Cypherpunks vs Legalists

The primary function of money is that of being a means of exchange (MoE), i.e. its usage in commercial transactions. The other two commonly cited functions of money (store of value and unit of account) are merely derivative. This seemingly banal statement actually has pretty deep consequences for cryptocurrencies. In the rest of this post, I will refer to Bitcoin specifically, but the reader may substitute any other cryptocurrency without changing the gist of the argument.

If MoE is the primary function of money, it means that the present value of Bitcoin must ultimately derive from usage. Since Bitcoin is presently overwhelmingly not used for commercial transactions, it must mean that the public is speculating that such usage is in the future.

Take another somewhat monetized asset such as art. Why does art have value? Art has value because we expect people to want to have art in the future. People flock to museums, and to houses whose owners have nice art. That’s what I would call “usage”. For money, usage is usage in commercial transactions.

Anything that affects its usage affects the value of the money. When regulators define Lightning nodes as money transmitters and subsequently shut them down for not being registered, usage goes down. When capital gains on Bitcoin are taxed, usage goes down. Larry White, in Better Money, describes how constraining that is:

All purchases and sales are to be reported to the IRS on Form 8949. Using BTC […] as a transaction medium thus carries two burdens: The financial burden of the capital gains tax, and the paperwork burden of recording the price and quantity of each acquisition (which counts as an asset purchase) and each spend (which counts as an asset sale) and figuring the capital gain realized with each spend. […] These taxes discourage US taxpayers from using BTC […] rather than the US dollar as a transaction medium.

(I’m not saying capital gains on Bitcoin shouldn’t be taxed. That perfectly makes sense for an asset that isn’t legal tender. I’m just stating a simple fact that it reduces the usage of that asset in settlement of commercial transactions.)

And while Bitcoin does not have the legal status of currency, it is nevertheless treated as one for regulatory purposes. Larry again:

For anti-money laundering purposes, Bitcoin is regulated like currency. Crypto exchanges must know their account-holders, just as banks must, and crypto exchanges must gather ID information from anyone who sells crypto for US dollars in any amount. Buried in the Infrastructure Investment and Jobs Act passed in November 2021 are provisions that […] [a]ny party who receives $10,000 worth of crypto must report the transaction and the identity of the spender to the IRS on form 8300, a provision that previously applied only to dollar currency transactions.

Any additional artificial constraint on Bitcoin’s function as a means of exchange (i.e. constraints not inherent to the Bitcoin network such as transaction fees) is a step toward making Bitcoin permissioned money. And Bitcoin as permissioned money is just a Rube Goldberg machine. In the extreme, if one can only spend one’s Bitcoin when the government allows it, then Bitcoin is pointless.

The supply of Bitcoin at any one point in time is determined by who will part with their coins, not how many coins there exist. In the limit, if people can only part with their coins when they are allowed, the government effectively controls the supply. One might as well just use whatever money the authority issues. Hence, in such a limit, Bitcoin is only useful if one doesn’t comply.

If MoE is what matters, then hodling isn’t helpful or virtuous. Hodling is anti-usage. It is hoping for a greater fool. At some point, people will have to start using their coins. When that happens, hodling won’t make sense anymore. Money doesn’t have cash flows. Saving one’s wealth in an asset that doesn’t generate cash flows is kind of silly.

This is why Michael Saylor may well be a threat to Bitcoin rather than its apologist. Saylor is fixated on Bitcoin as “property”, and seeks legal recognition as such, as a way to further entrench Bitcoin, since property is sacred in US law. In other words, Saylor seeks a kind of permission, the blessing of the State. Relatedly, Saylor celebrates Bitcoin primarily as a store of value. The point, according to him, is to never sell, and just borrow against an asset that will continuously grow in value because of its fixed supply.

But, first of all, value cannot be stored. One can only store things, i.e. coins in this case, but not the value of those coins. “Store of value” implicitly assumes stable demand. So there is no number-go-up guarantee.

Secondly, the demand for Bitcoin as an investment is much more volatile than would be a demand for Bitcoin as a medium of exchange. In the context of a fixed supply, demand volatility leads directly to volatility of purchasing power, which is a barrier to becoming a medium of exchange. Therefore, Bitcoin as investment is hurting Bitcoin as money.

Thirdly, if your only concern is number-go-up, then you should want Bitcoin to become money, as that demand is much greater than investment demand. Gold is much less valuable today than it would be if it was still a medium of exchange.

Fourth, demand for Bitcoin as collateral is downstream of demand for Bitcoin as investment. It is not a significant primary source of demand, it is merely a side effect of the demand for Bitcoin as an investment. And in a world where Bitcoin is regulated just like any other wealth-carrying asset, I don’t see why Bitcoin would constitute a superior collateral.

Finally, and most importantly, treating Bitcoin as property is uninspiring and self-defeating. Uninspiring because, in the limit, Bitcoin is just another regulated property in the pen. Self-defeating because the more onerous the regulations it accepts, the more permissioned Bitcoin becomes, the more pointless it becomes, and therefore the less value it has.

So, no, hodling isn’t virtuous. Permissionless usage is virtuous. Usage is better than storage (stabler, greater value). And permissionless usage is ultimately Bitcoin’s only source of value. Bitcoin is inherently subversive. Inherently anti-authority. It only has value to the extent that it is used to evade compliance. This is something I’ve recently changed my mind about, extricating myself from Saylor’s seductive and seemingly sophisticated narrative. Saylor is the cheerleader of the Legalists. Properly understood, Bitcoin’s true destiny is to be black market money. Ironically, this talking point has been mostly found amongst critics of Bitcoin. The critics were right all along to say that being a black market money is the only point of Bitcoin. The key realization is to actually embrace it, with both the good and the bad. Cypherpunk as fuck.