How Bitcoin Can Replace The Dollar

How Bitcoin Can Replace The Dollar

I’m hardly the first person to suggest what I’m about to suggest and I’m not the first person to draw the parallels I’m about to draw either.

However, I think this deserves fresh attention considering Bitcoin’s relentless rally, which found the digital token trading in excess of $57,000 on Saturday.

As you may have noticed, the latest sprint higher was accompanied by a steady stream of positive “adoption” news.

BNY Mellon is all set to provide custody services through a new “Digital Assets” unit. Mastercard said in a press release that the company will “start supporting select cryptocurrencies directly on [its] network.”

Tesla bought $1.5 billion in Bitcoin for its balance sheet. MicroStrategy issued another convertible bond, promising to plow the proceeds into Bitcoin, effectively offering investors an opportunity to protect their downside while owning what amounts to a call option on the token.

There are exhortations for Apple to start a crypto exchange, with the cost of the project offset by the purchase of a large amount of Bitcoin, which would surely rise as Apple’s own actions stoke still greater enthusiasm, thereby driving up the market value of its newly-acquired coins. Or at least according to one bank’s theory.

Jeff Gundlach suggested Bitcoin might be better than gold, becoming the latest “brand name” to offer a tentatively upbeat take on the token. Other big names are the furthest thing from tentative. Guggenheim’s Scott Minerd suggested Bitcoin’s “fundamental” value may be $400,000. One of Guggenheim’s funds has a (relatively small) position.

And so on and so forth.

Proponents correctly cite increased adoption as one cause of Bitcoin’s ongoing surge, but they very often miss the point, as do the adopters themselves.

I’ve argued that Bitcoin “is nothing.” That it’s essentially a fairy tale which ceases to have much meaning absent the ability to convert it, on demand, into traditional currencies like dollars, yen, or euros, which can then be exchanged for “hard” money like gold or, more commonly these days, financial products backed by it. I’m sure you can also exchange Bitcoin directly for gold or silver if you like.

But at a basic level, Bitcoin is no less of “something” than dollars, euros, or yen, and the intrinsic value of gold and silver is essentially zero, or at least when compared to metals widely used for construction, tools, industrial purposes, and, crucially, weapons.

Dollars are not dolphins. If everyone stops believing in dolphins tomorrow, dolphins will still exist. Unlike “the dollar,” “a dolphin” is an objective reality. You can tell stories about dolphins, but the existence of the dolphin isn’t in question. We often tell the story of “the dollar.” Implicit is the notion that it doesn’t exist outside of humanity’s belief in it. The dollar, like almost everything else in the financial universe, is a trust game.

Regular readers know I’m fond of quoting Yuval Noah Harari, even while acknowledging that doing so has become something of a cliché (and a cringeworthy one depending on the context and on who you talk to). But, his musings about myths and the distinction between them and objective realities, are applicable in this context. So applicable, in fact, that versions of this article have been written over and over again as Bitcoin’s popularity waxed and waned.

Money, Harari says, “is the most universal and most efficient system of trust ever devised.” I believe in the dollar because you believe in it, and you believe in it because I believe in it. Going on up the ladder, society believes in it because our government believes in it and, crucially, demands that taxes be paid in it. That speaks to the inherent veracity of Modern Monetary Theory, by the way.

“We accept the dollar in payment, because we trust in God and the US secretary of the treasury,” Harari notes. You laugh. Because it’s funny when you strip it down to the basics. And yet, it’s right there on the piece of paper. The signature of the Treasury Secretary and a reference to “God,” another fiction, no more real than the dollars he (or she!) supposedly guarantees through government.

If all of this is a fiction — a myth — then why can’t Bitcoin simply supplant it? The truth is, it can! And that’s why adoption by institutions, large companies, and ostensibly “important” people (like Elon Musk ) is noteworthy.

Musk understands this, to an extent anyway. “Money is just data that allows us to avoid the inconvenience of barter,” he said Saturday, responding, unfortunately, to Peter Schiff on social media.

But most Bitcoin proponents surely don’t think of themselves as mere acolytes of an increasingly popular fiction. People like Scott Minerd probably don’t tell investors that they’re buying Bitcoin because as imaginary constructs go, it’s becoming quite successful. And companies like Mastercard, themselves mere fictions, likely don’t refer to cryptocurrencies (or dollars) as “myths” on conference calls.

This is, to an extent, encouraging for Bitcoin (and other cryptocurrencies). “Inter-subjective” phenomena (as Harari calls them) will crumble if everyone sees them as fictitious. Examples of inter-subjective phenomena include laws, nations, deities, and, of course, money.

No one person’s decision to abandon a widely-held fiction is capable of relegating it to the dustbin of history. Not if it’s been accepted by millions or billions of people.

Some people’s opinions are more influential than others, but even the most persuasive among us can’t upend a well-established myth overnight. If Donald Trump decided, on Monday, to issue a press release declaring he no longer believes in the dollar, it’s doubtful that even his most ardent supporter would turn down the dollar-denominated prize from a winning lottery ticket, for example.

