Bitcoin's only use is to hold on to it and hope – economist

SS: Right, so you keep saying that Bitcoin isn't worth anything, unlike, for instance, gold. But if I bother to cash out a bitcoin, I'll get those like $50,000 or whatever for it, that I can then use to buy gold, right? So is it really worthless? 

PS: Well, there's a difference between the value and the price. I mean, Bitcoin certainly has a price because people are willing to buy it. And so people value it in the sense that they think it's worth something and so they're willing to buy it. That's different from something that actually has real value, intrinsic value. I mean, gold doesn't have value simply because people believe in it. Gold has value because it's a metal, and it has properties that are very unique that other metals don't have, that makes gold extremely useful. So there's a lot of demand for gold in the real economy, not just jewelry, which is one of the most obvious uses for gold, but it's used in electronics and dentistry, and aerospace because it has properties that other metals really can't replicate. So you're always going to have demand for gold. Now, the reason gold became a monetary metal, in addition to industrial metal and metal for luxury goods and jewelry, is because gold retains all of its properties over time. And so if I have some gold, I don't have to use the gold today, I can hold on to it, and somebody else can use it in the future, and it won't diminish. And so it became a store of value, because you know, the value didn't go away over time, and because it had other attributes, it was easy to use as a medium of exchange. But Bitcoin doesn't have any of those attributes. I mean, Bitcoin derives its value simply because people believe that if they own it, somebody else will give them more for it in the future. But that belief, you know, may go away in the future. You know, confidence is a very fickle thing because if people desire bitcoins solely because they think the price is going to go up, if they no longer think the price is going to go up, they no longer want it. And when the sentiment turns, there's no bottom, I mean, the market could just implode. That doesn't happen to something with real value like gold. If people don't want to own gold, because they don't think the price is going to go up, there's a lot of people who need to buy gold, regardless of what happens to the price. So you have, you know, natural demand. 

SS: Because I'm thinking like that: we can attach value to pretty much everything, right? Wood, copper, a pound of salt, stone, whatever, all those things can be money if we agree that they are, right? 

PS: No, you don't attach value. Copper has value because, again, it's a metal that is used. I mean, every commodity has value because of what you can do with it, what you use it for. Investments have value because of the returns that they generate. Real estate has value because I can rent it out. I mean, I can also live in it myself but apart from that, I can rent it out and get income. Stocks have value because they're companies that have earnings, and they can pay those earnings to me in dividends, they can buy back stock, but they can return value to me from the income that they generate. Bonds are an investment asset because I lend somebody money, they pay me interest, they pay me back the principal, plus they pay me interest. But Bitcoin is not an asset in that sense of the word and that it doesn't throw off any type of return. And it's not a commodity in that you can't use it for anything. Now, people say, well, it's a digital currency. Well, except it doesn't function as a currency. It's very expensive to actually use and it's very volatile. So you can't really price things in it, and it's too expensive to transact in it. So the only use case you have left for Bitcoin is to hold on to it and hope the price goes up. But, you know, a hope it’s not a strategy and eventually the price is going to crash. And I think a lot of people unfortunately are going to lose a lot of money because they put their faith in a fiction. 

SS: Alright, but what keeps surprising me is that despite all criticism of cryptocurrency, that it's a bubble, that its value is speculative and highly volatile, Bitcoin is still being invested into. I mean, I listen to Elon Musk and he says Bitcoin is a fluke, but then Tesla still buys it. You're a vocal critic of cryptocurrency and you own bitcoins yourself. What is it? Why? Is Bitcoin like a gamble, too tempting to resist? 

PS: No, no, I don't own any Bitcoin. I had some that were gifted to me that I lost, but I don't have them anymore. But I've never actually bought any Bitcoin. I mean, yeah, it would have been great have I bought it a long time ago, because clearly, I could sell it and, you know, to a greater fool and cash out. But, you know, I think that there are some Wall Street firms that were initially and correctly sceptical of Bitcoin and now they're kind of embracing it just because the public is into it. And remember, Wall Street is going to sell whatever the public is foolish enough to buy. I mean, they were manufacturing all kinds of dot-com stocks during that bubble, and they wiped everybody out. They were busy packaging up subprime mortgages and selling them to their clients when there was demand for them, and that bubble popped. So Wall Street has a history of getting involved in bubbles near the peaks, just because they're trying to make a buck off of the irrational exuberance of their customers. So I think this is no different when it comes to Bitcoin. But you know, whether or not we're at the top, clearly, there's no way to know how many new highs Bitcoin is gonna make. I mean, it got up to $58,000 and change as we're recording this. I mean, it's around $49,000. I mean, so was $58,000 the top? I don't know, I mean, maybe it's going to make another new high or several new highs, but you don't know. But also, maybe it was the top and it's just going to keep going down from here. You know, at some point, it will be the top and the bottom is zero, and that's probably where it's going. 

