Bitcoin could break everything
Financial populism and loose monetary policy could combine to create the perfect storm as the US economy attempts to recover from the coronavirus.
“Bitcoin”, according to Pierre Rochard, “is going to be the most peaceful eradication of State-sponsored terrorism that you’ve ever seen.” Mr. Rochard, one of Twitter’s many outspoken Bitcoin evangelists, offered me this wisdom in a tweet, shortly before blocking me for good. This wasn’t the first time I’ve been blocked by one of Bitcoin’s internet advocates when their attempts to red-pill me invariably fall on infertile ground. These zealots come in many forms, from the unabashedly greedy, always quick with the rejoinder “have fun staying poor,” to the moralizing influencers like Mr. Rochard, who follows most of Yoda-esque jewels of truth with the caveat: “Few understand this. “
Bitcoin was originally a crypto-anarchist experiment meant to disrupt the financial hegemony enjoyed by central banks and Wall Street, and now is beginning to embody a growing populist financial rage: For decades hard-working Americans have been unable to get ahead in a rigged system. Not only does the government tax our earnings, but they take another chunk out with inflation. “Inflation is theft,” is a central tenet. This inflation is overseen by a central bank beholden to both Wall Street and a federal government determined to ever expand their reach using socialist control mechanisms. Bitcoin is the perfect foil against this swamp of corruption, providing the persecuted class a way to opt out. Bitcoin, which went live days before Obama took office, is a long-awaited savior, an ideal bulwark that will slow our descent from greatness into a miasma of socialism. Few understand this, largely because the mainstream media won’t report on the corruption or the perverse incentives to create inflation. But why would they? After all the mainstream media is part of the swamp. This swamp includes most of the media, congress, Wall Street, and all the so-called economic experts, whom Bitcoiners distrust. If you point to an expert they’ll point out how that expert has been wrong in the past. In fact, this sort of whataboutism is bread-and-butter to their gospel — any flaw you find in Bitcoin can be found in abundance in traditional finance or central banks.
Wait, does this attitude sound familiar?
Bitcoinism, unlike Trumpism, hasn’t gained a foothold in the midwest diners, at least yet. But the thesis is undoubtedly resonant: Profligate money printing and debt-spending are the life-blood of socialism. These devalue the dollar and the savings accounts of the everyday Americans who have worked so hard to get ahead, while backstopping Wall Street in all of their bets. Bitcoin provides the opportunity to keep your hard-earned money from succumbing to the tax of inflation. Not only that, but Bitcoin does something even better: it’s a perfect thumb in the nose towards the elites who snickered it off as funny internet money for over a decade.
Now to be fair, the economic anxiety is real. Wages have not grown very fast. We can all agree on that. While the economists at Ivy league universities point to low inflation numbers and shrug off any claims that inflation is out of control, it certainly doesn’t feel that way. Why do housing prices feel like they’re shooting out of reach? Why are college education costs increasing 10–15% each year? Why are stocks going up and up and up when much of the economy has been shut down for the last 10 months? Why does everything I want to buy or do with my family seem so expensive?
Bitcoiners point to the Cantillon effect: Because Wall Street is the first stop in the river of money flowing out of the money printers, Wall Street keeps the lion’s shares of the gains. This certainly resonates with what we have observed. It seems to have accelerated since 2008-2009. We all remember TARP, when Wall Street got bailed out, and the rest of the economy slowly struggled to recover. This spawned two movements — The Tea Party on the right and Occupy Wall Street on the left, both of whose adherents are quick to tell you “no bankers went to jail.” Many will also point to TARP as the moment they became “radicalized.” The recovery from the 2007–08 crisis was largely K-shaped, although not nearly as jagged as the K-shaped market surge following from the brief coronavirus economic panic that lasted a few weeks last March.
The magic of Bitcoin, unlike the US dollar, is that the supply is fixed and bounded by a finite number. Bitcoins can’t be minted to stimulate a lagging economy. So when the demand goes up, the price goes up. When the supply of US dollars goes up, the numbers of US dollars that people want to convert to Bitcoin goes up, and so does the price. For a while, I tended to defer to the left and center economists who assured us that QE was fine. After all, they say, inflation is basically non-existent, at least well below historical benchmarks, so all those people talking about the Fed printing money don’t really have the right version of reality. The Bitcoiners memetic repetition of “money printer go brrr ” was thus easy to ignore. However, the asset bubbles that have been created in asset classes from Pokemon cards to equities make the Cantillon effect impossible to discount.
Whether or not the Fed’s money printers are the direct reason for these asset bubbles, this isn’t actually the point. What’s more important is that I would not have a hard time convincing anyone who is suspicious of our economic overlords that this is the case.
