What’s wrong with economists?
Undoubtedly, Bitcoin operates in the economic domain—though not exclusively there. How is it possible that something of such significance has escaped their theorists? “It’s a bubble! Digital tulips!”, with the slight difference that tulips multiplied their price by 22 while Bitcoin has multiplied it by 60 million. “It can’t be; the market must be wrong in valuing it,” they probably think.
But what exactly are they missing?
Bitcoin manages to solve a series of historical problems in the digital world. In this realm, by default, we lack privacy because there always has to be a service provider. Privacy means revealing information selectively. You have to choose whom to reveal your information to (a service provider).
And that provider will always have the ability to override your decision not to share your data. When you hand someone a physical letter, the contents of that letter are private. However, when you send an email, that privacy can be violated by the service provider, so by default you lack privacy.
The same thing happens with physical cash.
If you pay in a store with a physical banknote, the shopkeeper has no need to know who you are or the origin of that money, nor does the issuer of the note need to know what you buy, when, from whom, or where that money came from. However, when we move into the digital world, that privacy is lost.
Your service provider—your bank—does know, and that information can reach many other parties.
Electronic cash
The first step is to understand that Bitcoin is essentially that “electronic cash” that Satoshi described in the whitepaper. However, these two words have led to a series of assumptions—in my view completely mistaken—that are what prevent economists from understanding it. Bitcoin is not an alternative to fiat money and central banks, as proposed in Saifedean Ammous’s book The Bitcoin Standard. Let’s see why.
The two problems that Bitcoin solved in the digital world are the following: the double-spending problem and the problem of the trusted third party that provides a digital service. In this digital realm, it is easy to multiply units at almost no cost. For example, we can send the exact same image to multiple people through a messaging app. But the fact that it can be replicated endlessly prevents it from being a scarce good and, therefore, from being worth hoarding.
Dependency on a third party
Moreover, for an asset that aspires to become an economic good, unlimited reproduction is equivalent to counterfeiting. Imagine if 100 monetary units from our bank could be sent to many people at once (double-spending problem). This could be solved by introducing a third party that acts as an intermediary and guarantees that the image or those 100 monetary units cannot be forwarded again, as streaming platforms or banks do with our digital currencies.
But if you have to depend on a third party, there are considerable risks, starting with the loss of privacy; you depend on their diligence, you are subject to their rules, if they have technical problems your service suffers, they can implement censorship mechanisms, they can be attacked, go bankrupt, be intervened by the state, etc. (trusted third party problem).
Solving double-spending and the trusted third party
Bitcoin is the first and only digital asset that manages to solve both the double-spending problem and the trusted third party problem, making it the only real digital asset, a digital commodity. Yes, Bitcoin is a real asset; it is not anyone’s liability, it has no issuer, nor a company that controls it or focuses on generating value around it. Understanding Bitcoin as a real asset is the first difficulty.
The second difficulty is the comparison with payment media.
Bitcoin is not a great medium of exchange—not because of technical problems, but because it was not primarily designed for that. Nor do we generally have trouble making day-to-day payments in most cases, so its demand for that purpose isn’t particularly relevant.
Moreover, it significantly increases transaction costs (R. Coase) for making payments. On top of that, Bitcoin has a deterministic supply, so any change in demand is reflected through price; there is no way to adjust supply to demand to stabilize it, making it inherently volatile. Mediums of exchange and units of account require stability to enable economic calculation, but that very stability is achieved by sacrificing long-term appreciation of the asset. So what value does Bitcoin actually provide?
Redefining property rights
First, it is a redefinition of property rights. Until now, all our property depended on the order established by coercive power.
Since Bitcoin eliminates the trusted third party and creates a global autonomous system where one can own and transfer control of a real asset—Bitcoin—it actually resembles a global system of absolute private property rights.
The change is of historic proportions because, by making ownership of an asset depend on knowledge of certain words, it allows you to hold your wealth and conduct your transactions privately on a global scale thanks to being digital.
For the first time, every human being has the possibility of accessing property to save, exchange, and bequeath to whomever they choose, without censorship, with total accessibility, and without anyone being able to dilute it. That doesn’t seem trivial to me.
