Bitcoin – Somewhat Scholarly

012 – Should You Care About Bitcoin?

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008 – What Makes Bitcoin So Special?

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Bitcoin is an open, borderless, decentralized, immutable system of creating, tracking, and sending wealth from person to person without reliance on a third party for permission.

Bitcoin is the first type of democratic money (and payment network) ever invented, and it will likely transform the global economy in staggering ways.

At this point in time, I believe that Bitcoin Education is one of the best investments you can make in your own personal future.

If you educate yourself, you can protect yourself.

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“Bitcoin is not a Safe Haven.”

Premise 1. If an asset’s price goes down during a crisis, then that asset is not a “safe haven.”

Premise 2. Bitcoin’s price went down during a crisis.

Therefore:

Conclusion 3. Bitcoin is not a safe haven.

Evaluation:

Premise 1. “If an asset’s price goes down during a crisis, then that asset is not a ‘safe haven.’” Dubious. By this definition, every asset has the potential to lose its “safe haven” status (if its price goes down – even “temporarily” – during a crisis), which should strike the reader as “obviously flawed” and most definitely not a useful label.

In fact, the claims that an asset “is or is not a safe haven because of its price movements [in the short term]” are all subject to the “no true Scotsman fallacy,” also known as an “appeal to purity.” If, with each new economic “crisis,” a pundit can change the timeline, the loss or gain threshold, or some other criteria to classify an asset as either “safe haven” or not, then such an argument is invalid and such a definition is unusable.

A much stronger approach would be to define a “safe haven” by the overall nature of how money flows into and out of the asset throughout its entire lifetime, and NOT update the definition of a “safe haven” with each new “crisis.” See below.

Premise 2. “Bitcoin’s price went down during a crisis.” Agree, lol.

Therefore:

Conclusion 3. “Bitcoin is not a safe haven.” Disagree. This Argument, because of Premise 1, is not sufficient to establish the conclusion that “Bitcoin is not a safe haven asset,” but it’s possible that other Arguments would be sufficient to establish this claim.

Risk Assets vs. Safe Haven Assets

The beauty of “the markets” is that they capture the size and strength of everyone’s opinions, all over the world, at all points in time: all the lovers and haters of an asset, all of the PhD economists and the high school dropouts, all of the professional hedge fund managers and the amateurs with a hunch – everyone’s opinions are constantly and consistently captured in the price of an asset.

The price of an asset, therefore, signals the “revealed preferences of the aggregate” over time, and if we look at a long-enough time horizon, we can see how generations of individuals (and institutions!) around the world view a particular asset.

So what types of price movements do we see?

As you might expect, we see two broad types of price movements:

Risk Assets vs. Safe Haven Assets simplified

One type of asset “inches” upward most of the time, experiences a rounded top, and a quick downward spike during its “corrections.” Then the pattern repeats, and it does so relatively quickly and frequently. This type of asset enjoys long bull markets and short bear markets. Notably, the absolute largest single-day movements of all time are actually downward.
The other type of asset typically moves downward or sideways most of the time, experiences a rounded bottom, and a quick upward spike during its “corrections.” This pattern repeats very slowly and infrequently, but the magnitude of the movements is much greater. This type of asset endures long bear markets and short bull markets. Notably, the absolute largest single-day movements of all time are upward.

The two types of assets described above are risk assets and safe haven assets, respectively.

Here is a chart illustrating the prime example of each asset type – stocks and gold:

Risk vs. Safe - Stocks vs. Gold 1900 - 2020

Notice that Stocks exhibit a repeating pattern of steady uphill climb, rounded top, and quick spike down. Then the pattern repeats. Gold, on the other hand, exhibits a pattern of flat movement, then a rounded bottom, and a quick spike up.

Interestingly, there's another important pattern that emerges, but it's only apparent when we analyze the numbers more deeply: in a risk asset, the biggest single-day moves (up and down) tend to occur during a bear market, whereas in a safe haven asset, the biggest single-day moves (up and down) tend to occur during a bull market:

Stocks since 1900 with 20 Biggest Up and Down Days, joined

Gold since 1900 with 20 Biggest Up and Down Days, joined

In other words, big record-breaking single-day volatility is typically a sign of a bear market for risk assets, and a bull market for safe haven assets.

For those curious of the magnitudes of each single-day move, here’s the same information with the magnitude of the daily change (%) plotted on the left axis:

Stocks since 1900 with 20 Biggest Up and Down Days, split

Gold since 1900 with 20 Biggest Up and Down Days, split

What about Bitcoin?

Of course, we don’t have the luxury of a 120-year price history, so we’ll have to suffice with just 10 years.

