I love Max and Stacy on the Kaiser Report but Max has two key blindpsots – Gold – and its cryptographic equivalent – BitCoin.
Setting aside the rumours for a moment that Max invented it on his show he recently attacked those who said that ‘bitcoin was backed by nothing’ by saying that ‘bitcoin is backed by cryptography’.
Both wrong – all money, nominarian or not, is always backed by the future physical production of goods or services. That is lesson 101 of the credit theory of money – for a primer see Greabers 5000 years of debt. Indeed all anti-neoclassicals – of which Max is a prime example – seem to hold to this theory.
Money is advanced as credit, to fund some future operation which will yield a greater output of goods or services to create growth. Moving into it is the opportunity cost of buying some other good or currency.
To invest in bitcoin mining we need a pc and electricity – they are what back it – so if you were to advance me credit to do so you would need to be sure my mining operation would make money.
However look here for the definitive calculator for the expected profitability of mining – looking at cost of pc and electricity against return rates from mining – being a late player to the game you can’t make money unless you get the pc for free and the electricity for free – which is why so many bitcoin ops are from botnets. But if this became universal then bitcoin mining would become a cost free operation mining would go through the roof and we would get bitcoin hyperinflation and a collapse in the currency. It would be the equivalent of Spanish treasure ships returning from the indies and collapsing the Spanish economy as a result.
Indeed I would challenge someone to do a model of say – 25% of the worlds population getting into bitcoin, what would it do to price per bitcoin or electricity costs for mining?
There is a fallback argument, that bitcoin should just be seen as a store of value and hedge against inflation to other currencies. That is a better argument, though of course there is no safe haven anywhere any more and any that is seen to be is likely to suffer huge capital flows inwards – such as the Swiss Franc, and in due course suffer a collapse especially as that currency is leveraged. For this reason paper gold, a phantom is doomed to collapse and be a big a credit moment as a sovereign default (if you do the math of paper gold leverage from physical). As Warren Buffet says ‘Gold is for Smucks’ – even more physical gold as there is a storage cost- demurrage – so you lose a % of its value every year.
I hear now stories of traders who have thought this through and are doing things like buying farms and forests in places like Scotland as ‘the only safe store of wealth’ . Not so much a hedge against uncertainty but a forest against it.
Note: This is in good part a write up of a friendly twitdebate with Stacy.