This is an opinion editorial by Joakim Book, a Research Fellow at the American Institute for Economic Research, contributor and copy editor for Bitcoin Magazine and a writer on all things money and financial history.
When bitcoin tumbles, Bitcoiners get poorer. They don’t have fewer sats in their (hardware) wallets but can get radically less stuff with those sats — hence “poorer.” Poorer Bitcoiners can do fewer things in the world; they have less command over the world’s economic resources. If you think Bitcoiners have something practical to contribute to the world, this is a bad thing.
Some things, like spreading ideas and learning, can be done without funds, but most important things require capital.
When bitcoin tumbles, the press, the skeptics and the haters have a field day (“see, bubble! Corruption! Risky scam!”).
When bitcoin tumbles, the idea that it is in any shape or form a reasonable asset to hold against a clownish world seems less persuasive. For all their flaws, at least my dollar cash, my euros or my credit card — suffering from inflation and the occasional censored transaction — don’t explode like this!
It should be obvious, then, that a falling BTCUSD is bad for Bitcoin. Still, the most vocal Bitcoiners tend to disagree: falling bitcoin prices purge the weak and over-levered, and it lets the rest of us stack and learn in peace.
Here is the contrarian case laid out in more detail.
Story Time: How Falling Exchange Rates Hurt Bitcoiners
A few months back, I spent 500,000 sats on an expense for a trip. “What?!” Says the purist. ”You should never spend your bitcoin!” Yah-yah, but if you never spend it, its use case never grows and, anyway, it made most sense given my financial situation at the time (anyone else irresponsibly overweight bitcoin?) Given what came to pass thereafter, who’ll blame me?
I got a few nights in a decent AirBnB with some friends. I could have gotten about two weeks’ worth of groceries or something like two years of Nik Bhatia’s excellent subscription, “The Bitcoin Layer.” When I first wrote this draft, that was down to about a single night, probably just one week’s worth of groceries, and just over six quarters of Bhatia’s unencumbered writing. Inflation might be a bitch, but then what do we call a BTCUSD crash?
Now, after yet another bitcoin price debacle, those 500,000 sats probably get me a single hostel bed or two and would barely have covered what I just spent to add some basic items to my empty post-travel fridge.
Inflation is terrible and unfair, but it is slow, often predictable and fairly manageable with even the smallest of efforts (often automatically adjusted through indexation in wage contracts or other recurring transactions). Bitcoin is fast, unpredictable and entirely unmanageable to the average person. That’s what makes it such a poor money at present. It’s pretty unusable in its main duties (carrying economic value across time and space), and that’s before considering the altogether artificial hassle of paper, tax and capital gains. Perhaps that’s part of the inevitable growing pain. Humans are ingenious types; we adapt and learn and make institutional arrangements that fit our environments. But it’s at times like these that I’m not so sure. That mountain we’re climbing looks awfully steep.
I never thought I would say it, but the bureaucratic monstrosity that is the euro proved a better store of value over this same time period — the USD even more so, as I pay some portion of my expenses in even weaker currencies than the almighty dollar. Between the two weeks of pulling some sats-denominated savings and spending them, I didn’t lose 25% of what they could get me, but only some minor fluctuation around a pretty steady downward trend. My flat’s rent, which is adjusted to official monthly inflation metrics, was in June about 3.5% more expensive in local currency than in March, about 7% more expensive in euros, and about 50% more expensive in bitcoin (had I paid it with bitcoin two weeks later, it would have been another 41% expensive still — rent steadily increased, dollar recuperated somewhat, and bitcoin collapsed even further). Some store of value, eh?
This isn’t a critique of bitcoin but a form of basic internal housekeeping. Hardcore Bitcoiners and the newly infatuated like to say that price is irrelevant, that bitcoin is amazing at any price, that the revolution is inevitable and gradual regardless of what silly traders are doing with the silly BTCUSD tickers. Purchases go one way, bro.
