Bitcoin is often promoted as the antidote to the madness of fiat
irredeemable currencies. It is also promoted as the replacement. Bitcoin is
promoted not only as money, but the future money, and our monetary future.
In fact, it is not.
Why not? To answer, let us start with a look at the incentives offered by
bitcoin. We saw a comment this week, which is apropos:
“Crypto is so exciting and stimulating that is actually very hard for me
to be interested in/do things unrelated to it lately.”
This sentiment is chilling. It illustrates another way that bitcoin
speculation is affecting the real world. Some people are actually producing
less. Speculators like him get free money (i.e. the accumulated savings of
others, provided as income). Why should they do mundane work for wages? The
net result is that someone at the margin will have to consume less.
We could dub this the “tragedy of the speculations.”
We don’t prefer to focus on the real or alleged intentions of bitcoin
creator Satoshi. We do not call this “unintended consequences” (though we
doubt that Satoshi could have foreseen this). Instead, we say that the
skyrocketing price creates a perverse incentive. A perverse
incentive causes a perverse outcome. If people produce less because
speculation is so much more fun (and rewarding), this is a perverse outcome.
A monetary system is supposed to enable greater productivity, not reduce
it. A stable interest rate—and hence asset prices—is the principle virtue of
a free market in money (i.e. the unadulterated gold standard).
Bitcoin’s unstable price makes it unusable as money. Merchants may seem to
accept bitcoin, but really they just want dollars. Such merchants use a
bitcoin exchange to facilitate transactions. The exchange calculates the
current amount of bitcoin to net out to the merchant’s dollar price (after
the exchange fee). No merchant can hold any significant amount of bitcoin for
the same reason no saver can hold his life savings in bitcoin (as opposed to
a HODLer holding his speculation).
Suppose a merchant has 10% net margins, after cost of goods sold plus
payroll and rent. That’s not bad, by the way, in this falling-interest rate
regime. Just look at the increase in breweries in Switzerland, despite the decline in
beer drinking. This is surely putting downward pressure on the profit
margins of every brewery.
Anyways, suppose a merchant has a 10% profit margin. He keeps a
significant amount of capital in bitcoin. In two days, he loses almost 20
percent as the price of bitcoin drops from $5,000 to nearly $4,000 between
Saturday 2 Sep and Monday. That could be enough to bankrupt his company.
Business requires predictability. Some things are not predictable such as
the weather (which is one reason why farmers use the futures market).
However, the value of money is nearly as important as the rule of law itself,
and the right of property. If the value of money is subject to big changes,
then the ability (and incentives) to invest for the long-term are undermined
or destroyed.
Bitcoin’s unstable price also means it cannot be used for borrowing. We
have said in past articles that bitcoin is unsuitable for business loans to productive businesses. Only a bitcoin miner
could borrow in bitcoin. A reader argued that there are indeed bitcoin
lending exchanges. We found one site, but it had a scant two open loan
requests—from bitcoin miners.
We came across bitcoin lending on another leading exchange, Bitconnect.
This exchange offers a way to do what it calls lending bitcoin. Question #8 in the FAQ reads: “After completion
of my lending contract, would I get back USD or BCC?” The answer is “You will
receive USD back into your lending wallet.” If you click to read more, there
is a page which reiterates the same answer. The first comment
and response are interesting (these do not seem to be official responses by
the company).
<John Currier> Why in the world would you pay back in USD?? I
invested $49 on day one. I bought one bit coin at $.98 each. Are you saying
that all I get back is the $.98 a coin in CASH??
<Wes Taylor> Lets say you invest $100 worth of bitconnect coin on
day 1. Let’s say at the time, 15 BCC equals $100 witch would mean each coin
would be valued at $6.66 each. At the end of the 299 lending term, you would
receive 100 USD in your lending wallet. If they gave you 15 coins back at the
end of your lending term and the price of each coin went from $6.66 a piece
to over $20 a piece you would be getting back $300 plus the interest that you
received throughout the 299 day Lending period. That would be unsustainable.
The reason why you receive USD is because it’s more stable than the BCC coin.
Imagine if you lent out $100,000 worth of BCC and then the coin went down
from let’s say $100 a coin to $20 a coin then you would be losing value.
Stability is the name of the game.
Mr. Taylor is (we assume) a proponent of bitcoin and a participant in
bitcoin lending. He does not seem to be trying to make the case that bitcoin
is unsuitable for lending. Yet he did just that.
Getting back to our starting point, above, we see speculation running
rampant, to the point where it offers an incentive to stop producing and
start partying. We see an unstable price, which mostly goes up in recent
months—but which is punctuated by violent drops too. We see it’s useless for
lending, except for a niche market to finance hardware purchases by miners.
