Eugene Fama, a Nobel prize winner who is also known as the father of modern finance has not been a proponent of bitcoin and recently claimed that there is high probability that bitcoin will become worthless within next ten years. We have seen many critical points view regarding bitcoin over the years, and I think it important to listen to these arguments especially when it comes from the experts in the field. Eugene Fama is someone who dedicated lives work to finance, and I have no doubt understands finances and money much better than many of us. We may disagree when it comes to bitcoin. However, it is still important to see what the arguments are. I doubt bitcoin will disappear in ten years or hundred years. But I still accept the possibility it may. If there are such possibilities then I am interested to know.
For example, the most convincing argument for bitcoin becoming worthless, in my opinion, is the advancements in quantum computing. I can see how advanced quantum computing can make technologies like bitcoin obsolete. However, when such advancements in quantum computing are achieved, we have much bigger problems to worry about. We will have to reevaluate everything we do, starting with banking, governments, military, etc. When that time comes, I am sure we will see advancement in counter measures that will provide security against quantum computing attacks. Everything else would probably shift to quantum computing, including mining. I don't know how that future will look like. Human ingenuity and what has been accomplished so far suggests advance quantum computing will be a reality one day.
Eugene Fama is not talking about quantum computing. In fact, he is not suggesting anything we haven't heard before. I am kinda disappointed that one of the top experts in modern finance is not able to bring forward strong arguments against bitcoin while making big predictions like bitcoin will not exists in near future. It is also possible I am not taking these arguments seriously and they may actually be significant. So, what are the arguments?
- Bitcoin's value it not stable. Volatility.
- Bitcoin has no intrinsic value. It is not backed by central authorities.
- There are benefits of blockchain technology in form of stable coins, or government backed coins. But not bitcoin.
- Limited use case.
Fama primary focus is in the first two arguments. This aren't anything we haven't heard before. At first I thought Fama is confusing cryptocurrencies or currencies with money. Surely, father of modern finance would know the distinction between the two. The main problem Fama presents with bitcoin is that bitcoin's value is not stable, it is too volatile to be medium of exchange. For cryptocurrency to be medium of exchange there should be stability and predictability in its value. Otherwise nobody would use it, and there is no point of using it.
Bitcoin as medium of exchange vs as store of value has been debated over and over again. By now most people understand that bitcoin is great as store of value. But here is the problem. If it fails as a medium of exchange, it may lose its attraction as currency. Hence, lose value and no longer be a good store of value option. That is not what we have seen so far through bitcoin's history. It has demonstrated to be a great store of value, and also great investment instrument. It may not have seen massive adoption as a medium of exchange for daily purchases yet. Would this disqualify bitcoin from being money? Things get a little confusing here. Let's unfold.
I think the misconception of fiat as better medium of exchange comes from the illusion that fiat transactions are settled instantly. Yes, transactions are settled instantly when we use cash, actual paper money. Most of the transactions are cashless, and has been so for decades. In daily purchases, we use credit or debit cards which are layer 2 solutions for fiat. These transactions are not settled instantly. The credit based system allows these transactions to happen, but then it takes days for the payment process to actually clear. Even when fiat is digitized and had this technology for decades, the finality of the transactions takes days. In comparison, bitcoin transactions settle much quicker. It may take 10 minutes, it may take an hour. But definitely not days.
Now that banks will be able to custody bitcoins, if we were to utilize the same layer 2 solutions like debit cards transactions would go through as quick, settlement would happen in minutes. However, we don't need to rely on traditional solutions, we have layer 2 solutions like lightning network that will allow instant settlements. We may even see different solutions in the future. So, yes bitcoin as medium of exchange already works much better than fiat regardless we use the core network or layer 2 solutions.
When we consider international transactions, there isn't even comparison at the speed of transactions and settlements. The best feature of bitcoin as medium of exchange is no requirement for the middleman. People and companies can transact in billions of dollars worth of value in seconds, without an approval of a bank or financial entity. So technology is definitely superior. The money aspect of bitcoin is even better. No fiat currency can claim to be a strong money. Bitcoin is.
The real obstacle is the taxation and regulations. Fiat enjoys to be a standard medium of exchange because fiat is not taxed. It has a privilege of being a legal tender. Many people and merchants wouldn't use bitcoin in daily transactions because of the taxable events created after each transactions. If bitcoin was legal tender in the US, and we didn't have to calculate the US value of bitcoin every-time we engage in transactions, we may choose bitcoin as better alternative for transactions. Why not? It is cheaper than using fiat. Fiat transactions come with automatic 2%-3% fees for using the Visa or MasterCard. Yes, bitcoin has transaction fees, but they are not as crazy as fiat ones. Moreover, bitcoin transactions fee go to make the network more secure and stronger in an free market fashion. While fiat transaction fees act like hidden taxation to enrich the banks.
