Debunking Keith Weiner and Peter Schiff on 'Bitcoin is a Pyramid Scheme'
Why Bitcoin is Destined to Become the Superior Money
Gold vs Bitcoin: A Soho Forum Debate
Keith Weiner has been asking for my response to his debate with Pierre Rochard at the Soho forum for a while now. I don’t think Pierre directly addressed Keith’s core thesis, so I will attempt to do so below. Keith's critique of Bitcoin is one of the more well-argued ones I've come across, but he still doesn't grasp the value proposition of Bitcoin.
Here is Keith’s basic argument against Bitcoin:
Bitcoin's supply is relatively constant, whereas demand for Bitcoin is not. Because the supply is inflexible to demand, the value of Bitcoin will always be volatile.
By contrast, the supply of gold is responsive to changes in demand, since mining activity can increase, and non-monetary gold can be diverted to monetary uses. This, plus the large existing supply of gold, means the price is relatively stable.
This means that the price of Bitcoin will always be more inherently volatile than that of gold.
The volatility in Bitcoin's price makes it unsuitable as a unit of account, so it will never be widely used for commerce or lending. Even when the price of Bitcoin is growing, its deflationary nature makes it unsuitable for commerce or lending.
Thus, Bitcoin has no utility beyond speculation -- someone can only sell Bitcoin if there is another speculator willing to buy it.
Therefore, Bitcoin will remain a speculative asset, and its value could collapse if investor sentiment shifts and demand dries up.
Did I get that right?
OK, now let's see where this argument falls apart:
The Value of Bitcoin Is Predictable When Bitcoin Is Money
Imagine a scenario where Bitcoin is money — the common store of value and unit of account. The value of Bitcoin would then be proportional to total savings plus the total value transacted in the economy. Since the supply of Bitcoin is relatively constant, Bitcoin would experience deflation proportional to economic growth. In this economy, there would be very little speculative demand since the vast majority of Bitcoin would be demanded as a means of exchange and a store of wealth — just as we have relatively little foreign currency speculation relative to demand for dollars for commerce and savings.
Yes, prices in Bitcoin would be deflationary in a growing economy, but that is not unique to Bitcoin. The world experienced major deflation during the gold standard of the late 19th century when the world experienced rapid economic development. What makes a currency unsuitable as a unit of account is not just changes in the price level, but the unpredictability of prices. As long as the deflation is predictable, contracts denominated in Bitcoin could factor in deflation. (Keith says that loans would be impossible in such a system, but he lacks creativity: lenders could offer shorter loan terms, variable or even negative interest rates. Furthermore, borrowers would get income in Bitcoin to pay off their Bitcoin denominated loans. Likely, alternative financing models would emerge, such as shared equity financing or convertible debt. A Bitcoin lending economy would be very different, but not impossible! )
In a Bitcoin economy, Bitcoin would be more stable than gold, since industrial (non-monetary) demand for gold is more volatile than the total volume of economic activity.
Furthermore, the supply of Bitcoin is responsive to transaction demand. In an inflationary fiat system, people avoid keeping their wealth in cash because its value continually erodes. But in a Bitcoin system, most Bitcoin would be locked up in savings, increasing in value. Imagine if the value of Bitcoin doubled overnight. Bitcoin savers could suddenly afford twice the house they currently own. Thus, Bitcoin savings would be shifted into the economy by consumers, thereby depressing its value. This buffer mechanism would help stabilize the price.
Of course, Bitcoin is not used as a primary form of money today, but my point is that there is no reason why a Bitcoin monetary system could not work. As I will explain below, Bitcoin acquires "moneyness" gradually over time:
Bitcoin’s Price is Driven By Non-Speculative Use
Keith is wrong to claim that Bitcoin is exclusively a speculative asset. While most Bitcoin transactions are speculative, the non-speculative usage provides critical validation of Bitcoin's guarantees. In effect, all speculation on Bitcoin is a evaluation of non-speculative activity.
What is non-speculative Bitcoin use?
For example, I lived in China for five years. China has strict currency controls aimed at preventing wealth from leaving the country, as do many other nations. To smuggle money out of the country involves considerable risk and expense. Bitcoin provides an effective circumvention of currency controls, which is the main reason China and many other countries have tried (and failed) to ban it many times. Every time someone uses Bitcoin to evade currency controls, they obtain a tangible value from it, which is distinct from speculative demand for Bitcoin.
