Why I am Against Owning Bitcoin?

I’ve been reading a book called The Bitcoin Standard by Saifedean Ammous.  I consistently debate with myself whether learning about cryptocurrencies is useful or a complete waste of time.  But I like to keep an open mind… so here we are.  I find myself interested in the optimism around cryptocurrencies but at the same time extremely frustrated with it as well. Here’s why.

Bitcoin is Uninvestable

To start with, Bitcoin is completely uninvestable for me.  It is a non-productive asset just like gold or art. This doesn’t mean its uninvestable for everyone, but I choose to stick to the areas of investing where I know what I’m doing, and non-productive assets isn’t that.  I’ve written a couple of articles in the past about why not so feel free to go back and read them here and here.    

This article isn’t really about why I don’t own Bitcoin though. Its more about why I don’t think anyone should own it.

Types of Investors Who Have Bought in Cryptos and Bitcoin

If I look at the types of investors who have bought in cryptos and into Bitcoin specifically, I think they can be broken down into 3 categories. The three categories are:

1. Evangelists – Evangelists are people who believe      in the mission of Bitcoin to replace fiat currencies. They could      potentially be driven by a distaste for central banks and government regulation.      There are virtually few, if any, arguments one could make that would      convince these individuals to forgo the opportunity to buy and hold      bitcoin.
2. Transplanted Gold Bugs – These are investors who      are critical of central banking policies and the devaluation of fiat      currencies through inflation.      Previously they would have invested in precious metals like gold      and silver (hence the term gold bugs).      Now they are branching out into cryptocurrencies as a natural   extension.  They are usually less enamoured with the technical aspects of Bitcoin or the possibility of      transacting with it in every day life.      They simply see it as a store of value.
3. Speculators – This group of people covers a wide      range of people.  It includes casual      investors, momentum traders, technical traders, macroeconomic traders, and      other “gamblers”.  These people might      care less about the concept of Bitcoin and more about the potential profit      they could make by trading Bitcoin.      

Speculators

Ironically I think that of the three groups, the speculators might be the least worrisome to me!  Speculators are always going to be present in markets and that’s just something investors have to learn to live with.  Gold Bugs too are probably not doing any serious damage to the economy as their Bitcoin positions are likely just replacing their gold positions. I actually see the merit in this argument and don’t really have an issue with people doing this, though I wouldn’t invest this way myself.

The group that I see as really problematic is the first group, who can be fanatical and because of this fanaticism, they can be hard to reason with.

Evangelists

In order to truly understand Bitcoin Evangelists, we need to understand a little bit about economics and about economic history.  In the past 150 years there have really been three main schools of economic thinking.  I’m going to try and describe them in the most non-boring way possible, but at the same time, I apologize to any economics professors out there as I will probably not do a good job of describing them fully.

The Three Schools of Thought:

1. Keynesians – Named after the famous John Maynard      Keynes who worked in Great Britain’s treasury department during World War      I and went on to write the General Theory of Employment, Interest &      Money.  Keynes developed his      theories during the depression and the main idea behind his work was that      during periods of economic depression, where demand from the private      sector was insufficient to promote full employment, the government should      step in to provide sufficient demand so as to revitalize economic growth      and reduce unemployment.  An      important aspect to this is that Keynes strongly disagreed with a hard      money standard like the Gold Standard and believed that Central banks      should be able to create money for the government’s purpose when      necessary.  This is a very important      differentiator between Keynesians and the Austrian School below.  Keynesian economists dominated economic      policy in the United States and around the world from the post war period      until the 1970s, where they were somewhat replaced by Monetarists.  Since 2008 we have seen a resurgence of      Keynesian ideas in government policies.
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2. Monetarists – Monetarists are followers of Milton      Friedman.  Monetarists believe that      the supply of money in the economy is the primary driver of economic      growth and the withdrawal of money from the economy is the primary reason      for economic recessions or depressions.      Monetarists believe that it is proper to restrict the growth in the      money supply because it lowers inflation and high levels of inflation can      be just as bad as recessions (In Fact Paul Volcker, the famous chair of      the Federal Reserve in the early 1980s raised interest rates intentionally      to break the back of inflation, but in so doing caused a severe recession      in the economy).  Friedman believed      in small governments and was a strong advocate for free market      principles.  However Monetarists do      share the belief with Keynesians that the government should control the      supply of money to the economy.      Friedman would argue that the supply of money should be controlled      and should increase steadily and consistently over time.  It is important to note that for both      Monetarists and Keynesians, inflation is just a natural part of life, and      reasonably small and predictable inflation (such as 2% a year which is the      central bank’s target) is not a problem even though it does lead to the      gradual devaluation of the currency.
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3. The Austrian School – The Austrian School was      named after a group of Austrian Economists in the late 19th and      early 20th centuries including Friedrich Hayek, who was a      contemporary of Keynes, and had a bitter rivalry with Keynesians.  The theories of the Austrian school      developed over time and cover a wide range of areas.  I’m going to focus on two beliefs of the      Austrian School related to business cycles and inflation.  Whereas Keynesians believe that      government intervention is necessary to lessen the impact of economic      cycles, the Austrian School believes that there would be no economic      cycles if the government simply stopped trying to intervene at all.  They believe these cycles are caused by      distortions in interest rates caused by government intervention.  They look at modern day policies like QE      and government stimulus with horror.      The second belief is that the Government should not be in control      of the supply of money at all.  They      believe that in order for the free market to function properly and for      there to be no “malinvestment” money needs to be a durable store of value      and therefore needs to be capped and not subject to political      influence.  

No Laboratory to Perform Experiments in Economics

The problem with economics is that there is no laboratory to perform experiments in where we can test which of these three schools are correct. There are of course labs where economic principles are tested and experimented on, but to try and run an experiment testing an entire political economic system, to the exclusion of other systems, would be impossible. Because human behaviour is constantly changing, and is often influenced by lots of factors outside of our control, none of these schools of thought can claim to be 100% correct.  I think it’s reasonable to assume that all of the economic schools have some merit at different points in time.

So attempts to completely dismiss one or two of the schools of economic thought are in my opinion, questionable at best, probably arrogant, and at worst could be downright reckless.  Unfortunately, Bitcoin Evangelists and specifically Saifedean Ammous in his book the Bitcoin Standard try to do exactly that.  He is absolutely dismissive of both Keynesians and Monetarists and goes so far as to call into question the personal character of both Keynes and Friedman.  For Ammous only the Austrian school has any merit and its commandments must be obeyed. His book reads more like a manifesto rather than a true examination of the merits of the Austrian School vs the others.

Hard Money

In order to be a Bitcoin Evangelist, you must believe in Austrian Economics and the necessity of hard money, and by necessity you must also completely reject Keynesianism or Monetarism, and specifically their ideas about monetary policy.  Bitcoin was created to be the ultimate hard money, and I think it’s actually pretty well designed for that task.  Of course if you’re a Keynesian or a Monetarist then hard money isn’t actually important at all, and it might actually be a really bad idea.  

During the periods of “harder” money when money was backed by gold or by silver in the late 19th and early 20th centuries, it is true that overall inflation was lower in the United States.  However the swings in business cycles were actually much more violent during this time in the US.  This makes perfect sense if you are a Keynesian as there was no government back stop of the economy to cushion the blows of recessions.  It also makes perfect sense if you are a monetarist. The money supply during this time was very dependent on the supply of gold, and the balance of international trade. Discoveries of large gold deposits or a persistent trade surplus or deficit could have dramatic effects on the money supply, and therefore dramatic effects on the economy, both good and bad. The only school of economic thought that violent recessions does not jive with during a period of harder money is the Austrian School which believes that business cycles are a product of monetary manipulation.  But if this were true, wouldn’t less manipulation lead to less violent business cycles?  Ammous steps around this problem in his book by claiming that the monetary manipulation was there but just not well understood.  Sure I guess that could be true, maybe.  But was there really more manipulation then now?  Hard to argue that.

