Will A "Bitcoin Bubble" Destroy Society?
No, but the Fiat Bubble Might
Last week, MoneyWeek ran an imaginative article by a British economist and former EU bureaucrat arguing that Bitcoin is destined to cause cataclysmic redistribution, hyperinflation, and sociopolitical breakdown. To prevent all this, Connolly claims, authorities will have to burst the “Bitcoin bubble” before it’s too late.
While not as goofy as, say, an Elon Musk tweet, the article made a splash, with Coindesk dubbing it the “strangest FUD yet,” a surprisingly competitive field. Well-known Bitcoiner Tuur Demeester remarked that Connolly’s piece may mark the arrival of “outright government hostility against bitcoin.”
And, so, it’s worth a response.
Bitcoin’s Price Won’t Be Infinite
The crux of Connolly’s article is that, since no price can arithmetically go to infinity, sooner or later Bitcoin must crash. Which he thinks will, for some reason, lead to catastrophic riots. He throws in disgust about rich Bitcoiners getting all the stuff, although it’s not quite clear how those timelines mesh – perhaps the Bitcoiners will riot in their soon-to-be-repossessed Lamborghinis.
Walking through his logic, Connolly claims Bitcoin will inevitably crash because, “Either the market price of bitcoin can become infinite or it cannot. If it cannot, then at some point the only possible change in the market price of bitcoin is negative. At that point, all holders would want to sell.”
The premise here, common among the crypto-challenged, is that there is no demand for Bitcoin except speculators. In fact, my first Bitcoin article way back in 2014 was explaining to goldbugs why Bitcoin has actual utility. Alas, 7 years later, not much has changed.
By the way, since some are new, I’ve written on this recently as well. The key is that Bitcoin, like all money, is used for savings and transacting. Which are both extremely valuable activities — going by amount invested, some of the most valuable activities imaginable.
Meanwhile, as a nice bonus, sound money in general, whether Bitcoin or gold, also makes people richer and happier — more on this below. Since gold and altcoins are easy to kill, this means Bitcoin is worth quite a lot. Especially compared to randomly and chaotically printed fiat that erodes life savings every year.
When Happens When Speculators Move On
So, to answer Connolly’s fear, speculators will move on from Bitcoin only when everybody knows Bitcoin is going to be widely used. And that wide use itself will replace speculative demand many times over.
To illustrate, Bitcoin’s price today is volatile precisely because people disagree radically about how much and how fast usage will spread. Because this is quite unknown and changes often based on things like regulation or El Salvador, various investors’ guesses — and thus Bitcoin’s price — is also quite volatile.
So, if future usage becomes more certain, Bitcoin’s expectations, and thus its price, approach some number — I guess several million in today’s dollars. At which point those expectations, and thus Bitcoin’s price, stabilize.
How do we know? Because that’s what commodities do when they become widely used as money. Gold’s price, for example, was very stable during the classical gold standard, went wild during the interwar demonetization, and has been all over the place since the 1970’s — plus or minus 10x measured against equities.
And what of Bitcoin speculators?
Well, they get bored. Along that path to Bitcoin assuming its final form, the declining volatility itself makes speculators drop out one by one. They wander off to more thrilling gambles, leaving their bitcoin in the hands of new users who appreciate a little boredom in their money.
And, so, as always with successful currency speculators, their fate is to mitigate some of the price rise from that wider uptake itself. Indeed, they did more than mitigate — they midwifed the currency. For which they were paid, as it should be.
To claim otherwise is akin to Yogi Berra’s famous “it’s so popular, nobody goes there.” If Bitcoin is calming down specifically because wide usage is becoming certain, the wide usage itself swamps the lost speculative demand many times over. If not, it’s still volatile, so speculators are still happily speculating.
When, finally, that volatility eases, and when those speculators wander off, Bitcoin proceeds happily as a perfectly sustainable and low-volatility asset. Just the thing to buy lunch, or to pay a mortgage, just as gold used to be yet is not at the moment.
Does Bitcoin Create Wealth?
Connolly next laments that Bitcoin transfers wealth but that Bitcoin itself does not create wealth. This is historically illiterate, and follows from his speculation myopia. In truth, there is an enormous literature on the wealth impact of a hard currency, across centuries and across hundreds of countries.
