You’re wasting your time arguing with these dudes on twitter though. They think they’re making economic arguments but in fact they’re making religious ones. And you cannot hope to disabuse them, for you cometh not into the House of Coin a true believer.
Given how easy it is to get interest on "cash" in money market funds which pay interest and are functionally equivalent in liquidity, I'd add that as an argument for traditional cash. And while I agree that cash/ T-bills are not a good long term investment, a certain amount of cash in a portfolio is valuable for optionality for investment opportunities that arise (in addition to cash that supports living expenses).
Noah, Love your writing. I learn a lot from reading your posts.
Your argument that "Scarcity creates value" is a myth isn't convincing for me. So writing this comment to get a bit more elaboration from you on that.
As a first order effect, you are right. Case in example -> Webpage is like digital real estate but since it's digital it doesn't need to be limited , ergo there can be infinite webpages that can be created by anyone .
But second order effect of that is it pushes scarcity to one layer above -> "Which web pages do I want to visit now" . Ergo answer is Search engines , of which there are limited and mostly dominated by google. So we just pushed Scarcity from Stuff (pages) to Attention (how to find them) .
Same happens with Social media feeds. Creating digital content is free. But it just pushes scarcity to the feeds (attention).
But we have seen in both above cases scarcity is where most value is captured. In fact it's where most value is captured if you make other parts of the value chain abundant.
Very clear and fair explanations. My understanding of Bitcoin is that its best use case is as “digital gold”, not really as digital currency. Do your critiques in the Misconception 1 section still apply to this argument?
Interesting post just needed clarity on this point "Now there are a few exceptions to this general rule — things that people value because they’ve decided to use them as status symbols in a zero-sum status-signalling competition" What if people decide to value Bitcoin or some digital land, especially rich people and over time it becomes a desirable thing for others who follow after them, no matter the alternatives available in the market.
In regards to Misconception 1: I think its a mistake to compare BTC with cash and most holders would agree. With a block size of 1 MB and a transaction limit of 7 tps, using BTC as fiat is not technically feasible nor desirable. After the whole block-size debate, the matter was settled, and only holders of BTC Cash or BTC SV still view Bitcoin as an alternative to cash - a vast minority. Sure, there are L2 solutions for BTC, but that is not relevant to the core philosophy and investment thesis of Bitcoin. As the meme goes Bitcoin is a store of value, and Bitcoin's most important value proposition lies in its utility as verifiable digital asset with great security. Other digital assets and FinTech innovations are much more suited as alternatives to fiat.
In regards to Misconception 2: I think its a mistake to juxtapose Bitcoin with "the Metaverse" as these concepts have nothing to do with each other. The idea of Web 3.0 is based on the philosophy of Bitcoin, but "the metaverse" concept is related to XR technology, not Bitcoin. Bitcoin is revolutionary, since it was the first asset to provide digital scarcity, verifiability, and immutability in an online world where work and any kind of value really could be copied indefinitely if it was not for trusted intermediaries. Today, Bitcoin is the most secure blockchain network why it is valued much higher than other so-called cryptocurrencies.
This was quite excellent. Pretty much exactly my stance on the subject.
>Giving poor people a few bucks of returns is not worth giving rich people a huge windfall of unearned returns.
I might have added that such a subsidy on the rich's paper savings is also incredibly destructive as it displaces investment in value producing, job producing projects making the poor underemployed or unemployed while at the same time, trimming tax revenues and reducing government services.
Given the potential drop in production, even those receiving the subsidy might end up poorer, all their other assets, losing value. They'll be richer than those not getting the subsidy, but since it will be relative to a lower average, they might end up poorer in absolute terms.
The point is that a stable, insufficiently inflationary currency is not just a subsidy for cash hoarders, it is a subsidy for divestment in production, a subsidy for economic inactivity. It moves the world towards a scenario where everyone is hoarding tokens and no one wants to be the one financing production of something to buy with these tokens.
Noah, love your posts but I disagree with you on this one. Curious to get your rebuttal to these points:
Misconception 1: Cash is a form of long-term savings
I believe the truth is "unbacked fiat money" is not a form of long-term savings, or, said otherwise, is not a store-of-value. Consider the two forms of money most commonly used in modern history and the two we are most familiar with: fiat and gold. Gold, I would submit, has indeed acted as a form of long-term savings. Over time it has grown its value in fiat terms vs. every fiat currency in history, and has also grown its purchasing power due being able to purchase a relatively stable (total supply of gold grows about 2-3% annually over time) percentage of a growing economy.
Fiat currency debasement has created a warped reality where everyone needs to be an investor just to keep up. Not everyone is, or should be expected to be, an investor! Currency debasement has created the conditions for a racket where passive index managers can charge customers on one end (because they "have" to invest to keep up) and free load off of active investment managers on the other to provide a competitive product. The value proposition of passive investing is unbeatable and, left unabated in a status-quo fiat world, I believe will continue to grow as a percentage of total invested assets until price signals deteriorate so much that it disallows well-functioning capital markets.
