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The following is a guest submission from Monetary Metals client David S., responding to a recent article by CEO Keith Weiner. After learning of David’s perspective, we invited a published response in the spirit of healthy debate & productive disagreement.
As a proponent of both gold and bitcoin, I have a few responses to Keith Weiner’s recent article “Bitcoin: What Is It Good For?” When it comes to gold, nobody holds my respect more than Keith. But I think he has a few blindspots. In this rebuttal, I point out a few of the flaws in bitcoin he neglected to mention, and outline why bitcoin isn’t going away despite those flaws.
Additional Bitcoin Flaws
The fact that bitcoin and other cryptos can be trivially copied remains a flaw. It creates an environment where drastic change can happen at a breakneck pace. Coins (and fortunes) can rise and fall in a day. This has a destabilizing effect, and isn’t compatible with mature financial organization.
The most significant flaw is not a flaw of crypto itself but a problem with government regulation. Crypto transactions in the US are tax events and require tracking cost basis, calculating capital gain/loss, and paying the tax on those gains. This is a significant problem that will limit the common use of crypto for transactions in the US. It’s possible that “stable coins” might address this issue but that remains to be seen.
Keith’s Arguments
Volatility
The volatility issues of crypto are real but other assets including gold suffer a similar volatility problem. Keith is fond of pointing out that gold doesn’t change, the dollar does. An ounce of gold remains an ounce of gold regardless of its dollar price. But that same logic can be applied to bitcoin. Sure, there are those using BTC as a chip in the casino for more dollars, just as there are those who prefer the gold chip to the BTC to gain more dollars. However, there are the purists too. Just like Monetary Metals with gold, there are those in the bitcoin community who think and act in bitcoin, not dollars. Meanwhile, bitcoin’s volatility is declining as it matures and might one day have a volatility similar to that of gold.
Lending and Borrowing
Keith says that bitcoin is unsuitable to lending and borrowing. But here again, what is accused of bitcoin can be accused of gold. Just like Monetary Metals is confined in its gold lending to gold-using companies, so too is crypto confined in its lending to crypto-using companies. There is lending, borrowing, and value production occurring all within the bitcoin unit itself. This has been going on for some time and is expanding more generally by Decentralized Finance. Just as Monetary Metals would rebut any claim that lending and borrowing doesn’t or couldn’t occur in gold, so too must Keith admit that lending and borrowing IS happening in crypto, for more crypto, despite his comments to the contrary.
Medium of Exchange
Keith says that bitcoin is a poor medium of exchange. I disagree. Crypto has similar volatility issues as a medium of exchange as does gold or any non-dollar asset. But despite that and its nascency, crypto is used extensively around the world as a medium of exchange. That’s not coincidence. Crypto possesses properties which offer it advantages over gold and even over the dollar as a medium of exchange. Because of crypto’s decentralized digital nature, transactions can be made online, securely, irreversibly, reasonably anonymously, without restriction, and completely without a 3rd party, government, or banking entity required. Neither gold nor the dollar can say the same.
Bitcoin’s Essential Advantage
Decentralization[1] and disintermediation[2] is the key advantage Keith misses in his argument against crypto as a medium of exchange. It’s not that merchants must use a Third Party Currency Exchange (TPCE) when accepting bitcoin (though they can) it’s that crypto doesn’t require a third party at all. Crypto is the only thing that enables a direct p2p cash-like transaction over the internet without a third party acting as middleman and gatekeeper.
This is the essential reason why bitcoin is never going away. Because the desire to exchange value online without the consent of payment processors, banking systems, or governments will never go away. And the more governments abuse their currencies or restrict banking or the free flow of capital, the more crypto will be used as an alternative. I would not be surprised to see usage (and possibly value) to increase over gold because gold is simply not suited to the needs of an increasingly digital age.
Bottom line, crypto’s unique and completely digital nature enables it to exchange value in ways nothing else can. These features, despite the flaws Keith mentions and the ones I’ve outlined above, will give bitcoin and cryptocurrencies generally, utility and value for years to come with even bigger opportunities down the road.
[1] Newer cryptos like Ethereum have extended the “decentralized value” invention of bitcoin to add programmability. This allows Decentralized Finance (DeFi): basically the programmatic creation of various financial applications such as loans, insurance, crowdfunding, derivatives, betting and more, all executed without needing the consent of a third party. This creates opportunities to reduce the friction of middlemen and fiat currency and its institutions from all kinds of transactions. Crypto not only has the ability to obsolete (or at least bypass) fiat and the banking system, crypto has the ability to obsolete (or bypass) all of the financial industry.
[2] Divisibility, portability, and universality are all characteristics of marketability which is essential for money. Again, because of bitcoin’s purely digital nature, one can memorize account information and codes to access its value anywhere without the need of an intermediary. The only requirement is an internet connection. This allows your crypto to go with you anywhere while being impossible to detect or be confiscated. Crypto assets you directly control can’t be frozen and transactions cannot be prevented or reversed. Not even gold can boast such a claim to privacy and dis-intermediated access and portability.
Having read David S’s comments I am unconvinced of his arguments that not only favor Bitcoin (or crypto in general if you will) but that also appear to imply that Bitcoin is far superior to gold.
I have a couple of points. The first is technical. David’s use of the term disintermediation, although he footnotes it, is erroneous. In economics, disintermediation has traditionally meant the switching of funds from savings deposits (held at banks) into higher yielding, generally marketable, investment instruments. There was a time in the 1980s when disintermediation was a serious concern to the Federal Reserve. The use of the word intermediary in footnote 2 suggests a confusion of that term and disintermediation. Therefore, some term other than disintermediation should be applied when discussing crypto.
Second, my opinion is that David fails to adequately think in terms of gold as an irredeemable asset – something that does not appear as a liability in the balance sheet of a counter-party. Furthermore, his entire perspective suggests that he doesn’t understand what constitutes money. Consequently, his perspective although informative does not convince one of anything. A reading of Carl Menger and an understanding of the principle of marginal utility might better inform David of the difference between gold and crypto.
Bitcoin is a crypto store 1.0. Using machines (and consuming electricity) to solve a random puzzle and using that to create scarcity doesn’t sound like a great idea. But if you call it a bitcoin it sounds like a better idea.
Creating and ensuring scarcity through a computer network can be done in far more efficient ways. The novelty of bitcoin is the distribution mechanism that the “mining” gives.