The Bitcoin Narrative
Let me start by saying that I am heavily invested in Bitcoin. Definitely more than it is reasonable for someone who prides himself on being skeptical and rational. I guess we all have our own personal collections, and mine is a shiny piece of algorithm that if unsuccessful will burn my economies together with my self-respect.
Still, from time to time, I like to assess how correct my investment thesis is. After being around this environment for quite some time, seeing the developments, crashes, dog coin rivalries, images of smoker monkeys that I never quite understood, I think it’s time for me to put in words the narrative I see Bitcoin relying on.
This exercise will be both productive for me to keep track of what my model of the world is and also to folks interested in understanding how bitcoiners see the economy. In other words, following the steps of Craig Wright, I will put myself as the intellectual leader of this movement and translate the ethos to the wider audience.
Central banks are relevant actors in the financial system
I don’t know if I will be fighting a straw man here, but I am pretty sure I have seen people doubting the relevance of central banks on their ability to produce inflation, at least when applying quantitative easing measures instead of straight out printing money. And I am not really surprised people would think that. From the 2008’s crisis onwards, the Fed has been conducting a series of measures that led financial specialists to think high inflation would follow, and that didn’t quite happened. Maybe, some would think, central banks don’t really matter that much?
That’s a completely nonsensical view from the perspective of a bitcoiner; by promoting asset purchases, the central banks directly and indirectly generate pressure over prices. Sure, the post-2009 intervention didn’t lead to consumer prices rising significantly, but that’s because the effect was restricted to assets instead of goods.
How accurate is that view? From January 2010 to January 2020, the S&P increased 190%. The historic return of S&P is around 10.6% per year, which in a decade would render something like a 175% appreciation. Not very far away, actually. What about house prices? During the same time frame, there was a 45% increase in housing prices in the US, which is definitely higher, but not absurdly distant from 1990-2000 (30%).
I do think it makes intuitive sense that the policies taken by the Fed would cause inflation, but that doesn’t seem obvious from eyeballing the data after the 2008 financial crisis. After COVID, though, the correlation between Fed’s balance sheet and rate of inflation became undeniable, but I don’t understand why we didn’t see the same before. Perhaps the reaction was on different order of magnitude? Or this time the Fed had a closer connection to consumer prices by buying treasuries?
Anyways, I am inclined to say bitcoiners seem to be overconfident here. They were right about the aftermath inflation when covid subsided though, so I will give them that. But overall, I don’t think the Fed has the power bitcoiners think it really have.
It’s the ultimate store of value
Personally, I think this is the killer app for Bitcoin. I see a lot of energy being directed at shouting how terrible the influence of Fed is over the economy, when just highlighting its properties would be enough to attract users. This is something that took me a bit of time for me to really grasp, though, so here I will describe how I reached that conclusion.
If you are anything like me, receiving your salary makes you nervous. I mean, of course earning money is great, and this is a necessary ritual to remember why I still haven’t quit my uninspiring job. But the moment I have access to this money, I immediately have to think what to do with it, otherwise inflation will start kicking in. It’s like I am holding a hot potato and must throw it somewhere.
And man, that really pisses me off. I don’t want to keep thinking about where to invest this money only to keep my purchasing power! I am not an investor and I don’t want to be one, at least not right now. But we don’t really have a choice, do we? It’s either that, or losing money to inflation.
Fun fact: did you know that, over the long run, gold and the S&P returns are pretty similar? That’s right: a piece of metal appreciates with the same rate as the 500 most innovative American companies. Acknowledging this simple fact was essential for understanding how a good store of value could be of use to me: to serve as a medium to store my money without having to think about anything else.
As you can guess, I immediately became a big fan of gold. But if it’s so good, why it got displaced? Nobody really uses it beside boomers. I think the answer is pretty simple: it lost part of its appeal because it’s slow. It’s an analogue technology: it requires physical transactions for clearance to be determined. What if we had something digital?
And finally, we get to Bitcoin.
By being digital, we have speed. And with speed, some use cases gets unleashed. Now we can pay for products in the same way as we would with other types of money. We get the speed benefits of paper money with the scarcity of gold. A store of value that is pretty much 100% liquid by working 24/7 without interruption. Sign me up for that.
It’s difficult to confiscate and to censor
Truth be told, this is not the most appealing characteristic to me. But I am socially capable to read the room and I can see my fellow bitcoiners giving me that look. So, let’s discuss one of the properties of bitcoin that stands very close to its ethos: the permissionless way of transacting.
Look, I am an optimistic and I generally trust institutions. But I am young and naive and never really faced a war-like period in which rules and rights were crumbling down (if we don’t count the time when I crossed my cities center after a party and got robbed twice). If I did, though, I can see how it would be terrible for me if my wealth was distributed in assets that are both easily to confiscate and to track.
That feature definitely adds complexity, though, and I don’t think most users would take the effort to guarantee that the security of their holding were solely of their own responsibility. Because, you know, I don’t like trusting myself. But merely having this option is something unprecedented in these very interconnected times. Now, if it ever comes to that, governments will have to deal with a major Streisand effect if they attempt to freeze or retain some account for some arbitrary reason.
Volatility is temporary
Critics of Bitcoin come in all forms and shapes, but I feel that what they have in common is their disdain for how volatile Bitcoin is. And that's fair, the ups and downs sometimes also make me sweat. Bitcoiners will usually explain that these roller-coaster types of movements are temporary and will subside with time.
I do think they have a point. Since its inception, Bitcoin volatility seems to be trending in an opposite direction to its market cap. But I honestly doubt it will ever reach a level of stability seen on the USD, for example. Even gold, which is the most used store of value, still have very bad years (it lost 30% of its value in 2013, for example). That's the price to be paid when you have the free market deciding its value without a huge actor influencing its price all the time. So, for that criticism I say: pick your poison.
If anything, I want Bitcoin to succeed because it is practical: I don't want to worry about systematically losing purchase power and lose liquidity and direct access to money by trying to avoid that. I want a medium of exchange that is open, reliable and simple.
Is the current monetary system bad? I think it depends a lot. If you live in a developed country and inflatiom is under control, probably not that much. That is, unless you travel a lot and have to transfer money around the world.
Bitcoin is just a technology still trying to find its place. It will accomplish the vision of its creators insofar as it can convince users of its superior qualities compared to the alternatives. That is a future I see happening, though, and that’s why I am bullish.