Famed investor Ray Dalio recently challenged the crypto community to educate him about Bitcoin. I haven’t seen him share any cogent responses he’s received yet. But Bitcoin came to withing kissing distance of record price levels this week. Fans who bought during the Bitcoin crash of 2018 and held on for dear life have just bagged a huge win. This makes it rather pressing to ask a few questions of my own.
First, let me say that I am not hostile to Bitcoin.
It’d be great if cryptos put an end to the state’s ability to destroy economies and tax people without their consent via inflation of fiat currencies.
Being a libertarian, I see cryptos as a market response to government mismanagement of money. I want them to succeed.
But it’s precisely because I want Bitcoin to achieve what nearly a century of passionate and scholarly argumentation from free-market advocates have failed to do for gold that I must be on my guard. My desires shouldn’t be a factor. My mind needs to be sure that the case for Bitcoin is sound before I can adopt it.
Let me add that I think it’s incorrect to see this as a “winner takes all” situation. We don’t have to prove that Bitcoin is better than gold, or the reverse.
It may be that physical wealth held in gold and silver bullion is best for long-term savings and that some cryptos are better for day-to-day transactions. Or maybe not; online transactions based on metals on deposit make it just as easy to use gold as a currency as any purely electronic form of money. I’m happy to let the market figure that out.
What I do need to decide is whether I want to speculate on Bitcoin—or any other crypto—now, while the market is deciding.
With this in mind, I’d like to crowdsource some answers to key questions I have…
- Money is both a medium of exchange and a store of value. I’ve heard arguments that, being entries in electronic ledgers, cryptos count as money because they meet the criteria defined millennia ago by Aristotle. They are consistent (all units are identical), convenient (transaction cost is negligible), durable (they don’t rot, tarnish, burn, etc.), and are easily divisible (no limit to fractional ownership). Stipulated that this is all true; cryptos are, in fact, already serving as media for exchange. But this leaves out the fifth criterion, which is intrinsic value in the thing itself. That’s what makes real money like gold a store of value as well as a medium of exchange. I realize that the same criticism applies to fiat currencies—but not to gold. Far from being the “pet rock” it gets dismissed as, gold, like other metals, has unique chemical and physical properties that make it valuable for more than jewelry. How can something like Bitcoin, which has no physical existence, satisfy both use cases that define money?
- I’m not a mathematician. I understand that the math says cryptocurrencies like Bitcoin can never be hacked. I don’t pretend to be able to do the math and prove this for myself. Like other non-mathematicians, I just assume that if it were not so, some mathematician would have become famous debunking the claim by now. But how do any of us know that this won’t change in the future?
- I’m also not a programmer. I have to assume that the code implements the math correctly and that everything else about it is correct and secure. But if I was a clever and unethical hacker who found a flaw to exploit, I wouldn’t tell anyone. I’d discreetly use the Bitcoin market as a supply of free money for as long as I could get away with it. How can any of us ever know that the programming that implements the use of cryptos is safe, rather than just taking it on faith?
- Supposing that Bitcoin is indeed secure against hacking—by private sector criminals or those in government—what about the exchanges? What about things like keystroke tracking on individual users’ phones and computers? I realize that these vulnerabilities exist for regular bank accounts—but they don’t exist for bullion or other real assets. And if some private sector criminal did hack my bank account and drain it, I’d have recourse with the bank—but no recourse for my vanished bitcoins. How can I feel secure in an asset that can disappear so utterly and irrevocably?
- I’ve seen an eloquent case for why Bitcoin is unique, and hence why its value is secure from competition from new cryptos. I can see that the circumstances under which Bitcoin developed can never be repeated, and that does make it unique. But uniqueness—even among things well understood to have limited supply—isn’t enough to secure value. (My fingernail clippings have my unique DNA and there’s a finite limit to how many can ever be produced, but that doesn’t make them valuable.) What if a better cryptocurrency is developed? And a better one after that?
- What happens if governments get serious about stopping cryptos? What if they ban them and seize the identifiable exchanges and mining centers? I understand that they might have to shut the internet down wholesale to stop Bitcoin entirely, and that’s very unlikely. But even if cryptos are as fully secure as advertised, people are soft, squishy, and highly vulnerable to criminals in office. If they criminalize Bitcoin, would not its usefulness as money—and how much of other forms of money people would be willing to accept for it—be wiped out? (Gold can be—and has been—criminalized as well, but the metal itself has never lost its intrinsic value.)
- I don’t expect civilization to collapse in my lifetime, but a serious nuclear exchange is not off the table. Even if a nuclear war didn’t send us all back to the Stone Age, the EMPs and physical destruction would erase many ledger entries. Granted, I don’t lose sleep worrying about this, but aren’t such possibilities a rational basis for allocating at least some of our savings to monetary metals?
There’s a lot more about cryptos that I’d like to understand, but these are my fundamental questions.
Let me stress again that I’d love it if Bitcoin were to dethrone the USD as the world’s reserve currency. I don’t care who slays that monster, as long as the job is done.
I invite anyone who thinks they have good answers to any of my questions to send them to me at: L@LouisJamesLLC.com.
If I get flooded with emails, I won’t be able to answer them all, but I’ll do my best to reply to those that are useful—and polite. Hate mail will be deleted. Slogans will be ignored. Thoughtful, useful ideas will be duly considered and greatly appreciated.
I give my word that if anyone can change my mind or correct a material misunderstanding I have about cryptos, I will admit it in public.
Remember, I want you to be right.
But I’ll only invest based on what I think is so, not what I wish were so.
That’s my take,
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