1. Bitcoin as a measure of distrust

Many narratives exist around the intrinsic value of Bitcoin. There is the sound-money/inflation-hedge view served with a good measure of Austrian-school of economics. There is the censorship resistant, peer-to-peer payment interpretation favored by crypto-anarchists. On the other side of the spectrum are the skeptical “no-coiner” stance that there is no value at all—it is at best a temporary, collective delusion gripping the technorati or a convenient breeding-ground for scammers and opportunists of all types.

There is an interpretation that in one sense generalizes all of these views: bitcoin is a measure of distrust in existing systems and institutions. To the extent one believes the social contract is broken, financial system is rigged and governments are incapable of solving these problems—or worse, that public policies actively enable and accelerate this breakdown— bitcoin becomes an attractive alternative parallel universe. Operating outside this (allegedly) corrupt system, too decentralized to be co-opted by the powers-that-be seeking to preserve the status quo, bitcoin is not just a different monetary structure: it becomes an escape-hatch, a comprehensive ideology for opting-out, defecting from the present dysfunctional system. Money-printer run amok, flooding the market with dollars? Bitcoin has a fixed issuance rate and is fundamentally deflationary. The Federal Reserve doing another round of quantitative-easing to bail-out the market in the wake of another predictable crash? Bitcoin has a perfect track record of honoring the principle that “code is law:” there are no bailouts, no amount of political pressure to change the code such that some favored too-big-to-fail institution is rescued by socializing their losses to everyone else with a blockchain address.

The fundamental paradox of cryptocurrency is why so much of this shrill rhetoric around distrust in the system originates with and, by all measures, resonates so strongly in countries with arguably the highest level of development and most stable economies. It would be one thing to worry about the debasement of currency in Argentina or Turkey. Even at the height of COVID-driven money printing, US inflation did not reach double digits.

Similarly the specter of debanking is thrown around as a boogeyman, as if to underscore the importance permissionless, censorship resistant economic system. But these concerns are remote from the day-to-day lived experience of most Americans: Operation Chokepoint and its ill-conceived sequel were both aimed at very specific, narrowly targeted niches. The average American consumer does not go through life fretting about whether their credit-card issuer will yank their account in case their latest social-media missive ventures too far outside the Overton window.

Manufacturing distrust

To the extent distrust in the system or belief in its imminent collapse is the narrative driving bitcoin valuation, the proponents holding that view may paradoxically stand to benefit from further increase in distrust. Whether this is manifests as unconscious alignment of political positions with portfolio positions, or completely cynical deliberate attempt to sow further distrust may vary. (To paraphrase Sinclair Upton: “It is difficult to get a man to understand something, when his return on investment depends on his not understanding it.”) Either way, there is no incentive to work on improving this allegedly “broken” system by participating in the messy democratic process. Better to stand on the sidelines and cast aspersions on the players on the field. From the unaccountable central bankers in government printing money to their corrupt friends in private enterprise, the too-big-to-fail “banksters” always needing another bail-out at tax-payer expense, there is a veritable roster of villains to provoke even more distrust. As for the universally recommended response to this breakdown in trust? Buy more cryptocurrency— conveniently, helping ensure “number-go-up” and enriching existing holders who wisely gave up on the system earlier.

It is not a coincidence that this looks like an outright defection from the social contract. Let foolish idealists—the unwashed masses— waste their time on the thankless struggle to improve the system at the margins, to restore a modicum of trust. Those in the know have already given up hope and are busy building an alternative monetary model. (But no need to give up on opportunistic intervention in in the democratic process through regulatory capture, as the sheer scale of lobbying by the cryptocurrency industry attests.) If building that alternative model requires undermining the existing one that the majority of society depends on, the harm comes to be viewed as regrettable but acceptable collateral damage.

This is no longer about insurance against risk, the “inflation hedge” narrative of bitcoin as the last resort of value in the face of runaway monetary policy. “Hedge” implies a plan B ready to deploy in the event of an undesirable outcome. Averting that outcome remains plan A; purchasing car insurance does not result in drivers rooting for an accident or competing in the Demolition Derby. In the extreme case, the defection goes beyond cheering on and rooting for the collapse of the broken system: it crosses the line into orchestrating the mechanism of implosion.