Here’s Bitcoin’s price history with the 10 largest one-day price moves up and down. [Note that I’ve highlighted only the 10 biggest days, not 20, since the price history is so much shorter]:

Bitcoin since 2010 with 10 Biggest Up and Down Days, joined

Bitcoin since 2010 with 10 Biggest Up and Down Days, split

As you can see, the biggest one-day moves tend to occur during a bull market, just like a safe haven.

While the timing of big moves is interesting, it’s not our primary criterion for establishing an asset as a safe haven.

Instead, let’s look at the shape of Bitcoin’s overall price trajectory, and compare it to Gold’s price trajectory since it became “freely traded” in April 1968 (after the collapse of the London Gold Pool):

Bitcoin and Gold have similar Safe Haven trajectories

You’ll notice that I’ve slightly adjusted the horizontal time scales to highlight the staggering similarity in the shape of their price trajectories over time.

Here’s the same time comparison between Bitcoin and Stocks:

Bitcoin and Stocks have dissimilar trajectories

As you can see, Bitcoin and Stocks are not even close to moving in a similar way.

Key Takeaway

Remember, we’re defining a “safe haven” based on the overall behavior of every person in the world – including those who bet for an asset, against an asset, and those who sit on the sidelines.

We’re not interested in what people say about an asset – only in how people actually act.

The collective behavior of the market reveals that people largely ignore Bitcoin and Gold on a day-to-day basis (while instead focusing on Stocks or other “risk assets”), and then, occasionally, they flip their focus – rushing out of Stocks and into Bitcoin and Gold.

For these reasons, Bitcoin is a safe haven asset, just like gold.

Have I missed something? I welcome your constructive criticism and your evaluation of my Arguments.

“Bitcoin is not a store of value.”

Initial Claim:
@25:24 - 26:17

Peter Schiff: "When you buy Bitcoin, it's not providing any service. It's not satisfying any of your needs or desires."

Anthony Pompliano: "It's providing cryptographic security."

Peter Schiff: "But security of what? You've secured nothing. Yes, I mean, I could even concede potentially that... if I own a Bitcoin, no one's going to steal it. But if I have nothing, then what difference does it make whether someone steals it or not? I mean it only has this value to the extent that someone else believes that they're going to get rich by buying it. And again, y'know, you don't want to confuse (because you said earlier that [Bitcoin is] a store of value)- I will concede that the price of Bitcoin has gone way up, buy you can't confuse "price appreciation" with a "store of value." Anything that can go up can also come way down, as we've seen before. I mean Bitcoin has had some spectacular declines, and so there's a lot of volatility there."

P1. If an asset has risen in price because of purely speculative hopes, then that asset is not a store of value.

P2. Bitcoin has risen in price because of purely speculative hopes.

Therefore:

C3. Bitcoin is not a store of value.

Evaluation:

P1. Agree. If an asset has risen in price because of purely speculative hopes, then that asset is not a store of value.

P2. Disagree. Bitcoin has risen in price because of speculative hopes, for sure (and we might call that an "offensive" use case), but Bitcoin has also risen in price because of increasing demand for its utility (which we might call a "defensive" use case):

Bitcoin's utility is appealing to people who have been (or might be) the victim of theft, extortion, censorship, restriction, inflation, marginalization, suppression, surveillance, or another form of financial oppression. Bitcoin stops third parties - including corporations and governments - from oppressing its users.

Therefore:

C3. Disagree. Bitcoin enables its users to "store their value" outside the reach of individuals and institutions.

“Bitcoin will be overtaken by a better cryptocurrency.”

Initial Claim:
@22:53-23:34

Peter Schiff: "Even if you assume, "okay, cryptocurrencies are going to work," I cannot think of an example throughout history where any innovation- where the first one was the best one, right? Whatever was invented, whether someone invented the telephone- the first telephone was not the best telephone - it's been improved upon. The first television, the first automobile.

So if cryptocurrency would work, why would we assume that Bitcoin is the one that's going to succeed? Why would the first attempt be the best attempt? Why wouldn't somebody come up with something better, that's quicker, that's more reliable, that's more secure than Bitcoin? And if somebody can do that, then it renders Bitcoin worthless because there's something better."

P1. It is extremely unlikely that the first version of a product is the best version of that product type.

P2. Bitcoin is the first version of a product type.

Therefore:

C3. It is extremely unlikely that Bitcoin is the best version of that product type.

Evaluation:

P1. Agree.

P2. Agree.

Therefore:

C3. Agree.

P4. If someone invents a superior version of Bitcoin, then Bitcoin will be worthless.

