Bitcoin (still) makes no sense
Think Out Loud newsletter, 12/2/20
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Contents
Bitcoin Commentary
What I’ve been reading recently
2.1 Economics
2.2 Investing
2.3 Cryptocurrency
2.4 Philosophy
2.5 Software Engineering
1. Bitcoin Commentary
In what has begun to look like an annual tradition, I’ve started researching decentralized currencies again. This time, I’m focused on Bitcoin.
While I already understand the basics Bitcoin technically (some have even made it into blog posts of mine a few years back) I’d written it off some years back as a currency due to:
The number of competing (and superior) digital currencies
Its inability to scale out (both in terms of raw transactions, and due to the energy cost required to power it)
The hype. I don’t like getting in on things when I feel rushed.
A financial blogger I like, Lyn Alden, tweeted positively about it recently however, plus the CEO of Twitter, Jack Dorsey, keeps shilling it lately, so I decided to poke the bear.
This spawned a lot of mad Bitcoin enthusiasts getting on me about this or that, and got me a host of resources to read up on. A lot has changed since I last read about Bitcoin in particular, so hell, maybe my opinion should change?
Lyn’s article still remains the best I’ve seen:
Note: I assume some basic knowledge of Bitcoin below. I trust you can find an article explaining Bitcoin to you already, if someone hasn’t already explained it to you already. Lyn’s article is also a great resource for beginners.
I think Lyn has a really compelling article as to why Bitcoin’s price could increase in the coming years. She convinced me that, for an investor—I would assume one with a lot of disposable income—Bitcoin may be a solid asymmetric bet, worth putting 1% or so of one’s portfolio into. If some of the gold enthusiasts pour just a little bit of cash into it, it could moon. And she’s being proven right, with Bitcoin reaching new highs recently. Further, considering the increase in dollar supply most folks are expecting to see in the next few years, Bitcoin seems like a considerable hedge, given its fixed supply. Perhaps most importantly, Bitcoin stood the test of time. During the big craze a few years back, most—including myself—figured Bitcoin would be usurped by another cryptocurrency. It was not, and hence, it retained its lead in security (which, for Bitcoin, is tied to adoption). Lyn paints a conceivable picture about how, in the medium term—a couple of years time—Bitcoin could be a solid investment.
Full disclosure: I still own 0 Bitcoin as of this post.
But whether Bitcoin is a good currency—one that could function as a true reserve currency long term—or if Bitcoin merely has medium-term investing potential due inflation dodging or the “Theory of the Larger Fool” are two separate things. Lyn talks about investing, so she shies away from long-term speculation, at least in the post I read.
It’s tough to understate how pivotal the separation of currency and state would be. And it’s tougher to know how governments would respond. What would the role of fiat be if Bitcoin, a fixed asset that governments could not control, were to become the global standard?
Ray Dalio, a famous hedge fund manager and author, seems to think governments wouldn’t let this happen:
There are a lot of reasons governments want flexibility over their currencies, a la Modern Monetary Theory. The cliff notes version of MMT is that it allows governments with reserve currencies, like the US, to control price stability and employment, irrespective of the debt they take on. Other countries that borrow in reserve currencies do not enjoy this benefit; this is just one of the many critiques of MMT.
There’s a common line of reasoning arguing that decentralized currencies pose problems for central banks that manipulate fiat currency via MMT. My understanding is that “True” mass adoption would effectively upend the way global finance is done today by shifting demand from current world reserves to Bitcoin, thereby decreasing the power states have over currency. Today, especially in Coronavirus times, the “Power of the Purse” seems unlimited: the fed has signaled to congress that is willing to buy a practically unlimited amount of debt as stimulus by generating dollars out of thin air. In a world under mass Bitcoin adoption, this kind of stimulus simply doesn’t work, as the supply of Bitcoin is fixed, and fiat currencies, like dollars, might look like monopoly money by comparison.
For an excellent overview of MMT, read this piece: Modern Monetary Theory (MMT): A General Introduction.
Today, as most even mildly interested in economics know, the dollar is the world reserve currency. Many people are worried about the stability of the dollar, given that we’re injecting trillions of dollars monthly. This is like going to Iraq, but every month. Iraq was “only” 1.1 trillion dollars. A standard reserve currency, like Bitcoin, does give people an “escape hatch” from hyperinflation and other currency manipulation problems, stemming from state decision making.
The state of my thoughts on Bitcoin:
I’m still trying to piece together what exactly how much control governments really lose under Bitcoin, whether I can see that as a positive or a negative, and whether I agree with Dalio that governments would (or could) take action to prevent it.
