Why Warren Buffet’s “theory” behind his non-investment choice in Bitcoin is wrong, Part 2

From the fact that “Bitcoin and gold are assets that don’t produce anything”, for Buffet is a consequence that their price increase would be unjustified: a “bubble” destined to burst. Although the premise is correct, the conclusion is wrong.

Money is a “non-productive” asset in the sense that, if one would find himself/herself on a desert island, he/she wouldn’t know what to do with it. If you could choose between a wallet with 100 bitcoins and a peach, you would definitely choose the second one. This is due to the fact that the situation of a desert island is an economy of pure subsistence, primitive and above all without exchange. In this type of “economy”, money (the medium of exchange) has no use as an email account would have no use without networks and computers.

However, once introduced networks and computers, that email account acquires utility, is demanded and therefore is priced (a price that today, in many apparently free email services, is paid, instead of money, in personal data and lack of privacy; but this is another matter). Once the exchange is introduced and once, thanks to it (and given the subjectivity of the value, on which we will return later), the economy moves away from mere subsistence and approaches to a complex market economy, money, despite being a non-productive asset, acquires utility.

More specifically, although it may not please Keynesians (which by definition are not economists), the amount of money that in a complex market economy is not spent or not invested in productive assets (hoarding), has an utility. The greater this utility, the greater the demand for money. The greater the demand for money, the greater is its price, that is, its purchasing power. Back in New York, our aforementioned castaway would prefer a wallet with 100 bitcoins.

The utility of “reserve money” (the one not spent on consumption nor invested in productive assets) derives from some of its functions (See Rothbard M., 2001 [1962], Man, Economy and State, Ludwig von Mises Institute, Alabama, Chapter 11). One of these is the ability to cope with uncertainty; for example, the capacity to bear unexpected expenses. Another of those functions is speculative; for example, if a person who has a low temporal preference (i.e. who saves a lot and consumes little) perceives a bubble in financial assets, he/she will disinvest and thus increase his demand for money.

The current economic, monetary and political situation maximizes the usefulness of a “reserve money” with the characteristics of Bitcoin.

In this situation:

• people are forced by the government with the threat of violence to use an arbitrarily inflatable form of money and thus lose purchasing power over time;
• by depositing their money in a bank, people formally lose ownership of it;
• because of the progressive limitations on the use of cash, people are increasingly forced to deposit their money in a bank; however, given that banks resort to the fractional reserve (and resort to it in an extreme way thanks to the protection of central banks and the government), they are always intrinsically bankrupt: in the event of a bank run, they should close;
• governments have approved measures that, in the event of a bank run, authorize the “rescue” of the banks with the money of account holders (i.e. bail in), which, we remind you, are in fact increasingly forced to deposit their money in a bank;
• by depositing their money in a bank, account holders are also exposed to forced withdrawals aimed at financing a parasitic machine in continuous and inevitable expansion;
• people are easily and increasingly monitored in their expenses, in their donations and in their earnings;
• people don’t have “escape routes” from cyclical crises like the one in 2008, which are the direct product of the artificial expansion of money and credit by central banks and that have been “cured” with even greater doses of the same poison that produced them;
• and more.

In this situation, a currency like Bitcoin makes it possible to use “reserve money” much more than in normal market conditions. As a result, its price has good reasons to continue growing in the long run. Bitcoin in fact:

• offers a choice in the money sector;
• it is not arbitrarily inflatable and this contributes to increase its purchasing power over time;
• allows the transfer of money from A to B without passing through C and without the possibility of censorship/surveillance by D;
• is a non-censurable form of money;
• allows you to keep ownership of money;
• doesn’t allow the fractional reserve: a bitcoin can be in the wallet of A or in that of B, not in both at the same time;
• doesn’t expose who holds it to risks of forced withdrawals, bail ins, etc;
• it is a form of money which, being decorrelated from the monetary, banking and financial system, offers an escape from the systemic cyclical crises produced by central banks/fiat money system;
• and more;

So even if Bitcoin is a non-productive asset (and moreover immaterial), it doesn’t follow that its extraordinary price increase is unjustified. Among other things, if it were unjustified, governments and central banks wouldn’t hurry to “ban it” and “regulate it” as they are doing (i.e. to prohibit and regulate exchanges and centralized custody services between bitcoins and cryptocurrencies, which, unlike Bitcoin, can be banned and regulated). On the contrary, if everything goes well, we are only at the beginning. To be unjustified (in the sense that in the absence of government coercion aimed at their support things would be very different) are, among other things:

• the current purchasing power of fiat money;
• the artificially low level of current interest rates;
• stock and bond prices that have been affected by artificially low interest rates.

In Part 3 we will discover why Bitcoin is not a bubble and why its price increase is not only due to people investing money in it.

=> Click here to read Part 1: https://medium.com/@melis.io/why-warren-buffets-theory-behind-his-non-investment-choice-in-bitcoin-is-wrong-part-1-d91890955139

=> Click here to read Part 3: https://medium.com/@melis.io/why-warren-buffets-theory-behind-his-non-investment-choice-in-bitcoin-is-wrong-part-3-final-ccc335d2f622