After a volatile week, a bitcoin was still worth around $ 40,000 on Friday. This is still very valuable, which Bitcoin enthusiasts were keen to point out.
However, the code that governs the cryptocurrency doesn’t provide an answer to the question: How can Bitcoin become money when it becomes so valuable that you don’t want to spend it?
It is certainly true that, despite this week’s decline, the value of a Bitcoin has risen over the long term. In 2008 it was nothing more than a PDF that contained an idea. The PDF was trading at a spot price of zero, which is well below the current level. That’s an impressive 13-year performance for any asset. It is an Amazon or Apple version that should be used on the ground floor. I had Bitcoin explained to me for the first time in 2011 by a group of Swedish hackers in an attic in Malmö and I want to tell you: I regret it.
Bitcoin is not meant to be just an asset, however. It should be global money. Depending on who you ask, it will either become the standard medium of exchange for all transactions or the ultimate settlement medium for other types of money, much like the dollars banks can hold on reserve accounts with the Fed. Which means it can’t just increase in value. It must also become more useful as money to more people. That’s not a quality you have to ask for in your Apple stock.
Whether bitcoin is money is an exercise in scholasticism. For some people, it’s money now. There are transactions for which this is appropriate and which are already in use. In the week I was in Sweden in 2011, there were only 12,000 transactions per day. By May 2017, that number had grown to 300,000 transactions per day. Since then, a band has moved around this level – volatile but moving sideways. However, the value of a Bitcoin has continued to rise from just under $ 2,000 in 2017 – volatile but, as you know, up. As money, Bitcoin is becoming more and more valuable, but not more useful.
It is possible that its usefulness is limited by design. People who advocate Bitcoin as the future of money like to say that unlike the dollar, there is no central bank that can answer or screw it up for Bitcoin. But behind Bitcoin there is a governance structure as real and clear as that of the Federal Reserve.
The Fed follows a code of what it calls a statement on longer-term goals and monetary policy, which it updates about once a decade when its internal culture of macroeconomists MIT, Harvard, and Berkeley begins to think differently about money. Currently, both the code and the Fed culture believe that the dollar should depreciate over the long term against other goods by an average of 2 percent per year.
The code that generates bitcoins has limited its total number to 21m. This means that they should become more and more valuable through design. You can change the code, but just like 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 Bitcoin culture is fixated on the solidity of money, convinced that the best money only becomes more valuable over time. People encourage each other to “hodel” – hold onto their bitcoins and never sell. If you hodl, you have diamond hands. When you sell, you have paper hands. If you do nothing, you will be encouraged to have fun staying poor.
When you hodl you get richer, but you don’t act. That’s good for bitcoin, the asset, but it’s problematic for bitcoin, the money, because you keep what you do away from the markets. This is a challenge that is as old as money. Theognis, a 6th century BC Greek poet. BC, wrote that wise men know bad gold and silver and that no one “will take worse in exchange for better.” Aristophanes, the Athenian satirist, pointed out that “the full-bodied coins that Athens prides themselves on are never used, while the middle brass coins go hand in hand”.
Robert Mundell, the Nobel Prize economist who died a month ago, documented citations like these over centuries of a single idea, leading to a maxim usually attributed to Thomas Gresham, a 16th-century English merchant and advisor to the Crown: poor -Quality money drives quality money out of circulation. Why would you spend something that is becoming more and more valuable?
Both the code and the culture of Bitcoin are designed to take it out of circulation in the long term. This leads to the fact that the Hodlers are confronted with a collective action problem. Sell or change the code and your asset will lose value and become more useful as money. Hodl, and keep the code, and your fortune will be appreciated. Monetary culture is monetary policy. Diamond hands are Gresham hands.