There is no reason that sound money can't be a long-term store-of-value. If money has a fixed supply, it will be able to buy a constant slice of total economic output. The incentive to invest and seek higher returns will still exist, but the opportunity cost of investing will be raised so that capital is only allocated to ventures that are expected to grow more than the total economy. In today's world, that might increase the bar for investment from -2% (inflation target) to 2% (real economic growth) and result in a more optimal allocation of capital in the economy.
Misconception 2: Scarcity creates value
You argue that scarcity + utility creates value. But in the case of money, scarcity is precisely the thing that gives it utility. This is why gold is the only money that has lasted thousands of years while every single fiat currency has gone out of existence given enough time. Gold has been superior to all other forms of money because it is the most scarce asset that had been discovered or invented...until bitcoin.
There is no natural resource on Earth, including gold, that we have not been able to increase production of over time when incentives have dictated we do so. Not oil, not copper, not lithium, not silver, not gold. Human time and energy is the only, truly scarce resource. Gold has been used as money in part because it is the most difficult to increase production of and, thus, the most sound. That is, until bitcoin came along.
One thing I find helpful when pondering bitcoin is to consider: What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
“Volatility is inevitable along the path of monetization. A new money cannot go from zero to trillions without upward volatility by definition, and with upward volatility comes speculators, leverage, and periods of downward volatility. The first couple decades of monetization for the network as it undergoes open price discovery to reach the bulk of its total addressable market, should be different than the “steady state” of the network after it reaches the bulk of its total addressable market, assuming it is successful in doing so.”
Value of Bitcoin is not the disinflationary aspect, nor the foreknown rate of it, though those factors help.
It is the non-ownership of the issuance by elite or government entities.
Seignorage is not available in Bitcoin. No government can print it to run a massive military machine, nor can they control it via taxation and interest rates. You can hold it on your own computer and it cannot be confiscated if you have proper safety hygiene.
Re 1: Cash was not meant for long-term saving; it doesn't matter if it is inflationary
> Consider a world where cash goes up in value over time — where simply because
> you stuffed some money under a mattress, you can afford more and more
> of society’s production every year. This sounds like a pretty good deal,
> right? In fact, it is a good deal — too good, really.
> In this sort of deflationary world, you’re getting wealth for nothing —
> society is continually transferring you more and more of the fruits
> of its labors in exchange for you doing absolutely bupkis.
You imply as if it is wrong, even immoral, if you get more produced value for the same amount of money over time.
The way I see it this is normal, and we can see it best with computers and electronics - and it is caused by increased productivity.
When producing a computer now costs a fraction of what it cost 50 years ago then of course you can expect to get the more computers now for the same money unit.
This wouldn't be true for products whose production cost wouldn't change for whatever reasons.
Whether Bitcoin can and should be used as cash is a question for longer discussion, but its advantage is exactly in the fact that is protected from manipulation and money-printing by the state.
I don't see anything good about artificial inflation target of any value, I haven't read anything convincing about usefulness of inflation.
It benefits the debtors and state as the biggest one, and it is a form of immoral hidden taxation of all its subjects.
Re 2: Scarcity doesn't create value
True, but Bitcoin is not supposed to be valuable only because it is scarce.
Scarcity and usefulness create value - rising demand for something useful, but scarce, increases its value.
Anything can be a store of value - be it currency, gold or stone rings, and some of these things can be scarce as well.
But not as scarce as Bitcoin (there is final number of Bitcoins), and not as useful as Bitcoin - it is transportable and transferable, robust against central control, relatively anonymous.
For this reason, it could be expected its usage as storage of value will keep on growing, and with the demand growing its value and price should go up.
I think you are missing the point on BTC. For regular folks, their historical income have not kept up with goods inflation and asset inflation due to QE and $ printing. Also, they don’t have time and money to analyze and invest in long term investments like rich people. BTC is a rebel against existing establishment taking advantage of regular folks’ wealth. It is a belief system to preserve wealth for those who lost wealth due to corruption of Wall Street and corrupted government. If enough people believe in the system of BTC, it will succeed. If not, it will fail. Yes, it is very volatile but those who believe hold it for very long time and they have benefited until now.
Thought this was very good.
You’re wasting your time arguing with these dudes on twitter though. They think they’re making economic arguments but in fact they’re making religious ones. And you cannot hope to disabuse them, for you cometh not into the House of Coin a true believer.
Good post.
Given how easy it is to get interest on "cash" in money market funds which pay interest and are functionally equivalent in liquidity, I'd add that as an argument for traditional cash. And while I agree that cash/ T-bills are not a good long term investment, a certain amount of cash in a portfolio is valuable for optionality for investment opportunities that arise (in addition to cash that supports living expenses).
