Bitcoin was once dismissed as a tulip bubble, but it’s becoming increasingly clear that – in an era of fiat money inflation – it is the best way back to sound money
The incoming Trump administration has announced its intention to back a “strategic Bitcoin reserve”. That catapults what was once a fantastical thought experiment, one to be stumbled upon in obscure online message boards, to a major issue in global geopolitics and the financial system.
Financial institutions and governments now must answer whether Bitcoin is part of a speculative bubble inflated by easy money or part of the answer to it. Allen has long believed the latter, has written and spoken widely on the topic, and has bet his career on contributing to its realisation at the margin. As a former software engineer and longstanding advocate of sound money, Steve recognises he was wrong about Bitcoin as a bubble when he discovered it early in its history. Steve now recognises Bitcoin is firmly emergent as a synthetic commodity money.
Some nation states are scrambling to avoid being front-run. Others have revealed they have been accumulating Bitcoin in stealth for years. It is a remarkable turn of events.
In the background to the media attention around the price, Bitcoin is creeping into a variety of industries based on its undeniably novel and superior technical properties as a potential money. Applications in capital markets follow from its programmability. For example, it is becoming an advantageous form of collateral and the best medium of settlement for a wide variety of financial contracts, regardless of their denomination. Applications in energy follow from the network functioning as the buyer of last resort for stranded or otherwise wasted power. Applications in fintech are so obvious as to lead us to predict that “Bitcoin” and “fintech” will become synonymous soon.
The bubble had grown
But we also believe still deeper is happening. In 2013, the then chief Economist of the Bank of England, Andy Haldane, famously said: “We’ve intentionally blown the biggest government bond bubble in history”. Few City AM readers will believe that bubble has deflated over the intervening decade. Quite the reverse: further rounds of QE on top of sustained low interest rates have seen the bubble grow.
It is easy to forget the present monetary orthodoxy is a consequence of the collapse of the Bretton Woods system in 1971, ending the final link to a commodity of limited supply and inaugurating an age of inflation categorically different to that which prevailed over the centuries before. That raises the prospect that something historic is in progress. We forget that gold’s role in the monetary system was taken for granted: now gold advocates are treated as cranks.
Paradigm shifts in monetary orthodoxy can and do happen. It may be that the post-Bretton Woods monetary orthodoxy is now ending under the pressures of unaffordable spending and vast debt. We think so and we believe that conclusion will be accelerated by President Trump.
Public debt has widely spiralled. One can reasonably expect – as the Bank for International Settlements indicated in 2010 – that to lead to attempts at rolling currency devaluations in the years ahead. That will further deepen and entrench major economic injustices which were easily foreseen by scholars like Keynes and Cantillon, as well as those more readily identified with the sound money argument. Unattainable house prices are one obvious example.
In The Economic Consequences of the Peace, Keynes set out that debauching the currency was “the best way to destroy the capitalist system”. He wrote that a public awareness of the consequent arbitrary rearrangement of riches “strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” He acknowledged the immense forces unleashed, scarcely observed and still less understood, when new money is injected into the economy. He knew it would make the process of wealth creation into “a gamble and lottery”. A familiar critique?
The authors of this piece are both free-market capitalists. But we recognise that free markets cannot function to maintain orderly relations between creditors and debtors, and with an evidently just distribution of wealth founded on honest social processes, if somewhere someone is gaining early and unjust advantage through the injection of vast new sums of money. It is no wonder that the poorest are most disenfranchised and that political radicalism everywhere is on the rise: this too is and was foreseen in relevant literature.
As market liberals, we have become convinced that the private sector is now the only realistic route to good quality, honest money. And as Hayek famously wished, “all we can do is by some sly, roundabout introduce something they can’t stop.” Bitcoin is such a sly, roundabout way of returning to sound money.
Bitcoin is such a sly, roundabout way of returning to sound money
As free- and open-source software, the users of which are incentivised to run it locally, Bitcoin the protocol is as interesting as Bitcoin the asset, if not more so. It has blossomed into a robust, decentralised network that no state seems able to entirely shut down, as Hayek sought. If it is imaginable and physically possible that it could be stopped, Bitcoin presents compelling incentives to state actors to embrace it instead. Bitcoin is today a most peaceful revolution, one actively in progress. Not a sword for Theseus to fight the Minotaur, but a thread to follow to exit the labyrinth.
Bitcoin adoption is not certain but Steve thought it would end years ago. In its favour, there are auditable software, rational incentives and game theory. There will always be political, technical and financial risks but there is also opportunity. Unlike the incumbent fiat money it challenges, Bitcoin is transparent. Nobody need trust it.
This is exactly what excites us. The long-term, soaring price of Bitcoin is not only a consequence of fiat money inflation. It is a sign that the paradigm is shifting as these features are steadily more widely appreciated.
We are not telling the reader to buy Bitcoin. We do not seek to give financial advice of any kind. But we will be working together to ensure the infrastructure of a better monetary system is built, used and consequently cannot practically be turned off.
We both know the criticisms of Bitcoin. Steve continues with doubts. But we are united in observing monetary and fiscal history: it was once cool and learned to dismiss Bitcoin as a “Tulip Bubble”. We believe it will not be for much longer. No one will be able to say we did not try to tell you.
Allen Farrington is cofounder and general partner at Axiom, a venture capital firm focusing on the Bitcoin ecosystem
Steve Baker is chief provocation officer at The Provocation People, an advisor to Axiom, and a former MP and minister