We are at it again: Bitcoin price is heavily jumping up and down again and, like clockwork, the negative articles about Bitcoin pop up again. Especially the pro-Gold camp seems to harbour a lot of people who cannot wait to write negatively of Bitcoin. See for a few of my responses to these articles here and here.
New negative articles
Well, the hits keep coming. After Dimon's epic rant, we have we have a trusted Bitcoin sceptic at work: Hugo Salinas Price.
Hugo Salinas Price
Hugo is a 'sound money' advocate who as a long history of writing articles about the perks of the current financial system. He recently featured in one of my articles. In that article, I noted his main proposition that the value of Bitcoin is nothing more than a commonly shared belief among men. He is kind enough to point out that the same goes for fiat currencies, but thinks that the belief in cryptocurrencies will fade sooner than the belief in fiat currencies. His main argument is that cryptocurrencies do not have Central Banks acting as shepherds. Therefore, in his reasoning, belief in cryptocurrency (that has no shepherds or, at least, central shepherds) will vanish sooner than fiat currency.
A new Bitcoin obituary
Now, Hugo had the balls to make a prediction:
"the value of the Bitcoin will fall; when the holders of Bitcoins begin to see a trend to falling value, there will be nothing and no one to stop the trend: owners of Bitcoin will rush in panic to sell their holdings - to other holders of Bitcoins - before its value falls further. With more and more owners trying to sell, there will soon be no buyers: no one will want to catch the falling knife! The value of Bitcoin will fall to practically zero. When the famous Tulip Craze of the 1600's was over, the losers at least had their tulips to look at.
The Bitcoin rise in "value" that took months - or perhaps years - to take place, will be over in a question of hours.
The Bitcoin will become a history of mass speculation that came to grief."
Yes, I think it is safe to add Hugo to the list of Bitcoin obituaries.
The Real Matter
Bitcoin obituaries aside (I could not care less,;I am a Honey Badger user. Bite me...), Hugo keeps making the distinction between fiat currency having 'value' for some reason while Bitcoin does not. While I do not argue that Bitcoin comes with a lot of speculation value, and that price is volatile and its future unknown, I cannot grasp Hugo's idea that somehow the 'value' of fiat currency is based on anything different than the value of Bitcoin (leaving speculative value aside).
As I argued in my aforementioned articles, the value of any medium of exchange is based on the trust of the users thereof that the medium will be accepted as - here it comes - medium of exchange by the following recipient of that medium of exchange.
Nothing more, nothing less.
Yes, fiat is bigger. Yes, people are more familiar with fiat. Yes, fiat is less volatile.
But no, the value of fiat is not based on anything different than Bitcoin, being: trust.
Trust is all that makes fiat worth, and no central bank can do anything to force people to trust fiat once they lose trust. The concept of central backing is a fallacy. A narrative and a game of smoke and mirrors. The Bitcoin chapter, young as it is, is proofing this more and more each year, month, day that it continues to exist without sinking to a big fat zero. It's all about trust, and we all know how people trust their government, central banks, economists (let it be said) and bankers nowadays.
Analysis
The fallacy in the thinking of Hugo becomes clear when reading the opening paragraphs of his piece. Let's flesh them out piece by piece.
"If I have funds in a bank account, I know that I have a certain amount of fiat money available in that account, upon which I can draw more or less freely, according to the nature of the contract between myself and the Bank. The value of my account depends upon the value of the fiat money which it represents.
Bitcoins have no stated value. I cannot know the total value of my Bitcoins, until the moment I have exchanged all of them for a quantity of fiat money.
If you hold Bitcoins, you have certain number of Bitcoins. That is no different than fiat.
Where Hugo starts about 'value', he states that Bitcoin has not stated value. This is a very imprecise statement. What does he mean with 'Bitcoins have no stated value'? Does fiat currency does have a stated value? Looking at what follows, it seems Hugo somehow thinks that fiat currency does have a stated value and the only way to know what 'value' Bitcoin has, is by exchanging all Bitcoins for fiat so you can know its value.
If this is the reasoning of Hugo, the question is whether fiat has a stated value. Well, I think that is not the case. Just like any other 'good' on the market, the 'value' of fiat currency is weighted against other 'goods' in the market. The price of fiat is not a fixed matter, but a fluctuating number depending on market actions (basically, supply and demand; I am leaving out government/central bank meddling and human emotions).
