Last updated on September 20th, 2016 at 11:31 am
Recently, Senator Rand Paul (R-KY) commented on Bitcoin and said that it should be backed by a “basket of stocks” in order to give Bitcoin owners access to a tangible good with “real” value:
“I was looking more at it until that recent thing [sic]. And actually my theory, if I were setting it up, I’d make it exchangeable for stock. And then it’d have real value. And I’d have it pegged, and I’d have a basket of 10 big retailers… I think it would work, but I think, because I’m sort of a believer in currency having value, if you’re going to create a currency, have it backed up by — you know, Hayek used to talk about a basket of commodities? You could have a basket of stocks, and have some exchangeability, because it’s hard for people like me who are a bit tangible. But you could have an average of stocks, I’m wondering if that’s the next permutation.“
While Senator Paul claims to be a follower of the Austrian school of economics, adhering to the teachings of Menger, Mises, and Rothbard, he does not seem to have a grasp on some of the most crucial aspects of Austrian monetary theory.
Value is Subjective, So Bitcoin’s Value is Also Subjective
By saying that Bitcoin needs to be backed up by something with real value, the Senator implies that the value of Bitcoin is imaginary or that it has no intrinsic value. This is one of the most common misconceptions advanced by Bitcoin skeptics. They say that Bitcoin has no intrinsic value like gold or other commodities; Bitcoin’s value relies entirely upon the faith of those who accept it. This argument, made by self-proclaimed Austrians, completely ignores the foundational principle of Austrian economic theory, subjective value.
Carl Menger taught us that intrinsic, or objective, value does not exist. Value arises solely from subjective valuations of individuals. If a person finds value in a rock that he or she picked up from the ground, then that rock has value regardless of how anyone else perceives the rock. That being said, all value can be considered imaginary by Rand Paul’s standards. He claims that Bitcoin needs to be backed up by stocks because stocks have real value. But where do the stocks get their value from? The Dollar? Well, where does the Dollar get its value from? Government? Who backs up the government? Individuals who believe that the government has value and trust that the currency it produces is viable. Individuals also give Bitcoin value.
If we trace any value far enough down the line, we will find that it originates from the valuations of individuals, technically making any value imaginary since it resides in the minds of people. Bitcoin is no different. Bitcoin has the same qualitative value as stocks, dollars, gold, or any other commodity; Bitcoin is valuable simply because people value it. Rand Paul’s proposed stock “standard” would not give Bitcoin any more staying power than it already has. A stock has no value that can exist independently of the demand of individuals. If people no longer want stocks, then stocks will lose their value and everything tied to those stocks will see a sharp drop in value as well.
Tying Bitcoin’s Value to Stocks Ties it to Business Cycles
America is in the midst of a massive inflationary cycle induced by the Federal Reserve’s policy of Quantitative Easing. The injection of trillions of dollars into the economy over the last five years has produced a stock market bubble of record breaking proportions. On the eve of the 2008 crash, the Dow Jones Industrial stock index reached its all-time high at around 14 thousand points. Presently, the DOW pushes higher and closer every day to 17 thousand points.
Of course, this huge growth in the stock market comes as a direct result of the Federal Reserve’s easy money policy. Now that Fed Chairman Janet Yellen is tapering QE by $10 billion every month, we are starting to see the unprecedented growth in the emerging markets falter, as their growth was a result of investors exporting the Fed’s inflation. Eventually, the tapering will start to affect America’s domestic markets, gradually pushing us back into recession.
Tying Bitcoin’s value to this artificially inflated stock market would guarantee Bitcoin’s demise. Decentralization, and limitation of quantity through mining, are two of the virtues of Bitcoin; inextricably linking the crypto-currency to the stock market would artificially inflate its value and then completely destroy it when the stock bubble comes crashing down. If we made every Bitcoin payment redeemable by a basket of stocks, the price of Bitcoin would soar. Rather than picking and choosing which stocks are profitable and which are not, amateur investors would find it much easier to just purchase Bitcoin and be automatically invested in a wide range of stocks that are constantly rising. Once the Fed cuts off its supply of cheap credit completely, however, those stocks will come crashing down. This stock market crash would make its way to Bitcoin as well. All those amateur investors who purchased bitcoin as a way to get maximum returns with minimum effort will go on a selling spree, consequently driving the price of Bitcoin into the floor. Satoshi provided us with a way out of this endless cycle of currency depreciation and economic distress; we don’t want to throw that away by tying Bitcoin to stocks.
Backing up Bitcoin With Commodities is Like Backing up Gold With More Gold
Bitcoin works a lot like gold, except better. It is much more durable, portable, and divisible than gold. Why would we “back up” a gold-like commodity with something as arbitrary as a stock? It just doesn’t make sense. Historically, it was the other way around; gold was used to back up other commodities. But let’s ignore the fact that stocks are not a viable commodity to use to back up a crypto-currency and assume that Bitcoin is backed by gold. That still would be completely counterintuitive. Sure, gold would be a much better commodity to use as a backing for Bitcoin, but what would be the point? Bitcoin transactions are instant and practically free, thanks to Bitcoin miners; tying it to something that has greatly inconvenient storage requirements and incredibly expensive transportation costs would make Bitcoin harder to use, not easier.
Backing up Bitcoin with a commodity would be like backing up gold with more gold. If you think it sounds strange to back up gold, or the dollar, with a stock, then it should sound just as strange to do the same thing to crypto-currencies.
So ask yourself, Senator Paul, what would you think about making gold coins redeemable in shares of a mixed basket of stocks? Now replace “gold” with “Bitcoin.” It still doesn’t sound like a very good idea.