By Tarik in the Vineyard
Today I’ll spare you, I’ll keep it short, sweet… and sour.
I want to talk about Bitcoin. Don’t worry I wont try to convert anyone either way. I mean, there’s no denying it was(is?) an exceptional opportunity to amass literally obscene fortunes, if you new what you were doing, or just lucky enough to have jumped in at the right time, even after the latest killer’s correction. And it might, and probably will, provide still substantial appreciation, at least as long as the printing presses continue to flood the streets. Possibly reach the 1M mark or higher, at current rate of US$, Euro, etc… issuance, who knows. So if it worked out for you, by all means continue doing what works best for you. If I may just venture one advice: make sure you have a solid exit strategy.
Which brings me to my topic of interest and the possible ramification it may imply. Every aspect of Bitcoin, particularly in its function as currency, has been so extensively debated across the www, with such fine points expressed on both side of the divide, that we might as well call it a draw, or continue arguing ad nauseam. Except this one point that in all these years I have never ever seen mentioned, except once in a barely one line sentence thrown in as if in passing, or a slip of the tong, in a long article by Mr. Matthew Piepenburg. I know the gentleman to be of impeccable intellectual integrity, so I must attribute the “lightheartedness” of his comment to a lapse of judgment in the excitement of the moment, or something. Because indeed it is the one unassailable argument that single-handedly demonstrate that BTC can never be a stable, long term, currency and store of value. I’m not saying it cannot be used as currency, just that it’s an invitation for troubles.
The weird thing, is that the very first time I heard of Bitcoin, I immediately saw it, bright as the sun in a clear blue sky; yet for some reason completely obfuscated from public awareness. Anyways, we’ll come back to it further down, for now let’s cut to the chase.
For the sake of argument, imagine an exclusive Bitcoin world where total BTCs in circulation equals x, and a constant economic production of P. Let A be the average price of all goods traded. We therefore have:
Let’s further imagine A=10
Now if we introduce a new BTC chain in all ways identical to the original, that we’ll call BTC2 distinct from the original BTC1. Because they’re identical, both have the same limit set at x. Therefore average price now is:
If A was previously equal to 10, we now have A=2(10)=20
You’ve just halved the purchasing power of BTC1, or conversely, produced a 100% inflation rate in one fell swoop, and incidentally discredited the notion of its limited supply, on which the whole idea stands.
Theoretically nothing could prevent you from adding BTC3, 4, 5, etc… with a resulting geometric progression of A.
What might not be geometric, however, is the rate of creation of new BTC chains, I mean it’s just infinitely reproducible code. And that would translate into real time exponential progression of A.
Well, as I said, it’s the theory. Yet 13 years later I’m still waiting for that elusive BTC2, leaving me feeling like an ornithologist stalking a Dwarf Cassowary (just watched a documentary).
It is really, really puzzling! Or am I missing something? After all, it’s by far the easiest way to reproduce the fantastical performance of Bitcoin, regardless of other cryptos’ merits. Why hasn’t anyone thought of it still? As if there was a collective will to protect BTC1 from direct competition, which would have undoubtedly exposed its poor suitability as a currency.
Consider: if all tulips were say, white. Would it ever have turned into a mania? How far would prices have been bid up, if all we had was more white tulips hitting the market? Was it not necessary to introduce blue, red, purple, magenta, etc… for the mania to take hold? Does this explain (at least in part) the thousand shapes and forms (colors) of cryptos, instead of just stalking up BTC iterations (white)?
Technically, the argument holds, but practically it leaves me scratching my head, and with still more questions. Wasn’t BTC allegedly created by some mysterious, unidentifiable loner for the benefit of all us sheeple? (I instinctively freeze when I hear the sound of that). So how could the entire Crypto population censor itself so uniformly? Not a single one of them greedy enough to introduce BTC2? That would be a first!
Or was it that BTC was too well protected patent wise? But this is public domain stuff, then who holds the patents? And don’t these things have an expiration date? Does it even matter when billions are involved?
I was thus perplexed until the sector’s market cap reached the trillions. That, in my eyes, upgraded it from a mere curiosity, to a system relevant status. I immediately considered the money circuitry, because that’s what I do in those circumstances, it’s like ingrained behavior. And everything clicked… at some level at least.
I’ve talked in my previous article how important it is to suckle up excess liquidity from the street to conceal true inflation, and even more so to divert it from going into gold, for the sustainability of the dollar reserve system; especially since China and others have put a damper in its accumulation.
BTC from the start was sold basically as a more efficient alternative to gold. Those trillions worth of cryptos contribute both, to relieve street inflation and divert demand off gold. Most acquisitions and trades in cryptos are done through dedicated exchange platforms. Since very little coins are used in direct peer to peer (commercial) transaction, most (or a good chunk anyway) of the money invested remains in clients’ account held with the crypto exchanges, at least as long as the bull is alive, just shuffling hands within those microcosms. Those client funds are collectively placed in T-bills and possibly other financial assets, thus fueling the very system it is purported to protect against. The larger the sector and the more individual cryptos are “successful”, the better dollar (and other currencies) sponge it becomes. It eerily reminds me of another scheme previously highlighted with respect to ETFs, where the public, in its short term naivety, is taken for a long term ride.
So? Could Bitcoin be some Government/banker protected shadow project? Or was it just recuperated from “Satoshi Nakamoto”? Or is it all coincidence? All I can point to is circumstantial evidences and “cui bono”. Now I’m not saying the entire sector is a scam, there are certainly some economically useful application to crypto technology. But just as with Internet tech previously (and countless other sector manias), by far and large it is speculative, or shall I say gambling money chasing Unicorns.
Anyways, I thought I should share some of those thoughts, if only to remind ourselves there’s usually more lurking underneath every story; and also in hope that someone can solve for me the mystery of the missing BTC2?