Paul Tudor Jones made a splash recently by investing either “just over 1 percent” or “almost 2” percent of his assets on bitcoin.
That might be a great investment. After all, bitcoin enthusiasts are just the newest generation of gold freaks. The market in cryptocurrency is not driven by those who think it will one day be a useful currency. It’s driven by the ideology of debt hysteria. These people all believe that hyperinflation is just a short time away.
But unlike the Jehovah’s Witnesses who stopped making predictions about the end of the world after they were wrong a half-dozen times, the debt hysterics never admit defeat. It’s just a couple of years away!
If you follow the bitcoin press, you’ll see it’s more advocacy than news. While they do bring up troubling issues, the articles are always peppered with lots of happy horseshit from “industry leaders.” Unmentioned is that all of these people have strong incentives to keep the crypto bubble inflating.
The Value of Currencies
Think about currency in terms of its actual value. Those in the digital bubble refer to government-created currencies as “fiat.” It’s almost always used derisively. But it is true to some extent.
You see, even if all the world decides that the US dollar is useless, it will still have value. You and I can still pay our taxes with it. So the government, by law, provides its currency with value.
Where is the value of bitcoin except in the heads of its believers? The few things I can buy directly with bitcoin only exist because people are speculating on the currency.
But I understand: currency is a strange thing. The more you think about it the less you understand. But bitcoin advocates seem to think that it is some stable form of wealth whereas fiat currencies can’t be trusted. This is despite the fact that all the major currencies have been rock-solid over the last 40 years while the supposed great stores of wealth like gold and bitcoin have been all over the place.
“Whims” of Government, “Wisdom” of Markets
I said before that Paul Tudor Jones might be making a good investment. I am not, however, saying he is smart. His reasons for investing in bitcoin are based on the same old fact-free debt hysteria.
He noted that bitcoin wasn’t “subject to the whims of government spending.” First, the value of a currency is not subject to the whims of government spending. Japan, for example, has a 200% debt-to-GDP ratio but can borrow cheaply. The UK had a debt-to-GDP ratio that high or higher from roughly 1920 through 1960.
The second issue is this anti-government idea that what it does is bad. The whims of the market are supposedly fine. Bitcoin went from $15,000 at the start of 2018 to $4,000 at the start of 2019 to $7,000 at the start of 2020.
Think about that as a practical matter. Here are what you would have paid for a loaf of bread:
| Year | Cost |
|---|---|
| 2018 | $4.00 |
| 2019 | $15.00 |
| 2020 | $8.57 |
Wow! What a great system! You might as well live under hyper-inflation.
Inflation, Deflation, and Libertarian Fantasies
Paul Tudor Jones also said this:
If you take cash, on the other hand, and you think about it from a purchasing power standpoint, if you own cash in the world today, you know your central bank has an avowed goal of depreciating its value 2 percent per year. So you have, in essence, a wasting asset in your hands.
One of my first indications that libertarianism was nonsense was an article about the glories of the gold standard. It noted that inflation was a terrible thing that destroyed our precious wealth. It even talked about how great deflation (negative inflation) was. “Wouldn’t it be great if your money went up in value?!”
Well, no. It would be terrible.
If you are rich, a monetary system with no inflation or deflation might be great. If you have to work for a living, it’s terrible. The economy would not grow nearly as fast without modest inflation. If you knew that things would only get cheaper over time, you would hold off on purchases.
Now, that might be great in the abstract. We do a lot of useless consumption. But we need to set up an economic system where the lack of consumption doesn’t result in poor people starving.
Deflation would also be catastrophic for lending. Imagine if in addition to the interest you have to pay on a loan you have to pay it with money that is worth more!
The “Wisdom” of Paul Tudor Jones
People like Paul Tudor Jones don’t think this kind of stuff through. They don’t have to. They are like two guys running from a bear: it doesn’t matter how fast they are; the one who is slower gets eaten. In the bitcoin market, Jones can be an idiot as long as there are even bigger idiots for him to make money from.
That’s all fine. What’s not fine is that people like him are held up as oracles about the economy. And the fact that people see him on television results in something really odd.
People who don’t follow business at all tend to be slightly better informed on how the economy works. That’s simply because they haven’t swallowed all the debt scold nonsense that isn’t true but sounds so very Serious.
So invest in cryptocurrencies or don’t. I actually find them very interesting. I think the rise of stablecoins shows that they may be very useful in time. But the rise and fall of their prices is about speculation — mostly speculation based on nonsense reasoning.
If you invest in corn futures, you are doing something: helping corn get to where it needs to be in the global marketplace. What are you doing when you invest in bitcoin? I don’t think you are doing anything more than if you played poker.
Yes: some people are better poker players than others. Some people make a lot of money playing poker. But the world isn’t a better place because you play poker.
Image created from Paul Tudor Jones by Hedge Fund Letters under CC BY 3.0.