Bitcoin: What Does Mainstream Economics Have to Say? | Article Review \ stacker news ~BooksAndArticles

Bitcoin: What Does Mainstream Economics Have to Say? | Article Review

This is a non-technical review of "Bitcoin: What Does Mainstream Economics Have to Say?" (2024), by Joshua Hendrickson, an economics professor at the University of Mississippi.

The paper has not been published at a peer-reviewed journal and is currently a working paper available on SSRN.

Special thanks to @denlillaapan for pointing this article out to me.

Overview

This is a mostly non-technical paper written by a mainstream economist about what mainstream economics (not mainstream economists) has to say about Bitcoin.

The distinction between economics and economists is important because, as the author points out, many economists have dismissed Bitcoin without actually having taken a fair look at it. Hendrickson's argument is that despite the dismissiveness of most economists, mainstream economic tools still have a lot of useful things to say about Bitcoin, and I agree.

The paper is organized according to the following sections:

Section 2 discusses what money is and whether Bitcoin satisfies the properties of money.
Section 3 discusses valuation models for Bitcoin.
Section 4 discusses whether Bitcoin can be "sound money"; that is, whether the real exchange rate between Bitcoin and goods can be stable.
Section 5 discusses whether Bitcoin can really be used to tame government deficits and thus make it harder for governments to finance war.

Does the author understand Bitcoin?

This author demonstrates a clear understanding of Bitcoin. They are clearly a Bitcoiner themselves. Many academic papers will a give decent, but glossed over explanation of Bitcoin, but this author is aware of the low-level technical details, even correctly using terms like "unconfirmed transaction", "nonce", and "broadcast to nodes on the network".

Takeaways for Bitcoiners

This paper should be part of every Bitcoiner's standard orange-pilling toolkit. The paper is scholarly and credible enough to not be dismissed outright, but it's written in simple enough language that non-economists would be able to understand.

In particular, I found the following sections useful:

Section 2 on "what is money?" and "can Bitcoin be used as money?" is foundational. It establishes that, historically and theoretically, money is simply a record-keeping device that people can trust. The author goes through a number of reasons why Bitcoin satisfies that property.
Section 3 on "What is Bitcoin worth?" offers estimates of Bitcoin's present value based on a different scenarios and modeling assumptions. The range is pretty wide with estimates ranging from $47,000 to $1.3 million. Of course, that's in present-dollar terms. If fiat continues to devalue then the nominal value of a Bitcoin will continue to rise. Bitcoiners interested in valuation models of Bitcoin will find this section worth checking out.
Section 4 on "Can Bitcoin be sound money?" is also worth a read, especially for Bitcoiners interested in L2 scaling solutions like Lightning or Fedimint. It discusses Bitcoin's role as money under two scenarios:
- A Dollar Standard world where goods continue to be denominated in dollars but Bitcoin is actively traded
- A Bitcoin Standard world where goods are denominated in Bitcoin
One of the takeaways is that in a Bitcoin Standard world, Bitcoin-denominated price levels will decline as real productivity goes up and the supply of Bitcoin remains fixed. The author envisions the emergence of Bitcoin-backed banks that issue private bank notes backed by Bitcoin. These notes will be traded in a competitive market for bank notes, much like the competitive banking equilibria promoted by George Selgin. Fedimints may be one of the ways such a phenomenon is emerging in the real world. The paper also points out that Hal Finney envisioned the same thing, quoting:

Actually, there is a very good reason for Bitcoin-backed banks to exist, issuing their own digital cash currency, redeemable for bitcoins... I believe this will be the ultimate fate of Bitcoin, to be the "high-powered money" that serves as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will occur between banks, to settle net transfers."
Lastly, Section 5 throws some cold water on some of Bitcoiners' more optimistic predictions. In this section, the author evaluates the claim that Bitcoin can make it harder for the state to finance wars. He points out that, historically, being on a gold standard didn't prevent governments from finding creative ways to finance wars, and therefore he believes that governments will similarly find creative ways to finance wars even on a Bitcoin Standard.

The historical perspective is well taken and well appreciated, but I can't help but wonder whether the analogy holds. As Bitcoiners often point out, Bitcoin is much more portable and much harder to confiscate than gold. It is much easier to conduct peer-to-peer transactions directly using Bitcoin, without a third party intermediary and without the government knowing. How easy would it be for the government to suspend the usage of Bitcoin as they could for the convertibility of gold? I would argue that yes, governments will find creative ways to finance wars (as they always have), but a Bitcoin Standard probably makes it a lot more difficult than with either fiat or gold.

Conclusion

This isn't a typical academic paper because it doesn't say much that is new. The paper doesn't develop any new models or theories, nor does it present any new empirical results. What the paper does do is offer a solid, historically and theoretically-grounded explanation and defense of Bitcoin using the standard tools of economic discourse.

