I recently wrapped up a cordial discussion with Naomi Brockwell and Jimmy Song about BTC and BCH. During the discussion Naomi pointed me to an article I had not read written by Jimmy where he implies big blockers are the Keynesians of the crypto space while the small blockers are Austrians.

Oh boy.

So this article will be a bit of a reply to that one. Needless to say I don’t consider myself to be a Keynesian. Nor do I view the debate over the blocksize as having much do with Austrianism/Keynesianism, but we’ll get into that in a sec.

Here’s Jimmy’s words:

If you think about the block size limit, it’s essentially a speed limit on money moving through Bitcoin. I define Crypto-Keynesianism as a perspective where moving money through the economy is more important than perhaps an extra level of security around the money itself.

From a Crypto-Keynesian perspective, this is deadly for an economy. For an economy to grow, the Crypto-Keynesian perspective requires the money to be moving faster and faster. Larger blocks, then, allow for more consumption of goods in Bitcoin and thus are the key to Crypto-Keynesian prosperity.

From a Crypto-Keynesian perspective, Bitcoin’s usefulness increases with the velocity with which Bitcoin can move through the economy. If the velocity is limited, the thinking goes, the growth of Bitcoin is also limited.

In other words, Crypto-Keynesian economics emphasizes a faster velocity of money because the value of money from a Crypto-Keynesian perspective is mainly as a medium of exchange.

There’s a grain of truth here in that I do believe the value of Bitcoin is tightly coupled to its use. But the desire to see Bitcoin used (at least on my part) does not come out of a Keynesian desire to stimulate the economy through velocity but rather more a an Austrian/Neoclassical concept of price formation.

How prices work

Let’s just work through a basic example. How do we explain the price of a barrel of oil? Let’s ignore futures markets for a second. I think we’d all say that the price is formed through a combination of supply and demand. On the supply side we have the total number (stock) of barrels of oil available at any given time and the demand comes mainly from people who want to use it in one form or another ― to refine it into gasoline or make plastics, etc.

All other things equal, the more use cases for oil there are and the greater number of users there are, the greater the demand will be and the higher the price will be.

There is a second reason people demand barrels of oil, however ― speculation. Suppose you believe that the supply and demand conditions for oil a year from now will be such that the market price for a barrel of oil will be 20% higher than it is today. In that scenario you might want buy barrels of oil and stick them in storage for a year. In other words, you might want to HODL them. If you’re right and the price of oil is greater next year, you can take your barrels out of storage and sell them at a profit. Classic buy low / sell high.

Is speculation the same as “storing value”?

If you decide to speculate on a barrel of oil are you “storing value”? I suppose from one perspective you are but I do want to draw a distinction between what I consider to be two different intents, storage and speculation.

I touched on this is a previous article of mine that you should definitely read. But generally speaking people “store value” when the thing they want to spend that value on is not available at this point in time. It could that the number one thing I’d like to spend on is a snowboard trip to Aspen but it’s the middle of summer and I can’t do this right now. Thus I must store my accumulated value in some asset until I can spend it. It could be that I want to save for retirement, or for a rainy day, or whatever. The point is that I have some accumulated value that I don’t want to spend right now.

So what should I store it in? All other things equal I want to store it in the asset that offers the best combination of low risk and high liquidity. Typically that is money itself.

So why would I store it in barrels of oil instead of money or the myriad of other assets that offer lower risk and better liquidity? Speculation! I might be willing to store my savings in oil if I can get enough of an ROI to compensate me for the increased risk and loss of liquidity.

No ROI, no way I’m going to take on unnecessary risk!

What happens if usage disappears?

Suppose a substitute for oil were to appear such that the demand for oil from users dropped basically to zero. In such a scenario what would the HODLers do? It should be obvious that unless they continue to predict that the price will be higher next year they will all dump all their oil. What would need to happen to make them predict that the price for oil would still be higher next year? If the total stock of oil were fixed (as is mostly the case with Bitcoin) then the price would only go up if demand went up. But if the users all stopped using it where will this demand come from? The only place left for this demand to come from is an influx of new speculators. In other words, in the absence of actual usage , the price can only sustain itself with a perpetual influx of new speculators .

By definition this is not a ponzi scheme. A ponzi scheme is an investment scam with a specific definition. But it has very similar properties to a ponzi scheme in that the price can only be sustained by a perpetual inflow of new investors. Which is obviously not sustainable.

On to Bitcoin

My view is that HODLing is basically synonymous with speculation. Ask yourself if you would still be HODLing Bitcoin if you knew the price would never go above $7,600 and given the risk of it going way down? I think anyone who is honest with themself knows they would dump it incredibly fast. The only people for whom it might make sense to still hold Bitcoin is those who are of high risk of having their assets confiscated by the state as Bitcoin is still a pretty good way to shelter assets. But for most people this is unlikely to be the case.

