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Bitcoin and Religion
How Bitcoin became the latest opium for the masses, and why it cannot last
The withdrawal of faith and religion has left a void in modern life. Bitcoin sits at the nexus of innovation and revolution, making it a palpable belief-construct. However, it is not what its prophets promise it to be. It is a bubble that will burst as liquidity dries up this year. In its wake, blockchain innovations are happening right now that may impact the world the way first-generation products had originally promised.
The human brain is designed to believe, we want to believe in something.
The Renaissance philosopher and mathematician Blaise Pascal described this characteristic with his famous quote about the “God-shaped vacuum” in our mind, which could only be filled by Faith
Similarly, today’s cognitive scientists talk about us being born with a propensity to believe in higher powers. Many studies have been conducted on this intuitive phenomenon, which is observable from early childhood
However, traditional religions such as the Catholic Church (to which I belong) have struggled in modern times to maintain their followings
Many reasons have been cited to explain this trend. The biggest influence is probably the large improvement in life expectancy the Western world has experienced over the past century, which has made death less present in our lives. Indeed, looking at religious affiliation across the world, there is a very strong correlation between church attendance and life expectancy
However, the desire to believe still remains. Consequently, this “belief” or “purpose” void has been filled by all sorts of other concepts. Consumerism, climate change, conspiracy theories, or yoga are all present in a long list of ideas that are followed by many with religious zealousness.
Ok, interesting, but why is this relevant to Bitcoin?
As explored in previous posts, the economic dogma of the past decades has created a bleak environment, in particular for young people in the Western world
In essence, young Millennials are the screwed generation. While no generation before has been better off in terms of comfort, life expectancy or physical safety, the feeling of stagnation is omnipresent. Ultra-low interest rates and the corresponding asset price inflation have moved home ownership out of reach. Wage growth is anaemic, social mobility is in decline
In this purposeless drift, Bitcoin seemingly addresses the deficiencies of the status quo in a provocative way:
It is revolutionary as it breaks with the current fiat monetary system. Used as a currency, it has similar features to gold: there is no central bank that can expand supply in order to stimulate the economy (and as a side effect distort asset prices, create moral hazard or “make rich people richer”)
It is innovative as the underlying blockchain mechanism allows ownership to be tracked in an instant and immutable way. In a properly functioning form, this would signify huge breakthroughs for anything where transfer of ownership and authenticity are relevant. Many of these processes today are executed by oligopoly-like structures commanding high margin-returns (e.g., Visa/Paypal, stock exchanges, art, real estate etc.). In theory, a decentralized blockchain removes these “rents” from the system to the benefit of everyone
Take revolution, innovation, and throw in the ability to get-rich-quick by pressing a few buttons on your computer in the comfort of your home and voila: an intoxicating and irresistible cocktail to fill the void. And unsurprisingly, the biggest demographic attracted to Bitcoin are Millennials.
As with all movements, there are leaders and followers. In this case millions of Millennial followers are lead by business personalities who were early to recognize the potential of Bitcoin and are skilled in their usage of social media.
Let’s take Anthony Pompliano as an example. A former soldier in the Iraq war, then product manager at Facebook and early investor in Bitcoin, he runs a podcast that has been downloaded 20 million times. He frequently tweets to his 700k followers, which puts him into the top five personalities on the topic of Bitcoin on Twitter. This is his Twitter landing page:
There are obvious parallels to religious symbolism.
The background picture mimics the Last Supper, but instead of Jesus and the disciples we see several tech, business and celebrity personalities, with Steve Jobs and Elon Musk in the middle flanked by Beyonce, Jay-Z and Walt Disney on the side. The laser eyes indicate some supernatural power, much like a halo in medieval paintings
This prophet of the new age of Bitcoin has a big following because he indeed has a point:
The current economic system doesn’t work for a lot of people, and it seems evidently broken as gains in asset values don’t correlate to work and effort anymore. Instead central bank intervention is driving it, with the gains landing with a narrow group within society
Equally, innovation has accelerated and is changing lives - for the better - faster than ever before. It is hard to miss the exponential gains on the Nasdaq or in Venture Capital, everyone wants to jump onto the train
However, Bitcoin is not what it promises. The idea is indeed revolutionary, but the execution lacks what it would need to achieve its goals, for the following reasons:
Bitcoin consumes an incredible amount of energy. Estimates vary between the equivalent of New Zealand’s power consumption and 0.5% of global power in a given year. Imagine the consumption in the case of mass adoption. Until energy is literally free - and we are definitely not there yet - this is a problem
Given it is the very first blockchain, it is unsurprising that the Bitcoin network is also comparatively slow in processing transactions. With 7 transactions per second (tps), it only achieves a tiny fraction of today’s dominant Visa payment rail which can process c. 25k tps. Further, the more crowded Bitcoin becomes, the higher the cost per transaction as cost is the mechanism to prioritise between competing orders. That gives an advantage to bigger transactions, so the more popular Bitcoin becomes, the more it favors (very) large participants, the opposite of the egalitarian ethos it conveys
China’s influence on Bitcoin is disproportionate, with 65% of Bitcoin mining taking place in China. Given geopolitical tensions, this creates an undesirable vulnerability
Finally, even if Bitcoin were perfect in its technical features, governments would ban it as soon as it became a challenge to their monopoly position in terms of currency. Money is a key weapon in every government’s arsenal of power, be it a democracy or a dictatorship, and won’t be given up without a fight.
