Remember the Big Short?
Steve Eisman was played by Steve Carrell. The former famously shorted sub-prime mortgages leading up to the 2008 GFC.
My friend and loyal reader Austin challenged me to debate / refute the following commentary from Steve Eisman's appearance on the February 6th, 2023 episode of the Odd Lots podcast. In the segment he expresses his skepticism about:
a) Bitcoin's use as a currency and;
b) How it should trade relative to the currency markets
I told Austin I would give it a go, so read on and let me know how I did in the comments.
Steve on bitcoin:
So I remember during Covid, you know, I was out on Long Island in the North Fork basically living there. And I would come back to the city every Tuesday to visit my mother. And so I would drive to the city, there would be no traffic, and it would take me about two hours. So I listened to podcasts. What else are you gonna do? Right? I even listened to this podcast every now and then.
But one of the group of podcasts that I listened to were the so-called experts on Bitcoin. And there are always two questions that I had. Number one, why is Bitcoin a currency? And number two, okay, it's a currency, but how should it trade? Now on every single podcast, they completely skipped over the, "why is it a currency issue?" that was just a given <laugh> and that's not a given to me. We can get back to that.
But it wasn't given. The second part of the story about how should bitcoin act, they all had the same opinion, which was as fiat currency, which is government issued currency, has been terribly debased because of all the deficits that all these countries have issued. But it's very hard to short fiat your currency because they all trade relative to one another. So if you short the dollar, your problem is that in a basketball team where everybody's five four, the dollar is five 11. So it's hard to short the dollar. Because it's taller than the other currencies, even though, quote unquote, it's been debased. So therefore you should buy Bitcoin as a hedge against the debasement of all currencies.
Okay. So let's accept that theory for a second. If that's the case, then Bitcoin should go up when people are nervous and rates are going up and Bitcoin should go down when rates are going down everybody feels good. And the problem was it actually did the opposite. Right? It would go up with everything else speculative. And it would go down with everything else speculative. So what was the point? So, you know, Bitcoin is up a lot this year because it's up a lot with everything else speculative. Now you can't have a currency that moves 25% every six months. That's not a currency. That's a speculation. And the thing I don't understand about Bitcoin is what problem is it solving? You know, is there a problem with currencies? I mean, the last time you went to the store and you, you pulled out a $20 bill you paid with your credit card. Did the store owners say, oh no, I don't take dollars. I mean, it's not even an issue. And by the way, the currency markets are the most liquid markets in the world, you know, I like to say, how long does it take to buy dollar euro done? A billion dollars? Done. That's how quickly it is. So I, I don't understand what Bitcoin solves and I don't understand the purpose of owning it other than it's another form of speculation.
My response to Steve:
Dear Steve:
Rebutting a self-made-billionaire requires some humility so it is with that intention I write the following. During your interview with the Odd Lots duo you referred to Kuhn's The Structure of Scientific Revolutions; and specifically his popularization of the term: paradigm shift.
To paraphrase Kuhn: science does not evolve gradually toward truth. Instead science follows the incumbent paradigm rendering it unable to explain phenomenon in the subsequent paradigm. A paradigm shift occurs when new theories (about phenomenon) become increasingly accepted and preferred, rather than rejected.
This is a perfect lens with which to evaluate Bitcoin-related phenomenon in the early 21st Century while it is an emergent money. The existing monetary regime predates the birth of most people alive today and as a result questioning what is money is viewed as a redundant or fanciful endeavor. However as Kuhn posits: revolutions offer unanticipated ideas and progress is not linear.
I. Bitcoin as a hedge against fiat debasement
Keep in mind there is a difference between what bitcoin is and what it might be in the future. Right now bitcoin is a $550 billion market cap asset class (not even large enough to be a rounding error in relation to total global financial assets denominated in dollars). Imagine a super tanker in the middle of the ocean (USD) and a teeny tiny skiff (bitcoin) in its wake. When the super tanker is running on all cylinders, its rising tide lifts all boats; but when the tanker turns ever so slightly the surrounding waters get choppy, especially for small fish (such as present day bitcoin).
