What Happens If Bitcoin Succeeds?

By Jon Danielsson, Director of the ESRC funded Systemic Risk Centre, London School of Economics. Originally published at VoxEU.

As the price of bitcoin continues to rise, this column argues that most of us would not want to live in a society where bitcoin succeeds. Fortunately, the internal contradictions and perverse consequences of cryptocurrencies’ success mean that they are destined for failure. Until then, it might make sense for speculators to ride the cryptocurrency bubble, so long as they get out in time.

In a week when bitcoin is setting records with a market value exceeding a trillion dollars, what would it mean if cryptocurrencies succeed?

The only reason all the bitcoins are worth a trillion dollars is the expectation of success, as they are not very useful today. Cryptocurrencies must provide some valuable service if they are to justify their high valuation, otherwise holding bitcoin is just like collecting stamps or beanie babies – a minority activity that does not justify the current $51,000 price.

But what is the valuable service that makes bitcoin successful?

To the vast majority of bitcoin investors, success means its price continues to rise. But if that is all there is to it, someday a little boy will yell, “the Emperor has no clothes”, and the price will come crashing down.

The bitcoin enthusiasts are quite vague on what success means beyond rising prices, they seem more fond of arguments wrapped in mysticism than basic economic logic. The most important criterion for success is that cryptocurrencies end up being used in commercial transactions, like Tesla accepting bitcoin today. All the other value propositions, like their use in payment systems (Fatás and Weder di Mauro 2018) or their safe-haven role (Cheema et al. 2020), flow from that. If cryptocurrencies cannot be directly exchanged for real goods, they will not be very successful.

In other words, the value proposition for bitcoin is that it will displace fiat money – the dollar, euro, renminbi and all the others – either fully or partially. As I argue below, I think it is inevitable that it will be ‘either, or’ – either full displacement or no displacement, complete success or failure. And as I said here on Vox three years ago (Danielsson 2018), I don’t think cryptocurrencies make sense.

So how do bitcoins compare to fiat?

The US dollar is a debt obligation of the US government. The value of the US dollar for the holder of that dollar is the real goods the dollar buys.

In spite of bitcoin containing the word “coin” and cryptocurrencies the word “currency”, they are not money in any conventional sense. Just try to explain bitcoin to a typical person, and it becomes immediately clear that cryptocurrencies are not money in the way most people, as well as professional economists, think about money.

The task of comparing bitcoin with money is further made complicated by the fact that there is no single definition of money. Should bitcoin be compared to central bank paper money and reserves, M0, or on-demand money, M1, or something else? And then will bitcoin have the same velocity as the money we use today?

By a first approximation, suppose we use on-demand money, M1, for the fiat-bitcoin comparison and further assume they will have the same velocity. The amount of M1 money in the G20 countries is $31 trillion, which means, of course, that that M1 money can buy $31 trillion worth of goods. If the price of bitcoin goes to $550,000, the holders of bitcoin can buy $10 trillion worth of goods.

If bitcoin ends up equalling the purchasing power of M1 money, the price of a single bitcoin will be $1.5 million. These are very rough approximations, but a full displacement of fiat money would mean the price of a bitcoin would be somewhere in the neighbourhood of a million and a half dollars. Whether it is a million or two million is immaterial for the discussion below, but I think success means the price of bitcoin will be quite a bit higher than that.

That leaves us with two interesting questions. What happens to the holders of bitcoin? And what happens to everybody else?

To begin with, the current owners of bitcoin will become the wealthiest people in the world, rivalling the kings and emperors that ruled over empires in centuries past. They literally will own all the money. They can buy anything they want. There aren’t that many of them. Compared to the multitudes that own assets today via all the pension funds and mutual funds and the rest, it is a tiny group of people.

So, a sharp increase in inequality is an inevitable consequence of bitcoin success. And unlike the richest people of today – the Jeff Bezoses and Elon Musks, whose wealth comes from creating companies that benefit most of us – the bitcoin aristocrats will get their rank just by buying early. They will make no contribution to society.

When the bitcoin aristocrats start spending their trillions, what does that mean for the rest of us?

We do know that such extreme levels of inequality fuel social division and populism. The bitcoin aristocrats will come under increasing threat, and the government will have to respond. It will protect or attack; it can’t be neutral. Either way, political and social instabilities get worse.

If then the bitcoin investors respond that everybody should buy bitcoin, all that accomplices to bid the price up even more, making existing bitcoin investors even more wealthy.

What about the rest of us who don’t own bitcoin?

As bitcoin starts displacing fiat money more and more, it will change society in profound ways. Some will benefit. Those who own assets and services they can sell to the bitcoin aristocrats will prosper. Someone has to build their houses and clean their toilets, educate their children and cook their food. Someone has to defend them from the rest of society.

But that is also a small minority.

Those whose material wellbeing depends on fiat will suffer the worst, like pensioners. Because, as bitcoin continues to gain in dominance, the less we want to hold fiat. We will all want to be paid in bitcoin and hold our savings in bitcoin. As in any market, the amount of goods and services that can be acquired by fiat money will inevitably fall, further hurting those whose lives depend on it.1

The bitcoin enthusiasts will, of course, respond by saying they should also buy bitcoin.

But the perverse consequence of this is that as bitcoin continues its ascendance, the less fiat will be worth.

This is why I think coexistence between bitcoin and fiat would be an unstable equilibrium. If bitcoin becomes successful, then we will want to use it more and more. That makes it even more successful so that we disregard fiat even more. In the end, fiat will be fully displaced, as the success of bitcoin becomes a self-fulfilling prophecy (Aizenman 2019, Auer and Claessens 2018).

There is, however, a contradiction in this scenario. If bitcoin becomes the money we use in our daily lives, it must also become a unit of account. The current volatility of bitcoin precludes it from becoming such a unit of account because which shopkeeper wants to change their prices every time bitcoin goes up or down in value, and who wants high volatility in the purchasing power of their salary or savings?

