While the chattering classes are blathering about the racism of Dr. Seuss, the sexual harassment of Pepé Le Pew and the wokeness of Mr. Potato Head, a subterranean herculean battle is brewing over a new financial asset that could give the masses unprecedented power to prevent profligate governments from impoverishing them by printing money ad infinitum – Bitcoin.
Bitcoin is a digital cryptocurrency, meaning that it is protected by complex codes rendering it impossible to counterfeit. Its origins are somewhat mysterious but the consensus is that in 2008 a consortium of geniuses with the pseudonym Satoshi Nakamoto decided to create the digital equivalent of gold. But unlike digging in the earth or panning for it in stream, bitcoins are mined from Bitcoin software by ambitious computer geeks solving increasingly complex computer problems and then being rewarded a number of bitcoins. The number of bitcoins that would be released was fixed at 21 million and presently, almost 19 million have been mined.
Furthermore, Bitcoin has no central authority. There is no middle man – e.g. a bank – to record transactions. A grossly simplified explanation of how it works is as follows:
You go to Bitcoin.com and obtain an encryption key (password) and a virtual wallet. You may then use your credit card to purchase bitcoins or a fraction of one. This information is then placed in a blockchain data base and you can now transfer money to anyone who also has a Bitcoin account. This is anonymous and initially Bitcoin was used for shady businesses such as illicit drug dealing and pornography sites.
But then an interesting phenomenon occurred. As Bitcoin became more popular, the value of an individual bitcoin rose. For several years, its value languished in single digits but then the value rose exponentially – reaching $500 in 2016, $10,000 in 2020 and presently, in the $50,000 range. Those who invested early became “Bitcoin millionaires.”
An interesting aside is that Bitcoin.com does not have a “Reset my password” link. If you forget your password – tough bananas. Thus, some people who bought a few dozen bitcoins ten years ago and forgot their password have lost millions – with several resorting to hypnosis to try to recall it.
If this sounds ridiculous, consider what money really is – trust – nothing more. You cannot eat the green bills in your wallet or wear the check from your employer. The balance of money in your bank account and IRA is nothing more than a stream of electrons stimulating a computer screen.
The exponential growth in a bitcoin’s value occurred because mainstream institutions began to trust it both as a means of payment and as a good investment. Paypal, Expedia, Square, Home Depot, Starbucks, Tesla – to name a few – accept Bitcoin as a means of payment. In fact, Tesla made more profit on its Bitcoin investment than it made selling cars!
But the real power of Bitcoin is that it protects the masses from inflation – especially as governments print money and issue more debt. All through history, governments have jealously protected their ability to control the value of money as this equates to political power. Before paper currency gained trust, coins of gold and silver were used. And woe to those who were caught counterfeiting them. In medieval times, they were burned at the stake or boiled alive. In the United States, the Coinage Act of 1792 had a penalty for debasing American currency – death.
Because gold and silver had relatively stable quantities, paper currency in the United States was backed by these two metals. But when President Franklin Roosevelt wanted to create more money during the depression, he changed the value of gold from $20 an ounce to $35 an ounce. He then proceeded to seize everybody’s gold and only pay them $20 for it. If you didn’t comply, you went to jail.
Governments worldwide discovered they could stay in power by giving people what they wanted – free health care, better roads, disability payments etc. – by printing money and not raising taxes. But there was that pesky gold standard. This ended in 1971 when President Nixon decoupled the American Dollar from the $35 gold value established by President Roosevelt. This allowed the United States – and every other country who followed its lead – to issue what is called “fiat” currency. In other words, money backed by nothing.
Gold then became a way for the wealthy to protect themselves from inflation. The one-ounce gold coins from 1971 that were worth $35 are now worth around $1,600 each. But the problem with gold coins is that you can’t go into Starbucks and buy a cup of coffee with one.
Enter Bitcoin. Now not only can you buy a cup of coffee, but you are also protected against fiat currency eroding your hard-earned savings. Remember, there will only be 21 million bitcoins. No more.
Bitcoin is already preserving the capital of the masses in socialist cesspools such as Venezuela, where one U.S. dollar is now worth 1,870,000 Venezuelan dollars. China and India have made half-hearted attempts at banning Bitcoin. The Trump administration proposed regulations requiring Bitcoin transactions to be recorded and in a rare area of agreement, the Biden administration plans to enforce this rule. While the ostensible goal is to prevent illicit activity, the real reason is to discourage bitcoin use by taxing it.
The IRS has ruled that every time you buy something with Bitcoin, you must pay tax if you received a capital gain. For example, let’s say you bought a bitcoin for $20,000 and now it is worth $50,000. You use Bitcoin to book a vacation on Expedia for $10,000 (you were in the mood to splurge). Since you had a capital gain of $30,000 on your initial investment, this means you had a capital gain of $6,000 on the $10,000 you used to purchase your vacation. You owe tax on this $6,000 but as of now, it is very difficult for the government to prove this as Bitcoin is anonymous.
Another problem with Bitcoin is its use for down payments. Let’s say the above vacation is planned for six months from now but a 50% down payment is required. If the value of Bitcoin tanks 50%, the travel agency you used will be annoyed as will you if Bitcoin goes up 50%.
But what the government really hates about Bitcoin is that Juan, the lawnmower, now has the same power as Stuart, the hedge fund owner. Juan can now get $10,000 of his hard-earned savings, buy into Bitcoin, and not worry as much if our grifter political class causes gasoline prices to double with their latest climate change scheme or food prices to triple because of the inflation engendered by printing $5 trillion.
There is little consensus as to whether Bitcoin is a good investment. Some analysists expect it to be worth $1 million by 2030 while others believe it to be worthless speculative bubble that will soon burst. And also, our elitist but politically powerful cancel culture may decide to give Foghorn Leghorn a pass for his sexist dialogue, but prohibit him from buying Bitcoin so that he is unable to protect himself from rent increases by Yosemite Sam.
Joe Bentivegna is an ophthalmologist in Rocky Hill.