Let’s tie two topics we have treated, one in exhaustive depth and the other in an ongoing series. They are bitcoin and capital consumption. By now, everyone knows that the price of bitcoin crashed. Barrels of electrons are being spilled discussing and debating why, and if/when the price will go back to what it ought to be ($1,000,000 we are told).
As an aside, in what other market is there a sense of entitlement of what the price ought to be, and a sense of anger at the only conceivable cause for why the price is not what it ought?
Bitcoin, Postmodern Money
Anyways, during the incredible run up in price, we wrote a series of articles, entitled Bitcoin, Postmodern Money. We were not focused on the price of the thing, other than to discuss the problems of unstable price, and even rising price. We did not say the price will come down, or when. We said a rising price makes it unusable as money.
In an online forum, some folks insisted that bitcoin is a store of value (in contrast to the dollar). We said that even if you don’t think it will crash, a skyrocket is not a store. Here is the graph through Friday.
Obviously, the skyrocket is just Phase I. There is another phase afterwards. Will there be another skyrocket phase? Will it get higher than the last peak around $20,000? We don’t know, and obviously those who were calling for $1,000,000 when it hit $20,000 don’t know either—gold and silver is not the only market in which fools promote higher prices to credulous audiences. Our point is something else.
When the price crashes, as it has from $20,000 to $7,000—a loss of 65% by the way—everyone knows that dreadful losses have been incurred. It’s just that most people think the losses occurred when the price went down. If you take this idea to its logical conclusion, you’d have the central banking thesis in a nutshell: just prevent price from going down!
We disagree. The losses actually occurred on the way up.
Back in December, when you gave your $20,000 to someone to buy his bitcoin, that is where your capital was consumed. Let’s drill down in this.
The seller bought 15 bitcoin years ago, when they were selling for $50. So he forked over $750 to someone who had bought them previously. That guy took his profits, and ran all the way to the wireless store to buy the latest smart phone. His profit was the buyer’s capital. But it was only $750 so who noticed. Chump change.