So you can see we are not advocating usage out of some kind of Keynesian fetish for velocity, but rather because the basic economic concepts of supply and demand tell us that an asset must have utility for it to command a price. An asset cannot sustain a high price (or any price for that matter) if its demand comes exclusively from speculators.

There’s nothing Keynesian at all about this analysis. In fact I’d say it’s an affront to Austrian economists to say that they would agree with the notion that an asset without utility could sustain its price purely on the back of speculation.

This basic economic fact is openly denied by many small blockers. Here’s Alex Bergeron saying “The utility you describe is a completely made up concept”.

Along these same lines I’ve seen a couple small blockers (Stephan Livera comes to mind) argue that an asset must be HODLed first before it can be used as a medium of exchange. Talk about being ass backwards!

Imagine someone digging gold out of the ground and saying “You know I have no use for this but I better HODL it anyway”. And then only after enough people do the same can it be used as a medium of exchange.

This is pure nonsense. Logic would dictate if nobody had any use for it they wouldn’t have dug it out of the ground in the first place. Utility must always come first before people would even think about storing value in it. And even there, they would only chose to store value in it if and only if the expected ROI from doing so is worth risks relative the alternatives.

The real divide

So Keynesian/Austrian economics really doesn’t have much to do with the blocksize debate other than small blockers using the concepts of value and price in a very bizarre way. The real debate has more to do about the properties of the system that emerges from from the various scaling visions advocated by both sides.

As I’ve said many times before, sure you could have Bitcoin be nothing more than a secure digital token upon which a layer 2 banking system would be built. But why would we expect such a system to have any different outcome than the gold standard? It's basically just a gold standard with a digital base asset instead of a physical one.

Advocates of such a system seem entirely unaware of the history of the gold standard in the United States and elsewhere around the world. Banks, clearinghouses, payment hubs, etc have historically be very easy to control and regulate. Not to mention they themselves often engaged in regulatory capture and undermined the soundness of gold while lining their pockets.

The primary innovation of Bitcoin is p2p value transfer not “limited supply”. We’ve had assets with limited supply for thousands of years. We’ve never had the ability to bypass the corruptible and controllable institutions that have historically been involved in money transmission until Bitcoin came along.

Choking off that property and forcing everything to route through quasi-centralized institutions undermines Bitcoin’s reason for existence.

I recently came across this allegory by imaginary_username which does an excellent job of explaining why we must never create incentives for centralized institutions.

In the beginning Satoshi created Bitcoin and the community improved on it. Payment processing was decentralized, security was ensured via PoW, nobody controlled Bitcoin. Life was good, but the economy was small.

In the beginning people dug gold from the ground and silver was added to alleviate scarcity. You could pay anyone, security was ensured via checking and locking up an actual hunk of gold, nobody controlled where the next gold mined could pop up. Life was good.

Then the economy expanded, but blocksize was limited. Congestion raised fees, crashed nodes, and transaction became cumbersome; people who wanted to actually use bitcoin in their lives was frustrated.

Then the economy expanded and value rose, but gold and silver remained hunks of metal. They are heavy to carry, are hard to divide into small chunks, and do not travel easily over long distances. People who wanted to actually use gold for lots of commerce was frustrated.

But there is a solution! Coinbase, Changetip and Greenaddress rode to the rescue: We could just do everything offchain as long as you trust us! People flocked to the offchain shops; they are so much more convenient than the decentralized blockchain. It's not a big deal, since they're backed by the chain anyway, no?

But there is a solution! Governments, banks and big merchant houses rode to the rescue: We could just do everything in our shiny tokens and notes, as long as you trust us! People flocked to the note issuers; they are so much more convenient than the cumbersome, nobody-in-charge metals. It's not a big deal, since they're backed by gold anyway, no?

The use of offchain shops proliferated. Coinbase gobbled up Changetip, then in turn was bought out by Goldman Sachs. The use of Coinbase became the de facto standard of Bitcoin commerce; some holdouts still do things on-chain, but nobody cares about them, they are so few in number, and it's not like they can sell their coins to anyone but Coinbase at a reasonable price, anyway. Visa contemplates a merger with Coinbase.

The use of notes proliferated. Banks consolidated and in turn had their note-issuing capacity absorbed by the government. Notes became the de facto standard of commerce; some holdouts still trade in gold, but nobody cares about them, they are so few in number, and it's not like their gold won't end up in a government vault eventually, anyway. Other countries contemplate adhering to a Dollar standard.

Then Coinbase declared, one uneventful morning, they they will no longer buy or sell on-chain coins. Nothing much happened because they pretty much was the definition of Bitcoin anyway, it's of no practical concern to most people.

Then the federal government declared, one uneventful morning, that they will no longer honor gold exchanges. Nothing much happened because notes are already used in pretty much everything and nobody accepts gold anyway. It's of no practical concern to most people.

Coinbase (now part of the Visa network) betrays the people and starts colluding with bankers, inserting inflation, redistributing coins. A small group of people realized how horrible it is, and how technology can fix it. "Maybe this time we'll do it right! Let's call it..."