What if Bitcoin is money ?
What is Bitcoin ? What is it worth ? Why ? I find these to be surprisingly challenging questions. I personally struggle to separate the ‘price’ form the ‘use case’. In the absence of the utility why is there a value ? Much is made of Bitcoin as the future of money. A store of value, a medium of exchange, a unit of account and a mode for future exchange; with the limited ‘money supply’, distributed record keeping and anonymity driving the narrative. The heady performance and wild gyrations in price (as reflected in an alternate numeraire, the USD) suggest a toxic brew of varying confidence in the use case coupled with an unhealthy dose of FOMO. Yes — my biases are clear … I don’t understand WHY the instrument has any VALUE … but rather than engage in a frustrating debate where I cannot even see the arguments of the HODLers in the mist I thought it may be fun to play with a thought experiment that assumes that Bitcoin is MONEY. I am open to having my biases wilt in the sunlight of knowledge. I don’t want to miss the party !!
Let’s assume Bitcoin (BTC) is widely adopted as Money. As such we hold BTC balances, make payments in BTC for goods denominated in BTC and are remunerated for work done in BTC. The BTC network can facilitate ALL of this BUT lets dig a little deeper.
Income is a reward for work and effort. Work and effort provide both a sustaining and a growing base (as currently envisaged, in a world of an expanding population pursuing more wealth, health and happiness). Profit is the return on risk capital, be it sweat equity or assets. Profit is that which remains after servicing the costs — direct and indirect. Sadly, no profit .. no effort ! The system clears by way of EXPANSION. Every time we turn the wheel we GROW ….
The BTC supply grows with mining which is effectively a reward for maintaining the network. To the extent that the reward for mining exceeds a fair return on the capital deployed (sweat equity and assets), more miners will rush to the seam and stake their claim, reducing the reward and delivering a fair return for the effort. Mining generates an income …
How does BTC facilitate credit ? What if I borrow BTC to buy a house ? What rate should the lender charge me — remembering that there is some risk that I will default and that the lender will lose money on the security (my house) ? Remember also that the lender’s return must at least match the alternative to do nothing i.e. JUST HOLD. If BTC supply growth is limited to a payment for network maintenance then in effect BTC supply is static, but human activity expands. To balance the system the basket of goods and services purchased by one BTC must expand. What of CREDIT then ? Use of BTC muse deliver a positive return (or at the very least exceed the holding costs) however with a fixed BTC supply, the asset market when measured with reference to the currency of the day, namely BTC, suffers deflation. Security dissipates. Credit stalls. Velocity of money declines. Activity disappears …
Naturally BTC credit doesn’t (and shouldn’t) have to live on the BTC network. Obligations or promises denominated in BTC can be captured in any number of ways. Settlement is ultimately in BTC but the web of undertakings is distinct. However what does it mean when there are a multitude of future obligations denominated in BTC. Consider a group of economic participants A,B, C and D. A holds 100 BTC. A lends 100 BTC to B. B promises to return the 100 BTC plus a margin. B lends 100 BTC to C. C promises to return the 100 BTC plus a margin. C lends 100 BTC to D. D promises to return the 100 BTC plus a margin. D purchases an asset for 100 BTC. Does this have any impact on the total stock of BTC ? Surely not … it’s the same 100 BTC that has changed hands 4 times. The combined balance sheet is now simply long of the asset purchased by D but the sum of the individual balance sheets suggests a total asset value of 400 and a total liability value of 300. Is this any different from traditional banking ? Other than the lack of any capital or risk buffer maintained by B, C or D to provide comfort regarding their ability to meet their obligations. In effect leverage in this system is infinite …
I have ignored the state in this treatise. Surely they are the ultimate BTC motivator given the runaway money supply growth ? Perhaps … Money supply does not arbitrarily grow. In effect the state makes an investment. These investments — be they infrastructure, justice, support for industry or just cash into the bank accounts of citizens — are neither good nor bad by design, rather it depends on the returns generated by these investments that matters. Maybe these investments haven’t always been terribly successful …
What happens if we strip the state from our system of money ? Who provides the base level of services for all (infrastructure, security, health) ? How do they pay for it ? Could BTC be a gaudy mask for BIG L Libertarianism ??
Perhaps we don’t need credit …. Perhaps we only need a sustaining reward for effort …. Perhaps we don’t need to take risk … and perhaps we don’t need to consider tomorrows output using todays resources … perhaps we don’t need a state … perhaps we should ALL PAY for EVERYTHING we consume ALWAYS. OR perhaps NOT ! Why am I wrong ?