Unlike Q-anon, Stop The Steal, Virus-trutherism, Birtherism, Bitcoin is not a conspiracy theory. It might smell like one to educated elites, but it’s not. It is what it is, and everyone can see what it is. There is no secret. You don’t need to be willfully misinformed to buy into the fundamental thesis of Bitcoin — the observation that the elites are “up there” making all the rules and all the money. What differs is our response. Trump rose to power on a wave of resentment that sought to overthrow this system, side effects be damned, while the bourgeoisie liberals have taken a trust-the-experts and don’t-rock-the-boat and this will all work out approach.
To make this worse, we have the coronavirus and the response to the coronavirus. If anyone was unclear about the structural economic inequities in our system, they should be convinced by now. The decisions our leaders have to make are extremely difficult, this is certain: Shut down a large chunk of the economy, which destroys the small businesses while Wall Street profits surge, or, take a more laissez-faire approach and risk thousands of hospitalizations and death. For many people, this response has been tone-deaf and out-of-touch with the middle class. Middle Americans have been told to stay home, wait this out for 20 months, or who-knows, be grateful for their $2000 checks, while coastal elites continue to work remotely and watch their 401k head to the moon. If you had any suspicions that the elite were not on your side before the coronavirus, these have been resoundingly confirmed.
Part of the problem with Trumpism is that it lacks a full understanding of what or who the system is. Trumpism begins with the correct assumption that something is wrong, but assume there is a “they” conspiring to cause this. “They” is a pronoun that is used promiscuously to describe the mainstream media, congress, Wall Street, the central banks, liberal college professors, rioters at BLM protests, Hollywood, the Silicon Valley, and the nanny-state governors who decide when it’s safe to eat at a restaurant. Trumpism requires a hero to fight this unholy alliance, and the ultimate test of this hero is how many of the above groups are infuriated. Trump's appeal is grounded in his success at provoking vitriol among the system’s entrenched stakeholders.
But unlike Trumpist conspiracy theories, Bitcoin can never be debunked. It’s a special type of delusion. The collection delusion of Stop The Steal does not make Stop The Steal factual, but the fact that there will be not one more than 21 million Bitcoin after all are minted, this fact does give rise to a collective delusion that this finite supply gives Bitcoin intrinsic value, which does make it true, by nature of the delusion itself. Bitcoin can never be exposed. Even at its darkest moment, Satoshi Nakamoto will never be handcuffed and paraded off by Federal agents with a Yankees cap arched over his eyes. Not because he’s anonymous but because there is nothing to expose. There’s no Ponzi scheme. Bitcoin is out in the open, decentralized. No leader, no kingpin, just people.
Even more importantly, what separates Bitcoin from Q-anon and the like is that you can literally buy-in. Buying in has a built-in reward mechanism. By buying in soon, you reap outsized rewards, 40x, 1000x, or beyond. Bitcoin has two huge advantages over classic MLM schemes: First, because of the nonlinear way demand affects the price, everybody upstream appears to be extremely wealthy. On paper one sees huge multiples of wealth increase compared to the money that has actually come into the system. Second, you don’t have to develop your own downstream. If you buy Bitcoin in Seattle, and someone in Dubai buys into bitcoin — you reap the rewards, whether or not you are the evangelist who made that sale. Bitcoin is a way not only to rebel against the system but a way to become insanely rich.
But let’s go back to February 2009. Following the TARP act signed by President Bush in late 2008, President Obama took office facing the biggest financial crisis since the great depression. The American Recovery and Relief Act, which pumped money (about $800 Billion, which already seems quaint) into a flailing economy was signed into law by Obama on February 17th. Two days later, February 19th, is cited as the inception of the Tea Party, a right-populist movement based on the idea that the US had tumbled into fiscal irresponsibility.
Now, 12 years later. President Biden faces the greatest economic crisis (economic, not simply financial) of our lifetimes, and he’s pushing an ambitious Keynes-inspired recovery act that will dwarf ARRA. With a small advantage in the Senate, this stimulus will go through, most certainly over the objection of fiscal conservatives who will decry it as out-of-control spending. Instead of inventing a Tea Party, fiscal conservatives now have a new weapon — Bitcoin. Bitcoin is the darling of Austrians and the mortal enemy of Keynesianism. Unfortunately for Keynesians, there’s not much that can be done about Bitcoin. As more money is pumped to stimulate the economy, the bitcoin bubble is inflated, bigger, and with more conviction. Instead of creating jobs, as economic stimulus is supposed to do, extra money creates more speculation. But this time, the little guys can play. And they can get insanely rich by doing so.