And that contradiction may be the reason why bitcoin cannot become successful. Success means it is used in transactions, but that requires bitcoin becoming a unit of account, and for that to happen, the purchasing power of a bitcoin must stabilise.

Fortunately, the more successful bitcoin becomes, the more visible the perverse consequences and the internal contradictions become, so that bitcoin and other cryptocurrencies will be discarded long before we get to that point. At which time, the price of bitcoin will head to zero.

Bitcoin is a bubble. It makes sense to ride the bubble as long as possible – just get out in time. Watch out for a little boy yelling “the Emperor has no clothes.”

References available at the original.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. TheRoad

    I agree with this article but I feel like it misses this one question: what if people are forced into the position where they agree (because they have no other choice) to be paid in bitcoin? What happens then?

    With unemployment where it is currently, due to the pandemic, and our societies extremely high tolerance for the exploitation of the less fortunate, I see this as a potential avenue for bitcoin pushers to get more of the public addicted (for lack of a better word) whether they want to be or not.

    1. Yves Smith

      No one is forced. And bitcoin is wildly unsuitable for transactions. The volatility means a vendor has no idea how much he is getting. And gains are taxable. It’s an accounting nightmare.

      1. Michael Cooper

        Volatility of bitcoin in dollar terms is not an issue for the vendor if both the vendor’s prices and it’s liabilities are denominated in bitcoin.
        At the end of the day it’s just a network effect question, plus the fact that governments can always dictate what they will accept in satisfaction of tax liabilities.

          1. Nanning Andy

            The most useful function of bitcoin is it’s opaque nature. The only real value it has is for facilitating the transfer of drug money, corrupt cash, etc. This function makes it extremely valuable in real world terms- what smuggler wants to declare his profits?

  2. oliverks

    I am not sure I buy the argument that bitcoin won’t stabilize. If it were to start to become a dominant currency, you could argue that bitcoin would naturally stabilize and it would be the other currencies that seem unstable. In other words if a majority of people started to accept bitcoin as a standard method of transaction, the value would stabilize.

    To me the problem with bitcoin becoming dominant is transaction costs are high. See for example

    So perhaps buying a Tesla would work, but lots of small transactions would be very messy. That might be solvable in other ways.

    As an aside rant, I think bitcoin is morally reprehensible. It is destroying the planet without creating any value, but that’s a different story.

    1. ChrisPacific

      The reason bitcoin won’t stabilize is the same as the reason why transaction costs are high – it was explicitly designed to be proof against inflation (which means in a growing economy it would ultimately become deflationary). There can never be more than 21 million bitcoins, ever. As we approach this limit, the transaction costs for proof of work will continue to spiral up, and new bitcoin mining (these two are actually the same thing) will get more and more expensive for a given yield. The increasing scarcity of bitcoins relative to other currencies that are subject to inflation will make them more and more attractive to speculators, which means ever greater volatility.

      The designer of bitcoin supposedly intended it to mimic gold in how it traded, and did a pretty good job of that – it needs to have limited supply (check) and be shiny/desirable (check, for the moment). There are reasons why no major economy is on the gold standard any longer, and the same reasons apply to bitcoin.

      1. Wukchumni

        One thing that amuses me greatly is the need in every story about Bitcoin to include a photo of a good old fashioned representative round metal disc, in order so that there’s some there, there.

  3. Ep3

    I see bitcoin as just another free market attempt to eliminate another critical function of govt. Whose gonna guarantee bitcoin? Whose gonna back it up? Once there’s a collapse in it’s value, there will be a demand to guarantee it doesn’t collapse. Then what? What happens when the economy collapses and war is declared? How do u pay for your war? Oh wait, you would have govts wanting to buy ships and tanks with a worthless currency. Then military contractors would charge more because the currency is worth less. So military contractors would amass more bitcoin than normal for their tanks. Then when the economy recovers, the military contractors would be super rich, because they acquired more bitcoin during the war, then the price rose after the war. So a bad thing like war, just made rich ppl richer! Success! While the govt is broke, has no bitcoin to clean up after the war, now the rich ppl can step in and solve all our problems.

  4. Samuel Conner

    I think the author overlooks that the “debt obligation” of the US government is that it accepts USD in payment of taxes imposed by the US government, and that is why everyone in US wants USD. I don’t see how the “everyone needs/everyone wants” dynamic can apply to bitcoin. Surely USG is not going to start accepting other currencies in payment of taxes.

    Also, is there a workaround for the energy cost of validating bitcoin transactions?

    It seems to me that transactions in bitcoin are, in effect, a negative sum game, and it’s hard for me to see how that can become universally appealing.

  5. DTK

    The catch: The US demands the payment of taxes in that which it is the monopoly issuer of; the US dollar. If bitcoin somehow achieved that status then it would not be called bitcoin, it would be called dollars.

  6. SteveB

    “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

    Chuck Prince ex CEO Citi Bank July 2007

    Human nature never changes.

    1. bojackhorsemeat

      It costs too much per transaction and so can never replace regular transactions at stores. The alternative is it becomes like the gold standard, with currencies backed by it… Which doesn’t work because it is deflationary, so everyone should always convert as possible to Bitcoin.

      But the market can stay irrational for a long time, so as long as there’s plenty of stupid money I wouldn’t expect Bitcoin to to anywhere.

  7. The Rev Kev

    Maybe it will be a self-correcting problem. Already Bitcoin uses as much energy as a country like Switzerland. If the whole world went over to Bitcoin, the total energy usage would soon send our energy production facilities over the edge leading to a world-wide permanent blackout. As there would be no more electricity, there would be no Bitcoin so problem solved, right?

