The Breakdown - Niall Ferguson on Why Bitcoin and China Are Winning the Monetary Revolution

Episode Date: December 6, 2020

On today’s Long Reads Sunday, NLW reads Niall Ferguson’s latest Op-Ed for Bloomberg: “Bitcoin Is Winning the COVID-19 Monetary Revolution” In it, Ferguson argues that bitcoin’s sovereignty and “built-in scarcity in a virtual world characterized by boundless abundance” are driving its adoption.  He also argues that rather than adopt a China-style central bank digital currency, incoming President Joe Biden should look to integrate bitcoin into the U.S. economic system.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and all nodes. And produced and distributed by CoinDesk. What's going on, guys? It is Sunday, December 6th, and that means it's time for Longreed Sunday. And I have never had as many requests for a specific piece as I have. for this one, it could only be the piece in Bloomberg by Neil Ferguson. Bitcoin is winning the COVID-19 monetary revolution. So instead of giving you some big long intro, let's just dive in.

In Shuggy Bain, Douglas Stewart's award-winning and harrowing depiction of alcoholism, sectarianism, and deprivation in post-industrial Scotland, money is always scarce and often dirty. Deserted by her second husband and unable to hold down a job, Shuggy's mother, Agnes, relies on her twice a weak benefit to feed her children, or her booze habit. As the latter nearly always wins, she and Shuggy are regularly reduced to desperate expedients to fend off starvation, extracting coins from electricity and television meters, pawning their few valuable possessions, and ultimately selling their bodies for brutal sexual favors. Stuart vividly captures the miseries of a Glasgow of greasy coins and filthy banknotes. After one of many wretched

copulations in the back of a taxi, one of Agnes' lovers inadvertently showers her with coins from his pocket. Shiggy's father briefly reappears at one point handing his son two 20-pence pieces from his taxis change dispenser by way of a gift, grudgingly adding four 50-pence pieces when the boy looks nonplussed. Don't ask for mar. The rag and bone man who goes from house to house buying old clothes and junk pays with a roll of grubby pound notes bound by an old band-aid. The image is especially startling because banknotes have so rarely featured in the narrative. The only credit in this world is from rent-to-own catalogs, the Provident doorstep lender, and a few hard-pressed shopkeepers.

I grew up in middle class, mostly sober Glasgow, but I still remember the tyranny of those damned coins, the nightmare of having too few for a bus fare or the wrong sort for a phone box. To my children, all this is as much a part of ancient lore as pirate chests and de blooms once were to me. Coins are fading fast from their lives, soon to be followed by banknotes. In some parts of the world, not only China but also Sweden, nearly all payments are now electronic. In the U.S., debit card transactions have exceeded cash transactions since 2017. Even in Latin America and parts of Africa, cash is yielding to cards and a growing number of people manage their money through their phones. We are living through a monetary revolution so multifaceted

that few of us comprehend its full extent. The technological transformation of the internet is driving this revolution. The pandemic of 2020 has accelerated it. To illustrate the extent of our confusion, consider the divergent performance of three forms of money this year, the US dollar, gold, and Bitcoin. The dollar is the world's favorite money. not only dominant in central bank reserves, but in international transactions. It is a fiat currency, its supply determined by the Federal Reserve in U.S. banks. We can compute its value relative to the goods consumers buy, according to which measure it has scarcely depreciated this year.

Inflation is running at 1.2% or relative to other fiat currencies. On the latter basis, according to Bloomberg's dollar spot index, it is down 4% since January. Gold, by contrast, is up 15% in dollar terms. But the dollar price of a Bitcoin has risen $130,000,000,000,000. percent year-to-date. This year's Bitcoin rally has caught many smart people by surprise. Last week's high was just below the peak of the last rally in December 2017. When Bitcoin subsequently sold off, the New York University economist Norel Rubini didn't hold back. Bitcoin, he told

CNBC in February 2018, had been the, quote, biggest bubble in human history. Its price would now crash to zero. Eight months later, Rubini returned to the fray in congressional testimony, denouncing Bitcoin as the mother of all scams. In tweets, he referred to the first. referred to it as shi-coin. Fast forward to November 2020, and Rubini has been forced to change his tune. Bitcoin, he conceded in an interview with Yahoo Finance, was maybe a partial store of value because it cannot be so easily debased because there is at least an algorithm that decides how much the supply of Bitcoin raises over time. If I were as fond of hyperbole as he is, I would call this the biggest conversion since St. Paul. Rubini is not the only one who has been