I’m still trying to wrap my head around what mass Bitcoin adoption might mean for lending, or other financial obligations, like settlements. The enforcement of debt and the ability to track money seem, to me, like some of its most important properties. If I can’t tell how much Bitcoin someone has, how can they be made financially responsible in court? Perhaps we already have this problem today, to some extent, but it seems to me that Bitcoin would increase its scope greatly.
I’m also interested in what a world with a fixed amount of currency really looks like. I would imagine “inflating away” debtors obligations through fiat would not really be on the table. This avenue seems like it might have some interesting consequences.
The percentage of hash rate—the mining of Bitcoin—owned by Chinese firms is another looming concern I haven’t really seen an answer to either (65%). 51% of Bitcoin’s hash rate is what it would take it manipulate the network by an attacker or state actor.
The answers folks have given me on Bitcoin’s energy consumption—which is already matching Switzerland’s—have not been good either. One response to this recommended to me boiled down to the benefits of fighting inflation “worth” climate change. The promise of a “lightning” network that settles transactions as an intermediary seems promising, but requires more research on my end.
“Put a price on economic stability and the economic freedom a stable monetary system provides; that is the true justification for the amount of energy bitcoin should and will consume. Everything else is a distraction.”
Ew!
And yet, despite the above concerns, I can still imagine a scenario where Bitcoin—or a digital currency like it—becomes a reserve. There’s a part of me that’s worried this is a prisoners dilemma, and, at the end of the “Bitcoin tunnel”, we all end up being worse off.
I should have a final blog post once I’m finished researching. My hunch is I’m still a ways away from having a complete picture of Bitcoin.
2. What I’ve been reading recently
2.1 Economics
How much do we owe china? - Harvard Business Review has done some research into the increasingly important—and opaque—question of China’s foreign lending.
Modern Monetary Theory: A General Introduction - Probably the best overview of MMT I’ve seen.
The Federal Government Always Money-Finances Its Spending: A Restatement
Has the dollar lost ground as the dominant international currency? - A deep dive into the IMF data regarding foreign exchange reserves just pre-COVID. An interesting read for those beginning to dip their toes into how global reserve currencies operate and the moves different players, like Russia and China, are making.
2.2 Investing
3 Reasons I’m Investing in Bitcoin - The Lyn Alden article I mention in section 2, below. Wonderful read.
2.3 Cryptocurrency
Gradually, then suddenly articles. I read about half of these to try and get a “Bitcoiners perspective”. These are very hit or miss. I’ll still probably read the rest before I write a “real” blog post on Bitcoin.
2.4 Philosophy
The Moral Landscape - Sam Harris gives an overview of his flavor of moral realism. I was already very aware of Sam’s take on this question, but, given all the Bitcoin reading, I wanted to dive into something I knew I’d mostly agree with. I’m considering writing a post in defense of Sam’s argument here, as I’ve seen several posts online critical of it.
Language, Truth, & Logic - Some years back Nassim Taleb converted me to some form of empiricism, and, since then, I’ve wanted to work my way through some of its older iterations, like Logical Positivism, the topic this book is on (written 1936). The critique of mathematical apropri truths was particularly interesting, even if I’m not sure I entirely agree. However, sometimes I got lost on the linguistic points the author made. This book is, weirdly, a page-turner, and very short to boot!
“Whatever instance we care to take, we shall always find that the situations in which a logical or mathematical principal might appear to be confuted are accounted for in such a way as to leave the principal unassailed.”
2.5 Software Engineering
Spark: The Definitive Guide - I’ve started work as a data engineer at a new company recently, so I’ve been poking at some resources on Spark. This book’s first couple chapters are written very clearly; it’s definitely above and beyond the other resources on Spark I’ve been able to find online.
How to copy between Encrypted S3 Bucket - An article I wrote for Towards Data Science as a follow up for an AWS IAM introduction I wrote for work. The IAM introduction got to the top of r/aws. Cloud security is pretty tricky. In my time at AWS, I had some pretty solid mentors that taught me most of the basics, so I felt comfortable talking about it at an introductory level online.
The government used to control any form of publishing as tight as it cotroles financial institutions today. When the Internet first arrived in the 90s, many wrote it of as a pipedream cus the gov would forbid it. A crazy Idea that anyone with a phoneline can publish whatever he wants. Yet here you are writing blog posts. It's easy to dismiss technological possibilities by claiming that surly the ruling class would forbid it. Bitcoin is already on the brink of "to big to fail" as it grows bigger in Marketcap and ends up in more peoples portfolio the colletral damaga of banning it becomes bigger. The US could also benefit from the fact that BTC becomes the new world reserce asset. With chinas economic growth and expansion its just a matter of time that the RMB will start to compete with the USD for the place of world server currency. That gives china all the power that comes with it. It would be better for the US that BTC takes this place, this way atleast China won't benefit from the fall of the USD as the reserve currency.