  8. HH

    The obvious problem with Bitcoin is that it cannot be used as a tool of monetary policy. Because the supply of Bitcoin is fixed at 21 million BTC (soon to be reached) the bitcoin supply cannot be adjusted to offset inflationary and deflationary swings in the business cycle. Thus, Bitcoin is just as dysfunctional as gold as a monetary base. There is a future role for a global cryptocurrency, but such a currency must be sufficiently flexible to support a global monetary policy.

  9. rick shapiro

    Good luck trying to time the bursting of the bitcoin bubble. As John Maynard Keynes said, “the markets can remain irrational longer than you can remain solvent.” Unfortunately, bitcoin is being elevated by anarchistic hostility toward the collective action (govenrment) which protects us from warlords and would-be barons. The lunatic fringe of libertarianism may have started with liberal disdain for overweening societal constraints on individual liberty; but it has been transmogrified into crazy anarchism in service of racism, and barbaric contempt for expertise and civility (i.e., into MAGA). Bitcoin, having no special virtue over centralized forms of technology-aided payment methods, other than in aid of criminality, is an attack on government and civilization.

    1. drumlin woodchuckles

      Wouldn’t it be interesting if the bitcoin anarchists and MAGA merge into one movement?


  10. Cocomaan

    It’s a pyramid scheme: the people who bought in early use the capital of the people who bought in later.

    As soon as people stop buying it collapses.

    I’ve had family members awkwardly offer me similar deals at thanksgiving.

    1. Dirk77

      In a normal world, few of us on the sidelines would care when the scheme collapses. But in our corrupt socialism for only the rich world, it seems definite that the US gov will step in to make the buyers whole, if the bitcoin owners are also big donors. Does anyone know who they are?

  11. Phillip Cross

    I would say that it is a straw man argument to say it must displace the dollar. You need dollars to pay your tax bill, otherwise you pay a financial penalty and can go to jail. So, unless the US gov rolls over and gives up, that isn’t going to happen. The bitcoin holders are going to need a lot of dollars from somewhere to pay for all the capital gains they accrue when they use the coins.

    I think the biggest risk to the bitcoin story is that, once it becomes valuable enough to enable any and all large international payments to go ahead outside of the SWIFT system, the US government loses its “transaction veto”. Then it cannot enforce it’s sanctions, and so bitcoin becomes a national security threat. You have to imagine they will criminalize it long before it gets to that size, crashing the market.

    Just ask Colonel Gaddafi what happens when you try and set up a parallel payment system to challenge the dollar! He made some enquiries. *knife emoji* *peach emoji*

  12. Alex Morfesis

    The history of art…goodness… throwing paint on canvas…no self respecting collector would ever do anything except acquire marble statutes…these pigment blotches will never come to much… Bitcoin will not and can not be any form of underlying financializationable instrument…but it is in fact, stamp and coin collecting for those brought up with their noses buried in video games…but tastes change and certainly for those wanting their magical jack in the Bean stalk lottery ticket thingee…”this is my chance” is burped out by the unwashed…

    1. Wukchumni

      If any old artist could slap paint on canvas and have their work valued @ $90 million why wouldn’t everybody be doing it, aside from David Hockney?

      Everything about Bitcoin is so reminiscent of the Franklin Mint and the NCLT (non circulating legal tender) garbage they minted for primarily Caribbean countries in the 1970’s, and their limited editions were closer to 21,000, not 21 million.

      What if investors just had to have a 1975 Barbados 8 coin proof set with a mintage of only 20,458 sets, and took it from the current vale of around $45 (it has 2 silver coins in it with about 1 3/4 oz in content and is only worth the meltdown value) and got it up to $4,500 or $45,000 since it’s a much more limited edition than a virtual Bitcoin?

      It is worth noting that similar to all the cryptocurrencies on the market now, the Franklin Mint spawned dozens of other mints doing the same thing, strictly limited editions of medals, coins, plates, etc.

  13. Dftbs

    If Bitcoin succeeds we’ll all be paying for our subsistence goods with gold backed digital yuan. We’ll be buying expired MREs from bazaars set up on the decks of rusting USN ships. Some people will think it a tragedy, others will see it the just deserts.

    An interesting notion I’ve read recently and forgive me for not having the article handy, is that bitcoin is less the bubble and more the needle.

    I tell plenty of my friends who are bullish on their existing holdings, the higher bitcoin goes the more you are left with worthless bitcoins denominated in worthless dollars. If you want to get involved I’d do what the rich are doing, selling the growth in Bitcoin to buy a greater share of tangible legal ownership of society (be it equity, real estate or commodity).

    That will also lead us to eating MREs and paying in yuan, but you may get rich along the way.

  14. DTK

    It’s unusual to read a piece that envisions the success of a currency without a mention of taxes, inflation or deflation.
    At least the ivory tower is not without satire: “They literally will own all the money.” Followed by “So, a sharp increase in inequality is an inevitable consequence of bitcoin success.” Ya Think?

  15. ambrit

    There is also the attitude of the State, any currency issuing State will do, towards a privately sourced currency. As the old joke about why we have an FBI goes; “The Government doesn’t like competition.” A commenter the other day remarked that they deduced that there must be a State actor or major State aligned Corporation involved in Bitcoin, due to the lack of ‘action’ concerning crypto’s rise and growth. Why would any State allow the existence of a system that could clear “illegal” funds without scrutiny unless that State had access to said crypto’s inner workings?
    My main objection to the utility of crypto for “the masses” is the lack of private portability. Crypto’s, being purely electronica, are ripe for ‘hacking’ and other forms of electronic manipulation. One cannot bundle up some crypto’s and trot on down to the ‘business district’ to carry on some bargaining and trading. This objection applies to any card based wealth transfer system. Cards can be ‘cancelled’ at any time. (We have had to deal with a card being ‘hacked’ and used by malign third parties.) Safety is the key here, and, the fact of crypto’s being opaque and secretive in nature just tends to heighten the risks associated with their use.
    At bottom, from the ‘cheap seats,’ crypto-currencies look to be another in a very long list of get rich quick schemes.
    Stay safe, stay solvent, stay ‘liquid!’ (Hmmm… How does one “get wet” in the financial sense?)