SS: I remember you once predicted the 2008 financial crisis, which was caused by a housing bubble in the United States. So if Bitcoin is another bubble of sorts, it will burst one day just as well, like you’ve said. Under what circumstances do you think it will happen?

PS: Well, again, the financial crisis wasn't caused by the housing bubble. The Federal Reserve inflated the housing bubble with the help of the US government. And what caused the financial crisis was all the leverage in the housing market because a lot of banks and other investors had loaned money to people to overpay for houses. And those loans went bad when the real estate prices went down. And it was that that, you know, led to the financial crisis. Now, you don't have that much borrowing with Bitcoin. I mean, there are some circumstances where I've seen people borrowing money against their Bitcoin. But by and large, most people aren't leveraging their Bitcoin and that's a good thing because that means the losses won't be as severe when this bubble pops. But I think that the source of the bubble is still the same. It's the Fed. You know, it's ironic that all the people that are in the Bitcoin bubble, talk about the other bubbles that the Fed has inflated, without recognising that they're in a bubble themselves. I mean, it's like a bubble is generally in the eye of the beholder. Nobody can tell their own bubble. And so you've got all these people who are involved in the crypto bubble, that can't see it. And it's very ironic, because the Federal Reserve inflated that bubble too, because people are saying that, ‘Well, you should buy bitcoin, because the Fed is printing all this money, because all the QE, we're gonna have all this inflation, and so you need to buy bitcoin.’ But Bitcoin doesn't provide a hedge against inflation, because Bitcoin is nothing. I mean, gold is a hedge against inflation, because gold has a historic price relationship with all the other commodities like wheat, corn, soybeans, copper, oil, and those are the prices that are all going to go up with inflation. And so if you hold paper dollars, then all those commodities will get more expensive. But if you hold gold, the price of gold will go up along with the price of all those other commodities, so you can maintain your purchasing power. But Bitcoin is not a commodity, it has no price relationship to any other commodity and it has no use case. So you have no idea whether or not anybody is actually going to want Bitcoin in the future. So you don't know that people are going to be willing to sell you their corn or their soybeans or their copper for your Bitcoin. You know, they'll be willing to exchange it for gold because they've been doing that for thousands of years. 

SS: So what consequences do you think it will have for the global economy if the Bitcoin bubble bursts and there's a crisis? Will markets collapse etc.? 

PS: I think in the scheme of things, Bitcoin is not a big part. But I do think that Bitcoin is also part of the general bubble in risk assets. So if you look at the correlation between Bitcoin, it trades a lot more like a Tesla, or all sorts of other NASDAQ stocks than it does, you know, gold. So Bitcoin is a risk asset, and it's part of that bigger bubble. So if Bitcoin crashes along with all these other risky assets, then that is the problem. But Bitcoin in isolation – if Bitcoin were to go down and nothing else, then it's only going to be a problem for the people who own it. And of course, most of the money that's in Bitcoin is just on paper. Bitcoin has this huge market cap, almost a trillion dollars, but a trillion dollars didn't go into Bitcoin, you know, that's just the paper value of the appreciated Bitcoin. So when the price collapses, most people aren't losing the actual money. They're just losing the money they thought they had, but they never actually had it because they never sold. So a lot of this paper wealth is going to disappear. But yes, people that put real money into Bitcoin that bought a lot of bitcoin at $30,000, $40,000, $50,000, yeah, they're gonna lose a lot of money, and the money they lost was the money that the other people gained by selling them those overpriced bitcoins. The real winners in the Bitcoin bubble, are the people who got in early and cashed out, which, of course, is the case with every bubble: people come in early before it's a bubble, and then it hypes up, and then they're smart enough to sell. But a lot of people aren't that smart, and they ride it all the way back down. 

SS: I see big central banks, like the Bank of England, for instance, that they’re already creating their own cryptocurrencies. Is that big corporations trying to jump on a fad? Or do they see the future coming? What do you make of it? 

