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The Bitcoin Elite

Imagine this; Bitcoin replaces the US dollar as the main US currency. In order for the value of Bitcoin to be equal to the current M2 money supply (basically all US currency), each Bitcoin would have to be worth around $1mm once all Bitcoins are mined.

If this were to happen today, then the 27% of US adults that own Bitcoin would become very, very rich. Creating what I like to imagine; the Bitcoin Elite.

I imagine the Bitcoin Elite as a bunch of Bitcoin enthusiasts who got really rich from being early adopters of Bitcoin. But unfortunately, the only way they can spend their newfound wealth is with each other; since nobody else has the level of wealth that they have.

So now the Bitcoin Elite can only exchange with each other because they’re the only ones that can afford it. Maybe they can colonize with Elon Musk on Mars?

Maybe this is a little extreme, but I’m trying to paint the picture of what happens if our entire currency system is based on who were first movers into Bitcoin; to the detriment of everybody else getting “left behind”.

This doesn’t sound much like “the people’s money” to me. Sure, there is no governmental control, but it is never a good sign when something is being pitched with “buy now or get left behind”.

I think there are a lot of issues when it comes to crypto currencies. But this blog is going to focus on Bitcoin - this isn’t based on projects like NFTs, smart contracts, etc. And I just want to point out that Bitcoin isn't the blockchain; these are two totally separate things. I think the blockchain has a strong future, but this is a completely separate thing from Bitcoin. This blog is some of my thoughts on transacting money with Bitcoin.

An argument FOR Bitcoin is that it is “better money”. I think that the blockchain is amazing, and can be utilized to create better money, but that doesn’t mean Bitcoin is the system that will come out ahead.

In my opinion, Bitcoin will never be the primary money that individuals transact with. Here are some of my major dissents from Bitcoin.

Supply & Demand

In economics, oftentimes the supply and demand of an item creates value. If there is a low supply and a high demand, it is valuable. More people want it, and there is less of it to go around.

If there is a low supply but no demand… it is worthless. Just the fact that something has a low or limited supply doesn’t make it valuable. There needs to be demand to create value.

One of the major pitches for Bitcoin is that there is a fixed supply; ‘get in while you can, because there isn’t enough to go around for everybody’. But a limited supply isn’t enough to create value, and if demand for Bitcoin doesn't stay, then it ultimately becomes worthless.

The US government can continue to print US dollars (used interchangeably with “fiat currency”) which results in inflation, but due to the fixed supply of Bitcoin, many make the argument that Bitcoin is inflation-proof.

Did you know inflation can be good in some instances? I know it is bad timing for me to point this out, but I have to do it for my argument; the fear that prices will increase cause people to spend money now (while it is worth more), which in turn stimulates the economy.

In the instance of Bitcoin, the fact that the amount of coins won’t change could result in hoarding. Those who have a lot of money will hoard Bitcoin for the future and never have to worry about its value diminishing if it truly was inflation-proof. Hoarding = bad. This would exacerbate wealth inequality by allowing those who don’t actually have to spend money to hoard it for future generations.

Additionally, as we’ve all seen, the value of Bitcoin can change. Adding more US dollars to the economy increases the money supply. But the value of one Bitcoin increasing would also increase the money supply. Just because the number of Bitcoins available is stagnant doesn’t mean the value of Bitcoin is stagnant.

This is because everything has to be converted back to US dollars, and in my opinion, the value of Bitcoin will always be talked about in terms of US dollars. That is why it is not inflation-proof; unless we see and talk about Bitcoin in Bitcoin terms, this will continue to be the case.

Maybe someday we’ll talk about the cost of everything in terms of Bitcoins, but for now we don’t, and the value of Bitcoin cannot change every hour (due to price volatility) or else it will never be taken seriously as a currency.

I don’t like the argument that just because Bitcoin has gotten so big, it is “obviously” here to stay. As of writing this, Bitcoin has lost over 70% of its value since its peak - it doesn’t seem that far-fetched to me that it could lose the rest.