In fact, this diversion from job creation to speculation has already begun. Michael Saylor, CEO of MicroStrategy, has openly pumped over half a billion dollars of his publically traded company’s reserves into Bitcoin. He’s attempting to lead a large movement of corporations to do the same. When you think about what this means, it’s extremely jarring. His explanation is simple: Because of inflation, there’s more profit to be made speculating on Bitcoin than investing the money in any sort of job-creating venture. The fact that the real economy outside the financial markets is not an attractive investment to someone who’s spent decades advising entities in strategies to engage in capitalism is scary. We now see Elon Musk is also sticking his toes in. If Tesla can drop some fraction of their reserves in Bitcoin, so can anyone, right?
Now, what if I told you that you could go back to 2009 and make an investment in the Tea Party that would capture the right-of-center resentment or go back to 2013 and invest in Trumpism? This special investment has a special pay off: it responds nonlinearly for every person that joins the movement. All you have to believe is that the movement will sell itself.
We are at a point in time where we are sure to face an unprecedented populist rage combined with extreme partisanship. And this time, there is a currency that can be pumped with this rage. Opportunists like Michael Saylor are already jumping in. Certainly more will. Selling something scoffed at by liberal elites to Trump voters is child’s play for unscrupulous snake-oil salesman like Mike Lindell. I wouldn’t be the least bit surprised to see Lindell or any of the obnoxious cancel-martyrs like John Schnatter or Donald Trump Jr. jump in. It’s just about the perfect scam at this point: “Buying Bitcoin own the libs.” Liberals will no doubt continue to laugh it off, proclaim that Bitcoin is about to crash, you know, any day now. Smug elites laugh at Bitcoin because it’s funny, which it is. It’s a currency a bunch of internet finance auto-didacts use to transact on a public ledger in order to avoid censorship by the government, and it’s backed by “thermodynamics and mathematics”, whatever the hell that even means. But this poses a danger; if there’s one thing that acts like catnip for people on the right, it’s anything smug liberals scorn. But it’s much better than that — you can buy it, and your ownership of the liberals is quantified on a free market scoreboard that you can watch all day, you can check in the morning when you wake up and you can check at night right before you go to bed. And did I mention you could become insanely rich while doing so? You’re literally getting paid to own the libs.
It won’t be limited to gullibles or conservatives. If you’re an opportunistic trader and you start to see the above scenario come into effect, you’ll want to front-run it. Ari Paul, CIO of BlockTower Capital. states “As a trader, I think of myself as explicitly betting on that irrationality.” Also recently on Twitter, “If you buy bitcoin, you’re not buying digital gold,” Stephen Diehl, CTO of Adjoint, recently tweeted “You’re buying a future contract on human gullibility and a stake in climate change nihilism.”
How high could it go? Bitcoiners like to mention the marketcap of gold which is around $10 Trillion. However, the marketcap is deceitful. The value is gold is roughly equivalent to the amount of real-wealth that has been exchanged for gold — it wasn’t like ten years ago you get gold for 3 cents an ounce. Bitcoin, on the other hand, was purchased for much much less than the current price. In fact 85% of the total supply has already been created. So if real money came out of gold and into Bitcoin, the money would compete for a very small fraction of the Bitcoin that people are willing to sell, given that there is no upper bound on the value, and the incentive to hodl is so strong. So a large multiple $10 Trillion of market cap is easily possible. But why be content with replacing gold? Bitcoin’s ultimate goal is to replace the US treasury notes, which account for closer to $20 Trillion. So, $5–10 Million a Bitcoin? Don’t rule it out so soon.
Now hopefully at this point, I’ve made it clear how seductive Bitcoin can be for those whose economic resentment made them weak in the knees for Donald Trump. But so what if con-men orchestrate a pump-and-dump scheme on gullible people? What could possibly go wrong? If Bitcoin were to go to upwards $1.5 Million (taking it’s place as “digital gold”) a number of things could go really wrong.
- Huge drain on traditional economic activity. Finance will shift focus and capital away from traditional finance markets, which serve a purpose, in particular, the very important purpose of creating jobs and real wealth, if all the neoliberal economists are to be believed. Similarly, consumers may become more parsimonious as they stack money into Bitcoin. Less spending, less real investment, less jobs. This will provoke the Fed to increase QE and other stimuli. Inflation up, economic activity down. Vicous cycle.
- Increased polarization and tribalism. Right-wing politicians who extol Bitcoinism will begin accepting donations in Bitcoin or convert to Bitcoin. So will the toxic social media influencers who keep their audience fearful and outraged. Buying and holding Bitcoin is a way to support them, especially as they are canceled by Twitter or Facebook. Many on the left will persist in mocking Bitcoin, claiming it will crash, any day now, and this won’t help.
- Alliance between hostile nations and US Trumpists. Once the Bitcoin party gets started, it’s not unimaginable for Donald Trump Jr to say “Russia, if you’re listening, now would be a good time to put your national treasury into Bitcoin.” Russia would love this more than nothing else. Not only could they poison the US democracy, but destroy the economy. Trumpists, like Putin, resent the US role as a superpower, and blame our problems on the “globalists.” The fact that the US dollar denominates the majority of foreign reserves is seen as an extension of this globalism. What better way to diminish the US than devaluing US treasuries? Hostile nations could combine forces with US conservatives by joining the pile-in to push Bitcoin as a global reserve currency.