P5. Someone will invent a superior version of Bitcoin.

Therefore:

C6. Bitcoin will be worthless.

Evaluation:

P4. Disagree. This Premise assumes that only ONE product can retain value in a given marketplace (which requires that all consumers switch to using the one, single, "best" product), which is a False assumption.

Clearly, there is more than one type of telephone that exists today, just as there's more than one type of television, type of automobile, and type of money.

In all likelihood, many cryptocurrencies will exist simultaneously, each with a different use case, market segmentation, and market capitalization.

If someone invents a "superior" version of Bitcoin, then Bitcoin will become less valuable.

P5. Dubious. The label of "superior" is completely subjective, and every product-maker (in every market) must consider various tradeoffs in product design and functionality.

In cryptocurrencies, there is a 3-way tradeoff among security, scalability, and decentralization - you can pick at most two. Bitcoin attempts to have "unrivaled" security and decentralization, and it chooses to sacrifice its scalability. Other cryptocurrencies attempt to favor scalability, for example, at the expense of either security or decentralization.

Therefore:

C6. Agree, but for different reasons.

Bitcoin will become "less valuable" if and when a "superior" version is released.

Bitcoin will become "worthless" when its utility disappears (i.e. its security is compromised). This will not be a function of the competitive landscape (e.g. "other cryptocurrencies"), but rather the technological landscape (e.g. "disruptive technologies," such as quantum computing).

“Bitcoin has no intrinsic value.”

P1. Anything with no intrinsic value is essentially worthless.

P2. Bitcoin has no intrinsic value.

Therefore:

C3. Bitcoin is essentially worthless.

Evaluation:

P1. Disagree. Suppose we define "intrinsic value" as "the benefit derived from the minimum functional properties of an asset that are universally recognized and broadly applicable." In other words, "intrinsic value" is the "objective functionality" of an asset. That seems fair, but this definition causes us to dismiss other kinds of value as "worthless" (such as aesthetic or sentimental value), and clearly those types of value are not worthless.

If we expand the definition of "intrinsic value" to include aesthetic or sentimental value, then we've introduced subjectivity into the core value of something. Since subjective value, by definition, is a matter of opinion, and since we cannot make claims about other people's opinions, then the presence of subjectivity prevents us from making claims about this kind of value.

Hence, this latter definition of intrinsic value (that includes subjectivity) leads to a False Premise because it precludes us from making claims about other people's value, and the former definition of intrinsic value (that is strictly objective) also leads to a False Premise because it ignores a very real component of value (i.e. aesthetic or sentimental value).

Either definition of "intrinsic value" leads to a False Premise, so I Disagree with Premise 2.

P2. Disagree. Bitcoin does, in fact, have intrinsic value. In order for you to "have" a Bitcoin, the Bitcoin network must acknowledge that you have custody of that Bitcoin (i.e. you must supply a valid private key to claim ownership of a balance in a public address).

If you can demonstrate ownership, then you can transfer ownership - without any additional permissions or paperwork. The two functions (demonstrating and transferring ownership) are "structurally connected."

The intrinsic value of a Bitcoin, therefore, is the ability to establish and transfer ownership of digital assets on a globally-recognized and un-cheatable ledger. In other words, once you own something on the Bitcoin network, nobody can take it away, except you (either your own choice or your own negligence).

Another way to consider this intrinsic value is that each Bitcoin user has the same "power" and "sovereignty" as the other users. There is no hierarchy of power - such as authoritarian governments, remorseless corporations, and powerless individuals - there is only a public address with a private key, and everyone on the network is the same. It is an amazing environment of equality, and it's built into the network - if you "have" a Bitcoin, you "have" this equality.

Therefore:

C3. Disagree.

“Bitcoin is just another fiat currency.”

Initial claim:
@14:20 - 15:36

Anthony Pompliano: "Money is just a belief system, right? So a "medium of exchange" is simply valuable because both parties agree [that it's valuable], right?"

Peter Schiff: "Not real money. You're talking about fiat money. You're talking about paper currency that governments create out of thin air. There, [with paper currencies] the value's derived from faith and confidence, but it also has the backing of the government that issued it, and the fact that each government demands that its citizens pay taxes in that currency that it creates, which means that there is a demand among the citizens to accumulate that currency in order to pay those taxes.

And because of that, all of the contracts are denominated in that - employment contracts, rental agreements, bonds, insurance contracts - so everybody starts using it, but ultimately if the government abuses the privilege of creating it, and it creates too much, it collapses in value because the confidence is destroyed.

