Economics of Bitcoin

If price volatility isn’t necessarily a reason to switch to a different source of liquidity, is there something that a Bitcoin Maximalist can do to deal with price uncertainty? To me, when I was studying Bitcoin and still now, the argument that people choose money based on price stability sounds like something that was made up after Bitcoin appeared, because it didn’t fit well into pre-existing frameworks. In “The Case for a Genuine Gold Dollar”, Rothbard criticised Hayek, I’m paraphrasing here, that people choose money based on liquidity, not price stability. I dabbled in some other areas, and my university degree is in Business Administration, however I still mainly write and review code and build computer infrastructure (or manage people who do). The overarching principle of my reaction is that people writing about Bitcoin bring in their own expertise into the writing. I wouldn’t call it a review, it’s more of an extended reaction. I’m even starting to think that this is less of an economic issue, and more of a cultural issue, or, at the risk of sounding rude, a “boomer” argument. The users of any money have good reasons to avoid it: it both dilutes their wealth as well as increases the risk of losing control over them.

If Mises was still alive, he may just as well have said “not your keys, not your coins” and “don’t trust, verify”. However, it still doesn’t explain why a person would want to prefer to hold money that redistributes their wealth away from themselves. It would either be a person who can build, or a person who deals with trust or application of violence. If it was true, then, as I explained in “The Origin, Classification and Utility of Bitcoin”, once money (a generally accepted medium of exchange) appears, there can never be another medium of exchange. So, depending on what exactly you are analysing, it may or may not be relevant, but you need to use a different terminology, not “medium of exchange”. With Bitcoin, the transaction costs of using the base money is low, and even lower if transactions are conducted on additional layers on top of Bitcoin. The point is, the transfer can happen publicly, but the issuer won’t be able to identify the transferer based on the observed transaction data. Transfers of “Chaumian banknotes” were “blinded” from the issuer. These are mainly technical in nature and not of primary import for the readers of the book.

Blinding is a technical name for one of the steps during issuance. So what are my responses to the critiques above? This is why Bitcoin Maximalists promote operating your own bitcoin nodes (“don’t trust, verify”), why it’s desirable to keep the cost of operating such a node low, and why hard forks (backwards incompatible changes) in Bitcoin are shunned. All nodes validate the consensus, not merely the mining nodes. It will fail again, like gold did. I think like an engineer. I think that while it can’t be decisively concluded, we see the second aspect in the publications of Bitcoin Maximalists. Merely because they expect Bitcoin to appreciate against fiat isn’t an adequate criterion, because they may also simultaneously expect hyperbitcoinisation (meaning the disappearance of fiat). If Bitcoin had a US-dollar denominated revenue stream or was providing some traditional service, it would be diluted and censored and replaced by fiat. It would cause Bitcoin to be diluted and censored and ultimately replaced by fiat.

If Bitcoin had a more elastic supply, it would be diluted and censored and replaced by fiat. If Bitcoin was less suitable for gambling, it would be diluted and censored and replaced by fiat. My response: run a Bitcoin node. For Bitcoin Maximalists, avoiding using Bitcoin-substitutes is an important principle to follow. Taleb’s expertise is useless for Bitcoin. To be fair, White recognises this (unfortunately I don’t have the quote in my notes), and doesn’t seem to draw any conclusions regarding Bitcoin FRB, which I applaud. Often, they do not even enhance our understanding of the world, or contain actionable information (White however does present some other interesting information). And, merely based on observing their behaviour, we don’t have sufficient information to conclude whether either have a speculative or transactional demand for Bitcoin. However, it brings up another issue with the analysis of demand for Bitcoin. However, we already have technology to solve this problem. In order to understand the problem of dilution, it is critical to understand the Cantillon effect. It doesn’t necessarily mean that everyone will always choose an option to remain liquid / increase liquidity.

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