A Defense Of Bitcoin Against The Latest Version Of An Old Attack

Bitcoin, it seems, has been the subject of hyperbole since it jumped into the public consciousness a few years ago. At that time, I started to write regularly on the subject in these pages and quickly came to realize that most articles on the subject fell into one of two camps: Either they were what seemed then to be hopelessly optimistic, calling for the digital currency’s price to be in the thousands of dollars in a few years, or they were reporting comments of respected figures in the world of finance who said that a complete collapse was coming soon.

What we now know, of course, is that the bulls were right. There is, however still no shortage of people predicting a collapse to zero for bitcoin.

The latest to make that assessment is Vanguard’s Chief Economist, Joe Davis. In an op-ed piece for etf.com Davis says that while he is optimistic about the future for blockchain technology, he sees “a decent probability that its price goes to zero.”

For those of us who were bullish on the currency years ago, his reasons for that belief and his analysis elicit nothing more than a strong sense of déjà vu.

Davis points to volatility in the price of bitcoin in dollar terms over the last year or so as evidence, but that is a statement of the obvious. What it ignores is that said volatility was sparked by a massive run up at the end of 2017. There is nothing new in any traded instrument overshooting the mark on a strong bull move before correcting.

While the numbers involved in bitcoin’s surge and correction may be bigger than that of say, oil in 2013 and 2014 or gold during the same period, the chart pattern, and the dynamic that forms it, is essentially the same.

The argument is that the degree of volatility matters, and something that volatile cannot be a “currency,” but that argument fails on multiple fronts. First, bitcoin is currently a hybrid of a currency and a commodity. Its release and supply were, after all, modeled on gold which is seen as a commodity but is also one of the oldest currencies known to man.

Even if you ignore that, it is still true currencies are volatile by nature. That is hard to deny, even if you disregard the obvious examples such as the Argentine Peso or Zimbabwean dollar and look at a longer-term chart for a relatively stable pair such as USD/JPY.

Holding Yen from 2008 to 2012 resulted in a forty percent loss in value. Oh, and Davis's other argument that interest payments are vital falls down here too, when you would have received less that 0.2% on average over those four years.

Of course, I understand that there is a difference in both magnitude and time-span between USD/JPY’s volatility and that of bitcoin, but the argument really fails when Davis states that bitcoin’s volatility disqualifies it from being a currency, as it is not a “store of value.”

In fact, bitcoin was created precisely because currencies are not stores of value.

The current model for economies and their currencies is inflationary, which is to say that economic growth is enabled by creating more money. That is why a house that cost a few thousand dollars a few decades ago will now cost hundreds of thousands, an analogy that can be applied to almost any product.

If you simply acquired some dollars and stashed them away fifty years ago you would have lost a lot of purchasing power. Bitcoin, on the other hand, is designed to be disinflationary. The fixed supply means that as the supply of goods increases with growth, the value of each unit increases.

There are, therefore, several logical flaws in Mr. Davis’ argument that bitcoin is going to zero, but what creates the sense of déjà vu is that he refers in his piece to both “pets.com” and tulips. These bubble comparisons were being made five years ago when I started to write on bitcoin and have been trotted out by hundreds, if not thousands, of people since.

Time has shown that they were wrong then, and they are still wrong now. It is quite possible that bitcoin drops to significantly lower than the roughly $8,000 current price, but a rehash of clichéd arguments that have so far been as far from accurate as can be adds nothing to the debate. Until somebody comes up with something else, I will continue to believe recent history.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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