Five hundred years ago, the most sophisticated society in South America, the Inca Empire, was moneyless. The Incas appreciated the aesthetic qualities of rare metals. Gold was the 'sweat of the sun', silver the 'tears of the moon'. Labour was the unit of value in the Inca Empire, just as it was later supposed to be in a Communist society.
The Incas could not understand the insatiable lust for gold and silver that seemed to grip Europeans. 'Even if all the snow in the Andes turned to gold, still they would not be satisfied', complained Manco Capac.
The Incas could not appreciate that, for Pizarro and his men, silver was more than shiny, decorative metal. It could be made into money:
a unit of account, a store of value - portable power.
This part 2 of a series of articles about the current state of crypto. For the introduction, please start with What is the point of crypto?
To write about Bitcoin in sober, objective terms, and have anything of value to say, is always a daunting task, one does never feel quite adequate.
I started this substack mostly as a way to organize my own thoughts, and to be able to revisit them at a later time as events unfold and knowledge changes, with no pretense or delusion of having The Truth in the palm of my hands, so anything written here can be potentially retarded and flat out wrong, and in no way should serve as financial advice or guide your investment thesis in any direction. Also, I will make some statement which can be pretty obvious, banal and trite for players long in this game, but I wish to reiterate on them because some readers will be new to these concepts and are just approaching this substack from a background of pure up-only shitcoin apeing and are now lost and confused.
With this premise made, let’s talk about Bitcoin.
Satoshi Nakamoto created Bitcoin in 2008, in reaction to the biggest economic crisis since the 2000 dot com one, and which turned out to be more severe.
Actually, it is better to say in reaction to the response to that crisis.
Bailing out by printing billions of dollars the very Banks and Insurances who gambled overleveraged trading toxic products conveniently rated AAA (all that subprime stuff, bla bla bla watch The Big Short if you’re too brainlet to google and read) and then got fucked by CDS.
Embedded in the Genesis block of Bitcoin is the following newspaper headline:
The Times 03/Jan/2009 Chancellor on brink of second bailout for banks
What did Satoshi wanted Bitcoin to be:
a peer to peer electronic cash
censorship resistant
transparent, distributed and uneditable ledger
This is an simplified summary of it, but good enough for our scope.
Today, due to the explosive growth and volatility of Bitcoin price over the last (crypto) cycles, what Bitcoin set out originally to do is always in the background, or just waved around like a rag on a stick when we want some news to be seen as “bullish catalysts”, that is we still care only if and how it will affect price. There is no hypocrisy in not caring about how much Salvadoreños can save with BTC in remittance fees, and caring only about if this will pump BTC, but today let’s calmly examine what BTC set out to solve, and how it’s doing today.
Let’s take the most egregious recent event that gave crypto and Bitcoin a spotlight: The war in Ukraine. Ukraine organized a donation campaign and millions of dollars were quickly raised, both in BTC and on the Ethereum chain (in eth ans stables).
Sounds like point 1 and 2 were covered well, people could donate crypto to a foreign power, in a matter of minutes/hours, without their government being able to stop them, and ideally without any financial intermediary. The reality of it is a little more complex, as all the BTC, ETH and stables donated were actually purchased by onramping FIAT money through an authorized channel (exchanges, etc), but let’s say it’s good enough for us for now.
There’s another side to this coin (lol) that has been underlooked: the West sanctions blocking access to SWIFT to some Russian banks, and most notably Mastercard and Visa blocking russian credit and debit card access to the international circuit of payments, left many russians unable to use their cards outside of Russia. Note that some russian expats may be on western soil after leaving their country, and may have been in opposition to its policy and government, but found themselves in foreign territory with their card blocked all the same. Crypto provided an outlet to this, by allowing them to onboard rubles on exchanges like Binance, sending them to unhosted wallets or other exchanges, and withdrawing EUR/Dollars from other fiat offramp channels.
Now, crypto helping both Ukraine and Russia to facilitate payments, is indeed a triumph of “censorship resistance”, no matter where you think the blame in this war is.
Well done, Bitcoin.
Satoshi wrote about a “a peer to peer electronic cash", the bold for cash is mine.
Is Bitcoin “cash”? Let’s ask ourselves what is money.
Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account, which facilitates valuation and calculation; and a store of value, which allows economic transactions to be conducted over long periods as well as geographical distances. To perform all these functions optimally, money has to be available, affordable, durable, fungible, portable and reliable. Because they fulfil most of these criteria, metals such as gold, silver and bronze were for millennia regarded as the ideal monetary raw material.
I would add that a currency should be able to track a weighted basket of goods and services with minimum error, in the short to medium term. That is, volatility in the short to medium term is not desirable for a currency that should serve as “money”. Ask Argentina.
Sure, the dollar lost a metric ton of purchasing power since the 70s, but it is not felt day by day (except recently, with inflation in the double digits) to be appreciated. You don’t need to check the SPX chart in the morning to figure out how much you will need to buy a gallon of milk.
Did Satoshi envision BTC trading at $70k (and people are already calling $200k for next cycle)? There are some forum posts in which such future is kind of considered, and the logical conclusion was that by that point BTC would be used mainly to settle big movements (for example between big international institutions) while normal people would use a more down to earth currency.
As it is right now, Bitcoin is not fit to be cash. We will not touch stablecoins in this post.