I recommend every Bitcoiner to bookmark this article and keep it in their back pocket for any time you might need to send someone a defense of Bitcoin that's a bit more mainstream and neutral-toned than your typical Bitcoin influencer like Saylor or Saif.

31 sats \ 1 reply \ @Cotton 29 Oct

Having a well-reasoned, academic explanation on hand could be invaluable for discussions with skeptics who respond better to traditional economic arguments.

Thanks for sharing!

0 sats \ 0 replies \ @SimpleStacker OP 29 Oct

Indeed. The section on money I think will be eye opening for anyone who hasn't already seen it. Many others have covered the same ground before, but perhaps not with the same tone of academic neutrality.

21 sats \ 2 replies \ @denlillaapan fwd 30 Oct

To pretty shamelessly add what Josh told me in a DM: ”I largely share bitcoiners disdain for my profession. But I don’t see the problem as fundamental to economics. The problem, as I see it, is that a lot of the profession has stopped “doing economics””

That's a nice one

0 sats \ 1 reply \ @SimpleStacker OP 30 Oct

I wouldn't go as far as to say the profession has stopped doing economics.

I'd say that the need for novelty has trumped common sense, but only novelty that fits within the regime-approved narratives. And of course, the demand for regime-approved novelty is driven by the need to publish.

This is how you get grad students who write papers showing that natives have more accurate views of immigrants if they live near an immigrant, and thereby idiotically concluding that the right policy is to randomly allocate immigrants to predominantly native neighborhoods.

0 sats \ 0 replies \ @denlillaapan fwd 30 Oct

...among other shit that get published by grad students. Oh, man, do I have things to say about higher ed

21 sats \ 5 replies \ @Undisciplined 29 Oct

Great review. I'm curious where you landed on the present discounted value discussion.

That's not at all my area, but the couple of attempts I've taken at figuring it out landed towards the higher end of their range (including this post of mine about a really neat simulator).

78 sats \ 4 replies \ @SimpleStacker OP 29 Oct

I'm not entirely sure what to make of it, since I haven't studied the model deeply.

However, if you look at the appendix, one of the equilibrium conditions is:

where

is time-preference,

is the inflation rate of the dollar supply, and

is the transaction cost of bitcoin relative to dollars.

However, if you look at that equation, you'll notice that it can only hold with

In other words, his model blows up if bitcoin is as costless to transact as dollars and there's a positive rate of inflation. It seems plausible to me that the transaction costs of bitcoin will continue to go down and that dollar supply inflation will always be positive, so I'm not sure what his model would then imply.

21 sats \ 3 replies \ @Undisciplined 29 Oct

Odd. That seems like something you'd notice when doing common sense checks on your model.

You said he didn't do any original modelling in this paper, so I assume this is a model being used by other authors. Is it a holdover from trying to evaluate gold's monetary value or something?

70 sats \ 2 replies \ @SimpleStacker OP 29 Oct

I think it comes from another one of his other papers that explicitly tries to model bitcoin valuation. I didn't read that paper, and I didn't work through all the math in the appendix, so I'm not really sure what to make of it.

Maybe if bitcoin is as frictionless as the dollar, there can't be an equilibrium in which both are traded simultaneously?

The equilibrium conditions are basically an indifference condition between dollars and bitcoin, I believe.

21 sats \ 1 reply \ @Undisciplined 29 Oct

Maybe if bitcoin is as frictionless as the dollar, there can't be an equilibrium in which both are traded simultaneously

Interesting thought. That's similar to the last paper you reviewed.

It does make sense, when we're talking about exchange rates. I was expecting the pricing model to be based on bitcoin's future purchasing power.

67 sats \ 0 replies \ @SimpleStacker OP 29 Oct

Yep, his pricing model is explicitly based on deriving a dollar/bitcoin exchange rate in 2141, which assumes both are traded in 2141. He then uses time discounting rules to get the dollar/bitcoin exchange rate for today.

21 sats \ 0 replies \ @denlillaapan fwd 29 Oct

Definitely! I love how comprehensive Josh's article is and how carefully it weaves in so many standard economics components. Spells out that economists' anger at bitcoin is misaligned with their own discipline's findings

21 sats \ 1 reply \ @siggy47 29 Oct

I remember in my stock trading days a site called Seeking Alpha. I think this would be the kind of article that could pursuade conventional investors if posted on a site like that.

43 sats \ 0 replies \ @SimpleStacker OP 29 Oct

Agreed. The paper answers many of the common objections in a reasoned and measured voice which I think helps with mainstream acceptability.

Of course, the skeptic would have to do the work to actually read the paper, and too many won't.