Bitcoin deserves much merit for having instigated a technological revolution similar to the internet in the 1990s. But Bitcoin’s technological utility is limited, so what is actually does is it works as a sponge for excess liquidity.
Unlike a corporation or a real estate asset, Bitcoin doesn’t generate any yield or cash flows in itself. It is therefore entirely a function of the liquidity available and whether that liquidity increases or decreases. And in the Spring of 2021 we witnessed an unprecedent increase in global liquidity
When both central banks and governments went into overdrive in order to protect the economy from the COVID-19 shock and injected trillions of dollars into the economy, that money had to go somewhere
Given it was in many instances “free” money (cf. stimulus checks in the US), people picked riskier investment destinations that promised higher returns. Bitcoin was a prime candidate with its narrative around innovation as well as finite supply
However, for its price to continue to appreciate, new money needs to be brought into the ecosystem. “Bitcoin Jack”, a highly skilled Bitcoin trader who shares many of his moves online has encapsulated this dynamic well in the following chart.
The “ponzinomics” (i.e. price increases born out of thin air as the underlying asset doesn’t generate cash itself) require constant supply of new money, otherwise the price disintegrates. These new funds then float around the Bitcoin ecosystem, alternating between various cryptocurrencies alternatives (“$COINs”), with Bitcoin itself as the center of gravity
Where do we stand in this new money / liquidity cycle? This depends on several variables:
While the future is highly uncertain, in the near term, we are likely at or just past “peak liquidity”. The unwind of the Treasury General Account into the market ($700bn over 50 days during Feb/Mar/Apr) was probably the last major activity of such a scale and from this point in time onwards, central banks will be more likely than not to hike interest rates and to reduce quantitative easing programs
In 2020, central banks globally performed 195 rate cuts & 5 hikes. In 2021 so far there are 5 cuts & 12 hikes
At the same time, government debt issuance is still orders of magnitude larger than pre-COVID-19. The chart below illustrates the gap between US treasury issuance and Federal Reserve purchases (“QE”) and how it has reversed between this year and last year
Over the medium term, the biggest variable is the political choice as to whether prioritise growth or inflation, I had written about this before here. If growth is prioritised at the expense of inflation, inflation will increase and so will interest rates, which will remove liquidity from the speculative parts of the system by creating an investment alternative in government bonds
However, in the wake of Bitcoin, new blockchain innovations are emerging that promise tangible real-life purposes. The New Economy bubble in 2000 comes to mind, which gave birth to many of the literally life-changing companies that we today deal with on a daily basis (keep in mind that Amazon saves the average customer 75h of lifetime a year by fulfilling orders online). The following companies are particularly notable:
While Bitcoin’s capacity is limited to 7 tps, Solana, a chain built by a team of ex- Qualcomm and Google engineers that went live as recently as Fall 2019 can process 65,000 tps, at near zero cost. This is 2.5x the capacity of Visa, and would represent a “game changer” for payment rails if it proves to be robust as it scales
Akash is a project that offers hosting of servers in a decentralised cloud at a fraction of the cost of Amazon Web Services or Microsoft Azure, again, a major breakthrough if it proves to be robust
Circle, a start-up focussed on frictionless payments, has grown its USD proxy currency USDC (a so called stable coin) to 12bn USD transaction value, with first inroads into corporate treasury management and its many pain points e.g., in FX conversion
Aleo is a startup that aims to provide zero-knowledge-proofs, where authenticity is testified without knowledge of the content. This can be highly relevant for the commercial use of e.g., browser privacy data or credit card data
NFTs have been much discussed this year, a good summary is here
Innovation will drive the future, a bubble is a bubble, and while faith is a very personal and individual question, Bitcoin is not the right concept to fill the belief void; it won’t be saving the world. However, some very exciting developments may have been triggered by it and we will hear much more about them over the coming years.