I hate to get all financial planner on you, but Bitcoin has no intrinsic value. This means that there is no value being derived from Bitcoin; it doesn’t pay interest, there is no asset or entity that backs Bitcoin, it doesn’t bring in revenue and you can’t make shiny jewelry out of it.

This doesn’t mean it isn’t valuable, but it means that the only way for it to be valuable is for somebody to buy it from you, and for hopefully more than you purchased it for. You better hope the demand for it stays up or else you’ll be stuck holding it.

The government can do it better

Of course, demand will stay high on Bitcoin, right? We’ve already established that “obviously” it is here to stay. But what if something better comes along? There is one entity I can think of that can do it better… the government. If the blockchain is a better way to transact money and society has made it clear that this should be the currency system, then the adopted system will not be Bitcoin. There needs to be much better regulation and trust in the system.

As I mentioned before, Bitcoin as the major currency system would result in a situation where early adopters would be the richest in the world, which would create hoarding and turn into massive problems. We're not talking about a business or a seed round investment - we’re talking about the money supply! There shouldn’t be a first mover's advantage when talking about the money supply.

If currency on the blockchain is better, the US government will create a currency blockchain. The way I imagine this is that you could convert your digital or physical US dollars for a blockchain token. Money doesn’t actually change hands on the conversion, but now fiat currency is on the blockchain for a more efficient currency. But we still operate under the same fiat system.

This would create a stable coin, one that is ACTUALLY STABLE and backed by the same amount of US dollars as well as the trust of the US government. This way, there will be no more crashes (like Terra / Luna) and we wouldn’t have to worry about losing our money due to a malfunctioning algorithm.

The US dollar is, and will remain, the major currency in the US because of trust. We have trust that every US vendor will take our dollar as a payment. This cannot be said about Bitcoin.

We trust that the value of our dollar will stay relatively the same, sans inflation, which can not be said about Bitcoin. This is due to the store of value created due to the US government backing the value of fiat currency.

Store of value is important here, because it says the value of the currency is predictably useful when retrieved. Nobody could have known that the usefulness of Bitcoin today would be less than half of what it was at the start of the year. Bitcoin does not have a store of value.

How will this get enforced?

  1. Taxes

  2. Jail

Everybody has to pay taxes. You may say “well if everybody in the world adopts Bitcoin, the government can’t do anything”. Yes they can. Bitcoin is property and every time it is traded or exchanged, there is a taxable event. When there is a taxable event, taxes have to be paid in US dollars.

The IRS will not accept your Bitcoins.

In other words, everything has to get converted back to US dollars. Otherwise you evade taxes and go to jail.

If somebody tells you there are “creative” ways around using Bitcoin as currency without incurring taxes; that is called fraud.

The IRS would have to recognize Bitcoin as a legal tender (i.e. an accepted form of currency), as opposed to property, before Bitcoin could ever start to be considered a useful currency. And doing this today would wipe out any taxable income associated with Bitcoin wealth creation, which could be as much as $400bn as of writing this. That is a lot of wealth creation and taxes that the IRS would give up; and I can’t see that happening.

It can’t be an investment and a currency

I think Bitcoin is confused with its identity. It is pushing to be both a speculative investment and a reliable currency - it has to pick one or the other, and can’t have its cake and eat it too.

For an investment, risk is reward. The higher the risk, the higher the expected reward. Risk is usually seen as volatility, which we’ve seen Bitcoin has a lot of. The high risk has created some really high returns for Bitcoin over the long-term, but has also created some massive losses in the short-term.

This can’t happen with something trying to be a currency, as currency must have a store of value. It is not okay if my car cost me 1 Bitcoin at the beginning of the year, but 3 Bitcoins six months later.

The blockchain is a technology, it is not an asset or a currency. As I mentioned previously, there is no intrinsic value to Bitcoin; it could be $1mm a coin or $1 a coin and its function would still be exactly the same. And due to it being a technology, anybody can replicate it.

So, why would you own Bitcoin right now? The function of Bitcoin is that it creates “better money” by utilizing the blockchain, which allows you to send it to anybody around the world securely, efficiently, and cost effectively.