So, what would it take for Bitcoin to supplant the dollar (or gold) as the most successful derivation of the overarching myth we call “money”?

Harari spelled it out years ago. “The dollar… exist[s] in the shared imagination of billions, and no single individual can threaten [its] existence,” he wrote, adding that,

If I alone were to stop believing in the dollar, in human rights, or in the United States, it wouldn’t much matter. These imagined orders are inter-subjective, so in order to change them we must simultaneously change the consciousness of billions of people, which is not easy. A change of such magnitude can be accomplished only with the help of a complex organization, such as a political party, an ideological movement, or a religious cult. However, in order to establish such complex organizations, it’s necessary to convince many strangers to cooperate with one another. And this will happen only if these strangers believe in some shared myths. It follows that in order to change an existing imagined order, we must first believe in an alternative imagined order.

Bitcoin is an “alternative imagined order.” Adoption by the likes of Mastercard, Tesla, Minerd, and every incremental person willing to exchange their dollars (temporarily at least) for Bitcoin, is a step towards establishing a complex organization theoretically capable of challenging the inter-subjective phenomena called “dollars,” euros,” and “yen.”

Wider adoption means it will become increasingly precarious for governments to regulate cryptocurrencies out of existence.

As a practical matter, such a decree (or series of decrees) would paradoxically jeopardize the well-being of the existing system, especially if a company like Apple were to tie its fate to Bitcoin.

As a sociological matter, doing away with an increasingly popular fiction by decree has historically not been a safe proposition for those in power. Banning a new religion, for example, may be seen as desirable (or even necessary) for the dominant religion, but attempting to stamp out a blaze that’s burning vigorously risks catching oneself on fire.

In the final analysis, though, there’s no escaping from the mental prisons we’ve constructed around ourselves. “In order to dismantle [a company], for example, we need to imagine something more powerful, such as [a] legal system,” Harari wrote. And then:

In order to dismantle the legal system we need to imagine something even more powerful, such as [a] state. And if we would like to dismantle that too, we will have to imagine something yet more powerful.

There is no way out of the imagined order. When we break down our prison walls and run towards freedom, we are in fact running into the more spacious exercise yard of a bigger prison.

Earlier this week, Bloomberg ran an interesting piece documenting a decision by Christie’s to accept Ether for a standalone sale.

“We’re at this precipice where crypto is going to be such a more established and mainstream mode of conducting business,” Noah Davis, a specialist at Christie’s said.

As Bloomberg went on to note, “the premium, which is a polite word for saying the fee an auction house tacks on to the price, will have to be paid in dollars.”


 

27 thoughts on “How Bitcoin Can Replace The Dollar

  1. Now we’re getting somewhere. I just posted this as a reply on “Snorting M & Ms.”

    Of late I seem to notice an increasing shift to the use of the term “fiat currency” as a pejorative expression. Money, on the one hand, is felt by many to be this fiat crap and everything else is somehow “real.” Make no mistake. All entities people consider to be money these days — dollars, euros, crypo of any kind, gold, digital accounts, etc. — are fiat money. They only exist if an important enough institution or group of individuals considers that they serve the functions of money and jointly believe they have the value assigned to them. There is no such thing as “real” money, although in the US only the official currency is, by law, “legal tender for all debts public and private.” In his book “American Gods” Neil Gaiman creates a fantasy world where one group of gods is disappearing while another takes its place. The premise is that “gods” only exist because people believe in them. Zeus and Baal are gone. Others have taken their place. In Peter Pan, Tinkerbell only existed as long as Wendy and the other children believed in her. Deities, too, are fiat entities we create and which depend for their power on our belief in them. Just sayin”

  2. The importance of the US government accepting taxes in dollars cannot be overstated. You have to pay taxes on gains in crypto trading, even if your trades never touched a US dollar. You can’t pay those taxes in Bitcoin.

    1. Heisenberg is a God. If we didn’t believe “he” wouldn’t exist. He does write more articles than Bitcoin which makes “him” more a treasure. And, he maybe a fiction more than “any one person.”

  3. From what I have read, about 25% of the private addresses that are in existence for bitcoins are vulnerable to quantum computers because the p2pk addresses that were formally used are more vulnerable than the currently used p2pkh addresses. So where original holders have lost their private addresses for those bitcoins (p2pk addresses)- they could be stolen.
    Also from what I have read, it takes about 10 minutes to authenticate a bitcoin transaction- which results in a bitcoin payment to the “miner”. Should quantum computing ever get faster than 10 minutes, the transactions will be at risk and the entire system will ulnerable.
    If Google (or others) have a quantum computer working on this, I doubt they would publicize the status of their efforts.
    Not for me.

    1. If a foreign power manages to create a quantum computer in secrecy it could potentially begin stealing bitcoins. However that is not to say this is the end of the story. As we see with Ethereum the community could say we will Fork as of XX/XX/XXXX pre-attack to a new code which is now secure from quantum computers. There has already been a lot of work done looking at next steps needed to harden against quantum computing. If someone tries to “take the ball and go home” they will quickly realize they don’t have a real ball and everyone else left to play without them. You aren’t attacking pure set code, you’re attacking a gigantic community with every incentive to beat you.

