A few weeks ago, a reader emailed to challenge what he described as our “cautionary, skeptical and net negative” stance on Bitcoin. To make the case, our interlocutor, who wishes to remain unidentified, cited a series of blogposts written by Allen Farrington, a former fund manager at Baillie Gifford & Co., highlighting one example in particular:
Ludwig Wittgenstein once asked a friend, “tell me, why do people say it is more natural to think that the sun rotates around the earth than that the earth is rotating?” The friend said, “well, obviously, because it just seems like the sun is going around the earth.” Wittgenstein replied, “well, what would it seem like if it did seem like the earth were rotating?”
The reader eloquently argued that inbuilt prejudices may blinker us to the emergence of a truly global digital alternative to fiat currencies. My response was to corral a different quote from the Austrian philosopher: To my mind, Bitcoin is “not a something, but not a nothing either.”1
The cryptocurrency’s climb to $100,000 last month is viewed by its champions as a vindication of their fealty to the cause. The roaring success of Bitcoin spot exchange-traded funds — the largest, BlackRock Inc.’s iShares Bitcoin Trust ETF, has garnered $53 billion since its launch a year ago — is undeniable. And while the various projects to create central bank digital currencies appear to have stalled, mainstream asset managers are increasingly embracing Tether, Ethereum and their brethren.
My problem with the entire asset class — and I use the term cautiously — is that it’s impossible to reflect on it with anything approaching what Thomas Nagel, another philosopher, termed The View From Nowhere. Nagel’s 1986 book suggested that the truth of the world can only be revealed by combining our subjective, personal standpoint — the view from here — with an objective, transcendental overview — the view from nowhere. For Bitcoin and its ilk, the latter outlook is unattainable.
In the case of the sun and the earth and which revolves around which, for example, it may seem to an earthbound observer that the star orbits the planet; a Martian, however, would swiftly ascertain the truth. A trader trying to work out the correct value of the 10-year Treasury can assay the US growth rate, its inflation outlook, the geopolitical outlook and the likely behavior of fellow investors — and a host of other factual influences — and decide whether to buy or sell at the current price. A crypto-watcher attempting the same exercise with Bitcoin, however, has to rely solely on the attitude of fellow participants to judge whether the digital unit will rise or decline in value; it is literally untethered (pun intended) from anything but market sentiment.
The aforementioned series of blogposts by Farrington make an effort to address the question of what counts as a valuation driver:
I do not think it is quite accurate to say that Bitcoin’s price is its fundamentals, but certainly its price is a largely reflexive function of its fundamentals: as the price goes up, the fundamentals go up (and we must be mindful also that as the price goes down, the fundamentals go down. Sustained attack that drives the price down for long enough is by far the biggest risk). Bitcoin was weakest when smallest, but less so the more time passes. Bitcoin is a black hole sucking unsustainably artificial value beyond its event horizon. As it grows, so does its pull. Bitcoin is gravity.
Read that paragraph again. Then replace the noun Bitcoin with gold, or the dollar, or oil, or any other tradable security, and I hope you’ll come to the same conclusion as me: It’s sophistry at best, nonsense on stilts at worst. Demand — or the lack thereof — must have some basis in hard, cold facts, some external motivating factor, some reason, to count as a fundamental. The reflexivity Farrington refers to kills stone dead the notion that somehow price is knowledge where digital currencies are concerned — and I’d argue that the extreme intraday price moves in Bitcoin compared with, say, the euro are evidence of its unbound nature.
While volatility is neither inherently good nor bad, Bitcoin’s wild mood swings do highlight that its value is solely based on the fickleness of buyers and sellers rather than anything — and I do mean anything — that might qualify as a fundamental. As my colleague Lionel Laurent argued last month, “digital assets have gained acceptance — just not as money.” Digital currencies seem to have proven that they’re not a nothing; but that doesn’t mean they qualify as a something.
1 Wittgenstein was referring to the impossibility of a meaningful discussion of private sensations such as pain.
