Bitcoinsanity 1: The (Ir)relevance of Finance, or, It’s (Not) Different This Time

One of the many fascinating paradoxes about Bitcoin is that when knowledgeable economists, financial professionals and journalists write about it, because they almost always dispute its transformative power and revolutionary status, their analyses are almost uniformly greeted with shockingly abusive insults. In part this is a demonstration of the anti-democratic anti-expertise tendencies of our digital culture, in which participatory openness is mistaken for insight. The point of participatory openness was not that every opinion becomes equally valid: it was that every person has access to both information and the public sphere so that he or she could participate in an informed discussion.

Instead, under the influence of cyberlibertarianism, we find the exact opposite, in which hard-won expertise is explicitly derided and dismissed as if having attained that expertise is itself a kind of elitism—when, on the contrary, this is one site where “equality of opportunity” does apply. Everyone can learn to program, but you still have to learn it. Everyone can learn architecture, but you still need to go to school, learn the skills, and practice it. Everyone doesn’t just get to be an architect because he or she declares it to be so.

Finance is an extremely complicated subject. Despite apparent surface simplicity, money is one of the most complex and hard-to-comprehend aspects of finance. Money and currency are not the same. Money and commodities are not the same. The relationships of money to economies, of currency values to each other, of currency values to other securities, and so on, are tremendously complex. Monetary theory involves things like M1, M2, and other money supply variables we rarely hear Bitcoin enthusiasts mention at all.

Yet when economists write about Bitcoin and simply evaluate it on the terms in which it’s presented—that is to say, as a currency—the response is almost uniform trolling. What the trolls say is not quite that the economists don’t know how currency works; it’s that they don’t understand the sweet technology behind Bitcoin that makes “how currency works” irrelevant.

The problem is that despite the tenor of the trolling, we have zero evidence that financial theory does not apply to Bitcoin, the same way it applies to every other part of finance. The fact is that the Bitcoin maniacs are so ignorant about the complex world of finance that they truly appear not to know how many of their bare assertions about what makes Bitcoin special—that it’s “scarce” (true of many if not most financial instruments), that it’s “non-rivalrous” (largely false), that it’s not “fiat currency” (only true if you redefine what has always been meant by fiat currency), that it’s not regulated by trading oversight like the SEC (true of a tremendous amount of current securities trading), that it’s technologically advanced (ditto), that because it’s not “fiat currency” it can’t or shouldn’t be taxed (check some of the outraged reddit comments to this tax expert’s calm and rather obvious advice)—apply to many other instruments that already exist and that are not making finance more democratic or breaking apart investment banks, central banks and the nation state itself, although they are making the 1% richer (is that the “revolution” Bitcoin promises? The Winkelvii think so. Should we worker types be crowing about that? Should we assert the counterintuitive proposition that the Winkelvii do not recognize a hot security for what it is—or accept that maybe they do, and maybe those who think Bitcoin is somehow resistant to big banks & big finance are actually wrong?). Bitcoin is much less unique and revolutionary than its proponents suggest, at a financial, not a technological level, and it is clear that those proponents often know very little about the existing instruments to which they claim Bitcoin is an alternative, either technologically or financially, so their assertions are almost entirely ideological in nature.

They even know very little about gold and other precious metals, despite one of the most common refrains in Bitcoin mania being the completely wrong syllogism that “Gold is stable in value because it’s scarce, Bitcoin is scarce, therefore it will be stable in value.” There is no doubt about one prong of this syllogism: precious metals like gold are not stable in value. Don’t believe me? Here’s a chart of silver’s “real” value (along with its ratio compared with gold, making an interesting side-by-side comparison)—that is, silver in terms of how much it will buy you of real commodities like food, as opposed to in its exchange value for currency—over the past 750 years. There’s no argument about this, even among gold bugs. The scarcity of silver has not ensured stable value, no matter what Ron Paul might try to have you believe. Notice, among other interesting facts, that silver has recently spiked in value despite the available amount increasing over time, while the ratio with gold has fluctuated in almost the opposite direction—when, if the “stable commodity” theory was correct, both of them should either have maintained a steady value, or gone slightly down (however, even that “stable commodity” theory fails to account thoroughly for the continued mining of silver and gold).

gold and silver prices

Chart of historical silver prices in relation to gold, 1344-2010. From

So, lacking almost any apparent knowledge of finance, Bitcoin maniacs assert in an extremely aggressive fashion that Bitcoin completely revolutionizes… finance. It is a symptom of cyberlibertarianism that such a sentiment can be taken seriously, because this repeal is supposed to come out of the technological knowledge of computer systems possessed by Bitcoin fanatics. You really do need to understand something in detail before you can offer meaningful alternatives, but the relevant domain is not software, or at least not mostly software; it’s finance, securities design, trading, and economics. For a lot of reasons, unregulated instruments (again, meaning here instruments whose trading is not regulated by an oversight body like the SEC; I’m not referring to Central Bank modulation of exchange value at this point, which is what most Bitcoin fans usually seem to take “regulation” to refer to) do not solve any of the problems Bitcoin is said to address, and to the degree such instruments have been thrown at those problems, they only make them worse, because they have no checks against speculation and market manipulation, the main causes of the boom-bust cycles that characterize most financial markets.

Economics is a social science, and I believe, for philosophical reasons not worth going into here, that social sciences don’t have “laws” in the sense that physics does. But they do have observable regularities and probabilities. While it’s often framed as “one of the only iron-clad laws of finance,” what I would instead see as a very reliable regularity is that when people in financial markets claim “it’s different this time,” it almost certainly is not. The less that claim can be rooted in direct comparative data with similar market action, the less seriously the claim can be taken. Bitcoin now has a significant amount of historical data showing that, like almost every other unregulated instrument, it is subject to dramatic boom-and-bust cycles: that would make it the same as nearly every other unregulated trading instrument. Saying economics and finance don’t apply to it, as Bitcoin maniacs must, is the same as saying “it’s different this time.” If you have money to bet—and not that you can place this bet directly, and not that I am giving any investment advice—I would say the safe bet is that it is not different this time. Bitcoin is exactly what it looks like, a crazy, unsecured commodity that will boom-and-bust itself either until its very existence becomes onerous and ridiculous, or until nobody cares anymore. Perhaps if and when nobody cares it will become useful as the stable store of value economists call a “currency.” Until then, it is yet another way for little guys to get played, and, most importantly, will have no beneficial effect on those central economic problems that at least some Bitcoin maniacs claim it solves. If anything, it will make those problems worse, to whatever degree its total market capitalization increases relative to other commodities and currencies.

If you want to address the very real problems in our economic, financial and even monetary systems, it is imperative to understand those systems, and Bitcoinistas show almost no sign of being interested in doing that, substituting instead their superior knowledge of computer systems. You should believe reasoning emerging that way as much as you believe the next get-rich-quick penny stock advertisement (don’t).

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