A conversation with Bitcoin investor Tuur Demeester about the cryptocurrency, its relation to the theory and history of money as well as its disruptive potential on society at large.

Text: Pascal Hügli

How has Bitcoin altered the conception of money?

Bitcoin shows us that Hayek’s proposed denationalization of money is not just a pipe dream. And it is also challenging the idea that the money supply needs to be bureaucratically managed. Bitcoin is powerfully suggesting to the world that money can be scarce, decentralized, market-based, censorship-resistant, politically neutral and highly auditable.

Is there an inherent contradiction between money as a store of value, medium of exchange and unit of account being united in one thing altogether?

As classical economist Stanley Jevons has described, the four characteristics of money are in fact four consequent stages of evolution. First, collectible. Second, store of value. Third, medium of exchange. And finally, fourth, unit of account. If Bitcoin is to become full-fledged money, it will go through all four stages.

Doesn’t money as a lubricating oil for a functioning economy need to be flexible in supply?

This notion of money as a lubricating oil for the economy is one of the most damaging analogies of all time. If one increases the money supply, all that does is cause misallocation of capital (by giving the first recipients of the new money more purchasing power to the detriment of the later recipients) – these interventions don’t magically increase wealth. The reality is that the demand for money is always infinite. So, should we print infinite amounts of money? Of course not! Money is a communication tool, the blood of the economy. The world economy only needs one fixed amount of money to do the job of calculating prices. As long as the monetary unit is sufficiently divisible, no alterations to the money supply are needed.

But who decides what the optimal amount of money is? Satoshi with the 21 million Bitcoin? The market? If the latter, the supply of money cannot be fixed, because otherwise there would be no discovery process since the amount is already fixed in the first place.

Bitcoin is a mechanism to efficiently convert energy into financial reliability. If the market decides it likes the atom-like properties of Bitcoin, then it has to accept its hard-coded financial policy. Very much like how the market, after it chose gold as a monetary ledger, it had no choice but to accept the particular physical and scarcity properties of gold in our world. I believe there really is no debate possible at this point. Savers, ceteris paribus, will always prefer scarce assets over non-scarce assets. And so, this fundamentally undercuts demand for any assets with a more liberal supply scheme than Bitcoin.

At least something that is used as a store of value will be hoarded and stuffed away and can’t be used as a medium of exchange that needs to change hands often. Do you see this contraction?

No, I don’t. When something is a store of value, it means that it possesses optionality. Think of the potential energy that is stored in a pound of gunpowder. Very powerful indeed, but that same pound cased inside of bullets is likely even more powerful, because it allows the owner to release the potential energy entirely at a point of his choosing, with a simple squeeze of his finger. No need for time-consuming actions to prepare the gunpowder for deployment! And so likewise, the more liquid (=saleable) an asset is, ceteris paribus, the better it will function as a store of value. If an asset functions as a medium of exchange, all that means is that it has reached such a high liquidity threshold that now it can be used as a way to move value on a very regular basis.

That is a fascinating analogy, but won’t there be strong incentives to hoard Bitcoin because it’s conceptualized as the greatest store of value ever created?

“Hoarding” is just a derogatory synonym for saving. There’s nothing wrong with saving, on the contrary: it truly is the engine of all sustainable economic growth. In a hard money world, all economic development stems from investments that require prior saving (even the bootstrapping entrepreneur has somehow saved enough resources to dedicate scarce time to his startup).

Coming back to your analogy from above, “hoarded” Bitcoin can be seen as a mountain of potential energy to be released for good?

Yes. Think of it as potential purchasing energy, which is patiently waiting to rebalance markets. This energy will, in particular, be deployed when markets are undervalued, which means that investors are unwilling to provide businesses with new capital to improve production and efficiency, even though the consumers are showing enough demand and purchasing power to makes those businesses grow sustainably. Furthermore, it is an illusion to think that somehow all Bitcoins could or would ever be hoarded. Man is mortal, and there is always a price at which he would be willing to sell a fraction of a liquid asset that happens to be in his possession.

In the age of Bitcoin, do we have to make a distinction between stable and hard money? Bitcoin might not be price stable in the short term, but value conserving in the long-term.

Stable money, in my opinion, will always be a pipe dream. Any assets that trade freely in the market, will have a fluctuating price, including money. If the natural volatility of a financial asset is artificially suppressed, eventually that results in hyper volatility.

The stability in the case of fiat currencies is just an illusion that will finally break?

Any money that pretends to maintain a stable price against another asset, or basket of assets, will eventually fail to deliver. George Soros demonstrated the fallacy that monetary pegs are somehow sustainable when he “broke” the Bank of England.

Is stable money at least a necessary illusion, so producers and consumers can calculate their assets and navigate their business?

It depends on how you define “stable”. Of course, if an asset is extremely volatile, it won’t be very useful as a unit of account. But then again, the reason why it’s so volatile could very well be that it’s simply not mature enough. Commodities with stable supply, fairly stable demand, and which are owned and traded by hundreds of millions of investors tend to be stable in price. Cycles will not go away, and that’s not ideal – but still, it’s the best we have.

Where do you think does Bitcoin sit in the economic dichotomy between Keynesians and Austrians?