  16. Mikel

    The root of the problem: people thinking scarcity is the only thing that creates value.

    Look at global populatiom growth since 1900.
    Yet, people want to contstrain money supply while populations grow (number of financial transactions increase with the number of people needing to do financial transactions).

  17. JWP


    All of this, plus the immense energy and resource strain bitcoin and crypto mining takes. Paper money is easy and cheap to produce and uses relatively small amounts of power and resources. Bitcoin already takes as much power and pollutes as much as many well-sized countries like Argentina and Netherlands. It would be impossible to dedicate the necessary amount of energy to mine bitcoin at the scale of it equalling fiat.

    I’m also curious if the sale of wildly inflated crypto and stock prices will result in inflation once they start being sold off at higher volumes? Might this be a form of inflation the fed is unaware of where money supply jumps after asset sales at abnormal prices.

  18. Mansoor H. Khan

    I think of bitcoin as I think about gold (limited supply). If bitcoin is successful then it will be fractionalized since most people will not probably take possession of their private key.

    My bitcoin investment from Robinhood is that way. I don’t have my private key. So it is very easy for Robinhood to fractionalize it. If fractionalized it will lose its “scarcity status”.

    Also, trillions and trillions of liabilities exist in dollars. Therefore, demand for dollars will be very strong for a long time to come. People will need dollars to extinguish these liabilities.

  19. Susan the other

    I wish fiat got more credit for the ingenious thing that it is. “Fiat” has become a bad word. This, when the act of fiating money is the most logical and beneficial thing in the world. Technically the brave new world of Bitcoin could split each certified Bc a thousand times rather than allow each Bc to become absurdly valuable. “Absurd value” is an oxymoron fer shure. It is also illogical thinking, imo, to try to make any form of money be both a store of value and a medium of exchange. The whole ‘unit of account’ requirement for something to be money, which itself requires stability rather than volatility, also requires the backing of a sovereign government. So in order for Bc to replace money it would have to become money. No more crypto for you nazis. I just read what I thought was a joke – that Tesla/Musk had just purchased some billions of dollars worth of Bc – more Bc than had actually been mined. So are those Bc “futures” and are they discounted properly for the possibility that they might never be mined? Or it might take hundreds of years to do so. And also too: How could such decentralized, unstructured and rarified finance ever be used effectively for public purposes? Dear god we wouldn’t want to defile the sacred natural resource of crypto with something so banal as public spending. What a bunch of lunatics.

  20. Bill Smith

    Is Bitcoin just a digital version of gold? No intrinsic value?

    And until you can pay your taxes with Bitcoin it won’t be taking over.

    1. KiWeTO

      Gold has proven to be useful in actual chemical manufacturing processes… or even eaten as gold leaf for the desirous.

      Nobody has eaten a bitcoin yet. (well, one could eat the physical object containing said bitcoin digital wallet keys…) but… I don’t see that bedoming a regular expression of conspicuous consumption.

      Perhaps someone’s bitcoin blockchained history of transactions might prove useful for some algorithmic mathematical function in future… who knows what tomorrow might bring?

      The South Seas bubble never had the amplification of today’s social media, nor the ease of finding ‘fresh’ buyers.

  21. Pinhead

    The inevitable collapse of bitcoin’s value will hurt all the people who believe it won’t happen. They will get little sympathy.

    However, crypto-currencies do have real economic value for anyone engaged in illegal activities such as drug dealers, arms merchants and tax cheaters. As long as government allow it…

  22. JTMcPhee

    Bitcoin exists, as I understand it, in bit storage on computers, of which there’s a steadily increasing number with very great demand for electric power to keep the bitcoin in existence and “exchangeable.” “Bitcoin miners are starving entire cities of electricity,” https://oilprice.com/Latest-Energy-News/World-News/Bitcoin-Miners-Are-Starving-Entire-Cities-Of-Electricity.html

    Then there’s the problem of remembering your key to your “wallet,” another interesting attempt to bolster the legitimacy of the bits: “Lost passwords lock millionaires out of their Bitcoin Fortunes,” https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html

    To go with the defects stated by the post’s author. I’m sure there’s lots more.

    1. drumlin woodchuckles

      Maybe some of those bitcoin miners can become password miners. Use their computers to help bitcoin millionaires who forgot their password to rediscover their password in return for half of their bitcoins.

      1. KiWeTO

        x guesses and the password lock is permanently scrambled. No takebacksies.
        Infinite password attempts are not available as an option here, so password mining isn’t possible.

        1. John Rose

          So what happens to the bitcoins in a wallet with a lost password? Does that reduce the universe of 21 million possible bitcoins? That means, over time, the universe of bitcoins will be constantly shrinking.
          And we all need to keep in mind: bitcoins greatly enable kidnapping for ransom. All family members of wealthy, and not-so-wealthy individuals are ripe for picking up. The ransom is untraceable.

  23. Sound of the Suburbs

    Neoclassical economics is a pseudo economics that hid the inconvenient truths discovered by the classical economists.

    The classical economists identified the constructive “earned” income and the parasitic “unearned” income.
    Most of the people at the top lived off the parasitic “unearned” income and they now had a big problem.
    This problem was solved with neoclassical economics, which hides this distinction.
    It confuses making money and creating wealth so all rich people look good.

    They are going to have a problem if people realise money comes out of nothing and is just numbers typed in at a keyboard.
    This knowledge had to go.