But, these Bitcoin blockchain transactions are exactly the same, whether each coin is $1mm or $1; whether you’ve owned Bitcoin for 10 years or 10 minutes.

So why do I have to hold onto it and ride the volatility? Its function is useful in a moment of time and I don’t have to be a long-term holder of Bitcoin to benefit from its primary function.

An argument for Bitcoin is to get in now or get left behind. If you get left behind, you can’t use this great technology; right?

Nope - just like a dollar can be broken down into one hundred pennies, a Bitcoin can be broken down into one-hundred-million “satoshis”. In my initial example of Bitcoin being worth one million dollars per coin, you could still buy a satoshi for one US penny. Another example is that if Bitcoin becomes one billion dollars per coin, anybody with $10 can utilize the Bitcoin blockchain.

There is no situation where Bitcoin becomes monetarily inaccessible. My point: you’ll always have access to Bitcoin and the ability to utilize it for its main function of transacting. You don’t need to be a Bitcoin holder right now to take advantage of it when you need to; when you’re ready, you just need to convert your US dollar to Bitcoin and use it then.

I imagine using it as an upgraded Venmo; just as I convert my US dollars to Venmo dollars for a transfer to my friend, I would do the same thing in instant succession with Bitcoin. And if I got a transfer of Bitcoin from my friend, I would immediately convert it to US dollars and send it to my bank. I would get to use the benefits of better transacting through using Bitcoin, without having to own it beyond the time it takes me to transact in and out of it. When talking about Bitcoin's function as a currency, there is no need to hold Bitcoin right now and ride the volatility.

Due to Bitcoin having no intrinsic value and no change in function based on its price, there is no reason for the price of Bitcoin to be higher. It wouldn't change anything for the usefulness of Bitcoin. My opinion is that once the hype goes down, Bitcoin will ultimately end in the hands of the greatest fool.

Final thoughts

I didn’t talk about environmental concerns, theft concerns, security concerns, etc. with Bitcoin, and that is largely because without the basic function of Bitcoin having a purpose, all these ancillary benefits are futile.

At the end of the day, if we drop all the features and think solely of the utility of Bitcoin, it feels confused. It talks out of both sides of its mouth; both a rocket ship investment, but also “better money”.

You may have noticed some contradictions in my writing. The most obvious one is the Bitcoin Elite due to being so expensive that nobody can get in, yet in another paragraph I talk about a satoshi and even $1mm per coin is accessible to anybody.

In my opinion, Bitcoin is itself a contradiction, which I was trying to illustrate. It touts all these amazing benefits that sound great - but once you start comparing these benefits, you find that Bitcoin is talking out of both sides of its mouth. It is a currency when convenient, then an investment when convenient.

There are a lot of sales tactics with Bitcoin. Anybody who owns Bitcoin inherently has an incentive to tout the benefits of Bitcoin. If they convince people to buy, the price of Bitcoin increases, and the value of their holdings increases. Forbes even reported that more than 50% of Bitcoin trades are fake. This is to make it look like there are more people buying Bitcoin to make you feel like you'll get left behind if you don't join. But instead, it may just be smoke and mirrors to boost the value for those who already own Bitcoin.

Maybe I have a biased opinion because I don’t own Bitcoin - or maybe that makes me unbiased because it won’t affect me whichever way the price of Bitcoin moves. I'll let you decide.

Bitcoin is a great illustration as to how we can use the blockchain - but there are too many major holes in Bitcoin that will cause it to be unsustainable, in my opinion.

I can’t imagine the government would allow Bitcoin to have the ability to run the monetary system - the government would create its own, and everything would have to be converted back to fiat currency to pay taxes, or legally transact.

If there is truly a long-term future for Bitcoin, then it has to be easily accessible to everybody in order for it to be useful and have a high demand. Due to this, you don’t have to take the volatile ride along the way.

If I bought Bitcoin now, I’d have to hope that things work out. But, I’ll continue to sit on the sidelines because if it is truly successful, I’ll be able to get in whenever and still reap the same benefits of the currency.


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