PS: I think governments like the concept of taking their fiat paper currencies and making them digital. I mean, number one, it is easier. I mean, what blockchain has shown us and Bitcoin to the extent that if it didn't have the problems of the high cost, is that, you know, you can exchange value. I mean, if I had a fiat digital currency, the cost of transacting in that currency would be very low or nothing, and merchants can easily accept payment in digital currency, rather than, you know, a credit card or paper currency. So I think governments want to be at the forefront of that. But I also think governments look at digital currency as a better way to take more control over the currency and over their citizens, which is something that I don't like about it because when we have paper money, – you know, if I have a few hundred dollars in my wallet, I can spend that money and the government doesn't know that I've spent it, the government doesn't know what I've purchased, the government doesn't know who I bought it from, so they can't really spy on me. But if they can get rid of all the paper currency, and the only way I can buy something is to transfer a digital currency, they know everything that I'm doing, they can track every purchase I make, they know exactly what I'm buying, they know who I'm buying it from, and I just don't like governments having that much information about the citizens. I think it makes it easier for governments to become corrupt and become oppressive, and then it makes it a lot harder for the citizens to rise up and to try to overthrow a corrupt government because now the government knows everything you're doing, and they can easily target you, they can put you in prison as a political prisoner. So I just don't like giving governments this much power to know so much about all the people that they're governing. 

SS: Well, exactly. You're like reading my mind because cryptocurrency appeared in response to the 2008 crisis when people's trust in traditional financial institutions was shaken and it enabled peer-to-peer transaction with, you know, no bank or a middleman. So is banks’ creating their  own cryptocurrencies killing the initial idea that the cryptocurrencies had in the first place, I mean, the idea of no middleman, no oversight? 

PS: Well, of course, I mean, that was the original appeal of Bitcoin, was that it could be an actual currency and you wouldn't have to go through all the regulatory hoops. If you want to transfer money from one bank to another, there's all sorts of KYC and anti-money laundering laws and it's complicated. And with Bitcoin, it was like, oh, just send it to a friend and nobody has to ask anything. Well, you know, the government doesn't like that. And so more and more regulation has come on these exchanges. And I think a lot more regulation is coming on Bitcoin that is actually going to make Bitcoin a lot more burdensome. If I wanted to send somebody Bitcoin in the future, it could be a lot more difficult and a lot more expensive than sending traditional fiat currency, because the government really wants to crack down on these transactions. And meanwhile, the other problem with Bitcoin is when very few people were using it, then the cost was minimal, but as more and more people around the network, the cost of using it actually goes up. It's not like, you know, you have the economies of scale, which you would have with most businesses. The more people that try to use Bitcoin, the more expensive the transactions become, which is the biggest problem that you can't scale it up. So there's no way it can be used as a currency, which is why they've tried to just reinvent it as a store of value. But if it doesn't have any use, and it doesn't have any real value, then what are you storing? You know, you can't store price. I mean, that's all Bitcoin has is a price. But I can't store price because price can change, price can collapse. 

SS: Well, so far, digital currencies and the current monetary system coexist quite amicably. But if the digital currencies keep on growing and hit mainstream, what kind of changes will that cause to the current monetary system? 

PS: Well, again, I don't think that we're gonna keep seeing more and more of these digital currencies. I mean, there's thousands and thousands of them now. I mean, the only ones that would work would be digital currencies that were backed by real things and that would be fine, and you could do that. The problem is the governments and all the regulations may make these businesses unprofitable, that is the real problem. I mean that we have the technology to develop a medium of exchanges, digital money backed by gold or silver, or whatever you want to back it by, you can back a currency by anything. But the key is it has to be backed by something to give it a real value. And there can be plenty of businesses, entities that have good reputations that people could trust to be the depository for those assets that underlie those cryptocurrencies, and putting them out there, and making them available for the public so the public can choose the money that they want to use. I mean, that's all there. The only problem is government. Government doesn't like competition. Government wants to maintain a monopoly on issuing currency, they don't want private sector to issue currencies of a superior value. Because the fiat currencies that are issued by governments, you know, they're extremely risky, because the governments can print as many as they want and they can destroy their value, they're not tied to anything. So if the private sector started issuing a superior currency that was backed by something, more and more people would want to use it. And the governments don't want that. So the governments are putting all these regulations, which may make it impossible for the private sector to compete with government, because of the cost of compliance. 

SS: If governments’ control over finance loosens as a result of the loss of the money printing monopoly, will that end up benefiting the regular Joe? Or will it lead to just even more financial turbulence than we have now? 