    Studying 2008, I realised banks do create money out of nothing.
    (I got a bit further than our experts, with their “black swan” explanation)
    This was later confirmed by the BoE.

    If money comes out of nothing, where does the real wealth in the economy lie?
    I would eventually work out the relationship between money and real wealth.

    Where is the money coming from?

    Weimar Germany and Zimbabwe were never short of money.
    Weimar Germany and Zimbabwe had created far too much money compared to the goods and services available within the economy causing hyper-inflation.
    States can just create money, and the last thing you want is too much of the damn stuff in your economy.
    They had made so much money it lost nearly all its value, and they needed wheelbarrows of the stuff to buy anything.
    Money has no intrinsic value; it comes from what it can buy.
    Money is just an instrument for carrying out transactions in the economy.
    If you have too much of it, you get inflation.
    If you don’t have enough, the economy slows down as there isn’t the money to carry out all the transactions necessary.
    Central bankers actually look at the money supply, and expect it to rise in line with the new goods and services in the economy, as it grows. More goods and services in the economy require more money in the economy.
    The money supply should rise with GDP.
    The real wealth in the economy lies in its goods and services, not money, which comes out of nothing.

    Fiat currencies provide the flexibility to grow with the economy.
    Bitcoin is modelled on gold and it isn’t very flexible, this is a big problem.

    Bitcoin and gold enthusiasts have spotted that our policymakers don’t really know how the current fiat monetary system should work.
    They are looking to gold and Bitcoin as a safe haven, they are good for that due to the limits on supply.

    1. Terry Flynn

      Weimar Germany and Zimbabwe had created far too much money compared to the goods and services available within the economy causing hyper-inflation.

      True but highly misleading. Germany lost productive capacity when France seized land under the Versailles Treaty. Zimbabwe lost productive capacity by giving farms to illiterate peasants. In neither case did the govt INITIATE hyperinflation by making a decision to print more money. They simply found that the existing amount of money was way too much given the reduced quantity of productive capacity. THIS started the hyperinflation.

      Please don’t perpetuate misleading interpretations of what happened. In both cases the govt was playing “catchup”. “Too much money chasing too few goods” can happen because the number of goods collapses. The fact people assume its “govt producing too much money” says more about their implicit assumptions than providing real analysis.

      1. Thuto

        Your characterisation of what happened in Zimbabwe is overly simplistic, but not surprising, the mainstream version as it were. Funny you lay all the blame at the feet of the “illiterate peasants” (who incidentally, knew how to work that land for centuries before the white man arrived) without any mention of how international sanctions collapsed the economy. It’s like saying Cuba is stuck in the 1950s because of Castro and his government policies without mentioning the decades old embargo, the main cause of the economic malaise.

        I don’t know if you’ve ever been to Zimbabwe, I have, quite a number of times actually as Harare is only a 90 minute flight away. I also have many friends from there, so my knowledge of the intricacies of what happened there is more than what’s gleaned from western mainstream accounts. Over 85% of productive land was owned by 4% of the population, the 4% overwhelmingly white in a country that’s over 90% black and labels like “Africa’s bread basket” were used to spin this dynamic as something ordinary Zimbabweans should be proud of, when in reality it exposed the so-called “independence” as a ruse. Trying to decouple the state of the economy in countries under sanctions from the sanctions themselves is what the mainstream press does, but it’s very misleading for the general public because it leads to wildly simplistic statements like the one you make about illiterate peasants (Zimbabwe by the way has one of the highest literacy rates in Africa by the way, just so you know).

  24. Jackman

    Actually, you can just replace ‘stock market’ or ‘equities’ for bitcoin in this scenario and he is describing precisely the process of galloping inequality that has occurred over the last 30 years. The relatively tiny minority that own stocks control the world, while the vast majority that don’t are counseled to use their little capital to buy them, as their cash earns nothing. Of course, a complete transition to bitcoin would exaggerate those trends just as he says, but the essential dynamic is what we’re living with anyhow. And stocks already act a lot like bitcoin–many valuations no longer reflect actual income streams at all, real or projected. Stocks trade far more like art objects than economists would ever like to admit, like Warhols or Matisses, where fashion rules the day and markets are artificially supported by those who already own them.

    1. troublemecca

      A running theory of mine, is that cryptocurrencies are allowed to exist to sop up the extra $$$… it is a bubble completely unrestricted by pesky fundamentals. We see its lack of usefulness as its Achilles heel, when that is its perverse strength. A company can go out of business, a house can burn down, land can be salted, art decay, governments dissolved… but none of that applies to Bitcoin. When Bitcoin ‘crashes’, it will simply rise again, as it has done for a decade. Its price will only be limited by the extent to which we need fiat to transact: buy food, pay rent etc. It won’t displace fiat, as it is too cumbersome… but what amount to its derivatives (the other cryptocurrencies) might.

  25. J Brisby

    Something else to consider is that much of the value of fiat currency derives from governments demanding said fiat in the payment of taxes. If the US treasury (or another equivalent institution in another country) were to announce that they were going to start accepting BTC in payment of tax obligations it would set in motion the destruction of their currency and, ultimately, their power as a nation. I just can’t see the upside in doing this, but I see a hell of a lot of downside.

    Ironically, at least for me, one outcome of BTC is the realization that fiat currencies are really not as awful as I thought they were a decade ago when the genesis block was mined.

  26. Eric Lund

    I believe you are overthinking this. Because of the technology, btc seems to have this mystical quality. In my view (as as 68 year old investor who just sold most of his) its nothing more than a scarcity play. What makes a piece of cardboard with Willie May’s likeness on it valuable? Surely it has no utility or cash flow. It’s simply scarce. I believe it’s best to think of btc the same way. An asset that may provide some protection against fiat debasement. What it is not or will never be, is a payment mechanism or a replacement for money. No more than gold or a piece of art will ever be. If one views it that way, it doesn’t seem so mystical or even unusual. Its a nice financial innovation, hitting some mainstream investors in a market where inflation or devaluation concerns are perking up. That said, like every other asset there’s a fair price and the market price. It’s gotten a bit ahead of it self in my mind that’s all. It no more volatile than some stocks currently trading at high volatility in this ‘everything rally’ we are in.