Especially in this era of central banks getting radically more inflationary, and of regulators getting radically more interventionist, a money immune to both government debasement and bureaucratic veto may be the single most valuable investment in our lifetime.
Indeed, such a stable and uncensorable money is orders of magnitude more valuable than trifling little trillion-dollar playthings like Facebook, Tesla, or Wall Street banks. All, presumably, “acceptable” forms of wealth transfer to fiat fans like Connolly.
Bitcoin and Hyperinflation
Now we get to the heart of Connolly’s panic: the idea that, if crypto collapses, there will be hyperinflation as crypto owners rush to convert their tokens into real things. The process here is frankly bizarre.
To illustrate, if Bitcoin plunges to a penny overnight, then tomorrow all the Bitcoins would be worth, roughly, $180,000.
Even if our intrepid Bitcoiners uncharacteristically sold out gradually, it’s perhaps several billion dollars total moving into substitutes like stocks, fiat, and stuff over a period of weeks to months. For perspective, the world sells $300 billion worth of fiat for stuff every day. So the impact is trivial.
Even if we go sci-fi and imagine all Bitcoiners somehow perfectly time their sales so every last Bitcoiner gets today’s full $32,000 for their coin, it would be roughly 0.5% of fiat — $600 billion on $120 trillion.
Not hyperinflation, not nothing. It would very slightly make fiat stronger, very slightly make stocks, gold, and stamp collections stronger, and that’s that.
Bitcoin Fixes Fiat’s Riots
Next up in Connolly’s tale is something with a grain of truth: his claim that a collapse in asset prices could cause social unrest. Alas, this unrest won’t come from a crypto collapse, it is coming from a fiat collapse.
How do I know this? 2008.
In the wake of the 2008 Financial Crisis, many hedge funds and leveraged investment banks like Lehman Brothers were, indeed, wiped out. Nearly 7% of the entire hedge fund industry, for example, went under. Investors lost tens of trillions. And precisely nobody rioted over any of this. No rioting hedge funders, no guerrilla army of golf club wielding ex-Lehman bond traders.
And, yet, there was certainly unrest. System-changing unrest. And it came, very specifically, from government bailouts of fiat banks. Banks that were, as they always are in our system but especially so in crises, inherently bankrupt.
The unrest started first as Occupy Wall Street on the left, elevating obscure anti-bank socialists to national prominence. Then the Tea Party on the right, which directly led to Trump. Across the pond, bank bailouts sparked widespread unrest in Europe, bringing right populists into parliaments, even governments, for the first time since WWII. These populists, inter alia, made Brexit happen.
Finally, those very bailouts motivated Satoshi to release his famous Bitcoin White Paper, accompanied at conception by a screen-shot from the very January 3, 2009 London Times article announcing the UK’s second bank bailout.
So Bitcoin, from day 1, was a precise answer to the very hyperinflation and social unrest that worries non-Bitcoiners. The trillion-dollar never-ending collateral damage fiat has wreaked upon the people, decade in and decade out.
What gets people out in the streets, what causes social unrest, is not hedge funds closing. It is taxpayers being stuck with trillions to make politically connected fiat bankers whole in a thoroughly corrupt fiat money system that licenses counterfeiters waving permanent bailout cards courtesy of Treasury Secretaries, Ministers of Finance, and the central bankers who fuel the entire operation by thievery from struggling families.
Fiat: History’s Most Dangerous Bubble
And, so, the risk of hyperinflation and social unrest comes, not from Bitcoin, but from government money. Endlessly elastic government money that, by design, precariously floats along until its next collapse. Which happens about every decade — long enough for people to have forgotten the last.
In contrast, sound money, and Bitcoin above all, is our very best hope of heading off both hyperinflation and the social unrest it brings. Sound money doesn’t burn cities. Draining millions of regular peoples’ life savings with fiat Ponzi schemes and trillion-dollar bailouts to the politically connected most certainly does, and quite often.
And, so, Bitcoin is precisely the solution to the dangers that worry Mr Connolly. Bitcoin is the most robust, most uncorruptable, most survivable way to shrink the fiat bubble before it consumes yet more victims, and before its inevitable collapse wreaks ever-more chaos on the world.
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excellent retort.