Deterioration, divisibility, custody costs…
Second, if it is a real asset, it must possess certain properties X, since it is not anyone’s liability; its value will depend on the demand for those properties.
By not depending on anyone, it becomes the first and only censorship-resistant asset, extremely difficult to confiscate.
It also dramatically reduces transaction costs for saving and transmitting value over time.
With a deterministic—and in practice deflationary—supply due to custody errors, over time your share of the total keeps increasing, eliminating dilution risk and boosting your concentration.
It also requires no asymmetric information to decide where to deposit your savings.
It’s like buying gold: you don’t have to choose among thousands of companies or between one fund or another. However, gold is expensive to divide, custody, verify, and transport.
And it suffers 1.6–2% annual dilution, which is significant over the long term.
Bitcoin not only doesn’t deteriorate; it also has low custody costs. It is easy to divide, verify, and transport. Its divisibility, lack of deterioration, and absence of regulatory risks also make it attractive compared to real estate, where you need part of your savings upfront, you have to liquidate the entire asset, it incurs many associated costs from deterioration, and exposure to higher taxes, regulations, or squatting is significant.
Bitcoin’s superiority
When compared to the assets we use to park wealth and transport value over time, Bitcoin has properties far superior to most of them.
Bitcoin is designed for hoarding, and with a fixed supply, that is precisely what gives an asset real value: being demanded for holding, not for spending or making payments.
Moreover, as a real asset, it has no counterparty risk, doesn’t need to be backed by anything, and there is no possibility of anyone defaulting on an obligation.
What are the chances that states will stop devaluing their currencies? What are the prospects that regulations won’t increase? What can be expected from taxes on all assets, especially the less liquid ones? Will politicians leave private pension funds untouched when there is accumulated money there? Has a bank ever gone bankrupt and failed to return money to depositors? Has a state or company ever defaulted and failed to meet its obligations?
Bitcoin can be an answer to many of these questions.
Economists still have homework to do. It’s not about thinking about Bitcoin through the preconceived categories and beliefs we already hold, but about rethinking all those beliefs, theories, and categories in light of Bitcoin.
Undoubtedly, Bitcoin operates in the economic domain—though not exclusively there. How is it possible that something of such significance has escaped their theorists? “It’s a bubble! Digital tulips!”, with the slight difference that tulips multiplied their price by 22 while Bitcoin has multiplied it by 60 million. “It can’t be; the market must be wrong in valuing it,” they probably think.
But what exactly are they missing?
Bitcoin manages to solve a series of historical problems in the digital world. In this realm, by default, we lack privacy because there always has to be a service provider. Privacy means revealing information selectively. You have to choose whom to reveal your information to (a service provider).
And that provider will always have the ability to override your decision not to share your data. When you hand someone a physical letter, the contents of that letter are private. However, when you send an email, that privacy can be violated by the service provider, so by default you lack privacy.
The same thing happens with physical cash.
If you pay in a store with a physical banknote, the shopkeeper has no need to know who you are or the origin of that money, nor does the issuer of the note need to know what you buy, when, from whom, or where that money came from. However, when we move into the digital world, that privacy is lost.
Your service provider—your bank—does know, and that information can reach many other parties.
Electronic cash
The first step is to understand that Bitcoin is essentially that “electronic cash” that Satoshi described in the whitepaper. However, these two words have led to a series of assumptions—in my view completely mistaken—that are what prevent economists from understanding it. Bitcoin is not an alternative to fiat money and central banks, as proposed in Saifedean Ammous’s book The Bitcoin Standard. Let’s see why.
The two problems that Bitcoin solved in the digital world are the following: the double-spending problem and the problem of the trusted third party that provides a digital service. In this digital realm, it is easy to multiply units at almost no cost. For example, we can send the exact same image to multiple people through a messaging app. But the fact that it can be replicated endlessly prevents it from being a scarce good and, therefore, from being worth hoarding.
Dependency on a third party
Moreover, for an asset that aspires to become an economic good, unlimited reproduction is equivalent to counterfeiting. Imagine if 100 monetary units from our bank could be sent to many people at once (double-spending problem). This could be solved by introducing a third party that acts as an intermediary and guarantees that the image or those 100 monetary units cannot be forwarded again, as streaming platforms or banks do with our digital currencies.