One of the main reason bitcoin's price is not stable and there is always volatility is because fiat system is broken. The prices fluctuate against fiat. In a long term bitcoin keeps appreciating in value, because fiat is being diluted by the central banks on regular basis. Perhaps, USD is more stable than other fiat currencies and there are better systems in place by Fed. There are many fiat currencies around the world that experience extremely high inflations and it is accepted norm. If we consider all fiat currencies and their value fluctuations it will be very clear how fiat is definitely not stable. In most cases these instabilities go against ordinary people and businesses. There are many around the world who take steps not to use their fiat and use stronger fiat currencies like USD as medium of exchange. Similarly, if obstacles were removed people would choose stronger money, bitcoin over USD to use as medium of exchange.
This future is coming. People and businesses will be attracted to stronger money. For the same reason world uses USD or EURO instead of other currencies. Over the last decade, governments were creating obstacles for bitcoin adoption, and that is why its adoption as medium of exchange has been slow. Nothing else. Slowly things are changing, and those who opposed and fought against bitcoin are becoming bitcoiners themselves. If there was a fair competition in place and free market to choose, I have no doubt many will go to bitcoin. Incentives of using bitcoin are higher, benefits of using bitcoin are higher, and it also preserves value better than fiat.
Bitcoin has all that is needed to be used as medium of exchange in faster, cheaper, secure, and peer-to-peer fashion. That said, with obstacles in place, bitcoin has demonstrated to be great store of value. Why use great store of value in medium exchange when there is no need to do so. Time will come when bitcoin will become the standard, and use of it as medium exchange will be norm. That time is not now. Today with all the monetary policy decisions, money flow manipulations, extremely high inflations, it may be wiser to hodl bitcoin, and use other option as medium of exchange. Not because bitcoin can't be used as such, but because it may be more beneficial to hodl it at this time.
Fama also compared gold with bitcoin and obviously favor gold. The reason was that gold has intrinsic value because it is also used in jewelry, electronics, etc. So gold's utility cases seem to give it its intrinsic value. Sometimes I don't even understand what people mean with intrinsic value. Do things have intrinsic value or all values are just based who is willing to pay how much for something at a given time and place? I guess gold may have more intrinsic value than fiat. Even if we went with utility case for intrinsic value, some people just can't comprehend the value brought by a decentralized network. The intrinsic value of bitcoin comes from its network. There no such network in existence yet. I am not talking about the protocol, software, and connections. I am talking about all in one that can produced a truly decentralized network where no one entity can be in control. That is priceless. Anybody can copy the code, anybody can fork the network. The question is who will use the network, who will entrust their wealth in the network, who will spend insane amounts of money to secure the network.
Another argument usually given is that bitcoin can be replaced with something better. Technology always evolves, and one day we may see a better technology. But it is not only about technology when it comes to bitcoin. Technology is one part of it. It is the network that needs to be imitated. If better decentralized monetary network emerges, perhaps then we may agree something better could replace bitcoin. But the decentralization takes time and should happen naturally. If your goal is to create a better bitcoin, the start is already flawed. That's why we have tens of thousands of coins and none are truly comparable to bitcoin. They all trying to imitate bitcoin or become an alternative. The key is natural formation of decentralized network and continuous growth. I don't know how, but one may emerge. But it will not be easy. In fact we may not even notice if such thing happens.
Fama also like stable coins because he seeing benefits of blockchain in improving the traditional fiat currencies. Obviously. Lol. I don't understand how Fama doesn't see the blockahin of bitcoin but for stablecoins is great. Stablecoins are not even using their own core networks but rather are layer two solutions, unless it is an algo coin like HBD. For Eugene Fama as long as the currency is backed by a central authority, mainly government than it has value as money. I think this where Fama and traditional finance is stuck. They need government to be in charge of money. Bitcoin was created specifically not to have central authority, because central authorities is the reason traditional money kept failing time and time again. Market crashes continued to happen for decades. People kept losing their wealth to bankers for decades. Central authorities did not fix money, but they broke the money. That is where the core issue is. It is not even governments, it is governments that gave the power to central banks which can't even control.
Recently one of the reporters asked Jerome Powell if he would step down if Trump asked him. Powell said nope, and that Congress gave Fed power to conduct the monetary policy independently. President of the US cannot fire the chairman of the Federal Reserve. Congress cannot audit the Federal Reserve. How are they government again? Where are the checks and balances here. Even if government branches had any authority over Fed, that wouldn't make money better either. The innovation of the new money in bitcoin is that there is no need for central authorities. Because they have a reputation of braking money and financial stability.
To Fama credit, he allows the possibility that he may be wrong. If he is proven wrong, he suggests that we will need to rethink the entire monetary theory we know today. Not a bad idea. Now it makes more sense why traditional finance experts are so attached to the old system and show resistance to the innovation in money. Because that would mean they have been wrong all along. I don't think that is completely accurate. Perhaps the systems in place were proper for the time they were used in. These systems however corrupt they maybe, may have been better than the systems before. It may just be a time for a reset in money.
Counting ten years starts now. I wonder if Eugene Fama and followers of modern financial system will embrace bitcion when they are proven wrong in ten years. When bitcoin not only haven't gone to zero, but has added many more zeros to its valuation.