Can Bitcoin replace fiat currency?

Is bitcoin truly destined to replace fiat money? Is it possible, or even desirable? Might its primary use be something else?

21 Bitcoins

The interview with bitcoiner Shinobi on the Podcast What Bitcoin Did has recently made waves. One notable quote was:

“Maxis are idiots. They got it into their heads that bitcoin is magical after reading The Bitcoin Standard. They think that the simple 21 million cap is going to take over the world, destroy governments, and create a perfect utopia. That’s absolutely delusional.”

This is essentially what economists of the “Austrian” school like to preach. “Bitcoin fixes this”… As if having a fixed money supply were enough for us all to be driving Ferraris.

The truth is that the monetary system is not the economy. An economy is primarily about means of production. That is, machinery, and therefore energy. No wealthy country has low energy consumption. That does not exist.

We often hear the phrase “Abundance through scarcity”. Faced with this oxymoron, the response should be:

“If only a currency with a fixed quantity could create ex nihilo oil, raw materials, etc.”

Some respond: “It’s literally possible. Only time and sats are scarce. With the right economic incentives, anything can be produced in greater quantity. Including oil.”

Others will quote The Bitcoin Standard directly by reminding that “if the volume of the Earth were the same as that of an Olympic pool, the volume of ore extracted so far would be equivalent to half a glass”.

These are stories that “Austrian” economists like to tell themselves so as not to have to destroy their illusions.

Yet Another Malthusian…

There have always been people predicting the limits of growth. The Reverend Malthus was one of them in the 19th century. He argued that the population was growing faster than the production of wheat and that this was unsustainable in the long run.

He was not entirely wrong. But he did not account for the human ingenuity of a certain Fritz Haber, who invented a process for synthesizing ammonia that allowed the industrial-scale production of fertilizers. This resulted in an explosion of agricultural yields and a tenfold increase in the world’s population. It’s a textbook case.

The return of “Malthusianism” is credited to Dennis Meadows who published “The Limits to Growth” in 1972. Not to forget the geophysicist Marion King Hubbert who, as early as 1956, predicted the peak of American oil production for 1970. It indeed occurred in 1971.

Globally, the peak of conventional oil (the kind that is easy to pump from the ground) is already behind us. We crossed it in 2007. Since then, US Shale oil has taken over, but it costs more to extract.

To put it differently, we’ve picked the low-hanging fruits. And it even seems that we reached the peak of all types of oil in November 2018…

Yet, oil is the cornerstone of our globalized civilization. It fuels 95% of transportation due to its irreplaceable natural properties: energy density and ease of storage/transport.

Unfortunately, for over fifty years, we have consumed much more of it than we have been able to discover.

Oil is a Stock That We Treat as a Flow

Oil takes millions of years to form from microorganisms which, upon death, fall to the seabed before being covered by sediment layers. Once deep underground, heat and pressure cause chemical and physical changes that transform the once photosynthetic energy of the sun into energy stored in the form of oil.

Sure, there’s a lot of oil left. But at what speed and at what cost can we extract it? We talk about EROEI (Energy Returned on Energy Invested) in the jargon.

Simply put, to obtain one unit of energy (the Joule, kWh, whatever), how much energy have I had to spend beforehand? In other words, barrels of oil aren’t produced at the snap of a finger.

It’s necessary to build wells, thus bringing (among other things) concrete and steel by truck which itself consumes oil. The concrete and steel beams also required oil to extract their raw materials. Even the truck driver needs food calories which once again demand oil to reach his plate.

The reasoning around EROEI is simple to understand. We first extract the “easy” oil with a high energy return rate. But as time goes on, what remains becomes costly to extract.

No matter the fluctuations in oil prices, interest rates, geopolitical turmoil. What matters is the intrinsic, energetic profitability of oil extraction and the quantity that can be physically obtained (when there’s no more, there’s no more…).

This is where we must look to find the true origins of inflation.

The Fiat Ponzi and Energy

The monetary system is a ponzi. Money is created from debt serving interests. For the system to operate smoothly, bankers must lend a little more each year than the previous one.

This system is neither good nor bad. It’s mainly the one that allows for the fastest growth. Humans naturally gravitate towards what’s most efficient. Nevertheless, a ponzi is a ponzi. Everything goes well as long as production can increase as fast as the debt. But for that, you need energy.

Wealth = Productivity (production per person) = Machinery = Energy.

It is important to understand that the work done by our consumption of fossil fuels (oil, gas, coal, accounting for 80% of our energy) is equivalent to that of 450 billion humans…

The problem is that this energy becomes more and more expensive to produce. If production cannot keep up due to physical limits, the result will be inflation.

World debt doubles every 9 years.

But world GDP only double every 25 years.

This graph explains why you better have some #bitcoin pic.twitter.com/biY2xeb39L

— Nicolas Teterel #FixTheFilters (@NTeterel) February 24, 2024

And ceasing to incur debt doesn’t offer more energy. As Michael Saylor said at the Bitcoin 2023 conference in Prague:

“No country can stop inflation. No one can stop inflation. I can make you the ruler of the world, and you won’t stop inflation.”

Our ailing planet condemns us to more inflation. Only a technological breakthrough in the field of energy could allow wages (productivity) to rise faster than inflation.

Fiat money will not disappear. A complex civilization needs the tool of debt. Nations that have the largest banks and the biggest debts are also the wealthiest.

Ultimately, it all depends on the quality of investments. These depend directly on a nation’s level of education. Keeping in mind that there is a limiting factor : energy.

The Primary Utility of Bitcoin

The world is at a crossroads in energy. Galloping debt (and therefore inflation) is a symptom of energy scarcity.

Second problem : inflation benefits desirable assets. Meaning, luxury real estate, paintings by great masters, shares in Apple, Microsoft, Google, etc. Yet, these things are only accessible to those who are already wealthy.

Bitcoin is revolutionary in that it is:

1) Accessible to everyone. You can buy bitcoin for any amount.

2) A technological breakthrough that for the first time creates something in an absolutely fixed quantity.

3) Liquid. It can instantly be exchanged into fiat currency if necessary.

Bitcoin puts the savings of the rich and the poor on equal footing. It remedies the widening inequalities caused by the inevitable inflation.

That is Bitcoin’s primary utility. Protecting one’s savings, and not so much replacing fiat currency.

“The killer use case is capital preservation and capital appreciation.” – Michael Saylor#Bitcoin pic.twitter.com/yPbvDmfyDi

— Swan (@Swan) February 26, 2024

In passing, let’s recall this statement by Michael Saylor last year:

“Believing that bitcoin will replace fiat money is a distraction that causes mental dead ends for many. […] Bitcoin does not need to replace fiat money to succeed. […] Global wealth amounts to about 850 trillion dollars in real estate, debt securities, equities, art… Bitcoin is a better asset. People will stop buying real estate at 25 or 30 times the annual rental value. They will sell everything until the ratio falls back to 10. The same for the shares of multinationals worth 25 times their annual profits.”

Having said that, of course, bitcoin can also serve as an anonymous means of payment. It allows one to easily flee a country at war and could replace the petrodollar in international trade.