Bitcoin, Currencies, and Fragility

TL;DR

This paper critically examines bitcoin's economic properties, revealing it fails as a currency, store of value, or safe haven, and discusses the implications of its fragility and speculative nature within monetary history context.

Contribution

It provides a quantitative finance and economic analysis showing bitcoin's limitations and clarifies misconceptions about its role as a currency and hedge.

Findings

Bitcoin does not function as a reliable currency or store of value.

Bitcoin's expected value is no higher than zero, indicating high risk and fragility.

The paper contextualizes bitcoin within monetary history and discusses requirements for true inflation hedges.

Abstract

This discussion applies quantitative finance methods and economic arguments to cryptocurrencies in general and bitcoin in particular -- as there are about $10,000$ cryptocurrencies, we focus (unless otherwise specified) on the most discussed crypto of those that claim to hew to the original protocol (Nakamoto 2009) and the one with, by far, the largest market capitalization. In its current version, in spite of the hype, bitcoin failed to satisfy the notion of "currency without government" (it proved to not even be a currency at all), can be neither a short nor long term store of value (its expected value is no higher than $0$), cannot operate as a reliable inflation hedge, and, worst of all, does not constitute, not even remotely, a safe haven for one's investments, a shield against government tyranny, or a tail protection vehicle for catastrophic episodes. Furthermore, bitcoin promoters appear to conflate the success of a payment mechanism (as a decentralized mode of exchange), which so far has failed, with the speculative variations in the price of a zero-sum maximally fragile asset with massive negative externalities. Going through monetary history, we show how a true numeraire must be one of minimum variance with respect to an arbitrary basket of goods and services, how gold and silver lost their inflation hedge status during the Hunt brothers squeeze in the late 1970s and what would be required from a true inflation hedged store of value.