Business Cycles and Recessions

What if the Austrian School is wrong about what causes business cycles and recessions?  What if it isn’t the manipulation of money that causes recessions but instead is the “animal spirits” of individuals acting in their own self interest?  I can tell you that this makes a lot more intuitive sense to me and much more closely aligns with my experience of investment markets for sure.  If business cycles are caused by human emotions like fear and greed, and we moved to a Bitcoin “Hard Money” standard, well then we will have removed two of our best weapons against fighting a recession.  If we had been on a hard money standard in March of 2020, it would have been impossible for central banks to act as a backstop for investment markets, this would have led to much more violent drops in stock and bond markets, completely decimating many investor’s retirement savings.  On top of this, government fiscal support, such as unemployment benefits would also have been impossible, meaning that millions of people would have lost their jobs with no method of supporting themselves or their families.  The economy would have continued to sink until a support level could be found, and where that would have been, no one knows.  What could have happened then?  Russia in 1917?  Germany in 1933?  I’m glad we don’t have to find out.

Demolition of Our Current System

Another problem that I have with Bitcoin Evangelists is in order to be true a Bitcoin Evangelist, you must also believe that the current economic environment is truly unsalvageable and must be torn down.  But does the economic progress of the post war era really warrant such disdain?  The current economic situation in most western countries is far from perfect, but by and large people are better fed, wealthier, healthier, more educated, and more peaceful then they were 80, 50, or even 20 years ago.  There are of course still many problems (income inequality being a prime example) and I think there are lots of areas for improvement. But does it require a complete demolition of our current system in order to fix these problems?  Bitcoin Evangelists think so, but I am far from convinced.

So assuming that Bitcoin Evangelists might be wrong about the need for Hard Money, it could be a huge risk to incorporate their beliefs into our government policies.  And given that we cannot run experiments on economic systems where we can definitively test whether one system is superior to another, I think some humility might be warranted from anyone looking to influence government policies! Unfortunately, I don’t see much humility from Bitcoin Evangelists.  The following is a sampling of quotes from prominent Bitcoiners on Twitter just in the last few weeks which are genuine and are not meant to be exaggerations:

-          #Bitcoin is technology to gift humanity the right to property – Michael Saylor August 16, 2021,

-          #Bitcoin will unite a deeply divided country (and eventually: world) – Jack Dorsey August 9

-          The expected life of a: Company is 18 years; Building is 100 years; #Bitcoin is 3950 years. – Michael Saylor July 26, 2021

-          2 decades of wars, deaths, government debt, and inflation … for 10x return.  Holding bitcoin is entirely peaceful and massively outperforms the military industrial complex.  Have fun staying poor, war welfare queens! – Saifedean Ammous August 17th, 2021

-          Inflation cannot co-exist with advancing technology without the concentration of all power in state and the loss of individual rights and freedoms.  You have a choice to step out of the matrix #Bitcoin – Jeff Booth August 14, 2021.

I don’t see a lot of humility in these posts.  Now granted it is Twitter so we will forgive them a certain casual language, but make no mistake, these are their legitimate beliefs and these are big time influencers in the Bitcoin world.  Michael Saylor is the CEO of MicroStrategy which is a fortune 500 company famous for converting its balance sheet to Bitcoin, Jack Dorsey is the CEO of Twitter and Square, Saifedean Ammous is the author of the Bitcoin Standard, and Jeff Booth is the author of The Price of Tomorrow.  All of them are prominent Bitcoin advocates on social media with millions of followers.  They are about as mainstream Bitcoin as it gets.

Seek Out Multiple Perspectives

My real point in writing all of this is not to persuade you not to buy Bitcoin.  Most people are not going to be convinced one way or the other by reading one article. But I would strongly encourage you to seek out multiple perspectives before becoming a die hard Bitcoin Evangelist. If you’re just reading things like the Bitcoin Standard, you are only getting one side of the story

- Craig White, BA, LL.B., CIM®

Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.