As familiar frailties of fragile fiat money gut the economy yet again, why hasn't Bitcoin been able to rise to the challenge and distinguish itself?
The word crisis in Chinese is written using two ideographs – one represents danger and the other represents opportunity. However desperate the circumstances, there's always opportunity to be seized in every crisis. If nothing else, an opportunity to learn and evolve.
In a time when rancour and indignation laden with racial overtones are being unapologetically propagated in some quarters, it does seem like an opportune time to remind that we still have reason to draw inspiration from the Chinese language.
A few short weeks ago, the novel coronavirus was a Chinese epidemic, a foreign crisis. Earlier this week, the World Health Organization (WHO) declared it a pandemic, which sent stock markets promptly zorbing down a metaphorical hill as precipitous as China’s Mount Hua.
To further compound the crisis, Russia, recognizing an opportunity to corner the oil market, refused to comply with the OPEC’s request to cut down on its production of crude oil to stabilize oil prices. The cascade of calamitous triggers in quick succession proved too much to withstand for all global markets without exception, including gold and Bitcoin, which had both hitherto manifested a relative measure of resistance.
Lunatic running the asylum
Last Monday, WHO Director General Tedros Adhanom delivered a stirring rallying call to governments, “We are not at the mercy of this virus. The great advantage we have is that the decisions we all make – as governments, businesses, communities, families and individuals – can influence the trajectory of this epidemic.”
Failing to read the solemn tenor of the message, desperate to salvage a stock market in free fall, Donald Trump, flippantly maintained that this virus was less of a threat than seasonal flu. It was a blatant demonstration of crony capitalism, revealing Trump’s predominant allegiance to his corporate backers at the cynical cost of public health.
It wasn't until Friday that Trump finally conceded that this was an exigent health crisis of far-reaching consequences. His journey through the five stages of grief unfolded right in front of us – Trump first denied it, calling it a hoax, then angrily lashed out at epidemiologists who advised social distancing, bargained that it would go away once the weather got warmer, reached out to the nation in a depressing address, before finally accepting that it was a national emergency.
Across the pond, Trump’s mini-me counterpart, Boris Johnson still hasn't cottoned on to the gravity of the circumstances. Imagine being slower on the uptake than Donald Trump.
How will governments fund stimulus packages?
Predictably, governments are scurrying to prop up the economy by trying to artificially stimulate economic activity. Various central banks, including the Federal Reserve and Bank of England, have announced emergency cuts in interest rates, with the former lowering rates to zero for the first time since the 2008 financial crisis. Further cuts, even negative interest rates, very likely could be in the offing.
Trump has been lobbying Congress to approve a payroll tax cut for the rest of the year. This would entail a $1.23 trillion shortfall in revenue used to fund benefits such as social security, employment insurance, and medicare. Ironically, Trump has also been pressuring the Federal Reserve for more easing, which would nullify any benefits from a tax cut. Cognitively dissonant or economically ignorant? Perhaps both.
Governments around the world have announced “stimulus packages” in a desperate bid to avert a crippling global recession which already seemed imminent before the virus pandemic and Russian oil crisis precipitated it. But where’s all this money coming from? Seigniorage.
Seigniorage is revenue generated by government through printing new money. It's the difference between the face value of money created and the relatively trivial cost of creating money. Seigniorage is taxation disguised as economic stimulus, since the burden of inflation caused by an increase in money supply is passed on to the taxpayer.
This approach to fiscal policy is fundamentally flawed and anti-democratic, as described by the Austrian theory known as Cantillon effect, which explains how those “close to the money”, which would be banks and their corporate clients, reap the benefits of newly created money before the money is available to the rest of the population, who always bear the cost of higher prices from the inflation even though they do not ever actually profit from an increase in the supply of money at all. This effectively results in a regressive tax, perpetually redistributing wealth from the poor to the rich.
Tax cuts at this time will have no net benefit at all for the taxpayer when the central bank is also simultaneously printing money out of thin air, thereby imposing an alternate tax in the form of inflation.
Combined with the fundamentally self-serving cycle of fractional reserve banking, it’s not hard to fathom why even developed economies collapse at the first sign of a recession. The cycle relies on endless credit. We’re constantly spending money from tomorrow to fuel the economy.
What's worse? When the economy does inevitably collapse, it’s not the banks or their corporate clients who bear the brunt. The central bank is always on hand to nurse their self-inflicted wounds and bail them out with the taxpayers’ money in the name of deposit insurance.
