Bitcoin is the greatest informational and behavioural arbitrage of our time
The Herd loves the Status Quo
Herd mentality is a vital component of a happy community. I’m all for it. I love being involved in teams and groups. There’s nothing better than being part of shared achievement. It’s good for the soul.
I know that many people have a viscerally negative reaction to bitcoin and crypto; it’s like their sensibilities are being deeply offended, as though their worldview is being turned upside down. This is not what what a happy community wants. Bitcoin is the enemy – it is invading, aggravating, nefarious.
So when commentators frame crypto through a lens of crime, energy wastage, corruption and greed, it is human nature to seize on those negatives, however false or distorted they may be. And then you have the “evidence primacy” effect, whereby the first piece of information you get on something remains the dominant impression, and remains so even when different interpretations are presented.
Since February 1971 we have exchanged value only in pounds and pence in the UK. The way we have transacted has changed, from cheques and cash, to chips and pins and now to phone transfers, but the currency has remained the same. That’s who we are, that’s how we do it. Anything else is an imposter, an affront.
How has fiat performed?
1971 was a seminal year for money, because in August of that year President Nixon took the US dollar off the gold standard. From that moment on, you couldn’t go to the government and receive gold in exchange for a promissory note, or cash. Instead you would receive another piece of paper, promising you, well, another piece of paper. The era of “fiat” money had begun, with the value of your money being backed by the word of the government, and nothing else.
How has that worked out? You could argue that in Western economies, not too badly, but it’s a stretch. At the start it was a good thing for the USA, granted an “exorbitant privilege” because of the dollar’s dominance in world trade. But with power comes responsibility. There are many nations who consider that, in its role as global head of compliance, the US has overstepped the mark, most recently with the confiscation of Russian sovereign assets. There has also been a marked drop in assuredness as to how to act internationally, demonstrated by the inexplicable withdrawal from Afghanistan in 2021. Now, in both the US and the developed West, we see monumental private and public debt, wilting public services, a squeezed middle and acute wealth dispersion, all overseen by a blob that seems to have neither the ability nor the inclination to re-set the way it operates.
In developing countries the fiat experiment and reliance on the US dollar can be considered a disappointment at best and an abject failure at worst. Very few developing countries have escaped from cycles of severe currency debasement and accompanying fractious and authoritarian politics. And how frustrating to be constantly at the mercy of a small cabal of economists in Washington DC, in return for…what?
Bitcoin as a solution, not a problem
Money is, at its root, a communication mechanism which rewards us for our time, industry, ingenuity and effort. If we collect money for doing a good job, it makes sense to save it and enjoy the fruits of our work later. If money can be created by a central authority at will, however, the laws of supply and demand mean that the value of what we have saved will be reduced. This is currency debauchment, and it undermines fairness and reward for our labours.
So when people say they hate bitcoin, it is puzzling. Bitcoin doesn’t hate them. Bitcoin is just a computer programme.
However, Bitcoin is a form of money that can not be debauched. Isn’t that exactly what we need, as a yardstick for our debasing currencies? It is also global, so it has the power to benefit people wherever they live and whatever their condition in life. Alongside gold, which has its own practical drawbacks, bitcoin is the one asset that has the ability to set a global standard by which all else can be measured. As a rule, if a product is better than any of the alternatives, it will prevail.
US regulatory onslaught is a back-handed compliment
Given all the above, is it any surprise that the most aggressive attack on the crypto world is coming from the US, because they have the most to lose? Belatedly, the authorities have come to understand the threat bitcoin poses to US dollar hegemony, as well as the need to stem deposit flight from a faltering domestic financial system. It’s been extraordinary to witness the weaponisation of regulation by the Biden administration in the Land of the Free.
The problem the US has, however, is that bitcoin is a global phenomenon, and it looks like countries from Brazil to Nigeria, Vietnam, China and India are no longer towing the US line. At some stage all empires crumble, and it usually happens when they lose the moral high ground. In many countries, including Hong Kong, laws which encourage crypto usage and development are being put in place. As I write, news has hit that the SEC has thrown huge lawsuits at Binance and Coinbase, the two most dominant exchanges. Crypto prices have barely budged.
As this global economic and political rebalancing plays out over the next decades, it seems highly unlikely that Bitcoin will play a peripheral role. Alongside gold it is the one asset with truly decentralised credentials that can fill the impending void. If US dollar dominance was built on the back of trust, and that trust is being eroded, the fragility of the fiat experiment must necessarily be exposed.
And yet people “hate” bitcoin. They don’t even give it a chance. Because of the behaviour of the US and UK regulators, it is deemed uninvestable by virtually every investment institution on the planet, and because people believe what they read in the newspaper, they unquestioningly agree. Yet really that very behaviour should be interpreted as a compliment! The regulation has nothing to do with consumer safety, but everything to do with undermining an existential alternative to dollar hegemony.
Arbitrage of the century
In a quarter of a century of investing I have never seen such a blatant informational and behavioural arbitrage. Owing to bitcoin’s popular depiction as some sort of demented gambling scheme, most people have little knowledge of the genius of the technology or its suitability as a long-term store of value in a dysfunctional global economy. This extends to professional investors who are actively disincentivised from participating. Yet one day this will change, and the stampede will be of biblical proportions.