forced to reassess Bitcoin this year. Among the big-name investors who have turned bullish are Paul Tudor Jones, Stan Drucken Miller, and Bill Miller. Even Ray Dalio admitted the other day that he, quote, might be missing something about Bitcoin. Financial Journalists, too, are capitulating. On Tuesday, the Financial Times, Isabella Kaminsky, a longtime cryptocurrency skeptic, conceded that Bitcoin had a valid use case as a hedge against the dystopian future, quote, in which the world slips towards authoritarianism and civil liberties cannot be taken for granted. She is on to something there, as we shall see. So what is going on? First, we should not be surprised that a pandemic has quickened the pace of monetary evolution. In the wake of the

black death, as the historian Mark Bailey noted in his masterful 2019 Oxford Ford lectures, there was an increased monetization of the English economy. Prior to the ravages of bubonic plague, the feudal system had bound peasants to the land and required them to pay rent in kind, handing over a share of all produce to their lord. With chronic labor shortages came a shift toward fixed yearly tenant rents paid in cash. In Italy, too, the economy after the 1340s became more monetized. It was no accident that the most powerful Italian family of the 15th and 16th centuries were the Medici, who made their fortunes as Florentine money changers. In a similar way, COVID-19 has been good for Bitcoin and for cryptocurrency generally. First, the pandemic

accelerated our advance into a more digital world. What might have taken 10 years has been achieved in 10 months. People who had never before risked an online transaction, were forced to try for the simple reason that banks were closed. Second, and as a result, the pandemic significantly increased our exposure to financial surveillance as well as financial fraud. Both of these trends have been good for Bitcoin. This episode is brought to you by Crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can

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I never subscribed to the thesis that Bitcoin would go to zero after it plunged in price in late 2017 and 2012. In the updated 2018 edition of my book, The Ascent of Money, the first edition of which appeared more or less simultaneously with a foundational Bitcoin paper by the pseudonymous Satoshi Nakamoto, I argued that Bitcoin had established itself as, quote, a new store of value and investment asset, a type of digital gold that provides investors with guaranteed scarcity and high mobility, as well as low correlation with other asset classes. Satoshi's goal, I argued, was not to create a new money, but rather to create the ultimate safe asset, capable of protecting wealth from confiscation and jurisdictions with poor investor

protection, as well as from the near universal scourge of currency depreciation. Bitcoin is portable, liquid, anonymous, and scarce. A simple thought experiment would imply that $6,000 is therefore a cheap price for this new store of value. Two years ago, I estimated that around 17 million bitcoins had been minted. The number of millionaires in the world, according to Credit Suisse, was then 36 million, with a total wealth of $128.7 trillion. If millions, if millions of million, millionaires collectively decided to hold just 1% of their wealth as Bitcoin, I argued, the price would be above 75,000, higher if adjustment is made for the Bitcoins that have been lost or hoarded. Even if the millionaires held just 0.2% of their assets as Bitcoin,

the price would be around 15,000. We passed 15,000 on November 8th. What is happening is that Bitcoin is gradually being adopted, not so much as a means of payment, but as a store of value. Not only high net worth individuals, but also tech companies are investing. In July, Michael Sailor, the billionaire founder of Microstrategy, directed his company to hold part of its cash reserves in alternative assets. By September, Micro Strategies' corporate treasury had purchased Bitcoin's worth $425 million. Square, the San Francisco-based payments company, bought Bitcoin's worth $50 million last month. PayPal just announced that American users can buy, hold, and sell bitcoins in their PayPal wallets. This process of adoption has much further to run. In the words of

Wences Cesaris, the Argentine-born-and-tech investor, who is one of Bitcoin's most ardent advocates. After 10 years of working well without interruption, with close to 100 million holders, adding more than 1 million new holders per month, and moving more than 1 billion per day worldwide, it is a 50% chance of hitting a price of 1 million per Bitcoin in 5 to 7 years time. Whoever he is or was, Satoshi summed up how Bitcoin works. It is a purely peer-to-peer version of electronic cash that allows online payments to be sent directly from one party to another without going through a financial institution. In essence, Bitcoin is a public ledger shared by a network of computers. To pay with Bitcoins, you send a signed message transferring ownership to a

receiver's public key. Transactions are grouped together and added to the ledger in blocks, and every node in the network has an entire copy of this blockchain at all times. A node can add a block to the chain and receive a Bitcoin reward only by solving a cryptographic puzzle chosen by the Bitcoin Protocol, which consumes processing power. Nodes that have solved the cryptographic puzzle, miners in BitSpeak, are rewarded not only with transaction fees, five bitcoins per day on average, but also with additional bitcoins, 900 new bitcoins per day. This reward will get cut in half every four years until the total number of Bitcoins reaches 21 million, after which no new bitcoins will be created. There are three obvious defects to Bitcoin.