And finally, we see bitcoin used as a mere conduit for dollar lending,
which raises a simple question. Why bother with bitcoin—why call this bitcoin
lending—if one is lending $100 worth of bitcoin and getting back
$101? That’s just a 1% dollar loan (likely minus some bitcoin exchange fees
and/or bid-ask spread).
Bitcoin could not work as money when it was $1. For the same reason,
bitcoin did not work as money when it hit $5,000. It will not work as money
if it hits $50,000 or if it drops back to $5 (or both).
The same applies to gold. Too often, the opponents of the gold standard
trot out the trusty old saw, “there’s not enough gold to have a gold standard
today” (presumably because they can’t really say gold caused the crisis of
2008).
And equally often, the defenders of gold take the bait. They say “it’s just
a matter of price—maybe we can’t have a gold standard at $1,300 an ounce, but
if we divide M1 money supply by the US government’s gold—$3.5 trillion
divided by 147.3 million ounces—we get $23,760 an ounce. So, this claim
amounts to asserting that at $23,760 an ounce, gold will circulate.
It won’t. It couldn’t.
Think about that scenario. The price of the dollar has already fallen from
a high over 7 grams of gold in 2001, to its present value just over 23
milligrams (prices should be measured in money, which is not the dollar but
gold, so we look at the dollar as falling rather than gold as rising). If
gold exchanges at $23,760 an ounce, that means the dollar will have fallen
much further, to 1.3 milligrams gold. What would make people want to pay out
their gold? Gold is hoarded today, and if anything, the falling dollar will
confirm why it was right to hoard gold.
A yield on gold, paid in gold is the key to circulation.
Interest makes it possible for one to save money without making a bet on the
rising price of said money. Holding money is not a way to get rich—as
measured in terms of some other unit of measure. One makes money by… making
money. If one has 100 ounces, one seeks to have 101oz.
The root of our monetary problem is not the Federal Reserve. It’s mental.
It is that people think of gold’s worth in dollar terms. They know the dollar
falls—they know that the Fed has a mandate to devalue it at 2 percent per
annum. Yet they think gold goes up—and look forward to it. We (not so
eagerly) await the heady headline “Nuclear War with North Korea Will Be Good
For Gold!”
Johann Wolfgang von Goethe predicted dollar slavery in 1809, “None are
more hopelessly enslaved than those who falsely believe they are free.”
The Fed has put us into a giant Skinner Box, and programmed us to seek
speculative gains. With three and a half decades of falling interest,
it has trained us to salivate like Pavlov’s Dogs at each rise in asset
prices.
If there were not a bitcoin or a dollar, enabling one to bet big for big
prizes—someone would invent one. After all, there’s a lot of money
to be made!
In this sense, we must conclude by noting that the gold standard will be
boring. People will simply get back to work, and money will be earning
interest financing this work.
There were big moves in the metals markets this week. The price of gold
was up an additional $21 and that of silver $0.30.
Will the dollar fall further? As always, we are interested in the
fundamentals of supply and demand as measured by the basis. But first, here
are the charts of the prices of gold and silver, and the gold-silver ratio.
Next, this is a graph of the gold price measured in silver, otherwise
known as the gold to silver ratio. The ratio was all but unchanged.
In this graph, we show both bid and offer prices for the gold-silver
ratio. If you were to sell gold on the bid and buy silver at the ask, that is
the lower bid price. Conversely, if you sold silver on the bid and bought
gold at the offer, that is the higher offer price.
For each metal, we will look at a graph of the basis and cobasis
overlaid with the price of the dollar in terms of the respective metal. It
will make it easier to provide brief commentary. The dollar will be
represented in green, the basis in blue and cobasis in red.
Here is the gold graph (Oct contract), this time showing intraday
resolution for the full week (here is the live gold basis chart).
This is the October contract, which is under selling pressure (pushing
down basis and up cobasis). However, there has been a significant drop in the
dollar (the mirror image of how most people think of it, a rising gold
price). Here is the continuous gold basis chart for comparison. There is not much change
in continuous cobasis, as price rises (and as you can see above, a rise in
October cobasis).
The cobasis of -0.5% for October or -1.3% for continuous is not exactly
screaming shortage. Yet the refusal of the cobasis to drop in the face of all
this gold buying is. It feels a bit like a stealth bear market in the dollar
(i.e. stealth bull market in gold).
Our calculated Monetary Metals gold fundamental price was up $22, to
$1,379.
Now let’s look at silver.
In silver, we see a rising basis and falling cobasis in the December
contract (and the continuous silver basis chart too).
Our calculated Monetary Metals silver fundamental price increased $0.25
to $17.89.
© 2017 Monetary Metals
