The logical defenses against "a robber points a gun at you" is "as long as you're pointing that gun at me, I can't give it to you even if I wanted to" and "you can't ask for what you don't know about". Bitcoin on your personal laptop, to which you know the encryption key, is about as safe as, well, cash in a safe to which you know the combination, but as you've explained, you can work around that with different security methods. (On the other hand, what happens to your Bitcoin if the robber smashes your laptop out of spite?)
Kidnapping for ransom is a different kind of threat model, as are court orders, revolutions, invading armies, and natural disasters...
smashes:
You should have backup if you have any kind of meaningful funds.
No, it isn't seignorage. Is gold mining seignorage?
Seignorage applies to the sole issuer of the coin. If there was only one miner permitted, that might be an argument, but it is a competitive field with mining available to anyone, anywhere. That is the opposite of seignorage.
Re 1: Cash was not meant for long-term saving; it doesn't matter if it is inflationary
> Consider a world where cash goes up in value over time — where simply because
> you stuffed some money under a mattress, you can afford more and more
> of society’s production every year. This sounds like a pretty good deal,
> right? In fact, it is a good deal — too good, really.
> In this sort of deflationary world, you’re getting wealth for nothing —
> society is continually transferring you more and more of the fruits
> of its labors in exchange for you doing absolutely bupkis.
You imply as if it is wrong, even immoral, if you get more produced value for the same amount of money over time.
The way I see it this is normal, and we can see it best with computers and electronics - and it is caused by increased productivity.
When producing a computer now costs a fraction of what it cost 50 years ago then of course you can expect to get the more computers now for the same money unit.
This wouldn't be true for products whose production cost wouldn't change for whatever reasons.
Whether Bitcoin can and should be used as cash is a question for longer discussion, but its advantage is exactly in the fact that is protected from manipulation and money-printing by the state.
I don't see anything good about artificial inflation target of any value, I haven't read anything convincing about usefulness of inflation.
It benefits the debtors and state as the biggest one, and it is a form of immoral hidden taxation of all its subjects.
Re 2: Scarcity doesn't create value
True, but Bitcoin is not supposed to be valuable only because it is scarce.
Scarcity and usefulness create value - rising demand for something useful, but scarce, increases its value.
Anything can be a store of value - be it currency, gold or stone rings, and some of these things can be scarce as well.
But not as scarce as Bitcoin (there is final number of Bitcoins), and not as useful as Bitcoin - it is transportable and transferable, robust against central control, relatively anonymous.
For this reason, it could be expected its usage as storage of value will keep on growing, and with the demand growing its value and price should go up.
> But not as scarce as Bitcoin (there is final number of Bitcoins)
If this were true (there were a limited discrete number of bitcoins in the world), that would make it less useful as money. Imagine if there was only one dollar in the world - no one would accept it as currency because they wouldn’t even have heard of it before. That’s called network effects.
It’s not true, because bitcoins can be divided up, so everyone can get some fraction of them. However, it’s also not true because Bitcoin has no natural monopoly and you can always create a new currency with new owners. That will happen if it’s more useful to do it than acquire some from existing Bitcoin owners.
I think you are missing the point on BTC. For regular folks, their historical income have not kept up with goods inflation and asset inflation due to QE and $ printing. Also, they don’t have time and money to analyze and invest in long term investments like rich people. BTC is a rebel against existing establishment taking advantage of regular folks’ wealth. It is a belief system to preserve wealth for those who lost wealth due to corruption of Wall Street and corrupted government. If enough people believe in the system of BTC, it will succeed. If not, it will fail. Yes, it is very volatile but those who believe hold it for very long time and they have benefited until now.