One of the few experiment of BTC being used as cash is El Salvador, and the results are not so encouraging:
Dagart Allison, who told Rest of World he is a property manager from Los Angeles who dabbles in cryptocurrency as a hobby, had been at Bukele’s initial announcement at the Miami Bitcoin conference. He was so enthusiastic about the Bitcoin Law that he knew he had to visit El Salvador, but he was concerned about safety issues in the country. Bitcoin Week was the perfect excuse to come, knowing that he would be surrounded by a wave of like-minded people.
But the Bitcoin mecca didn’t quite live up to his expectations. He had tried to rent a surfboard from a stand in El Tunco with Bitcoin, and they told him they didn’t accept it.
He asked if they had Chivo. They said yes, but they didn’t know how to use it with other wallets — the functionality was hidden behind a confusing array of buttons.
“From a Bitcoin perspective, it’s amazing — it’s so groundbreaking and beautiful and, in my mind, looks like perfection,” he said about El Salvador. “And then you come here, and you realize that on the ground, it’s a different ordeal. It’s a struggle.”
Let’s look at the two main core tenets of Bitcoin today, 8 years after Satoshi disappeared:
Bitcoin is a store of value
Bitcoin is the future of digital money
How is it faring against these?As this tweet by Adam summarized, maybe not so great":
We already talked about El Salvador, but to insist on the concept, through the words of Taleb:
Furthermore, if a vendor prices goods in bitcoin, and the value fluctuates from the initial fixing, the price will be directly or indirectly arbitraged: when the conversion rate to fiat is favorable, customers will buy from the bitcoiner; when it is unfavorable they will either buy elsewhere (indirect arbitrage), or if possible, return previously purchased goods (direct arbitrage). For the price to not be arbitrageable requires the good to be unique and unavailable elsewhere at a price fixed in another currency –in this case it becomes, simply, a proxy for bitcoin. The only items that currently appear to be somewhat priced in bitcoin are other cryptocurrencies, even then not always.
You may have a bias against Taleb, but it is undeniable that as of today no material goods are effectively priced in Bitcoin and floating in usd.
What about the “store of value” argument?
There is a long standing narrative around Bitcoin saying that it will perform as an inflation hedge, bear market hedge, or store of value akin to gold.
It’s not playing out that way for now.
As S&P500 and Nasdaq are heading into a bear market, BTC has an impressive 0.91 correlation to those indexes. This is not a store of value. If anything, it is basically a beta of them. No good as bear market hedge. Can this be broken? Will the famous “decoupling” finally be upon us? If anything, the decoupling might happen on the downside for the near future.
Now, many readers may be interested in just price action. Red button or green button, Heart? I hear some asking. I am not a good trader, but I would like to perform a little thought experiment to remove bias and approach things with an open mind.
I tweeted this yesterday:
For those not familiar with the chart, the blue line is around 20k. I personally believe we will go even lower, while also being of the opinion that after tardi markets will be absolutely crushed, and FED finally pivots dovish and starts easing again, BTC will trade well into the 6 digits. Somewhere between 2023 and 2024 is Heart estimate for the time being.
There’s still people in complete denial when prices below 20k are mentioned for BTC, and I guess in part it is emotional bias, in part is that growing up in consumerist societies, people grow up with a strong mental association between value and price.
But price is not value per se, price is price.
What does the market try to do? To try and explain it with James Dalton:
Markets are constantly moving from low to high and high to low. This two-way auction process enables all market participants to express their opinions — no matter how those opinions were obtained—with real money; the auctions effectively establish a fair price where business can be conducted at any given time. This expression of the market’s colective will results in a constant flow of objective market-generated information.
There’s a concept that for many new (or naive) players sometimes is counter-intuitive, that is they see the market as reacting to information, and don’t see that the market is generating information. In fact, we could say that the going up and down is a constant quest for information (where are the sellers? where are the buyers? What’s a fair price for this?).
Can Bitcoin price go below 20k in its quest for information? Absolutely. Does this mean that Bitcoin would “die” or never recover from say a dip to 6k? It would be a failed experiment? Not necessarily. Uniswap and Chainlink are now cornerstones of Defi (Defi will be in a separate article) and yet their price is only down (against ETH) for the last 2 years or so. But they’re not going away for now. Price is not value.
There’s an argument about the electricity costs required to mine Bitcoin being some kind of untouchable mathematical bottom and the closest thing to a “fair value” for Bitcoin. I think that’s bullshit.
Right now the cost is around $5,000 I believe, more or less - I don’t care to google it.
If price will go below the mining cost, miners can have two choices:
keep mining with the conviction that price will recover or at least mean revert
shut down their operation, and relinquish hashpower to those that believe in 1.
Depending on the macro context, and geopolitical situation (costs of energy due to warfare or supply chains), this transitory can easily last months, and Bitcoin could trade below mining cost during that period.
I firmly believe the fair value of Bitcoin to be exactly zero. I am also long term bullish on crypto, and about Bitcoin itself I can envision it trading at 6 figures price. These thoughts are not contradictory, you just need to keep an open mind and know what you are trading, or accumulating, with no delusions or magical/religious cultist approach to it.
This series of articles will touch ETH, Defi and NFTs separately next. Stay tuned.
Absolutely agree and time has proven you right on that sub-20k prediction. BTC maxis today feel like goldbugs of old, boomers attached to an old paradigm. They can not envision that evolution of money / crypto will render their favourite asset deprecated. Essentially, they married their bags and are in denial. I do expect BTC to go to 6 figures in the medium-distant future should macro-economic conditions enable it. But without any validated value proposition other than being the first crypto, it lacks longevity. The first big nail in the coffin will come when ETH flips it in mcap. It will only get worse from there.