Rebuttal of Willem H Buiter

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Avatar for ewyr
Written by
2 years ago

The following article appeared in CNA:

"Commentary: Don’t trust the hype – Bitcoin will never be a wise investment"

"The sooner Bitcoin and other DLT-based cryptocurrencies are relegated to a footnote in economic history, the better, says Willem H Buiter."

First, it is unclear how buying Bitcoin can mitigate company risk.

It is quite clear. On the contrary, there is significant risk not diversifying into select cryptocurrencies.

  • There is a high risk holding USD cash or bonds due to monetization.
    Holding cash depreciates at around 8% normally, simply due to monetary expansion.
    Bonds return 0%, effectively the same as holding cash.
    Money expansion is unknown and opaque, and high risk.
    Devaluations will occur quickly, and must be done without warning or in secret to hide it from the general public.

    Recently there is unprecedented monetary expansion, largest deficit since WWII at 16% of GDP, and it not financed by international or domestic bond purchases. Previously much of US debt was financed (lent) by Japan, China, other countries, and US funds like pensions buying bonds. However this is not the case anymore, it is completely monetized by the Fed, with 3 trillion created over 9 months.

    This is so large, unprecedented, with such unknown the effects, that China is bracing for the effects of the money expansion.
    There is also a high risk of coming wars over US losing supremacy to China, which will cause far larger devaluations of currencies as military war funding takes precedence and will come from money expansion. US will likely need to engage in middle east wars as China asserts control, and US will likely engage in proxy wars with China over Taiwan, Spratly, and Senkuku islands.

  • There is a high risk without Diversification
    While it was typical to diversify cash or bonds in multiple countries, such as EURO, YEN, USD, these are all the same systems with the same systemic risks.
    Property is not liquid, while cryptocurrencies allow diversification while keeping full security and liquidity of funds.

  • There is high risk going forward of difficultly or inability to move funds between countries. Countries are closing off and tightening capital controls for geopolitical and domestic economic reasons. Cryptocurrency reduces this risk, providing fully secure transactions internationally without intermediaries for negligible cost.

  • Those who have researched bitcoin and invested a portion of cash into bitcoin over the last 10 years don't need to be told by someone less clear on the technology about the 'risk'

But that hardly makes it a wise investment, especially when one weighs the potential returns against the high risk of material capital losses.

It seems the opposite is true. There is high risk of large lesses in cash and bonds currently, low risk in cryptocurrencies like bitcoin. There is potential for large gains in cryptocurrencies like bitcoin.

The author seems to pin his arguments on the belief that bitcoin is a bubble that will pop, without showing an understanding of crpytocurrency, nor providing any analysis of why.

Equally far-fetched is the idea that cryptocurrencies could provide solutions to problems often encountered in emerging economies.

over-issuance of currency is just one possible threat to emerging-market financial stability, and removing it does not suddenly make Bitcoin a reliable store of value.

Bitcoin protects against over-issuance of currency, and over-issuance of currency is by far the single most important thread to financial stability. This is primarily what gives Bitcoin value and makes it a reliable store of value.

All current currencies have no value, and are just bits in a computer. The control of issuance is precisely the only thing that gives modern fiat currencies a value.

Rather than being 'far-fetched' idea, it is the primary idea, and the primary solution to economies that suffer due to poor fiscal policy.

The issuance issue alone does indeed suddenly make Bitcoin a reliable store of value.

The author says over-issuance is just one possible threat, but does not state the other 'possible threats'.

Other threats, such as taking your money by force, exist, but again, Bitcoin provides a far safer haven than cash or bank accounts in this case too. For example, in Greece, money was just deducted from savings accounts when the government needed more.

Bitcoin’s price volatility since its inception in 2009 has been staggering.

Of course, it started out with a couple of people and no value. Stability will continue to be related to the market cap, since large buyers can move any asset with a small enough market cap. That is no reason to dismiss the technology.

He doesn't seem to mention that since 2009, it has risen from a few cents a bitcoin to over $50,000 based on fundamentals and market forces alone.