Choppiness (aka volatility) is a feature of bitcoin and most emergent properties. The USD emerged long ago and therefore it seems unreasonable to expect bitcoin or any other emergent "dollar hedge" to move up in lockstep when the dollar moves down or vice versa.
Fiat debasement is not immediately marked-to-market, especially not for the global reserve currency.
Perhaps a more relatable way to think about fiat debasement is through Grade 1 maths; otherwise knowns as fractions. Let's assume a fictional class of twenty First graders who have access to 100 non-perishable apples (currency) in aggregate for high performance during the school year.
Three teacher's pets are nominated every week, each receiving an apple that can be redeemed immediately for a reward of Dixon Ticonderoga pencils; or traded with classmates during the year; or saved for a bigger prize redemption at the end of the school year.
Approximately 33 weeks later, one high achieving, hard working student with low-time-preference accumulated 20 apples; 20% of the total supply of apples, enough for the elusive and exclusive grand prize LEGO Kit. This kid is an absolute beast, controlling one-fifth of the classroom's money supply. On graduation day (this is a very serious elementary school) the school administrators proclaim one final act of generosity by bestowing 5 extra apples to each student in the class. This sudden and unexpected supply shock of apples (apple debasement) devalues the currency in one fell swoop.
Our valedictorian's purchasing power dramatically falls from 20/100 to 25/200; almost a 40% devaluation. Despite the gift of an incremental 5 apples, the valedictorian could no longer redeem his hard-won basket of apples for the grand prize Klutz LEGO Gadget Kit, now priced at 40 apples. Sad day.
The following month at Summer camp, insult was added to injury when the Klutz-less kid met a new LEGO-toting friend who attended a nearby school, offering a similar high performance scheme for students, albeit predicated on 210 rare, indestructible yet divisible oranges no longer in cultivation. No surprises there!
II. You can't have a currency that moves 25% every six months
Hmmm. Try telling that to the Turks, Argentinos, and Lebanese in 2023. All three countries have their own central banks and their currencies moved -24%, -48% and -90% versus USD over the last year.
While these currencies are neither reliable or aspirational as stores of value - they remain fiat sanctioned mediums of exchange. On a comparative basis over the last year, bitcoin held its stability against the Lira, dominated the Peso and absolutely crushed the Pound; which is why average citizens of these countries are receptive to bitcoin, arguably more so than their US-based counterparts.
So the next time someone proffers a "you can't have a volatile currency" argument remember that this is a Western-centric point of view that is not grounded in the realities of millions of people around the world.
III. I don't understand the purpose of owning it other than it's another form of speculation
The currency markets may be the most liquid markets in the world, however because the USD is the global reserve currency it suffers from Triffin's Dilemma. This paradox centers on the United States' need to run a balance of payments deficit (status quo long-term insolvency) in order to stimulate its reserves from the international community. It's no wonder that the US has revised its debt ceiling 78 times since 1960. At a rate of 78 times / 63 years hopefully it is obvious that accumulating more debt is how our monetary system is designed.
The US government is simultaneously a perpetual debtor AND creditor to itself.
At some point the debt burden will reaching a tipping point resulting in a paradigm shift. When that happens it will seem obvious that the writing was on the wall. Seen from this lens we can fairly view owning bitcoin as a form of speculation on the dollar's inability to maintain its hegemony indefinitely.
Nobody knows when the paradigm shift may prevail but owning bitcoin is asymmetric to the upside (as in the potential gain is greater than the downside potential loss) if and when such a shift occurs.
And that is the purpose of owning it.
Song of the week - Lowe Mi by Sevana
While released in 2022 if I told you this song first hit the airwaves the year you were born - you would believe me. 👵🏽