“I can calculate the motions of the heavenly bodies, but not the madness of people”
Sir Isaac Newton (who invested £3500 in The South Sea Company and sold out at £7000; he then re-entered the market and lost £20 000).
“[T]here shall be one coinage throughout the realm”
An Anglo Saxon rule dated to Athelstan, c. 930AD
So Jamie Dimon (CEO of JP Morgan Chase & Co), probably not a reader of this blog, also thinks Bitcoin is a bubble:
I’m going to be really clear in this one. Forget the blockchain, that’s a technology… But… the currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think the people buying it are really smart. It’s worse than tulip bulbs, OK?
Note use of the word currency not money. Banks create money out of thin air as The Bank of England agrees. And private money creation has a long intellectual tradition in economics, with Friedman asking the question “Does the Government have any Role in Money?”. And there are less extreme examples: in 1970 during the Irish Bank stike even cheque clearing closed down and Irish pubs and supermarkets continued to “cash” cheques as they passed like money throughout the system for over six months and cheques were cashed by pubs as if the banks were open.
Currency on the other hand is a unit of account given the force of state backing and can be used to settle tax obligations. As soon as there is a threat to the tax base or the control of money the government will extinguish that threat: clearly the more authoritarian the bigger the threat and the quicker they will act.
What is clear is that Bitcoin is a bubble. There is no intrinsic value in it and the price and it is clearly only worth what someone else will pay. I love this quote:
When Stanley Druckenmiller, who managed George Soros’ $8.2 billion Quantum Fund, was asked why he didn’t get out of technology stocks even earlier if he knew they were overvalued he replied that he thought the party wasn’t going to end so quickly. In his words “We thought we were in the eigth inning, and it was the ninth”. Faced with mounting losses, Druckenmiller resigned as Quantum’s fund manager in April 2000… Julian Robertson, manager of the legendary Tiger Hedge Fund, refused to invest in technology stocks since he thought they were overvalued. The Tiger Hedge Fund was dissolved in 1999 because its returns could not keep up with returns generated by dotcom stocks.
A Wall Street analyst who has dealt with both managers vividly summarized the situation: “Julian said, ‘This is irrational and I won’t play,’ and they carried him out feet first. Druckenmiller said, ‘This is irrational and I will play’, and they carried him out feet first.”
Dimon has history on his side. Sooner or later this is going to end badly. Currency creation is a prerogative of the state as is the ability to tax and the two are inseparable. As Redish notes:
Numismatists believe that the earliest coins were produced at Lydia (now Western Turkey. in the mid-seventh century BC. The coins were made of electrum, a naturally occurring alloy of gold and silver. They had a designon one side and were of uniform weight but had a highly variable proportion of gold. In an influential article, Cook (1958) argued that these coins were introduced to pay mercenaries, a thesis modified by Kraay (1964) who suggested that governments minted coins to pay mercenaries only in order to create a medium for the payment of taxes. Both interpretations stress the role of the government in the introduction of coinage.
Something that has worked for thousands of years and used to keep governments in power and is crucial to the tax base isn’t going to be usurped by an unkown computer programmer, a bunch of gun nuts (who don’t want to pay tax), drug dealers (who don’t want to pay tax and get caught (crime clearly has a major impact on Bitcoin valuation)), and a bunch of fintech guys (who don’t want to pay tax and have no sense of economic history). Something Ross Ulbricht could testify to.