  27. Matthew G. Saroff

    The root of the word “Currency” is current.

    It allows for immediate payment.

    If I want to buy a pack of gum with 0.000035 Bitcoin, about $1.50, it can take DAYS for the transaction to process, or it can take hours, or minutes, or seconds, (Typically, somewhere between 10 minutes and 300 minutes)

    As such the settlement time is unpredictable, and long, it will typically take less than a minute to settle a credit card transaction, with far more protection to the spender.

    Blockchain is not a solution for currency, nor is it a solution for anything else.

  28. Terry Flynn

    Given the coming relaxation of covid restrictions here in UK I have rejoined a contact website. This (non sex focused) predominantly gay site in pre-covid times was pretty good. First person I got linked with and chatted to this time was…. A piece of work.

    Boasted about huge profits trading bitcoin. I mentioned issues but it was clear that this type of petson (1) doesn’t care that economic externalities that mean the huge expansion of fossil fuel production, affecting all of humanity; (2) sees personal profit as Paramount and that “government is bad mmmmkayyyy!”

    Of course he’ll cry for bailout when the pyramid scheme crashes. Someone who IMHO is so amoral deserves nothing but immediate block. I’ll add “attitudes to bitcoin” to my screening questions in future. One of my good friends, heavily steeped in MBA old economics now recognises Kelton’s book. I’ve definitely done a fair bit to stop stupid thinking but I’m not raising my blood pressure trying to educate bitcoin idiots.

  29. Starry Gordon

    As I understand Bitcoin, the value of the unit rests on the fact that there is a finite, unchanging number of them. Like most money, they are intrinsically worthless, so they have value only as tools (mediums of exchange, stores of value, aesthetic and reputational uses, etc.) A tool which is harder and harder to find is harder to use and declines in value. An analog might be a bus system where the number of busses remain the same even as the population and their businesses increase. At first the bus company could raise fares, but eventually no one would wait for the ever rarer, ever more crowded bus anymore and other means of transportation would be found or devised. The bus company would probably not go bankrupt, however, because the buses would still be a quaint form of entertainment, like cable cars in San Francisco. Something similar can be expected of Bitcoin.

  30. Robert Hahl

    My idea in buying a fraction of a bitcoin through a mutual fund was as a form of insurance. If they could sell for $10,000, why not $10 million? Why not $10 billion? My German grandfather once handed me $17 million Deutschmarks from 1923 with the advice to “never trust government.” He was one of those Germans of a certain age who saw a man stealing a wheelbarrow full of cash by dumping the money out and taking the wheelbarrow.

    I never figured out if bitcoin is supposed to keep consuming enormous amounts of electricity forever or drop down to something reasonable after the mining is done. Either way, I reasoned that if the price kept rising. the system would be able to afford the electricity even if no one else could afford electricity for anything else, hence the insurance angle.

      1. vlade

        As you say, new BC are awarded to the “miners” for verifying transactions. No transactions = no mining.

        This has some peculiar results.

        Right now BC supports a fraction of transactions (either by a number of transactions or volume) that a world-payment system such as Visa does. Visa alone does something like 65000 transactions/second. BC does about 7. On a good day. Usually, its closer to 5. So, for simplicity, Visa operates something like 10000 timex more transactions/second on its “old” technology.

        BC transaction verification is a proof-of-work system, which means that it’s supposed to _always_ use the same amount of processor work (CPU or GPU), more or less regardless of anything else. So unless you get significantly more energy efficient silicon, the energy usage would grow, very very significantly. (making more computationally effective silicon doesn’t matter, as the complexity of the tasks would just increase to compensate).

        A lot of people is looking at how to make it more efficient (TLDR for this purposes), but unless the combined efficiency of transactions and energy efficiency of the silicon is raised by four order of magnigute, the BC sucess would mean way fewer transactions than now despite major part of the economy being dedicated to processing of the transactions. In other words, about as a stupid a world as you can imagine, which to me sounds deserved for a world where BC suceeds.

        There is no known problem that crypto adresses that can’t be done w/o it, more efficiently (and that includes parting idiots from their money).

  31. Keith Newman

    When the US applies sanctions to other countries it undermines the use of the dollar as the reserve currency for international transactions. This is especially the case when it is done to big countries like Russia, China and Iran. It is possible the increasing use of Bitcoin is by people seeking to avoid using the dollar for this reason. This is Mike Norman’s view.

  32. bernie karpf

    How would BTC, when refined, not be any different then a debit or credit transaction on a Visa/Mastercard?

    Perhaps, if used w/in a certain limited area, it can accomplished w/out the consequent fees associated with current credit card transactions. And remove the ability of the controlling agents to use it as a loan unto themselves.

    1. Yves Smith

      Because it can’t be “refined”. Every transaction has to be mined. Mining now takes >10 minutes.

      There are energy and time costs, as well as enormous uncertainty (you don’t know what the price will be by the time the mining is done, even if you agree the price at the of the transaction, the miner has basis risk while he mines) and tax hassles (every transaction is taxable).