Noah, Love your writing. I learn a lot from reading your posts.
Your argument that "Scarcity creates value" is a myth isn't convincing for me. So writing this comment to get a bit more elaboration from you on that.
As a first order effect, you are right. Case in example -> Webpage is like digital real estate but since it's digital it doesn't need to be limited , ergo there can be infinite webpages that can be created by anyone .
But second order effect of that is it pushes scarcity to one layer above -> "Which web pages do I want to visit now" . Ergo answer is Search engines , of which there are limited and mostly dominated by google. So we just pushed Scarcity from Stuff (pages) to Attention (how to find them) .
Same happens with Social media feeds. Creating digital content is free. But it just pushes scarcity to the feeds (attention).
But we have seen in both above cases scarcity is where most value is captured. In fact it's where most value is captured if you make other parts of the value chain abundant.
Would like your thoughts on this.
Very clear and fair explanations. My understanding of Bitcoin is that its best use case is as “digital gold”, not really as digital currency. Do your critiques in the Misconception 1 section still apply to this argument?
I just want to know what will happen to my Bored Apes.
Interesting post just needed clarity on this point "Now there are a few exceptions to this general rule — things that people value because they’ve decided to use them as status symbols in a zero-sum status-signalling competition" What if people decide to value Bitcoin or some digital land, especially rich people and over time it becomes a desirable thing for others who follow after them, no matter the alternatives available in the market.
Great read as always.
In regards to Misconception 1: I think its a mistake to compare BTC with cash and most holders would agree. With a block size of 1 MB and a transaction limit of 7 tps, using BTC as fiat is not technically feasible nor desirable. After the whole block-size debate, the matter was settled, and only holders of BTC Cash or BTC SV still view Bitcoin as an alternative to cash - a vast minority. Sure, there are L2 solutions for BTC, but that is not relevant to the core philosophy and investment thesis of Bitcoin. As the meme goes Bitcoin is a store of value, and Bitcoin's most important value proposition lies in its utility as verifiable digital asset with great security. Other digital assets and FinTech innovations are much more suited as alternatives to fiat.
In regards to Misconception 2: I think its a mistake to juxtapose Bitcoin with "the Metaverse" as these concepts have nothing to do with each other. The idea of Web 3.0 is based on the philosophy of Bitcoin, but "the metaverse" concept is related to XR technology, not Bitcoin. Bitcoin is revolutionary, since it was the first asset to provide digital scarcity, verifiability, and immutability in an online world where work and any kind of value really could be copied indefinitely if it was not for trusted intermediaries. Today, Bitcoin is the most secure blockchain network why it is valued much higher than other so-called cryptocurrencies.
Cheers,
Tobias
This was quite excellent. Pretty much exactly my stance on the subject.
>Giving poor people a few bucks of returns is not worth giving rich people a huge windfall of unearned returns.
I might have added that such a subsidy on the rich's paper savings is also incredibly destructive as it displaces investment in value producing, job producing projects making the poor underemployed or unemployed while at the same time, trimming tax revenues and reducing government services.
Given the potential drop in production, even those receiving the subsidy might end up poorer, all their other assets, losing value. They'll be richer than those not getting the subsidy, but since it will be relative to a lower average, they might end up poorer in absolute terms.
The point is that a stable, insufficiently inflationary currency is not just a subsidy for cash hoarders, it is a subsidy for divestment in production, a subsidy for economic inactivity. It moves the world towards a scenario where everyone is hoarding tokens and no one wants to be the one financing production of something to buy with these tokens.
> First, some productive assets like houses
Very surprised to see that your example of a productive investment is a house.
Noah, love your posts but I disagree with you on this one. Curious to get your rebuttal to these points:
Misconception 1: Cash is a form of long-term savings
I believe the truth is "unbacked fiat money" is not a form of long-term savings, or, said otherwise, is not a store-of-value. Consider the two forms of money most commonly used in modern history and the two we are most familiar with: fiat and gold. Gold, I would submit, has indeed acted as a form of long-term savings. Over time it has grown its value in fiat terms vs. every fiat currency in history, and has also grown its purchasing power due being able to purchase a relatively stable (total supply of gold grows about 2-3% annually over time) percentage of a growing economy.
Fiat currency debasement has created a warped reality where everyone needs to be an investor just to keep up. Not everyone is, or should be expected to be, an investor! Currency debasement has created the conditions for a racket where passive index managers can charge customers on one end (because they "have" to invest to keep up) and free load off of active investment managers on the other to provide a competitive product. The value proposition of passive investing is unbeatable and, left unabated in a status-quo fiat world, I believe will continue to grow as a percentage of total invested assets until price signals deteriorate so much that it disallows well-functioning capital markets.