PS: No, I mean, a return to sound money would benefit everybody, particularly the average Joe. You know, we would have much stronger economies if we return to sound money, we would have smaller governments, which means governments would impose smaller burdens on the private sector so the private sector could be wealthier, and there'd be more opportunity, there’d be more economic growth. And that would benefit the average person the most. I mean, the rich are rich and their lives are pretty good, and they can afford the cost of government. It's the middle class and the poor that are affected the most by the burden that government places on the economy. And so they would feel the effects of being liberated from that burden the most, to the extent that we could shrink government and alleviate the burden that it places on society. 

SS: But since digital currency requires different expertise from that of traditional financial institution, will we see, for instance, tech giants coming in and playing the role of the new bank? Like when Google and Apple develop their own coin, will they become Fed’s competitors? 

PS: Well, I guess a lot of companies could do it just like you have airlines that issue frequent flyer miles. I mean, obviously, those frequent flyer miles could be tokenised digitally and could circulate as a medium of exchange, because everybody who flies, you know, ‘Well, I could use them for airline mileage.’ Of course, they devalue every once in a while, the airlines say, ‘Now you need more miles to buy a ticket.’ So they're not fixed. If they made them fixed, and they said, Hey, we're never going to change this, then they could be an inflation hedge, too, and it would make them better as a means of payment. But I don't know, you know, what companies – You have Facebook out there that had a trial balloon about launching their own digital currency that initially was going to be backed by a basket of currencies. I mean, I don't know, they should have picked gold, it would have been a much better anchor for that currency than a basket of other fiat currencies. But now, I think maybe they're thinking about issuing one that's only backed by the dollar thinking that that'll be easier to get through the regulators, that Libra project. But again, who knows. I mean, they launched that a couple years ago and so far nothing has come of it. So I don't know, I just think that the regulations are going to be so strict from governments that it's hard to say, what's going to happen. But absent government, sure, the private sector would be very innovative, and there'd be all sorts of things that would be happening, and the public would be able to choose, and that would be good. But the government is interfering in it just like they interfere in a lot of things. And so they're preventing the benefits of the free market from flowing to average people. 

SS: Also like, when I look at it, I buy things and pay taxes online, and even among friends, we borrow money and we pay back online. I barely use banknotes, let alone coins, anymore. Do you think these are the last days of cash? Are they already upon us? 

PS: Yeah, I mean, clearly, that's going to happen. But you know, it would be much better if we're all - even though we're transacting digitally - that we're transacting in something real, that at the back end of those digital transactions lies real money, which would be gold. And in fact, a lot of people think, ‘Oh, gold is, you know, that's the Stone Age, we've evolved.’ No, it's not. Gold was an evolution, before we had gold, we had barter. But the market can make gold even more efficient as money because initially, we didn't have coins, people figured out how to make a gold coin. And that was more efficient than a big bar. But then people had gold at depositories, in banks with blacksmiths. And then we started issuing notes that were backed by the gold, but the gold was still there, giving value to the paper notes that it backed up. And so the next evolution in that process would be to have a digital medium but ultimately to have gold, backing it up so that you have something real that you can hold as a store of value and that governments can't debase.

SS: So, Peter, if money is becoming virtual, and most of it already is, then what difference does it really make if it's a pound or a dollar, or a yen, or a yuan? Is virtuality of money a sure path towards a global single currency? 

PS: Well, what gives those fiat currencies value is the confidence among the public that people will accept those currencies in the future for the goods and services that they're offering. And to the extent that that confidence is lost, because governments are printing too much money, then the currencies will collapse, and they won't have any value anymore. They don't have any intrinsic value, but they do have a price because they are used, and people have believed in them. But of course, you have governments that mandate them as legal tender, so that helps them and governments require taxes to be paid in those currencies. And so you need those currencies to pay taxes, so people have to accumulate them. But even that, if they print too many, no one's going to want them. And that's actually where we're headed. And that's why I think that we're going to come to an end of this fiat system. Ultimately, we're going to have to go back to sound money once the public loses complete confidence in the fiat system. 

SS: Alright, Peter, thanks a lot for this wonderful insight into the world of finance. It's really interesting to see what's going to happen in the nearest future. And I hope we'll get to do this again, maybe in two, three years time so we can revalue everything we’ve spoken about today. 

PS: Yeah, well, maybe we won't have to wait that long. I think something could happen, pretty substantial, in a shorter timeframe than that. 

SS: One year? 

PS: Who knows. I think this is gonna be a very interesting year, 2021.  

SS: Then I’ll give you a rendez-vous in one year. 

PS: Yeah. Maybe. 

SS: Thanks a lot. Have a great day. Stay safe.  

PS: All right. Bye-bye.  

SS: Bye.