The Money That Wasn’t Money — Is Bitcoin A New Form of Money?
No one really understands Bitcoin [BTC]. I don’t own it and don’t plan to. On the other hand, it is an excellent gamble for the time being. Up is up. As long as one is confident in an ability to get out in time, it’s like free money. I prefer roulette because you can enjoy a drink while you’re playing, but bitcoin works fine.
One test of whether bitcoin really is a new form of money is to assume the answer is yes and think through the implications of that answer. If bitcoin is money, then a comparison of the exchange rate between bitcoin and US dollars (BTC/USD) is reasonable.
With bitcoin at US$8,855 per coin (the price on 1 May 2020), the BTC/USD cross-rate is US$8,855 to 1. Bitcoin was US$52,000 per coin on 22 April 2021. That produces a cross-rate of US$52,000 to 1. If bitcoin is taken as a unit of account and store of value (two parts of the basic definition of money), this means that the dollar has been devalued by 83% in less than one year on a bitcoin standard.
A measure of speculation, mania, greed — or all three
Is there any evidence that the dollar has lost 83% of its purchasing power? If it had, gasoline would be US$18 per gallon, milk would be US$22 per gallon, and gold would be US$12,000 per ounce. None of those prices are true. In fact, there is almost no evidence of material inflation in the US economy.
In the absence of validation of dollar devaluation, the dollar price gain in bitcoin is not a measure of moneyness; it’s more a measure of speculation, mania, greed — or all three. That mania may continue, and the price of bitcoin may go higher. Still, the price gain is not a precursor to monetary status.
Despite the extensive critique of bitcoin, I was not satisfied with my own analysis until recently. Bitcoin boosters such as Ray Dalio, Paul Jones, Elon Musk, and others are not dumb. They see the bubble dynamics. What else do they see, if anything?
The McLuhan thesis
To advance my understanding, I had recourse to the greatest philosophical genius Canada has produced: Marshall McLuhan. He’s most famous for his saying: ‘The medium is the message.’ Few know what he meant by that. In the 1950s and 1960s, when the TV audience was growing quickly, critics pointed out that TV content was violent, juvenile, simplistic, and they decried the negative cultural influence. McLuhan said that debates over the content of TV were irrelevant. What mattered was the medium itself, not the content.
In McLuhan’s view, TV was a cool medium (meaning the viewer sees a mosaic that requires extensive viewer involvement to complete the picture), rather than a hot medium (where the medium targets one sense and is so overpowering that the participant does not have to do anything except read or listen).
TV was cool while radio was hot because it engaged the single sense of hearing and got inside the listener’s head with no effort by the listener. McLuhan was clear that the hot/cold distinction and the elevation of medium over content could be applied to any medium.
McLuhan on bitcoin
To break my intellectual and analytic dead end on bitcoin, I applied McLuhan to the new money medium. The content part was easy — higher prices, regulation, exchanges, mining, and Tether. What was the medium? And what is the message of bitcoin?
McLuhan’s method was to see all technological change as an extension of the human body. The wheel is an extension of the foot, the light bulb is an extension of the eye, and so on. He also observed that all new mediums contained old mediums. For example, the automobile was a new medium (replacing the horse) that included an old medium (the wheel and fire).
Thinking of bitcoin as a medium quickly reveals that it is an extension of people’s desire for food and nourishment along with prestige, shelter (another old medium), and things that money can buy. Bitcoin is a new medium that includes an old medium (dollars). Bitcoin becomes an invisible environment that wraps around us and is not easily seen or felt.
While everyone is focused on content (the price), they are ignoring the electronic media environment, a kind of security blanket that quickly morphs into a belief system.
Bitcoin isn’t money — it’s an identity
Bitcoin’s invisible environment has huge implications. It means that bitcoin will not easily fade away like Lehman Brothers or the Soviet Union. There is no way that bitcoin will replace the dollar as a major reserve currency, but it could displace the dollar (and all major reserve currencies) and cause command currencies to become obsolete.
The medium is the message. Bitcoin is a medium and the message is an idea. What is focused on — price, use case, liquidity — is mere content and mostly irrelevant. The message is an extension of human reach and scale. Bitcoin is a cool medium that requires extensive involvement of the observer or user to interpret a mosaic of information. This will be highly disruptive to existing forms of money.
It could be a unifying factor, but it could also lead to greed, obsession, dysfunction, and social unrest. Bitcoin can be deflationary when transactions are denominated in bitcoin and highly inflationary when the same transactions are translated into dollars if interoperability grows. Bitcoin could destroy confidence in existing command currency systems without actually displacing them. It is hallucinogenic in that sense. Every user sees something different.
Bitcoin could be the cause of social disorder and a contributor to the decline of linear, rational civilisation. My solution to this conundrum is to hold some physical gold, which will be more robust to shocks than command currencies. For the bitcoin believers, the solution is…more bitcoin.
All the best,
Strategist, The Daily Reckoning Australia
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