There is no reason that sound money can't be a long-term store-of-value. If money has a fixed supply, it will be able to buy a constant slice of total economic output. The incentive to invest and seek higher returns will still exist, but the opportunity cost of investing will be raised so that capital is only allocated to ventures that are expected to grow more than the total economy. In today's world, that might increase the bar for investment from -2% (inflation target) to 2% (real economic growth) and result in a more optimal allocation of capital in the economy.
Misconception 2: Scarcity creates value
You argue that scarcity + utility creates value. But in the case of money, scarcity is precisely the thing that gives it utility. This is why gold is the only money that has lasted thousands of years while every single fiat currency has gone out of existence given enough time. Gold has been superior to all other forms of money because it is the most scarce asset that had been discovered or invented...until bitcoin.
There is no natural resource on Earth, including gold, that we have not been able to increase production of over time when incentives have dictated we do so. Not oil, not copper, not lithium, not silver, not gold. Human time and energy is the only, truly scarce resource. Gold has been used as money in part because it is the most difficult to increase production of and, thus, the most sound. That is, until bitcoin came along.
One thing I find helpful when pondering bitcoin is to consider: What would it seem like if it seemed like a global, digital, sound, open, programmable money was monetizing from absolute zero?
It would probably seem like bitcoin seems today.
So much of modern crypto reminds me of ancient burned offering rituals. Maybe this is scratching at something deeply human and necessary.
As the plumage of a peacock proves its fitness,
The hashes prove the crypto brother.
Interesting arguments. I’m quoting a counter-argument from https://www.swanbitcoin.com/a-look-at-the-lightning-network/ :
“Volatility is inevitable along the path of monetization. A new money cannot go from zero to trillions without upward volatility by definition, and with upward volatility comes speculators, leverage, and periods of downward volatility. The first couple decades of monetization for the network as it undergoes open price discovery to reach the bulk of its total addressable market, should be different than the “steady state” of the network after it reaches the bulk of its total addressable market, assuming it is successful in doing so.”
Ironically, the history of De Beers illustrates how diamonds are a perfect example of Veblen goods that are artificially scarce : )
Bitcoin is NOT deflationary.
It is disinflationary. Very different.
Value of Bitcoin is not the disinflationary aspect, nor the foreknown rate of it, though those factors help.
It is the non-ownership of the issuance by elite or government entities.
Seignorage is not available in Bitcoin. No government can print it to run a massive military machine, nor can they control it via taxation and interest rates. You can hold it on your own computer and it cannot be confiscated if you have proper safety hygiene.
Those are the more critical values.
Re 1: Cash was not meant for long-term saving; it doesn't matter if it is inflationary
> Consider a world where cash goes up in value over time — where simply because
> you stuffed some money under a mattress, you can afford more and more
> of society’s production every year. This sounds like a pretty good deal,
> right? In fact, it is a good deal — too good, really.
> In this sort of deflationary world, you’re getting wealth for nothing —
> society is continually transferring you more and more of the fruits
> of its labors in exchange for you doing absolutely bupkis.
You imply as if it is wrong, even immoral, if you get more produced value for the same amount of money over time.
The way I see it this is normal, and we can see it best with computers and electronics - and it is caused by increased productivity.
When producing a computer now costs a fraction of what it cost 50 years ago then of course you can expect to get the more computers now for the same money unit.
This wouldn't be true for products whose production cost wouldn't change for whatever reasons.
Whether Bitcoin can and should be used as cash is a question for longer discussion, but its advantage is exactly in the fact that is protected from manipulation and money-printing by the state.
I don't see anything good about artificial inflation target of any value, I haven't read anything convincing about usefulness of inflation.
It benefits the debtors and state as the biggest one, and it is a form of immoral hidden taxation of all its subjects.
Re 2: Scarcity doesn't create value
True, but Bitcoin is not supposed to be valuable only because it is scarce.
Scarcity and usefulness create value - rising demand for something useful, but scarce, increases its value.
Anything can be a store of value - be it currency, gold or stone rings, and some of these things can be scarce as well.
But not as scarce as Bitcoin (there is final number of Bitcoins), and not as useful as Bitcoin - it is transportable and transferable, robust against central control, relatively anonymous.
For this reason, it could be expected its usage as storage of value will keep on growing, and with the demand growing its value and price should go up.
I think you are missing the point on BTC. For regular folks, their historical income have not kept up with goods inflation and asset inflation due to QE and $ printing. Also, they don’t have time and money to analyze and invest in long term investments like rich people. BTC is a rebel against existing establishment taking advantage of regular folks’ wealth. It is a belief system to preserve wealth for those who lost wealth due to corruption of Wall Street and corrupted government. If enough people believe in the system of BTC, it will succeed. If not, it will fail. Yes, it is very volatile but those who believe hold it for very long time and they have benefited until now.