    2. flora

      Suppose for a moment that b-coin is only a stalking horse or proof-of-concept trial for the self-same cc companies and govt backed via central bank currencies. Not that I’m foily, and I’m certainly not a ‘barbaric’ specie proponent. Even so… This commentary, which would have seemed foily in the past, now seems, uh, less foily (which in itself is commentary on something-or-other, imo … ;)


      adding: the amount of electricity required to ‘mine’ said b-coin puts paid to the idea b-coin digital currency is in anyway environmentally forward looking. / ;)

      1. Susan the other

        I don’t grasp what is being accounted for in mining the ether using a preprogrammed algorithm designed to create a unit of value by a verification of scarcity – vs. sovereign fiat. Fiat is certainly less complex, people get together and decide what they want to achieve and provide the fiat to do it. It’s like a form of permission as much as accounting. The only difference in supplying money between the two is that fiat is a social decision and the money is (usually) used to achieve relatively good things whereas crypto is purely a “private” medium of exchange based on consensus between parties and the decentralization it creates would seem to prevent large projects for the benefit of society. Based primarily on the fear of inflation. But to my thinking it is absolutely clear that the two can never mix because, like opposite charges, they will cancel out the efficient use of both. Crypto can never be anything more than an “asset” – more like a meta-asset. It would be more productive to consider inflation to be just another asset, which is reflected in the economy by prices and wages.

  33. someone

    Let’s not forget, bitcoin is secure as long as no one person controls more that 50% of the network.

    I have to believe there is a BTC price point at which point hackers will trying to engineer a “50+% attack”.

  34. drumlin woodchuckles

    There could be a ” no crypto” pledge.

    I will not use crypto currency, and I will not tolerate those who do.

  35. Wukchumni

    What if Bitcoin et al had a rather sudden downfall ala the South Sea Company, or John Law, and seeing as it is seen as a tangent of high finance in the mainstream media, wouldn’t it be such a clever thing to blame a subsequent Wall*Street crash of 3-letter-montes on-and nobody in Manhattan takes the blame, instead just a bunch of anonymous kooks that believed what Keyser Söze told them in regards to something that doesn’t exist.

  36. Scott1

    Have not the people who created a marketplace where Bitcoins could be used to buy drugs to sell for real dollars been arrested? Would not this imply that those buying and selling or using Bitcoin need a marketplace where their Bitcoins will buy more than what was available on Silk Road?
    From what I know there is simply no currency or money superior to fiat currency. That isn’t Bitcoin.

  37. Sibiryak

    Someone should write a (hard) science fiction story about a near future where 90% of the Earth’s GDP is spent on crypto-currency mining or directly supporting the infrastructure for mining.

    Of course, with such a singular focus, there would be little left for the rest of society, such as health, education, or infrastructure.

    It would only be appropriate if the squalid conditions in the story matched the people’s delusions about “making it rich”.

  38. eg

    Buddy misses the obvious. Fiats have value because the monetary sovereign demands them (and ONLY them) in payment of its taxes, fees and fines.
    No nation that understands fiat monetary operations is going to accept Bitcoin in payment of its citizens’ obligations because to do so is to unnecessarily constrain its policy space.

  39. Procopius

    Whoo, boy. I really don’t think the treasuries, and chancellors, and central banks are going to let their power to create money, which means “that which can be used to pay taxes,” go. Just a couple of days ago, in a book on the history of money, I was reminded that gold has no intrinsic value. Its exchange-value was set by the priests in Mesopotamia and Egypt. It was an early fiat currency, like barley, cattle, and cowrie shells. Anything can be money as long as it can be used in payment of debt, but government-issued specie will always win out because nothing else can be used to pay taxes. Not even gold.

    1. Wukchumni

      Its worth noting that for a very long time, the spot price of gold was pretty much unchanged as it was money. An English Sovereign (about 1/4 oz in content) from 1489 was worth 1 Pound and had a similar content to one dated 1889. I doubt any priests in the middle east had anything to do with the valuation. In our country under the Au standard, it never varied from a value of $18 to $20 an ounce for almost 140 years.

      When the Continental Currency debacle happened, it so chastened the young country that 80 years would elapse before Federal banknotes were issued, and in an attempt to make the new specie oriented economy more acceptable, every last gold coin issued by the U.S. Mint until 1838 actually had a scintilla more in metal content than the stated face value.

  40. Christian

    How much would you be willing to pay to eliminate counterparty risk in a large transaction?
    This is the only intrinsic value of Bitcoin. Once the network confirms the transaction, the whole world acknowledges that the value has been deposited. No need to vet the credibility of the sending institution or employ an army of fraud detection and audit personnel at the receiving bank.
    Nobody cares about counterparty risk when buying a pack of gum, but it is certainly important when the transaction approaches the millions. Once the transaction is confirmed, it is not reversible. The recipient need not worry about the money vanishing from their account. There’s real value there.

    1. Yves Smith

      No, you have this backwards. No buyer with an operating brain cell wants an irreversible transaction. I make even pretty small purchases (anything I’m not consuming immediately) on a credit card, because the chargeback rights are powerful and important. I would not deal with a seller who wanted to deal on cash or irreversible terms for any item of significance. I would see this as an indicator of fraudulent intent.

      When are you happy to spend millions with absolutely no recourse to the seller? This is why brokerage firms have back offices, to check and resolve “out-trades” and why most people who are rich have super elite American Express cards, not for the miles as much as the ability to claw the payment back if the product was misrepresented or defective.

    2. vlade

      You’re transforming a credit risk (which is well understood), into fraud risk which is already a major issue. Moreover, credit risk is a good-faith risk (i.e. in general the assumption is that both parties act in good faith, otherwise it’s fraud), while fraud is by definition a bad-faith risk, which means way harder/expensive to detect/prevent (because the party conducting the fraud takes active steps to avoid detection).

      On top of that, you’re creating additional risk, because the party in the fraud can perfectly identify the BC in question, and can request to be restored. Which may impact people way down the transaction chain, who acquired it in good faith. In other words, if the BC (all or part of) in your wallet were ever in a fraudulent chain which was _not_ resolved yet, you run a risk of losing them, with the only way of restitution being suing up the chain. Good luck with that.