But you have to get to that future somehow, and having newbies rekt on 50% drawdowns and businesses saying “no thanks, give me d-o-l-l-a-r-s!” isn’t exactly helping.
Like goldbugs have long insisted about an ounce of gold staying the same, 1 BTC might equal 1 BTC but its economic value can still shift. In reality, prices adjust; as economic actors, human beings care about what money gets you, not what the denomination of that unit is. What, do you think Venezuelans consider “1 bolívar equals 1 bolívar” to be a profound statement?
When everything is priced in dollars, what “1 BTC” gets you is subject to ever-shifting bitcoin prices, with the nominal “1” in that unit being unimportant. Six months ago, 1 BTC got you a new Tesla Model 3 Performance with some extra fancy gadgets. When I first wrote this first draft, that same saving only got you a new Ford EcoSports. Now it gets you a couple-years-old used car with 80,000 miles behind it. But 1 BTC still equals 1 BTC, right?
No. A bitcoin is not still a bitcoin since those who would sell me anything of material value index their bitcoin sales to the dollar and not to a specific number of sats. That might be a fault with them that in time must change, but so far seems to be the way of the non-bitcoinized world. Unit of account is the required trophy for a Bitcoinizing world.
Following the May blow-up from $45k to $30k, Nico Antuna Cooper wrote what most Bitcoiners chanted in public or in private: “Why the bitcoin price doesn’t matter:”
“The difference between Bitcoin and everything else is that the price of bitcoin doesn’t matter. Over the long term the price of bitcoin has gone up, yes, but the value proposition of bitcoin as hard, non-confiscatable and truly decentralized money is really what matters.”
Think about that statement for a minute. Money’s sole purpose is to coordinate consumption and production in the real world. It’s to move value from one place to another, across time, and to transact between people who therefore don’t have to trust one another. Money’s price is its purchasing power, how much real stuff it can get you. But Cooper, echoing sentiments of most Bitcoiners, claims that the price of bitcoin doesn’t matter. What you can get for bitcoin and therefore how it stores value across time is somehow inessential.
Cooper continues by saying that bitcoin’s value proposition isn’t as an asset that appreciates, but rather as a “hard, non-confiscatable and truly decentralized money.” True, but irrelevant. Yes, those things are what Bitcoiners treasure about bitcoin and how Bitcoin, the monetary network, can revolutionize the world. But bitcoin, the asset, can only do those things if the network’s total value packs some financial punch. At a sub-$1 trillion market cap — now sub-$400 billion — it doesn’t. With an asset tumbling in real-world market value, it doesn’t.
Put differently: the HODL mindset requires you to believe that -25% weekend drops — or -70% over seven months — in your net wealth is fine. Dandy fine. Time in the market beats timing the market, or some other fashionable Warren Buffet quote.
An asset’s price is a gauge of its success. Almost trivially so: an asset rises in price when buyers (i.e., those who want it) outnumber or out-money sellers (i.e., those who don’t want it). So in the recent seven-month period, fewer people or cumulatively less-wealthy people have wanted bitcoin. Tell me again how that’s good for Bitcoin?
Honey badger should care because price knows something you don’t and because a tumbling bitcoin price is the greatest vote-of-no-confidence any market economy could ever deliver. Sellers are dominating the market, saying, “We don’t want you.”
It’s because markets know something that it’s so hopelessly asinine for “trad-econ” profiles like Nouriel Roubini, Warren Buffet, Paul Krugman or Nassim Taleb to confidently claim that bitcoin is an overvalued bubble at x, y or z price. “Hurray,” cheers the Bitcoin crowd when we’re shitting on the haters.
Since the principle works in reverse too, it’s equally asinine to say that bitcoin is undervalued at $29,000 or $45,000 (what about $18,000?), like many prominent Bitcoiners are fond of doing. But how could it be? Markets know something. For you to say that markets are wrong reflects a quantity of hubris I don’t even want to…
Read More: Bitcoin Price Action Does Matter