There is a lot of talk about Bitcoin.
Now, with Elon Musk forming a new political party, the focus is upon the leading cryptocurrency. Musk, when asked, stated that the party will accept Bitcoin.
We have to keep in mind that Musk studied Economics. Unfortunately, when it comes to money, few get it more wrong than economists. Musk might now how to make bundles of it, but how it truly works, his background is misleading him.
Tesla CEO and tech entrepreneur Elon Musk has confirmed that his newly formed political party — the America Party — will accept Bitcoin.
“Fiat is hopeless, so yes,” Musk replied to an X user who asked if his new party would embrace Bitcoin.
Herein lies the problem. While many economists can tell you about the dollar, central banks, and there economic models they created, few truly understand banking or, more importantly, the global dollar system that took over more than half a century ago.
For this reason, the belief that Bitcoin will replace the US dollar is misguided. It is not a popular opinion among Bitcoin maxis, economists, or other USD haters.
In this article we will go through the reason why this is the case.
Bitcoin Will Not Replace The US Dollar
The US dollar is the leading medium of exchange. This is something we discussed at length so I will only lightly go into it here.
When people (or companies) invoice, they are not into speculation. For example, if I pay a bill of $10K in consulting fees on Friday, what happens if the person on the other side doesn't tend to the transaction until Tuesday due to being on vacation? If the price of Bitcoin declines 10%, the consulting services just became worth $9K.
Some will say "but the price could go up 10%". That is true yet it drives home the point. When people issue an invoice for goods or services, they do not want to speculate on currency value.
This means price stability is crucial. Guess what Bitcoin lacks in droves: price stability. The component that makes it a great trading vehicle results in it being a lousy medium of exchange.
Distribution
Another factor in the medium of exchange discussion is the idea of distribution.
Many forecast the Yuan replacing the US dollar since China is, according to many, going to surpass the US as the leading superpower. If this occurs, there is a problem: the Chinese engage in capital controls.
A global reserve currency cannot successfully operate under this premise. The reason for this is because we people need access to the currency. In other words, distribution is crucial.
One of the problems with "sound money" people is they are really talking about fixed money. History shows that fixed money always pools. In fact, we are seeing it with Bitcoin. When the money pools, distribution is lacking.
Bitcoin appears to be the ultimate HODLers asset. This is great for those who have it in their portfolio but destroys the distribution of the coin. To operate as a medium of exchange, people need access. We already see how 2.7 million BTC are already controlled by Coinbase.
Store of Value
The other area where Bitcoin fails is as a store of value.
In reality, we are talking about a trading instrument. It is an asset that people speculate upon. Certainly, over time, the price of Bitcoin can appreciate. Actually, this is what the history of Bitcoin is. Also, if people remain confident in the asset, we could see higher levels in the future.
This is no different than the plight of Apple stock. That has seen higher upside over the last 15-20 years. However, nobody is saying that is going to replace the USD.
When we are looking at store of value, we cannot operate on 10-20 years timeframes. People feel the impact much quicker.
The business cycle is such that when the economy is raging, the price of goods, services, and labor (people tend to overlook this) goes up. We see the opposite when the economy reverses. Therefore, purchasing power will ebb and flow due to business cycles which occur over a period of years.
Bitcoin, being fixed, has inherent volatility. This is no difference than grain or cattle. Market forces push it up or down. This means we have shorter cycles which affect the stability in terms of real world assets.
Income Crash
Bitcoin proponents like to talk about an "increase in purchasing power". The idea is that the US dollar is declining in this area, something that is often not debated and taken as fact. In reality, few factor free into the metrics something that is becoming increasingly commonplace.
What gets overlooked is that an income statement has two sides. The aforementioned mindset only looks at the expense side of the equation. Deflation money is good because when I go to buy something, each unit of my money goes further.
Here is the major challenge. What happens when you go to sell something?
On the balance sheet, this includes all assets. Imagine most everything you owned behaving like a car. With each passing year, it declines.
That means, when you go to sell the house you bought for $300K, you will get $250K,
Then we have the number one thing people sell: labor. Few consider the impact upon deflationary money on their paycheck. Do you think a company that is seeing a reduction in revenues will hand out raises? If each unit of currency is purchasing more, that means the owners of businesses get more labor for each unit.
How many considered the idea of an income crash due to deflationary money? Basic accounting mandates this happen. There are two sides to the income statement. Labor is like anything that is purchased. At times, a unit of currency will buy more, other times less.
Deflationary money means it will also be purchasing less.
No Difference
What is ironic is we end up at the same place with Bitcoin and the US dollar.
Ultimately, this boils down to the pace of change. Whether it is inflationary or deflationary, the rate of difference between income and expenses (on a per unit basis) is what matters. Nobody cares if prices are going up 10% per year if 30% raises are handed out. By the same token, a 10% reduction in price (increase in purchasing power) is of no benefit if the income declines are 20%.
Since the business cycle is always in operation, we see this playing out regardless of the money used.
Hence, Elon Musk is out in the weeds on this one. Bitcoin appears to be a good asset to acquire and hold long term. In this regard, some of the moves towards treasury could make sense (depending upon how it is structured and paid for).
That said, as a medium of exchange. Bitcoin fails. We will not see it replacing the US dollar. It is the King of Crypto-Assets but does not really size up as a currency.