Would The Father of Economics Invest in Bitcoin?

Considering the current turmoil in the crypto markets, I thought it would be a fun Idea to imagine ourselves in the shoes of the father of modern economics – Adam Smith – and decide if he would be willing to invest in Bitcoin.

Before we start this little adventure, I must inform you that I am not the ghost of Adam Smith, nor am I a reincarnation of him, and I do not possess the means of communicating with his soul, so I would advise you to treat this post for what it is – speculative thinking that I hope has some rationale at its epicenter.

Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value

I believe R. G. Collingwood wrote in An Autobiography that a book is a set of answers that were given based on a set of questions that the author had at the time of writing the book. Since we start our Bitcoin investment analysis from The Wealth of Nations, we should consider that the book was written in a certain historical context, where it had the goal to deal with particular circumstances and conceptual particularities that were present at that time. So we cannot just extrapolate the teachings from The Wealth of Nations to the world of Bitcoin, but we can infer certain attitudes, principles, paradigms, and “decide” if Adam Smith would invest in Bitcoin if he was one of our contemporaries.

In Wealth of Nations Adam Smith states that money or currency is used as a medium of exchange in any transaction.

In Smith’s time we had commodity money. Commodity money means that the value of money is backed by a real world commodity. Hence it’s intrinsic value.

Going fast forward into 1933 we see the emergence of Fiat money. Fiat money is a currency without intrinsic value established as money by governments around the world. In Adam Smith’s time money’s worth was based around a real commodity. But now on what is money’s worth based would you ask. And although answers might be given that somewhat legitimizes the worth of current money, the truth is that money isn’t worth anything.

It is worth thinking about money as the bubble that never ends

Our system of money operates on a mutual set of beliefs; so long as enough of us believe in the future value of money the system will work. What happens when the belief system is shaken? – Millionaires. Millionaires Everywhere. But that’s like the dream, right? Well, look at what is happening to Venezuela and think again.

Venezuela is probably the exception rather than the rule. But it's not a singular case, as shown in this article.
Also consider that the total value of World's money is estimated to be around 83 trillion dollars. Recently USA’s debt alone surpassed 20 trillion dollars. And in a Market Watch article is stated that there is $1.2 quadrillion invested in derivatives alone.

But the funny part is the critics of Bitcoin saying that Bitcoin is not real, it’s a scam, it’s just some information in a computer, while at the same time around 90% of current money is digital. Ones and zeroes. “Printing” money these days is as simple as adding one more zero at the end of a number. And the current architecture of the financial system will never enable it to be as secure as the blockchain - on which Bitcoin is based. But that is another story.

So If I would come from a time where all I had known was commodity money, fiat money would be a bit unsettling. But seeing for what it actually is, as stated above, I would be scared of it. And since I personally know people who were making fire with money after the collapse of the Soviet Union, I can unfortunately say that I witnessed the bubble that never ends ending, and it wasn’t pretty.

But where does all that leave Bitcoin?
Can Bitcoin really be the “new money” or is it all pure speculation?

Well, Bitcoin is capable of realizing all the functions that William Stanley Jevons analyzed in his book:

• Medium of exchange;
• Measure of value;
• Standard of deferred payment;
• Store of value,

and it possesses the necessary properties to fulfill those functions (except one):

• Fungibility;
• Durability;
• Portability;
• Cognizability.

Stability of value it’s Bitcoin’s big NO to why it can’t be a real currency. But in the context of our analysis, this weakness can be an advantage for investing in Bitcoin. That’s because its volatility is a sign that the market is still young. It’s a sign that Bitcoin might have a long way to go until it can be fully considered a true currency – this implies that there is still room for financial growth until bitcoin reaches maturity, and stability of value.

Bitcoin, and the ideas behind it, will be a disrupter to the traditional notions of currency

But Smith views money purely as a medium of exchange in any transaction, why would he want to invest in it, after all he states clearly that the sole purpose of holding money is to facilitate the circulation of goods and services. Thus the inhabitants of a country demand the specific quantity of money necessary to circulate the whole of their goods, and are unwilling to hold either more or less than this amount.

And the reason might be because he argues that a prudent man in every period of society will seek to always hold a quantity of some commodity such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

Although many different commodities have functioned as a medium of exchange throughout history, in Smith’s eyes there are irresistible reasons as to why it is that the precious metals have proven to be the most favoured for exchange.

Preeminent amongst these reasons are the qualities of high durability possessed by the precious metals, and their capacity to be sub-divided with a relative degree of precision. And gold has proven itself throughout the ages to be… well, the golden standard.
So Smith would indubitably prefer gold as a currency instead of Fiat money. It is virtually indestructible. It is divisible, portable, sufficiently rare, fungible, non-essential for consumption, easily identifiable, a store of value.

At the same time think about how big of a hassle would it be to pay for your coffee with gold, to carry it most of the time with you, not to mention the inconvenience it would have using it at a large scale. So maybe Fiat has some advantages over gold as a form of currency, but Gold definitely is a good store of value & investment.

But what makes gold the best choice from all the other metals? There is no “objective” intrinsic value to it that enables us to say that gold is “better” than copper or palladium. The meaning that we instilled in it, based on the criterias that we determined to be proptitious for our economic dealings, makes gold the best choice from all possible contenders.

But now a new contender arises, and conceptually is so similar to gold, no wonder it was named digital gold.

Yet a James Dimon knows that gold can be seen, it can be touched, it can be smelled, it can be licked. What about Bitcoin? Can you lick Bitcoin? Sorry, but for some of us this is a deal breaker. Bitcoin is no real contender. Bitcoin is a scam, it doesn’t have “any intrinsic value” like gold.

This logic is fallacious at its roots. If a song is stored digitally does that mean that it is a scam? It doesn’t really exist? It doesn’t have any real value? What about a picture? A movie? You get the idea. And at the same time we already discussed that the “intrinsic value” of gold isn’t objectively given to us by nature, but rather legitimized by the meanings we instill in it. So why would bitcoin be any different? Bitcoin derives part of its intrinsic value from our meaning of it, but ALSO from the man-hours it took to create it and it still takes to develop it, and from all the hardware and infrastructure upon with it is build and is functioning. Not to mention its characteristics that gives it an edge over traditional currency & over gold.

So at this point you might be inclined to agree to some extent with me, and say at least that Bitcoin has some vague intrinsic value, but which is it then.

Is Bitcoin digital gold or digital cash?
I think it's both.

Bitcoin is Commodity Money 2.0It’s what gold would have been as a currency. But it doesn’t have the disadvantages of gold. And it has all the advantages of fiat money while bringing so much more to the table.

And most important of all, Bitcoins embodies the ideal of The Invisible Hand that Smith believes should govern the free market. A currency that is not controlled by any government. A currency that is not centralized. A self-regulated currency. A currency that possesses the qualities of gold and the functionality of fiat money.

This all sounds like a dream. Too good to be true. And yet sometimes even dreams come true despite all the vicissitudes.

Will Bitcoin be one of those big dreams that seem unconceivable at first, unachievable after, and reality in the end?

That’s the big question!

I do believe though that Adam Smith would be intrigued by Bitcoin, and I think he would consider investing in it.

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