With His Bitcoin Bet, Michael Saylor Mistook ‘Scarcity’ For An Inflation Hedge

Argentina has a population of 45 million, while Switzerland can claim roughly 8.6 million citizens. Where it gets interesting is that the Swiss franc is one of the world’s most circulated currencies, while the Argentine peso isn’t even the currency of choice in Argentina. Given the country’s history of devaluation, Argentines go to great lengths to exchange their pesos for dollars as a way of mitigating the horrors of devaluation. Though the peso is the country’s official currency, the dollar liquefies much trade, and is most certainly the required currency for debt issuance and imports. Really, who would provide real goods and services for paper that’s so routinely in decline?

The Swiss have no such worries. Their franc liquefies transactions around the world. Trusted money is wherever serious business is taking place. Getting right to the point, the Swiss franc is all over the world, while the Argentine peso isn’t. As mentioned above, it’s not even heavily circulated in Argentina.

It’s all a reminder of just how misleading “scarcity” can be. Supposedly what’s scarce is valuable, but the peso is far scarcer than the Swiss franc in concert with the Argentine currency being much less valuable. With money, what’s heavily circulated is what’s trusted, while what’s not trusted generally can’t be found. This is logical when you think about it. No one buys, sells, lends, or borrows with money. Money is just the agreement about value among produces that facilitates the movement of real goods, services, and labor. Precisely because transactions involving “money” signal the movement of actual wealth, those transacting only want to do so with trusted money. Translated for those who need it, those operating in the marketplace don’t want to get ripped off. Trusted money means the provider of goods and services in exchange for currency will attain roughly equal value for it precisely because there’s broad acceptance of the money’s value in the marketplace.

The above truth explains why international exchange or debt issuance globally never involves the peso, the bolivar (Venezuela), the won (North Korea), the toman (Iran), or any other debased money form. In the “closed economy” that is the global economy, bad money rarely circulates. If you doubt this, visit shops in the countries mentioned with the local currency and with dollars, See which currency actually commands resources….

The throat-clearing that you just endured is a useful way of getting to Michael Saylor, the brilliant founder of MicroStrategy. In recent times Saylor has become best known for converting his company’s cash to Bitcoin. It would appear Saylor bet on scarcity. In his words,

“The biggest idea here is bitcoin is the first and the only legitimate scarcity in the universe. Gold is not scarce. They just found 320,000 tons of gold in Uganda… so bitcoin is the ideal commodity because you can’t make anymore of it.”

Ok, but what does scarcity get you? The dollar is the most circulated currency in the world, by far. Is that the source of its decline as a measure of value at times over the decades? Obviously not. Think about it. What if the dollar still had a gold definition? As in what if the dollar’s value were more of a certainty due to the constancy that gold imbues in currencies for it being the commodity least influenced by everything else? The obvious corollary to a more stable dollar would be even greater circulation globally. Trusted money is circulated wherever there’s production. Again, no one wants to be ripped off.

Those who might defend Saylor’s Bitcoin bet will say that the limit to its supply makes it preferable to the dollar and gold. “Bitcoin can’t be printed,” or something like that. But what’s limited in supply logically would not be useful as “money.” And this is true based on the highly questionable “supply” logic that Saylor and others offered as the reason to buy it in the first place: a fixed total of 21 million coins. Based on their assumption of limited supply making it valuable, they’re implicitly saying that it will never be useful as a money form. How could it be? If the value of anything is always going up due to limited supply, who would use it for transactions? To buy with what’s rising in value is to give up major upside in the future. Same with borrowing. Are you going to go into debt for that which will be increasingly expensive?

The simple truth is that the rationale Bitcoin buyers used for owning the money form loudly explained why it wasn’t money. Even if scarcity did make it valuable (a highly debatable presumption) that same scarcity rendered it much less than money. What would make Bitcoin money would be a fixed standard of value, and a commitment to maintaining that fixed standard over years and decades. If so, one guesses that in time there would be many multiples of 21 million Bitcoin in circulation. Again, what’s trusted is everywhere.

Of course, it’s apparent that Saylor wasn’t looking for money as is. Which is a statement of the obvious. He was speculating. Except that good money is never a speculation. Good money is quiet.

Which brings us to gold. Saylor’s rationale for Bitcoin over gold is new discoveries. Bitcoin is fixed in total supply, while they keep discovering gold. But the rationale misses the point. Gold’s constancy never had anything to do with scarcity; rather it was a stock versus flow play. Even large gold discoveries never come close to matching up to total gold above ground. They’re small relative to total gold supply globally such that discoveries and big sales can’t move its price. In other words, gold’s value is its immense supply relative to what’s discovered.

Some are no doubt saying now that gold would have been a better inflation hedge for Saylor in consideration of Bitcoin’s collapse. Except that gold was trading in the $1,900 range in August of 2020 when Saylor began buying Bitcoin, and it’s $1,840 now. Hmmm. Saylor would have lost either way, and then this has to be the first “inflation” in history that occurred in concert with a strengthening currency. It makes you wonder about how they’re defining inflation these days….