2. Bitcoin as check on state monetary power

“The threat is stronger than the execution.” — Aron Nimzowitsch, chess grandmaster.

A more sanguine view considers Bitcoin as a potential counterbalance against irresponsible monetary policy by central banks. In this model, the actual adoption rate of bitcoin or the laundry list of usability problems holding back that number— challenges of self-custody, unintuitive software/hardware despite years of iterations— are completely irrelevant. As a monetary system it does not have to impress retail investors. It does not have to aim for mass popularity. It only has to show up on the radar for policy makers and central bankers as a credible threat, a potential exit strategy for citizens who have had enough of capital controls, currency debasement or financial censorship. Credible would mean the risk of further bitcoin adoption has become an input to policy decisions for legislators and central bankers, reshaping the outside boundaries of what they consider feasible options.

This is not a case of moving the goal-post or giving up on ambitions of upending the existing financial order— although it would certainly have the ring of capitulation to a certain brand of ideologue bent on “world domination” until all fiat currencies are extinct. If anything it is an optimistic view: bitcoin can succeed in its mission even at very low adoption rates, relegated to niche scenarios. If the threat of increased Bitcoin adoption is enough to deter central banks from engaging in the very policies that inspired the creation of Bitcoin, the mission has been accomplished in a very real sense. It is irrelevant whether that state of equilibrium is reached at 20% or 0.20% adoption on whatever metric one favors for measuring adoption.

A counterintuitive corollary follows: Bitcoin generates externalities even for the uninvolved. Its policy repercussions indiscriminately benefit those who hold no bitcoin, those who never heard of digital assets and even cryptocurrency-skeptics who consider the entire space to be one glorified pyramid-scheme. The sharing economy offers useful parallels on this: Uber and Lyft have exerted competitive pressure on taxis, forcing a moribund industry protected by the cushy regulatory moat of the medallion system to get its act together. Even passengers who remain skeptical about stepping into a car driven by a stranger are better off when they opt for a taxi today: the threat of losing additional business to ride-sharing upstarts has forced the introduction of conveniences such as the ability to hail cabs with mobile apps or settle fares using flexible payment options. Airbnb is an even better example. Its hypergrowth phase in the 2010s was a shockwave for the hospitality industry. Peer-to-peer accommodations were not new: in fact they had been already written off as a niche category; the non-profit Coach Surfing had been in existence for years. By proving that this model could operate commercially on a global scale, once anchored to a platform that solves the trust problem between hosts/guests, Airbnb created a genuine alternative to the existing model, eventually become the single largest lodging provider by number of bed. Airbnb did not have to decimate the hotel industry in order to succeed. It did not have to win over every traveler and convert them over to the ideology of belonging. Even travelers who would never opt for an Airbnb because they place a premium on the predictability, professionalism and elevated service standards they expect from hotel chains still benefit from the presence of Airbnb: the existence of that competition keeps prices in check and forces hotels to offer improved services.

Bitcoin does not have to become an indispensable component every 401K any more than the Lightning Network achieve Visa/MasterCard levels of transaction volumes. What matters is the marginal adoption possibility as a credible escape hatch, one that can succeed where gold and foreign currency has failed in the past. This is good news for sound-money enthusiasts, constantly having to account for abysmal present-day usage: minimal as store of value by allocation in investor portfolios and even more negligible as an active medium of exchange for payments. What constrains policy is not the existing user base of die-hard maximalists; it is the adjacent group of pragmatic users, waiting in the wings, evaluating the trade-offs. Increased capital controls, financial censorship and irresponsible monetary expansion are the factors that would push them over the line.

For now, bitcoin is clearly on the radar of major central banks, but the jury is out on whether it is having any meaningful influence on policy decisions. But if the threat of increased Bitcoin usage can curb the worst excesses of monetary policy worldwide— from autocrats in banana republics denying access to disfavored groups to respectable central bankers inventing creative excuses to justify negative real returns on savings— Satoshi’s idea will have succeeded in a very significant way, even if the terms of victory are unrecognizable to Satoshi.

CP