After listening to a podcast by Kyle Ward from Mises Institute, I was glad to hear a confirmation that not all Austrian economists reject the promising potential offered by cryptocurrency. In fact, he is the second Austrian economist that I heard having such a positive evaluation of the crypto space. The first one is Saifedean Ammous, the author of the book, The Bitcoin Standard: The Decentralized Alternative to Central Banking
Generally, Austrian economists are anti-crypto. I was once a crypto basher. What made me such a critic of cryptocurrency is due to the influence of the Austrian School of Economics.
This time, I would like to add my thoughts after listening to Kyle Ward's podcast talking about common criticisms of cryptocurrency.
The First Criticism: Cryptocurrency Does Not Have an Objective Value
In the past, every time I encounter a controversial monetary issue, my first response was to go and check what the Austrians say about the subject. The same thing with crypto and the persistent message I’ve been reading is that Bitcoin or any crypto is no money because they don’t have any fundamental value outside from its monetary use. I think this is the most popular criticism that crypto enthusiasts hear from advocates of sound money.
Though I respect both Peter Schiff and Gary North for their knowledge of economic and political issues, but when it comes to Bitcoin and cryptocurrency, I think they are not listening well enough to understand the space. Or perhaps, their mind is closed as to the value proposition of cryptocurrencies.
Both Peter Schiff and Gary North are gold bugs and they tend to compare crypto with gold. As a result, their interpretation of crypto is influenced by their view of the yellow metal.
According to Peter Schiff, contrary to gold, which is used in electronics, dentistry, and jewelry, bitcoin and cryptocurrency lack essential value. This confused me because the Austrian School of Economics is known for the subjective interpretation of value. As such, value is a relative concept. The value of cryptocurrency is established by its users, just like the value of gold. Even though if it is true that cryptocurrency has no real-world utility, we cannot just take away from it its monetary value.
The Second Criticism: Cryptocurrency Cannot Protect us from Inflation
The second criticism thrown at cryptocurrency is its inability to protect us from inflation. In fact, many cryptocurrency projects have turbo charge the inflation rate far greater than the fiat currency.
How are we to respond to this criticism?
One response we often hear is that the problem in global economy contrary to mainstream narrative is not inflation but deflation. What we are seeing now is not the massive growth of fiat currency under the leadership of the USD. Instead, what we are witnessing is monetary contraction. There is not enough money to provide capital for all the projects and business ventures out there.
This response sounds good to me. I forgot the name of that Mexican Austrian economist who have been warning the world about the same monetary phenomenon since 2009.
My common sense reply to the second criticism is that, yes, it is true that some crypto projects are really growing their supply of the token in almost unlimited degree. I see some tokens with maximum supply of even up to trillion and quadrillion though their current circulating supply is still in the billion.
The inflation/deflation debate continues even in the crypto space. There are those who advocate to reduce the number of the token in the market by burning mechanism and they consider it good for the long-term sustainability of the project.
Others see such burning as nonsense and destructive of value. The important focus for them is not the supply of the token but the ongoing development of the project. Of course, it is insane to increase your token’s supply without the corresponding growth in value. That to me spells doom for that crypto project. However, those who argue for the advantages of inflation are also arguing for continuous development.
Returning to the inability of cryptocurrency to protect people from inflation, the experience of Venezuela denies this. A lot of Venezuelans have used bitcoin to hedge against declining currencies where the value of bitcoin was rising quickly against other currencies. In other words, any market product, not simply precious metals or cryptocurrencies, can act as a hedge against a currency's depreciation.
Third and Last Criticism: Sound Money is Scarce and We Cannot Say that to Bitcoin Because of the Existence of Thousands of Cryptocurrency
The third and last criticism is an extension of the inflation argument. There are crypto critics that downplay the 21 M limited supply of bitcoin, not believing the reality of its scarcity by pointing out the emergence of thousands of other cryptocurrencies.
This criticism according to Kyle Ward of Mises Institute ignores the importance of network effect, as well as the fact that Bitcoin is the first and most well-known cryptocurrency. According to him, the existence of many cryptocurrencies and the division of demand among them are comparable to the existence of multiple precious metals.
Ok, so I think that's it. That’s my take on the critics’ attacks on cryptocurrency using the objective value, inflation hedge, and scarcity arguments. The critics fail to take into consideration the subjective nature of value and the network effect of crypto projects.
Grace and peace!
Note: This is the transcript I used in the 3Speak video where I talked about Objective Value, Inflation Hedge, and the Scarcity Arguments.