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.”