The deleterious moral hazards that inhere within the banking system constitute the essence of Bitcoin's existence.
Ideal opportunity for Bitcoin to shine
Bitcoin's ascendency to prominence as the de facto currency of the Internet is nothing short of a miracle. Bitcoin is a black swan event if ever there was one.
Anybody that tells you Bitcoin was always destined to be what it is today could not have heard about Bitcoin until a few years ago. Early Bitcoiners never expected the cryptocurrency to have any value. It was a cypherpunk's unassuming curio, a glorified collectible for geeks which caught fire because the purity of the concept resonated irrepressibly with those who had grown weary of a ruinous, undemocratic and hierarchical monetary system.
In recent years, some pro-Bitcoin economists have theorized that a global economic crisis would accelerate broader adoption of Bitcoin as a mainstream currency. Now the novel coronavirus outbreak, increasingly appearing to be another black swan event, has eviscerated the economy in one fell swoop, precipitating in the process ideal circumstances to test that theory.
After the SARS outbreak in 2003, the governments of Singapore and South Korea implemented necessary measures to ensure readiness for future epidemics. Despite their relative proximity to China, they've been evidently more capable of coping with the virus than Europe and North America.
Bitcoin, born from an economic crisis as an antidote for the fiat virus, has been similarly preparing to usurp fiat economy for a decade. So why is Bitcoin now failing to separate itself from the pack and capitalize on this ideal opportunity? What’s holding Bitcoin back?
An inopportune identity crisis
A software, a decentralized network, an independent monetary system… It's hard to define Bitcoin as one specific thing because it is at once so many things. But Bitcoin's purpose is easy to define.
Bitcoin’s purpose, at least its founding purpose, was to democratize the creation and distribution of wealth by separating money from the state and restoring the power of issuing money to the people. This is not a radical idea but only recently became viable, thanks to the Internet.
“The issuing power of money should be taken from the banks and restored to the people, to whom it properly belongs” – Thomas Jefferson, Founding Father of the United States
As a timeless notation indicating this intent behind what he had just created, Satoshi embedded into the genesis block the text, “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
In the last couple of years, with the rise of rampant, unbridled tokenization devoid of utility – that would be all the copycat shitcoins, we've lost sight of the purpose and we’ve resorted to trading tulip bulbs.
Until we ran into a scaling snag, Bitcoin was a currency. Now everyone's on the store of value bandwagon and cryptocurrencies are said to be a new class of asset denominated in fiat, barely distinguishable from other assets. But how does any asset become a store of value without utility, simply by dint of being traded against an assortment of made-up tokens?
We see centralized Bitcoin services like Coinbase and Binance, who effectively operate like banks, parroting the need for Bitcoin to comply with legacy financial regulations. Centralized services built around Bitcoin have no option but to comply with legacy systems or they risk being shut down. Bitcoin, however, does not need to comply.
Watering down Bitcoin to work within the irreparably broken banking system would not represent adoption, but a terribly abortive adaptation. There is no way we can make Bitcoin work by kowtowing to governments and central banks.
This week’s alarming slide also illustrated the perils of courting “institutional investors”, who are not here for the revolution, but to speculate, profit and perpetuate the fiat establishment of which they're an integral part.
Bitcoin's fundamentals have not changed and they never will. Bitcoin is the most distinguished representation of money today. It is borderless, democratic, uncorrelated and antifragile by design. For the markets to reflect this, Bitcoin needs to refocus on its founding purpose.
This can only be achieved through unqualified decentralization, by getting rid of middlemen services, and widespread merchant integration of second-layer payment protocols. If people don't accept Bitcoin as money for goods and services, there's no utility. In times of crisis, nobody is going to hold on to an inutile speculative asset.
If Bitcoin, as a financial system beyond the blockchain network, were truly decentralized, uncorrelated as a consequence of that and boasted the utility of being readily spendable, Bitcoin would have been perfectly poised to take advantage of the present crisis. But a deviation of purpose has meant that the cryptocurrency is not quite ready to seize this opportunity.
We may or may not soon stumble upon a vaccine for the coronavirus, but a vaccine for the fiat virus is already at hand and only we are to blame that, at this time, it’s not as effective as it could be. This crisis, for Bitcoin, is an opportunity to learn and evolve.
The word crisis in […]