As a means of payment, it is slow. The Bitcoin blockchain can process only around 3,000 transactions every 10 minutes. Transaction costs are not trivial. Coinbase will charge a 1.49% commission if you want to buy one Bitcoin. There is also a significant negative externality. Bitcoin's proof of work consensus algorithm requires specialized computer chips that consume a great deal of energy, 60 terawatt hours of electricity a year, just under half of the annual electricity consumption of Argentina. Aside from the environmental costs, one unforeseen consequence has been the increasing concentration of Bitcoin mining in a relatively few hands, many of them Chinese, wherever there is cheap energy. But these disadvantages are outweighed by two unique features.

First, as we have seen, Bitcoin offers built-in scarcity in a virtual world characterized by boundless abundance. Second, Bitcoin is sovereign. In the words of Cesarees, no one can change a transaction in the Bitcoin blockchain and no one can keep the Bitcoin blockchain from accepting new transactions. Bitcoin users can pay without going through intermediaries such as banks. They can transact without needing governments to enforce settlement. The advantages of scarcity are obvious at a time when the supply of fiat money is exploding. Take M2, a measure of money that includes cash, bank accounts, including savings deposits, and money market mutual funds. Since May, USM2 has been growing on a year-on-year rate above 20%, compared with an average of 5.9% since 1982.

The future weakness of the dollar has been a favorite 2020 talking point for Wall Street economists such as Steve Roach. You can see why. There really are a lot of dollars around, even if the velocity of circulation has slumped because of the pandemic. The advantages of sovereignty are less obvious, but may be more important. Bitcoin is not the only for the only form of digital money that has flourished in 2020. China has been advancing rapidly in two different ways. Nowhere in the world are mobile payments happening on as large a scale as in China thanks to the spectacular growth of AliPay and WeChat pay. Those electronic payment platforms now handle close to 40 trillion of transactions a year, more than double the volume of Visa and MasterCard

combined, according to calculations by Ribbic Capital. The Chinese platforms are expanding rapidly abroad, partially through investments in local fintech companies by Ant Group and Tencent. At the same time, the People's Bank of China has accelerated the rollout of its digital currency. The potential for a digital yuan to be adopted for remittance payments or cross-border trade settlements is substantial, especially if, as seems likely, countries participating in the One Belt One Road program are encouraged to use it. Even governments that are resisting Chinese financial penetration, such as India, are essentially building their own versions of China's electronic payment system. Some economists, such as my friend Ken Rogoff, welcome the demise of cash because it will make

the management of monetary policy easier and organize crime harder. But it will be a fundamentally different world when all our payments are recorded, centrally stored, and scrutinized by artificial intelligence, regardless of whether it is Amazon's Jeff Bezos or China's Xi Jinping who can access our data. In its early years, Bitcoin suffered reputational damage because it was adopted by criminals and used for illicit transactions. Such nefarious activity has not gone away as a recent Justice Department report makes clear. Increasingly, however, Bitcoin has an appeal to respectable individuals and institutions who would like at least some part of their economic lives to be sheltered from the gaze of Big Brother. It is not, as the term cryptocurrency misleadingly implies, that Bitcoin

is beyond the reach of the law or the taxman. When the Federal Bureau of Investigation busted the online illegal goods market Silk Road in 2013, it showed how readily government agencies can trace the counterparties and suspect Bitcoin transactions. This is precisely because the blockchain is an indelible record of all Bitcoin transactions, complete with senders and receivers' Bitcoin addresses. Moreover, the Internal Revenue Service is perfectly prepared to demand information on Bitcoin accounts from exchanges, as Coinbase discovered in 2016. A rumor of new U.S. Treasury regulations requiring greater disclosures by exchanges caused a sharp

crypto sell-off over Thanksgiving. The point is simply that the financial data of law-abiding individuals is better protected by Bitcoin than by AliPay. As the Stanford political theorist Stefan Krasner pointed out more than 20 years ago, sovereignty is a relative concept. Rather than seeking to create a Chinese-style digital dollar, Joe Biden's nascent administration should recognize the benefits of integrating Bitcoin into the U.S. financial system, which, after all, was originally designed to be less centralized

and more respectful of individual privacy than the systems of less free societies. Life in the east end of Glasgow in the 1980s was nasty, brutish, and short of money. But all those transactions in grubby pounds and Pence's genuine shit coins were, if nothing else, private. If Agnes Bain bought special brew instead of oven chips, it was a matter for for her, the shopkeeper, and her long-suffering kids. The state was none the wiser. That was stanton consolation for poor Shuggy. But as we have learned again this year, a free society comes at a price that is not always payable in cash.