And Bitcoin has much more in common with a fiat currency than it does with gold, because gold's value is derived from its physical properties that make it desirable and make it useful, whereas Bitcoin's value is derived from the confidence that people are going to want it in the future even though it has no physical properties or any other properties that you could use it for."

P1. If a "medium of exchange" derives its value from its physical properties, then it is "real money."

P2. Gold is a medium of exchange that derives its value from its physical properties.

Therefore:

C3. Gold is "real money."

Evaluation:

P1. There's a lot to clarify here, but such clarification is not essential to the main argument, so let's assume that I Agree with this Premise.

P2. Again, we could clarify this, but it's not essential, so let's assume that I Agree with this Premise.

Therefore:

C3. Agree. Gold is "real money."

P4. If a "medium of exchange" derives its value solely from the "confidence" that people are going to want it in the future, then it is "fake money."

P5. Bitcoin is a medium of exchange that derives its value solely from the "confidence" that people are going to want it in the future.

Therefore:

C6. Bitcoin is "fake money."

Evaluation:

P4. Let's suppose I Agree.

P5. Disagree, but if we include a very important addition, I would Agree:

Bitcoin is a medium of exchange that derives some of its value from the "confidence" that people are going to want it in the future.

Consider that a holder of any non-consumable asset - e.g. stocks and bonds, but also gold and Bitcoin - is reasonably "confident" that people are going to want that asset in the future.

This confidence is a component, but not the entirety, of each asset's value.

A stock typically entitles you to a share of a company's profits, and perhaps voting rights on future corporate actions, AND you're "confident" that people will want that stock from you in the future.
A bond typically entitles you to a stream of future interest payments from a counter-party that you believe to be creditworthy, AND you're "confident" that people will want that bond from you in the future.
Gold can be used in numerous commercial and industrial applications, AND you're "confident" that people will want that gold from you in the future.
Bitcoin can be used to prove ownership, protect ownership, and transfer ownership without permissions or restrictions (resulting in economic equality and self-sovereignty among participants), AND you're "confident" that people will want that Bitcoin from you in the future.

Bitcoin is a medium of exchange that derives some of its value from the "confidence" that people are going to want it in the future.

Therefore:

C6. Disagree. Bitcoin is not "fake money."

P7. Eventually, the value of "fake money" will collapse when confidence is destroyed.

P6. Bitcoin is "fake money."

Therefore:

C8. Eventually, the value of Bitcoin will collapse when confidence is destroyed.

Evaluation:

P7. Agree. Eventually, the value of "fake money" will collapse when confidence is destroyed.

P6. As we discussed above, Disagree. Bitcoin is not "fake money."

Therefore:

C8. Disagree, but if we include a very important addition, I would Agree:

Eventually, the value of Bitcoin will collapse when (1) its utility disappears AND (2) confidence is destroyed.

In the short term, macro and micro factors will increase and decrease the overall "confidence" in the Bitcoin network, while the "utility" of a Bitcoin remains unchanged.

In the long term, something will undermine the integrity of the Bitcoin network (e.g. breaking the hashing algorithm, a 51% attack, etc.), and the "utility" (i.e. security) of the Bitcoin network will disappear. When this occurs, people will lose confidence in Bitcoin rapidly, and the value of Bitcoin will collapse.

The same process will unfold in other asset classes (e.g. stocks, bonds, and gold), but on very different time scales (e.g. decades, centuries, or millennia).

“Bitcoin is a Ponzi Scheme.”

P1. A "Ponzi Scheme" is a community, organization, or system characterized by (1) participants who join for a "small" cost and who hope to leave with a "large" profit, and (2) a pool of money which is ultimately insufficient to provide all members with the desired profits, thereby leaving many participants with sizable - and sometimes total - losses.

P2. The Bitcoin community exhibits the characteristics of a Ponzi Scheme.

Therefore:

C3. Bitcoin is a Ponzi Scheme.

Evaluation:

P1. Disagree. This is a loosely accurate example of a Ponzi Scheme, and it bears a superficial resemblance to Bitcoin, but when we clarify some important details, it becomes clear that "a Ponzi Scheme" and "the Bitcoin network" are two very different things. A Ponzi Scheme includes the following features:

A central authority. This authority handles membership and reporting requirements (if any), it collects fees and distributes profits, and it is ultimately the negligent and/or unethical party responsible for the scheme's collapse (see #4 below).
A promise, either verbal or written, from the central authority to each of the members, regarding the expectation of future profits, typically specifying the size and timing of payment(s), or, at a minimum, the calculation methodology of those future payments. In accounting terms, the central authority maintains a liability for each of its members (i.e. a "payable"), and each member maintains a corresponding asset (i.e. a "receivable"). This establishes an on-going financial relationship between the two parties for as long as the asset is held.
A mechanism, vehicle, or methodology whereby the central authority attempts to grow - either in earnest or in deceit - the initial sum of money (collected from fees) to increase such capital to an amount sufficiently large to afford the promised future payouts.
A default. The most (in)famous feature of a Ponzi Scheme is probably the collapse. Eventually (or, possibly, initially), the pool of money is insufficient to honor all liabilities. The scheme may survive "in the red" (i.e. owing more in liabilities than it has in assets) for a long time - using new members' fees to pay existing members' obligations (sometimes described as "robbing Peter to pay Paul") - but eventually, new membership will decline, the remaining funds will be paid to some of the members, and the central authority will go bankrupt with the remaining members each holding a worthless promise.

P2. Disagree. Bitcoin does not fit the original definition or the improved definition of a Ponzi Scheme. There is no central authority, there's no promise to receive funds in the future, and there's no mechanism whereby a "central authority" attempts to grow the money you paid them when you first acquired your Bitcoin.

People may hope to make a profit from buying and selling Bitcoin, but hope is something that exists inside a single person: a promise is something that exists between two people. There are no promises in Bitcoin, and there's no on-going financial relationship. Without this on-going financial relationship, there's no Ponzi Scheme.

While it's true that many Bitcoin users are attempting to "join for a 'small' cost and... leave with a 'large' profit," this is insufficient to establish Bitcoin as a Ponzi Scheme. In fact, every major asset class includes speculators, who, by definition, are hoping to "buy low, sell high." The presence of speculators in a market does not affect the nature or legitimacy of the asset(s) in that market.

Therefore:

C3. Disagree.

“Bitcoin has no utility, so it has no value.”

Initial claim:
@22:38 - 22:57

Peter Schiff: "If you [have] Bitcoin, you have nothing. If you divide it into two halves, you have half of nothing. So you're not "dividing" anything. You're not "storing" anything. When [someone] says, "it's a store of value": you must have value in order to store. Bitcoin has no value today - there's nothing you can do with it, so it doesn't make sense for you to store it for the future, because there'll be nothing you can do with it in the future either."

P1. For something to have value, it must have "utility" (i.e. the ability to accomplish something useful or practical).

P2. Bitcoin has no utility.

Therefore:

C3. Bitcoin has no value.

Evaluation:

P1. Dubious, but let's suppose we Agree. (I would tend to argue that anything can have value under the "right" conditions, but we can overlook that point for this Argument).

P2. Disagree. Bitcoin does, in fact, have utility (i.e. the ability to accomplish something useful or practical).

The Bitcoin network provides a solution to each of the following problems:

How do I prove that I own something, especially in a country with tenuous titles to land or other property?
How do I secure my purchasing power so that it can't be physically stolen or confiscated?
How do I store my purchasing power so that my government cannot steal it via inflation (or bail-outs), and banks cannot steal it via bail-ins?
How do I transfer ownership of my property to a family member or friend - possibly in another country - if one (or both) of us does not have a bank account?
How do I transact when and where it's convenient for me (e.g. 24/7, anywhere there's internet, worldwide)?
How can I participate in the global economy without trusting corruptible institutions (e.g. corporations, governments, or other intermediaries)?
How do I protect my privacy and my data from faceless and remorseless entities?
How do I buy a product or service that I believe to be safe and ethical, but that my bank, my government, or some other intermediary prohibits?

Of course, there are some existing solutions to each of these problems. The point here is not that Bitcoin is unique in solving these problems, but rather that Bitcoin is simply an "available alternative."

Since Bitcoin provides a solution to at least one problem, then Bitcoin has utility (i.e. the ability to accomplish something useful or practical).

Therefore:

C3. Disagree. Since Bitcoin has utility, Bitcoin has value.

What is the "fair value" of Bitcoin, and is it currently undervalued or overvalued? That question is - and always will be - answered by the sum total of the opinions of every person on the planet: i.e. "the market" and the current market price.

“Bitcoin is intangible, so it has no value.”

P1. For something to have value, it must be tangible.

P2. Bitcoin is not tangible.

Therefore:

C3. Bitcoin can not have value.

Evaluation:

P1. Disagree. There are many examples of intangible things that have value: love, freedom, friendship, power, memories, promises, and even "the satisfaction of being right." Those are things we live and die for (and often kill for), so clearly, intangible things can have value.

P2. Agree. Bitcoin is not tangible.

Therefore:

C3. Disagree. Bitcoin can have value.