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After a volatile week, a bitcoin on Friday was still worth about $ 40,000. This is still quite valuable, something bitcoin enthusiasts have been eager to point out.
There is nothing in the code that governs cryptocurrency, however, that answers the question: How can Bitcoin be turned into money if it becomes so valuable that you don’t want to spend it?
It is certainly true that, even with the fall of this week, the value of a bitcoin has long been appreciated. In 2008, it was nothing more than a PDF containing an idea. The PDF was trading at a spot price of zero, considerably lower than current levels. It’s an impressive 13-year return for any asset. It’s a level of Amazon or Apple that you should have on the ground floor. For the first time, a group of Swedish hackers who had explained Bitcoin to me in a penthouse in Malmö in 2011 told me: I have regrets.
However, Bitcoin is not supposed to be just a good. It’s supposed to be global money. Depending on who you ask for, it will become the standard medium of exchange for all transactions or the means of final settlement for other types of money, a bit like the dollars that banks may have in reserve accounts in the Fed. . This means you can’t just gain value. It should also be more useful, like money, for more people. This is not a quality you should ask for in your Apple stock.
Making Bitcoin a money is a scholastic exercise. Now it’s money, for some people. There are transactions for which it is suitable and which are already in use. The week I was in Sweden in 2011 there were only 12,000 transactions a day. By May 2017, that number had risen to 300,000 transactions a day. Since then, it has moved in a band around this level: volatile, but moving sideways. The value of a bitcoin, however, has continued to rise from just under $ 2,000 in 2017: volatile but, you know, up. Like money, bitcoin is becoming more valuable, but not more useful.
Its usefulness may be limited by design. People who defend bitcoin as the future of money like to say that, unlike the dollar, there is no central bank that can respond to bitcoins or ruin it. But there is a governance structure behind Bitcoin, as real and as clear as that of the Federal Reserve.
The Fed follows a code it calls Statement on long-term objectives and monetary policy strategy, which updates, about once a decade, when its internal culture of MIT, Harvard, and Berkeley macroeconomists begins to think differently about money. Right now, both the Fed’s code and culture believe that dollars should lose value relative to other long-term assets, averaging 2% annually.
The code that generates bitcoins has exceeded its total number by 21 m. This means that they are supposed to be more valuable, forever, by design. You can change the code, but just like in the Fed, to change the code, you have to change the culture – you have to convince a lot of people to use the new code. Here too the culture of bitcoin is fixed on the solidity of money, convinced that the best money only becomes more valuable over time. People encourage each other to “hodl”, to cling to their bitcoins and never sell. If you do, you have diamond hands. If he sells, he has paper hands. If you do nothing, we encourage you to have fun keeping yourself poor.
When you pass, you will get rich but don’t make transactions. This is good for Bitcoin assets, but it is difficult for Bitcoin money, because you keep out of the market what you keep. This is a challenge as old as money. Theognis, a 6th century BC Greek poet, wrote that intelligent men know bad gold and silver and that no one “will take it worse when it is better.” Aristophanes, the satirical Athenian, noted that “the coins with body that are the pride of Athens are never used while the average brass coins pass hand in hand.”
Robert Mundell, the Nobel Prize-winning economist who died a month ago, documented quotes like these through centuries of a single idea, which led to a maxim generally attributed to Thomas Gresham, an English merchant. 16th century and Crown adviser: poor – quality money makes high quality money out of circulation. Why would you spend something that is increasingly valuable?
Both the code and the culture of bitcoin are designed, in the long run, to drive it out of circulation. This causes hodlers to cling to a problem of collective action. Sell or change the code and your asset decreases in value and becomes more useful as money. Hodl, and keep the code, and your resource will appreciate it. Monetary culture is monetary policy. Diamond hands are Gresham’s hands.
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