- Economic instability in the US and beyond the dollar is challenged. Over 60% of the foreign bank reserves are denominated in dollars. If the US can’t borrow by issuing treasuries anymore, the liberal era of debt-spending will be over. Suddenly, the national debt doomsday scenario that fiscal hawks have been predicting for decades becomes a self-fulfilling prophecy. This means our government basically ceases to function.
- Rearrangement of global alliance and emergence of new power players on the international stage. If nations like North Korea, Iran, Venezuela are all-in, they become allies to anyone else who is all-in. I wouldn’t even try to dare to speculate what would happen if the oil-producing nations found it more lucrative to ditch the petrodollar.
- Partisan groups leveraging economic power to spread disinformation. With a few billion dollars, you can set up a reddit or 4chan type social network with global reach, no censorship whatsoever, and use this to reach out to network with extremists or mercenary fake-news providers throughout the globe. Mechanical turks who are paid in Bitcoin could easily do a number of disinformation tasks. Such a network can be an initial testing ground for hyperpartisan news before plying it through the usual channels. Even here in the US, money can be used to buy or create media outlets that promote Bitcoin and anti-socialist narrative.
- Extremist groups and individuals suddenly having huge power and influence. I can’t imagine that the Proud Boys have a huge bank account today, but I could imagine the Proud Boys deciding to cash out to Bitcoin and take donations in Bitcoin before another 40X. This will apply to any groups who may have been forced into Bitcoin because they were unable to hold traditional bank accounts. If these guys are scary now, imagine them with millions of dollars. In addition, there’s probably quite a few racist incels living in their parents basements who have stacked up 10–20 bitcoins. If the price goes to $2 million, these people now have a bit of power. They can buy NBA teams or newspapers.
- Bitcoin becomes increasingly impossible to regulate without causing a civil war. Any attempts to tax, regulate, or somehow stymie the exponential price growth will be met with anger from people who have invested in it. Further, we know that Trumpism thrives on persecution — any attempt to stop a rush toward Bitcoin would be seen as statist attack on Bitcoin holders by a desperate state flailing to maintain power.
- Insane demand for energy. Around 900 Bitcoins are mined each day. At current mining rates, if we assume some free-market efficiency, a $2 Million Bitcoin this amounts to about $1.8 Billion of electricity burnt every day. Bitcoin advocates say some of this comes from renewable sources, but we won’t be able to build that many solar panels or wind turbines in the desert to do this in the near term. That’s well over half a trillion of electricity burnt and gone every year.
- Insane demand for computer chips. If the price spikes, it will become incredibly profitable for chipmakers to focus on mining hardware. Graphics cards are already skyrocketing.
- Increased inequality. While a hyperbitcoinization scenario with $2M Bitcoin would certainly create some millionaires who never would have otherwise been, it will mostly favor the already wealthy. The wealthy are risk-tolerant and can afford to drop $2,000,000 in a toy internet currency a few years back, and not fret too much if it never pans out. Most of us can’t risk that, now or in 2015. Tesla can risk $1.5 Billion, because they’re a wealthy company.
- Pandemic of anxiety, financial trauma and degradation of the traditional social contract surrounding the relationship work and money. Try to imagine the anxiety in a 18-month bull run. Try imagining sleeping, or putting your normal effort into work. The bull run won’t be straight up. Some people will buy heavy before panicking during a drop, dooming their families to destitution, while the neighbor next door will do the opposite for dumb luck. Either you’re exposed to Bitcoin, or you’re exposed to not having Bitcoin. Hackers will be everywhere. Home prowlers will come for your computer. Your passwords had better be secure, and you better not forget them or where you store them.
- Wall Street will co-opt the movement. Because of course they will. These are smart people, and they’ve been playing this game longer than anyone in crypto.
Solution? The US needs to signal aggressive mark-to-market taxes soon.
We need to clearly define the crypto asset class and tax it aggressively. In particular, extremely progressive tax rates applied annually via mark-to-market accounting. We need to signal early that this is not a good YOLO opportunity. Anyone who makes 10,000% ROI in one year should get a 95% capital gains tax. In particular, corporations. The scenarios get really nasty when corporations see Bitcoin as a profitable investment.
Even apart from the partisanization of Bitcoin, an aggressive mark-to-market tax would increase adoption and be good for all of the things that bitcoin is actually good for. Not only would the price stabilize, but space would become less hospitable for greedy sociopaths who populate much of the space today.
Only then, after the grifters have left the scene, will we all be able to root for crypto again.