  4. I feel that barter, e.g. lumber and nails and sheep, might be almost just as arbitrary as fiat money, and certainly not as convenient. What is the true value of a sheep anyway? Well it depends on the day of the week. I’m not sure how any of us would live without our fictions.

  5. How would the US government, feeling “threatened” by Bitcoin (as a “unit of value” vis a vis the Dollar) “regulate “(control) a crypto currency, given it’s rapid “institutional” adoption? Would they institute some form of annual reporting (like open futures)? Would they legislate spending thresholds? Could they just “outlaw” it? I don’t see the Treasury yielding control to any entity…willingly. But, equally, I don’t see any “democratic” means to achieve the same. But, I do see them doing “something” quickly, precisely because of it’s rapid adoption. Which, most assuredly, threatens them.

    1. I mean ultimately there is no threat. The US Gov requires taxes paid in dollars and decides what those taxes are and what you need to record and report. Whatever functions crypto serves no government is about to hand over control of its currency. In that respect crypto is like a currency issued by a new country with no taxes, no physical location and no laws but that anyone can visit. It’s “Internet Money”. Criminal organizations have functioned just fine for a long time using cash USD.

      The conflicts that exist relate to property reporting which may be more challenging but no more so than offshore accounts have always made it. It’s in many ways a democratizing of the corruption once only available to the rich. The solutions to that are simple though, just change how taxes are assessed accordingly, which is now something which all major world governments have a mutual reason to cooperate on.

  6. The collective, shared, overlapping (intersubjective) beliefs of human beings. Narrative cuts to the core of value. When one is forced to consider the nature of reality, one is getting somewhere.

  7. When I buy some apples at the grocery here in CA in dollars, not a taxable event. If I were able to buy in bitcoins or gold, taxable as to change value of bitcoin or gold. Lifo or fifo…value of bitcoin gold in real time to calculate tax…

    Let the accounting begin…

  8. Thanks, H. I won’t presume this was written for me per se but I appreciate its clarity and the fact it answers my previous query so perfectly. Notably the admission that gold and silver are also intrinsically worthless. Tangential but – I feel economics obsessing over value is/was a mistake, which is why most economics post 19C focuses on prices. Value is a mess, price is observable.

    Big fan of Sapiens too. Homo Deus was a bit disappointing, imho.

    Just one pushback : “But most Bitcoin proponents surely don’t think of themselves as mere acolytes of an increasingly popular fiction”. IDK. I’m certainly clear this is what I’m doing. I mean, there are practical argument as to why BTC is a superior fiction to gold. It’s easier to transport, store and trade/split. Then again, there are two main practical arguments for gold. It’s an old, very well established, fiction and humans tend to like shiny rocks/stones.

    So, yes, adoption is and remain the only criteria that matters – is the new religion displacing the old one? (or at least establishing its own niche).

  9. And yet our money is only legal because we are living under a state of national emergency that is in effect indefinitely. That state of national emergency nullifies the section of the constitution that declares “No state shall make any thing but gold and silver coin a tender in payment of debt.” If that state of national emergency were ever lifted, the money which we rely on and place our trust in would become worthless. Just pointing out that things are a bit more precarious than they might otherwise seem.

  10. Bitcoin might best be described as a digital commodity (you might say it’s digitazation taken to the extreme where you are paying for an algorithm. It’s not what’s been digitized such as music, but just the digitizing process itself.) It’s a strange rabbit hole we’re going down.

    Currently bitcoin is a commodity investment (bet) as opposed to a currency investment. I’m guessing that most of the people that own some bitcoin have it as an investment rather than as a convenient way to complete a transaction. Up to this point, the exception might be those dealing in the blackmarket who want their transactions hidden. Companies like Christie’s and Tesla that are anticipating accepting digital coin are doing so because they realize that there are people who have enough bitcoin to make very large transactions – an expensive car or piece of art – a market that these companies want to tap into.

    I have no bitcoins at the moment. If I wanted to buy a Tesla with some, I’d have to first buy some with dollars. That wouldn’t make much sense over just sending those dollars directly to Tesla. I’m not sure what the total value of bitcoins is at the moment, but that’s the limit of the market that companies can tap into.

  11. BTC cannot be a general use currency, given the energy consumption and slow speed of transactions.

    Even if it could, the US government and other governments will not permit BTC to supplant national currencies. In addition to the obvious reasons of sovereignty, security, and monetary and fiscal policy, there’s tax evasion. If Sally buys her Tesla with appreciated BTC, the government needs that to be a taxable event. There’s also economics. BTC is inherently deflationary: fixed BTC supply + economic growth = deflation and we can’t have that!

    Governments have many ways to suppress BTC. We might see this first in China, where the government is not known for tolerating things it can’t control and monitor. Beijing controls and monitors the digital yuan, but not BTC, so which will Xi favor? Easy enough for the government to identify every BTC transaction (deep packet inspection) and exact consequences.

    For now, BTC is a speculative investment “asset”. It will be one until governments decide it is a threat, to financial stability or otherwise. Statements from government officials around the world don’t sound so benign.

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