Stop trying to reinvent the monetary wheel with Bitcoin, argues Robert Skidelsky, a member of the British House of Lords and professor emeritus of political economy at Warwick University.
[Note: This is an op-ed]
Old Man Yells at Bitcoin
In an article published last week, Skidelsky draws similarities between gold and Bitcoin, concluding that it’s incorrect to perceive flaws in money itself as the cause of “sick” economies. In other words, boom and bust cycles are natural occurrences, and the incumbent financial system is the best humans can do, if only the sluggish economies could just get it together.
The fact is that human societies have discovered no better way to keep the value of money roughly constant than by relying on central banks to exercise control over its issue and to act directly or indirectly on the volume of credit created by the commercial banking system.
But let’s leave the Keynes versus Hayek debate for another article. Instead, what stands out like a sore thumb is not only the complacency and the knee-jerk reaction to defend the status quo, but doing so through ignorance of Bitcoin’s fundamental properties.
Amusingly, Skidelsky even acknowledges that “the technical details of the new cash-generation systems are difficult to grasp; their inspiration is not.”
A person from the early 20th century might have also said that “the technical details of the airplane are difficult to grasp; their inspiration is not.”
Hence, the mere attempt to improve money is rebuked because all previous attempts have failed to come up with anything better than the paper mill that is today’s financial system. Skidelsky dismisses Bitcoin as merely the latest attempt to use new technology “to stop money from going bad.”
Let’s take a look at some examples of the erroneous statements made by the emeritus of political economy.
Lie 1: It’s Created Out of Nothing
Paradoxically, although it is created out of nothing, it will offer no possibility of money ‘creation.’
First, bitcoins aren’t created out of “nothing.” Second, since it’s already being accepted as a medium of exchange in many places online and across the globe for goods or services, then it’s de facto money.
Furthermore, energy, coding skills, resources, and time spent on software and hardware development and production are just some of the components required to run and maintain the Bitcoin network. It is also underpinned by a globally distributed network of users who all agree to play by the rules of the network for their own benefit.
The more users in this network, the greater the value of Bitcoin will become, according to Metcalfe’s law.
Lie 2: No Elasticity
Bitcoin will be ‘mined’ in diminishing quantities until it is exhausted in 2040, having delivered 21 million digital coins. In other words, there is no elasticity in the currency… [T]he currency will run into the same problem as the gold standard: not providing enough money to support a growing economy and population.
First, Skidelsky is off by a century as the last bitcoin will be mined in 2140, though most will enter the supply by 2030.
Second, the problem was never with gold itself but the debasement of gold and thus the distortion of value. For example, most scholars believe it was the “clipping” of gold coins that was largely responsible for the fall of the Roman Empire. The publicly verifiable and immutable ledger of bitcoin ensures that this monetary network can’t be tampered with, unlike with fiat.
Third, unlike gold, a bitcoin is merely the name of a digital unit (whose value is determined by the market). This makes it highly divisible. In fact, the smallest possible unit is one hundred millionth of a single bitcoin (0.00000001 BTC) — called a ‘satoshi’— making it possible to send tiny fractions of a penny at current market prices. This can’t be done even with digital fiat today, let alone physical cash or metal coins.
This, in fact, makes Bitcoin the most elastic form of money ever created as the 21 billion digital units equal to roughly 2,099,999,997,690,000 (over 2 quadrillion) satoshis according to the calculations presented here. What’s more, new layer-2 applications built on top of the Bitcoin blockchain, such as the Lightning Network, will enable the ability to send even smaller amounts off-chain.
Lie 3: Deflation Will Lead to ‘Hoarding’
This [lack of money supply] would be exacerbated by any tendency to hoard bitcoins.
Hoarding is a pejorative term for saving. If there is no saving, then there is no capital. And there can be no capitalism without capital.
The “deflationary death spiral” argument against sound money is an overblown theory perpetuated by Keynesian economists, which is refuted here.
In fact, some argue that saving actually leads to greater consumption in the long-run. Saifedean Ammous explains this concept in his book, The Bitcoin Standard, stating:
A society which constantly defers consumption will actually end up being a society that consumes more in the long-run than a low savings society, since the low time-preference society invests more, thus producing more income for its members. Even with a larger percentage of their income going to savings, the low time-preference societies will end up having higher levels of consumption in the long-run, as well as a larger capital stock.
You can also read more about the advantages of having a capped supply in a new report from BitMex Research here.
Lie 4: Inflation
Cryptocurrencies provide no security against inflation.
Skidelsky doesn’t specify which inflation he’s actually referring to – monetary supply inflation vs. price inflation. Though the two are correlated, the latter is an integral feature of fiat currencies whose value is guaranteed to depreciate over time as more money is printed.
Sooner or later, the incentive for governments and central banks to print more money becomes irresistible to the detriment of the population. Inflation is also sometimes referred to as a “hidden tax” that is much easier to impose on citizens as opposed to direct taxation.
On the other hand, Bitcoin’s monetary supply is not only controlled but is fully transparent and known to all. Even the gold supply cannot be as accurately predicted. Whereas the 21 million digital units that will ever exist are a key property of the Bitcoin protocol that cements its digital scarcity.
Put differently, the millions of people around the world who use Bitcoin today know the supply is capped, which results in more accurate price discovery for goods and services. It is also important to note that people who use bitcoin are doing so voluntarily to store their wealth and move their money.
Bitcoin Is a Revolutionary Idea
With the advent of cryptocurrencies, for the first time in history, humans now have the option to choose their money. This is nothing short of revolutionary since throughout history there was always some central authority, be it the state, the church, or a banking cartel, maintaining a monopoly over money by decree, and ultimately, by force.
Comparatively, it is fiat currencies that provide no security against inflation. In fact, fiat currency supply is specifically designed to grow indefinitely as emission rate is controlled by a handful of unelected bankers through the artificial setting of interest rates.
Rubber will meet the road as more people realize they can now opt out of this system by buying Bitcoin. The good news is that people now have a choice between trusting bankers or a voluntary decentralized monetary network with no one in charge.