The latest report from the Biden Administration writes off the benefits of Bitcoin while ignoring the fundamentals and economic activity that give it value.
The White House has released the extensive “Economic Report of the President,” which included a section titled “Digital Assets: Relearning Economic Principles.” This section detailed Bitcoin, its functionality and various “possible benefits that proponents claim for this popularity of crypto assets.”
The proponent’s claims the report intends to address vary from crypto assets serving as investment vehicles and enabling fast digital payments, to improving the United States’ current financial technology infrastructure. The report then addresses the “Reality of Crypto Assets,” as the section is so titled, setting the record straight in the eyes of the Administration.
“Compared with many other asset types, crypto assets are very volatile, and, hence, highly risky,” the report begins with. “Because they are very volatile, crypto assets can be used for speculation, an investment strategy that seeks to make a profit from short-run trading. One reason many crypto assets are highly volatile is that many of them do not have a fundamental value.” It then goes on to provide the example of stocks and debt, comparing them to “unbacked crypto assets [that] are traded without fundamental anchors, suggesting that their market prices only reflect speculative demand, or market sentiment, not claims on cash flow.”
In between this and the next statement, is an interjection “Box 8-2” which details “How Does Bitcoin Work?” This box, coincidentally, may serve as the answer to the question of, “what is Bitcoin’s fundamental value?” in its description of the inner workings of Bitcoin.
Strawmanning bitcoin’s proponents, the report then goes on to state that “one of the purported benefits of crypto assets like bitcoin was to hedge against inflation, meaning that their value does not erode as inflation increases. But as inflation increased globally in the second half of 2021 and in 2022, the prices of crypto assets collapsed, proving them to be, at best, an ineffective inflation hedge.” While the inflation narrative surrounding the 2020-2021 bull market did prove a distraction, the price of bitcoin still soared during the pandemic, reaching all time highs of $69,000. Besides that, bitcoin has still been serving as a store of value for those living in countries with highly inflationary currencies, and is incredibly likely to do so for all countries with inflation on a long enough time scale given bitcoin’s fundamental scarcity.
The next section, “Cryptocurrencies Generally Do Not Perform All the Functions of Money as Effectively as Sovereign Money, such as the U.S. Dollar,” demonstrates the Administration’s belief that bitcoin will never be able to fulfill the three functions of money — the ability to act as a store of value, medium of exchange and unit of account — as effectively as the dollar.
“Cryptocurrencies currently serve each of these functions, [but] they only do so in limited ways in the United States, so they do not serve, from an economic perspective, as an effective alternative to the U.S. dollar,” the report states. But this is a short-sighted conclusion, as Bitcoin is still in its relative infancy, and even now it has proven in other markets that it can very effectively fulfill these functions — the U.S. and its citizens simply enjoy the privileges of a functioning economy that makes the necessity of bitcoin seem distant.
The White House describes how, because of the smaller number of entities accepting bitcoin as payment, it does not serve as a proper medium of exchange and therefore unit of account.
But this is, once again, short-sighted in that every day, further markets, products and businesses are built around the bitcoin ecosystem. Indeed, El Salvador made headlines as it made bitcoin legal tender, and now is seeing success in their choice to adopt it.
“The strength of the U.S. dollar is derived from several important factors, such as faith in government institutions and the legal system, but cryptocurrencies lack these factors,” the report states. But this faith has been tangibly shaken as the world watches the banking system repeatedly fall back on the need for federal action. It shouldn’t be mistaken that this encourages faith in the system, but rather, highlights the necessity to continually save a system fully designed to rely on a debt-cycle bubble.
There are also fundamental misunderstandings within the report. Highlighting the differences in energy requirements between proof-of-work and proof-of-stake, the report describes how “Despite Ethereum’s switch to proof-of-stake, Bitcoin has not announced plans to make a similar change.”
But, as Foundry’s Director of Public Policy Kyle Schneps said in a recent “The Atlantic” hit piece on Bitcoin’s energy usage, “It is impossible for Bitcoin to switch to proof-of-stake, because the Bitcoin network is completely decentralized. There is no governing body that could make such a decision.”
Not only is the Bitcoin network fundamentally averse to moving away from proof-of-work, there is no “Bitcoin” to announce plans in any sense that the White House report suggests.
“In places like Texas, which expects to add 27 gigawatts of additional cryptomining demand in the next four years—equal to roughly 30 percent of the generation capacity of the entire Texas grid—cryptomining could increase the likelihood of power crises, where demand overwhelms the grid’s ability to provide sufficient generation,” the report says. But this conclusion ignores the potential of returning energy to the grid during peak-load times in return of subsidies from the energy company, making energy demand surges less impactful on the grid, not more.
The report also focuses on the potential for a U.S. CBDC and how it might improve the financial system. “A U.S. CBDC—a digital form of the U.S. dollar—would have the potential to offer significant benefits. It could enable a payment system that is more efficient, provide a foundation for further technological innovation, facilitate faster cross-border transactions, and be environmentally sustainable.”
“For example, a potential U.S. CBDC could help ensure that such payment systems are aligned with the principles of human rights, democratic values, and privacy,” the report says, all values which are highlighted as potentially being compromised by a CBDC by the Bitcoin Policy Institute.
The report ends with the conclusion that cryptocurrencies “cannot challenge basic economic principles, such as what makes an asset effective as money and the incentives that give rise to run risk. Although the underlying technologies are a clever solution for the problem
of how to execute transactions without a trusted authority, crypto assets currently do not offer widespread economic benefits. They are largely speculative investment vehicles and are not an effective alternative to fiat currency.”
These conclusions too have been proven incorrect in other markets, as the widespread economic benefits of bitcoin usage have made themselves visible in the various local economies flourishing around the world.
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