So if the value of fiat currency is measured by price action against other goods in the economy, why wouldn't the same apply for Bitcoin. Bitcoin's 'value' also fluctuates against other goods in the market. Due to the still very small footprint of Bitcoin compared to the total economy and the large speculative part involved, the 'value' fluctuates heavily, but there is no difference in the 'value' of Bitcoin being determined by the markets each second of the day, as the value of 'fiat' currency being determined by the exact same mechanism.
Taking this further, one could also reverse Hugo's line of thought and state that 'Fiat currency has no stated value. I cannot know the total value of my fiat currency, until the moment I have exchanged all of them for a quantity of Bitcoins'. It is immediately clear that this is a stupid thing to say. Not because of Bitcoin being mentioned or fiat currency being mentioned, but because of somehow conflating the concept of 'value' with fiat currency. Value is not fiat currency and fiat currency is not value. Value is determined by what you can get for a good at some point in time for the good that you are willing to exchange: that determines the value. And again, the trade only works if either the recipient was looking for exactly your item of exchange or, in modern times, accepts your medium of exchange because the recipient has trust in the medium of exchange.
Hugo seem to overlook that - when stripped to the core - Bitcoin and fiat currency are not that different after all. Their value is based on the value that people attach to it. Nothing more, nothing less. So if he wants to attack Bitcoin, he should look to the prospects of people continuing to attach value to it instead of attaching 'magic qualities' or 'stated value' to fiat currency.
Going further in Hugo's piece:
"At present, the owner of 1,000 Bitcoins thinks that he is the owner of over $4 million dollars. But he is mistaken; he will only have $4+ million dollars when he has sold them all for $4+ million dollars."
Hmm, I certainly do not think that I own XX of US dollars because I hold a Bitcoin. Instead, I know that I am holding a Bitcoin that I can exchange for XX of US Dollars at the prevailing rates. Again, you can reverse this statement and swap 'Bitcoins' with 'US Dollars' and vice-versa. It means nothing.
"I cannot use Bitcoins to purchase anything directly from just anyone; in order to purchase something with my Bitcoins, I have to find someone who will accept them in payment of what I wish to acquire, and for which that person is willing to accept Bitcoins in exchange.
In such a theoretical operation, both the person who tenders Bitcoins in a purchase, and the person who accepts Bitcoins in a sale, are both of them calculating their exchange in terms of fiat money, not in terms of Bitcoins."
Hugo is right that not everyone will accept Bitcoin. Bitcoin is still very small compared to the total economy so not everything may be accepting Bitcoin. And yes, I think that most people that do accept Bitcoin still count in US Dollars. That is no surprise. As long as Bitcoin operates in a tiny part of the economy, this is no surprise.
But this is also not the issue. The issue is: can someone do a transaction that would be impossible with fiat currency. And the answer to that question is a profound yes. 24/7 all over the world uncensored permissionless payments to anyone who can download/install a wallet (or even just generate a random Bitcoin address) and all this without a middle man.
Banks 0
Bitcoin 1
That is what the fuzz is about. That is what makes cryptocurrency attractive. This is the appeal that cryptocurrencies have. Each adaptor has his own reasons to like the aspects of cryptocurrencies, but it is a fact that Bitcoin solves some problems that fiat currencies - until the day hereof - do not solve. And that is what the basis is for the continued existence and growth of Bitcoin and other cryptocurrencies.
Disregarding the attractiveness of this new technology to anarchists, there is a very easy way to see the potential value of this new way of exchanging 'value' over the Internet. Ross Pilot spells it out for you, Hugo.
So no, I do not think the value of Bitcoin depends on the existence of fiat currency. They exist next to each other and with Bitcoin steadily rising in use and - thus - value. So I consider the statement below pertinent untrue.
"Thus the Bitcoin has no independent existence such as fiat money has. Its worth depends on the existence of fiat money in which to transact exchanges."
But one thing I must give to Hugo: yes, Bitcoin is a Chapter in the History of Mass Speculation. And anyone not seeing the potential should just leave it alone and see others take the risk of being better off because of it.
Broaden your Horizon
I hope Hugo will consider doing a piece comparing the characteristics of fiat currency against fiat currency, so that he can present well though out arguments. Because looking at his past of informing the public about sound money, he should be able to start seeing the light and the definition of 'sound money' staring him in the face.
Go Hugo!