But if you have to depend on a third party, there are considerable risks, starting with the loss of privacy; you depend on their diligence, you are subject to their rules, if they have technical problems your service suffers, they can implement censorship mechanisms, they can be attacked, go bankrupt, be intervened by the state, etc. (trusted third party problem).
Solving double-spending and the trusted third party
Bitcoin is the first and only digital asset that manages to solve both the double-spending problem and the trusted third party problem, making it the only real digital asset, a digital commodity. Yes, Bitcoin is a real asset; it is not anyone’s liability, it has no issuer, nor a company that controls it or focuses on generating value around it. Understanding Bitcoin as a real asset is the first difficulty.
The second difficulty is the comparison with payment media.
Bitcoin is not a great medium of exchange—not because of technical problems, but because it was not primarily designed for that. Nor do we generally have trouble making day-to-day payments in most cases, so its demand for that purpose isn’t particularly relevant.
Moreover, it significantly increases transaction costs (R. Coase) for making payments. On top of that, Bitcoin has a deterministic supply, so any change in demand is reflected through price; there is no way to adjust supply to demand to stabilize it, making it inherently volatile. Mediums of exchange and units of account require stability to enable economic calculation, but that very stability is achieved by sacrificing long-term appreciation of the asset. So what value does Bitcoin actually provide?
Redefining property rights
First, it is a redefinition of property rights. Until now, all our property depended on the order established by coercive power.
Since Bitcoin eliminates the trusted third party and creates a global autonomous system where one can own and transfer control of a real asset—Bitcoin—it actually resembles a global system of absolute private property rights.
The change is of historic proportions because, by making ownership of an asset depend on knowledge of certain words, it allows you to hold your wealth and conduct your transactions privately on a global scale thanks to being digital.
For the first time, every human being has the possibility of accessing property to save, exchange, and bequeath to whomever they choose, without censorship, with total accessibility, and without anyone being able to dilute it. That doesn’t seem trivial to me.
Deterioration, divisibility, custody costs…
Second, if it is a real asset, it must possess certain properties X, since it is not anyone’s liability; its value will depend on the demand for those properties.
By not depending on anyone, it becomes the first and only censorship-resistant asset, extremely difficult to confiscate.
It also dramatically reduces transaction costs for saving and transmitting value over time.
With a deterministic—and in practice deflationary—supply due to custody errors, over time your share of the total keeps increasing, eliminating dilution risk and boosting your concentration.
It also requires no asymmetric information to decide where to deposit your savings.
It’s like buying gold: you don’t have to choose among thousands of companies or between one fund or another. However, gold is expensive to divide, custody, verify, and transport.
And it suffers 1.6–2% annual dilution, which is significant over the long term.
Bitcoin not only doesn’t deteriorate; it also has low custody costs. It is easy to divide, verify, and transport. Its divisibility, lack of deterioration, and absence of regulatory risks also make it attractive compared to real estate, where you need part of your savings upfront, you have to liquidate the entire asset, it incurs many associated costs from deterioration, and exposure to higher taxes, regulations, or squatting is significant.
Bitcoin’s superiority
When compared to the assets we use to park wealth and transport value over time, Bitcoin has properties far superior to most of them.
Bitcoin is designed for hoarding, and with a fixed supply, that is precisely what gives an asset real value: being demanded for holding, not for spending or making payments.
Moreover, as a real asset, it has no counterparty risk, doesn’t need to be backed by anything, and there is no possibility of anyone defaulting on an obligation.
What are the chances that states will stop devaluing their currencies? What are the prospects that regulations won’t increase? What can be expected from taxes on all assets, especially the less liquid ones? Will politicians leave private pension funds untouched when there is accumulated money there? Has a bank ever gone bankrupt and failed to return money to depositors? Has a state or company ever defaulted and failed to meet its obligations?
Bitcoin can be an answer to many of these questions.
Economists still have homework to do. It’s not about thinking about Bitcoin through the preconceived categories and beliefs we already hold, but about rethinking all those beliefs, theories, and categories in light of Bitcoin.