On March 29, 2021, its price reached US$57,856 – some distance below its all-time high of $61,284 on March 13

This is a poor attempt as showing instability and price volatility. It shows a 5.6% decline from an all time high over 16 days. This is normal for a market cap of it's size, where large buyers and sellers can move the market.

Volatility will remain, and will continue to reduce as market cap goes up.

a recent study finds that Bitcoin’s price volatility is almost ten times higher than that of major fiat currencies (such as the US dollar against the euro and the yen).

Of course, but that sounds quite good, since bitcoin market cap is far less than 10 times the monetary based of USD and YEN.

The author picking the two largest currency bases on earth to compare with the market cap of bitcoin is disingenuous and misleading.

Bitcoin transactions are notoriously inefficient... only seven transactions can be completed per second.... Bitcoin is simply too inefficient ever to become an effective medium of payment.

Maybe he is unaware that bitcoin is already, and has always been, and effective medium of payment. It is used worldwide for payments.

While bitcoin has become a store of value, other cryptocurrencies like bitcoin cash, litecoin, dogecoin, and monero are used for micropayments.

So the efficiency is irrelevant, cryptocurrencies are already used for remittances, payments, and micropayments. They are already a more secure and effective medium of payment that any other payment type. Combined, that all scale far above visa.

The author does not note that Visa is not an effective method of payment

  • is only available to a small portion of the world

  • is only available to a small portion of shops of the world

  • is high cost, adding fixed fee and percentage fee on all transactions

  • is not available to the vast majority of the world. it only takes a trip around the world to see how absurd the idea of using credit cards around the world is

  • due to lack of security, $35 billion in credit card fraud was reported in 2020

  • 7% of of all credit card transactions are fraud in 2020

  • in the US, there were 165 million records of personal data breached in 2019, due to the credit card system requiring card and identity data (out of a population of 330 million)

  • most common method of identity theft and crime is credit card

Cryptocurrency has none of the above problems. Any person in the world with a cheap mobile phone can fully participate in a completely secure and trusted monetary system with no identity, no accounts, and no signup.

This opens up cheap, worldwide payments to billions of people.

A proper currency should be able to undergo a massive expansion in supply when circumstances demand it

Where does the author get these ideas?

What is a 'proper' currency?

Why 'should' a currency undergo massive expansion for circumstances, typically things like a new military invasion for resource control?

A property of currency is supposed to be secure in its limited supply, which national currencies no longer keep to, and bitcoin does.

Gold is considered a 'proper' currency, used by the world for thousands of years up to 1971. It cannot magically undergo a massive expansion in supply whenever it is demanded.

Nothing is changing with regards to national currencies, they remain, and they will expand per the wills of those in power, nothing changes. Bitcoin is available to those who want to use it, nothing more.

Bitcoin and similar cryptocurrencies are extremely unattractive as stores of value.

Bitcoin has proven to be an extremely attractive store of value, and has proven to operate as such for 12 years since inception. It is a remarkable technological advance and success that it has done this, the only current method providing secure store of value on the internet.

What does the author 'research' to make this statement?

Bitcoin’s extremely high energy demand is another nail in its coffin

Bitcoin's high energy demand is it's success. The energy use provides the security.

Things that use electricity are not the problem. If it were, electric cars and appliances should be the first to go.

Electricity use is a good measure of societies advancement, and the challenge is to produce clean electricity, not remove the use.

Using electricity to secure global transactions is a very honorable and good use electricity to advance humanity.

If the author is worried about the environment

  • he should be promoting bitcoin as an alternative to banks.
    Banks are estimated use 3x more carbon that cryptocurrencies (ref)

  • ensure electricity production is clean, so society can keep using electricity

Bitcoin farms primarily use hydro power due to being the cheapest in cost.

Willem H Buiter is Visiting Professor of International and Public Affairs at Columbia University.

It is typical for people who become rich or get titles to start thinking they are an expert in unrelated fields of their expertise.

It is surprisingly un-researched text coming from a 'researcher'.

Maybe it is 'sponsored' research from vested interests looking to make attacks on bitcoin?

The author made another article a month ago on 'Bitcoin, the 12-year-old bubble' !

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