I think Bitcoin has disproven the Austrian dogma of the regression theorem: money does not need to originate from a commodity first. And I think Bitcoin is challenging and disproving the Keynesian fallacy that the engine of economic growth is debt – it’s actually saving, and the flourishing Bitcoin economy is a great illustration of that.

Doesn’t the regression theorem just state that for something to develop into money, this thing needs to have some use value first? As use-value is subjective, Bitcoin doesn’t necessarily violate the theorem, does it?

Correct! I was painting with strokes too broad when I said commodity instead of “economic good with use-value”. The background to this discussion is that Carl Menger was the first “Austrian economist” to describe the historical origins of money, i.e. that all monies likely emerged from market places where they had some kind of value before they were used as a media of exchange. And then his student Ludwig von Mises came around and stated that that value meant that this “pre-money good” must have had some kind of utility. And this is where current day Austrian dogmatists have trouble with Bitcoin because they don’t recognize that utility is also a subjective phenomenon! The use of Bitcoin as a collectible in the period 2009-2011 is a perfectly valid “use case” under the subjective theory of value.

Do you think that our world, which is oftentimes described as capitalistic, will look completely different 50 years after Satoshi launched Bitcoin?

In my opinion, people’s economic freedom and prosperity will improve because of Bitcoin, much like how the efficiency gains by the printing press, electricity, and the internet made the world a better place. Several monopolies will likely become challenged and unbundled because of Bitcoin, which should reduce the phenomenon known as „crony capitalism“.

Can you maybe elaborate a little more on what kind of monopolies you have in mind? And what would the unbundling look like?

I’m mostly thinking about the financial services industry, which includes the issuance of money and credit. Because of the monopoly on the production of money, this industry has become highly centralized, with many inefficiencies as a result. I also believe the business cycle originates from credit expansion (money printing), which leads to misallocation of capital throughout the economy, eventually resulting in a “bust” or economic depression.

Zooming out: We are entering the digital age. Bankers, Nobel laureates, politicians as well as economists seem to be reacting rather stubborn and uneducated to Bitcoin and its wider implications. Can you see a parallel to feudal lords that were afraid of the industrial revolution?

I’m more leaning towards an analogy with the reformation. Just like the printing press allowed people to share whichever ideas they liked quickly and cheaply, Bitcoin is allowing for capital to flow and be stored freely like never before. Similar to the catholic church in the 16th century, central banks and financial institutions today are „damned if they do, and damned if they don’t“ participate in the conversation about these new financial ideas. If they do participate, they could be embarrassed by critics who point out the “true” meaning of their economic euphemisms or lambast them for particular inconsistencies. But then if they don’t participate, they risk being ignored and seen as old, obsolete dinosaurs.

What about physical privacy in our day and age, is it dead?

I believe privacy isn’t dead at all, but there is indeed a struggle going on with the centralization of online identities. One promising counter-movement of projects in that area uses the word „self-sovereign identity“.

Is self-sovereign identity really a thing? And if so, will it be ushered in by Bitcoin or any other blockchain?

I could be wrong, but I don’t think self-sovereign identity data will even directly be stored on blockchains. I imagine people employing “key banks”, which can store parts of a multi-signature encryption scheme that can prove your identity. One could also share keys with one’s family or friends for recovery purposes. Bitcoin Lightning technology could possibly play a role in compensating individuals or entities for storing the keys that help preserve people’s self-sovereign identities.

What do you make of blockchain technology? Is there only Bitcoin or could there be other things besides Bitcoin that are interesting?

I think there will be multiple cryptocurrencies in the future, though I do think that Bitcoin’s market share will be in the 80-90% range. Private blockchains are a misnomer in my opinion: permissioned databases with particular signature schemes have been around for a long time. As far as public blockchains designed for fundamentally other purposes than secure transaction settlement, I don’t know and for the moment I don’t see any that I am interested in.

Do you think Satoshi has figured it all out then?

Satoshi’s code wasn’t perfect. He put down a good enough foundation, but even after ten years of core development, a lot of work needs to happen still to make the Bitcoin protocol stack into an environment that has similar reach and societal integration as, say, the worldwide web.

Have Western nation-states reached their limits concerning (social) scalability and are coming to an end?

I don’t believe nation-states are coming to an end anywhere soon, though I do think it’s possible that widespread adoption of Bitcoin could curb their ability to borrow and spend. The ECB already hinted at this possibility in its 2012 report on Bitcoin (Virtual Currency Schemes), where it suggested that seigniorage income streams could be jeopardized in such a scenario. In other words, it is possible that we live in the era of “peak government”.

There is the argument that western nation-states can only exist to the oversized degree that they do today because they can basically borrow and spend with no limit.

The challenge with state-issued money is indeed that it allows for near unlimited rent-seeking: a monopolistic service provider (fiat banking) charging an ever-higher price for the privilege of financial transactions and investing. Bitcoin is severely challenging this.

Tuur Demeester is the founder of Adamant Capital, an US-based investment company. Tuur is very well versed in the field of Austrian Economics. He first discovered bitcoin on a research trip in Argentina and started recommending it as an investment at $5 in January 2012.