Another example: some countries (like Lebanon) are experiencing hyperinflation and confiscating dollar-denominated bank accounts. Bitcoin is a lifeline for savers in those countries.
Every time someone uses Bitcoin for a non-speculative purpose, they validate the privacy and security guarantees of Bitcoin. The main driver of the price of Bitcoin is the judgment of investors about how widely these effects will spread. For example, if the dollar experiences hyperinflation, Bitcoin might become a safe haven asset for Americans -- if it can effectively serve this function in other countries. Bitcoin markets, therefore, reflect price discovery of the practical and technical merits of Bitcoin -- can it deliver on its promise as a monetary asset? The speculators are predicting the future of adoption of Bitcoin based on real adoption, not merely trading a collectible. This is why the Bitcoin keeps steadily increasing after 15 years.
The market for Bitcoin is similar to that of gold in this regard. Putting non-monetary use aside, most gold owners are also speculators betting that the price of gold will go up. A minority of users have a practical need for gold, perhaps because their currency is untrustworthy or they have been excluded from the banking system. The gold speculators are engaging in price discovery when they observe the current uses of gold and try to extrapolate it to the future. In this way, the prices of both gold and Bitcoin depend on their technical merits and practical applications as a store of wealth -- and Bitcoin has far superior monetary properties to gold.
The Better Money Ultimately Wins
Suppose that instead of a 5000 year head start, Bitcoin and monetary gold were invented at the same time. What would the debate between gold and Bitcoin look like?
Gold bugs would tell you that non-monetary demand for gold is about 10-30% of it’s price, so if it failed as a monetary asset, you would retain some of the value, whereas if Bitcoin failed, you would lose 100%. Gold would also be slightly less volatile, though there would still be room for 60% drawdowns. Bitcoiners would reply that it is superior to gold by every metric: it is more portable, divisible, durable, fungible, and scarce than gold.
Despite gold having a bottom, it’s clear that the superior money would win: in a global economy, the instant settlement times and decentralized nature of Bitcoin would win. Given gold’s 5000 year head start in our world, it is taking decades for Bitcoin to acquire the same level of trust as gold, but I think the end result is inevitable: hyperbitcoinization.
Peter Schiff’s Double Standard On Gold vs Bitcoin
Peter Schiff claims he will admit he is wrong about Bitcoin when goods are priced in it. However, Schiff believes gold is a store of value despite goods not being priced in it for centuries.
Schiff argues that the difference lies in gold's non-monetary utility. But this is a double standard. Approximately 90% of gold's price is derived from monetary demand, not its non-monetary uses.
Gold has monetary demand due to its physical properties that make it suitable as money, NOT because of its non-monetary utility. Many commodities have non-monetary utility, but they are not considered viable monetary candidates because their physical properties render them poor stores of value.
Similarly, Bitcoin has value because of the unique properties of the Bitcoin protocol, which make it a viable candidate for a store of value and a means of exchange.
Schiff argues that gold is a monetary metal because of its physical properties, yet he denies the possibility that Bitcoin can be money because of its technical properties. This inconsistency in his argument undermines his stance on Bitcoin's potential as a currency.
Why Gold Failed as Money:
In today's digital and connected world, settling transactions with physical gold is impractical, if not impossible. As a result, gold inevitably ends up being settled as gold certificates held by banks. This trend, which began with the rise of international trade, has only accelerated in the information age.
However, when gold becomes centralized, it is subject to seizure. No matter how trustworthy the system may be initially, when money is based on debt (i.e., gold claims), there is an irresistible temptation for the political class to reset the system when debt levels become unsustainable.
History has shown that when a debt-based system is in trouble, governments will seize gold, regardless of whether the money is fiat or nominally gold-backed. This scenario has already played out in the West, leading to the demonetization of gold.
Consequently, people are unlikely to trust gold as money again. This sentiment is reflected in the stagnation of gold prices since the invention of Bitcoin. While most investors remain cautious about entering the Bitcoin ecosystem, their hesitation on gold demonstrates a growing acknowledgment that gold's time as a monetary asset has passed.