      The I-am-Satoshi Craig Wraight is now pursuing an action on the irrevocability of the transactions. Which is funny in many ways.

  41. Andreas

    Lots of things damn Bitcoin and all of the crypto-currencies.

    My firm finances sovereign solar projects.
    We discovered, perhaps, the most disturbing one.

    The total electricity consumed by crypto-currencies exceeds the entire globe’s solar electricity production.

    1. drumlin woodchuckles

      What is a “sovereign” solar project? Does that mean a “government” solar project?

    2. John Rose

      That means governments can immediately double the effectiveness of the world’s solar capacity by prohibiting bitcoin.

  42. Martin

    It’s a shame that bitcoin has become the poster child for all cryptocurrencies. Bitcoin is deeply flawed, as stated in the article, and correctly addressed by some commenters. Just its energy usage and transaction delays render it useless as a currency. However there are other projects that solve these issues, and that are looking to develop into an ecosystem that could bring banking to the unbankable, ease transfer of wealth around the globe, and remove costs associated with middle-man in everyday transactions. Stellar, Cardano, Polkadot and others, while still in a developing phase, will suffer if (when?) bitcoin colapses because they will be associated with it.

    1. vlade

      Please tell me how “unbankable” will be all of sudden “bankable” beause of crypto.

      There are few technical limitations to transfering the wealth around the globe, almost all limitations that exist are regulatory. Tell me how will any crypto bypass those (legally)?

      The transaction cost of the middle-man is, in many normal economies, trivial. In the EU next-day payments are free, and in the UK even faster ones. In the EU, the debit cards have 0.2% cost cap carried by the seller (and I very much doubt that the sellers would reduce their prices by this amount). Credit cards have 0.3% cap IIRC (all for retail, commercial clients can have higher).

      I’d really, really like to see a worked out use case where crypto could be shown to be better than a current technology. So far, I haven’t seen one that could not be taken apart because it (intentionally or not) ignored a number of real-life items.

      1. Martin

        This article addresses your first question.

        Regarding your second question, it could be done legally as long as governments are willing to provide legislation that supports it. Might happen, might not, but it’s not something to be asked of developers, but of governing entities.

        The transaction cost is usually low, I agree. But it adds to the cost of having a credit card, which usually isn’t zero. And the further away you get from big cities and first-world countries, the higher the costs rise, and the network that supports the credit card payment system further dwindles.

        As for a worked out use case, for crypto and blockchain technology, please see OriginTrail and OriginTrail Explained.

        It’s something new and skepticism is healthy. But there are some green shoots that shouldn’t be stepped over just because Bitcoin is a screwup.

        1. vlade

          1) doesn’t answer anything about unbanked, it’s a PR fluff. Unbanaked are unbanked for a number of reasons (fail KYC due to a number of better or worse reasons, not-profitable enough, too-costly etc.). Also, in many cases they _want_ to stay unbanked, as they move in the gray economy that’s mostly cash.

          2) exactly. But if it’s a regulatory problem, then the whole “trust us, it’s trustless” is gone, because it depends on the external forces of regulations

          3) It’s been a very long time since I paid any fees either for by CC or DC (which I actually consider a problem, as there are real costs associated with providing payments, but now are hidden elsewhere).

          4) The only worked out example is for supply chains. Except, it’s not really solving a problem.

          Because of a simple thing.No amount of crypto smartness can affect real world. This is the main, and fundamental problem with not just crypto, but any IT technology. It can control only a very small part of the world. If someone swipes a content of a crate “marked” by the crypto, it will stay swiped even though crypto says otherwise (and humans are very inventive in these things). There’s literally no real-world problem that can be solved by crypto alone, and once you take that “alone” bit in consideration, you find out that crypto, at best, solves very little that has already been solved (i.e. immutability of some data. Just sign it with a strong key, and don’t trust anything not-signed).

  43. Jonf

    How in the world will our Treasury Dept deal with bit coin? What are the tax rates? How will bonds be priced and how will interest be regulated? Volatility and no creator of the currency makes it mere nonsense. But hey don’t get caught with a pocketful of these things when they explode and they will.

  44. LTL

    I view Bitcoin as the proof of concept that proved blockchains work (technically speaking, anyway), but a small number of early adopters found it profitable to stop all meaningful development on that chain years ago.

    For a look at the future consider the development of Ethereum, the second largest chain, and all the work being done there towards proof of stake: Ethereum Plans to Cut Its Absurd Energy Consumption by 99 Percent

    1. vlade

      PoS has its own problems, many of which would be excerbated if the crypto was widely used. In other words, w/o a strong regulation, it’s extremely doubtful it would work.

      And since the whole point of crypto is to have a regulation-less “trustless” environment (which is where you can see that the people doing it are either unaware of human society works or don’t care).

  45. Jason

    Tangibility is the very essence of life. A lack of tangibility is therefore the antithesis of existence. It is a deadening, a stunting of the spirit – of our true essence.

    1. skippy

      Professor of the Practice of Global Economics and Management, MIT Sloan School of Management, emphasis on Sloan School IMO E.g. corporatist neoliberal school of management …

  46. Xander

    The value proposition of bitcoin is that it is an immutable store of value like gold. It is also a bank and self-contained decentralized ledger. This article reeks of misunderstanding and straw man saying it will never be used for transactions… Bitcoin maximalists say that it will replace the dollar and all fiat while deniers say it will go to zero. The truth is somewhere between. Bitcoin is on a path that as Citi described, could “turn it into the global currency of trade”. Traditional Finance will not be overthrown, it will find a way to live with a digital standard but we just don’t know what it will look like at this point.

    This article is giving me deja vu. I feel like I have read the same exact FUD reporting in 2014 and 2018. When I read articles like this I know a bull run is coming up and yes, I am long BTC because I like making money.

    Remind me in 6 months :D

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