When Bitcoin goes to Zero, Don’t Blame Regulation

After bitcoin goes to (essentially) zero (since it is global, even a few oddballs can prop up its value for years at some low level, like hobbyists do for all kinds of things), which it will, some will say that it was regulation that killed it, not, as I explain, because crypto is worthless because it is not part of a balance sheet and as such has no inherent value to extinguish debt.

To be clear: That bitcoin can’t withstand being treated as any other ordinary good yet does not deserve special tax-free treatment is part of the theory though. You don’t get to declare “I’m a currency! I deserve special treatment!” and not pay taxes. Governments maintain the value of their currency through taxation (taxes drive currency). Money is a public good we all support for our mutual benefit.

You can’t just invent some new token (even if something new and shiny like blockchain & crypto) and declare it a special good that can be traded tax free. Yet taxing a self-declared “currency” guarantees its failure as it will not make sense for individuals to move into it if they are going to be taxed in real money for transactions in it.

Until recently crypto has been bartered freely in its sphere like Pokémon cards because no one cared. It takes time for public institutions to catch up to developments, but there is no more reason, if they become significant, to allow crypto tokens to trade tax free than anything else someone invents; we simply do not have the right to declare something tax free because we want it to be or businesses would do it all the time.

Because crypto tokens do not have any intrinsic value (as opposed to the other taxed assets they compete with), AND because they, unlike real money, are neither tax credits nor bank-loan repayment credits, then any ordinary taxation that every other good can bear will drive cryptos to zero.

Speculators will cry because their Ponzi scheme is tamed, Millennials will want a participation trophy, and libertarians and anarchists will as always be sophomoric, not understanding the deeper need for social cooperation that is embodied in agreed taxation.

Real businesses provide real value that makes them able to pay taxes and still be profitable. Crypto tokens have no intrinsic value and cannot just declare themselves tax free to claim utility; unlike real assets, crypto will not bear even the slightest bit of legitimate taxation because there is no value there to tax. House of cards (or tokens I guess).


March 28, 2019  UPDATE: The Intro to Economics textbook is finished! Live on Amazon here –

1000 Castaways: Fundamentals of Economics

Bitcoin Delusions

Bitcoin collectors and crypto-token creators suffer from a number of unsupported beliefs destined to come back and haunt them. The key ones:


That Quantitative Easing was the same as “printing money”.  It wasn’t.


That printing money causes hyperinflations.  It doesn’t.


That a 21 million limit means anything.  It doesn’t.


That blockchain is the future of finance/law/business.  It isn’t.


That if blockchain were to become more widespread it would be based on cryptocurrencies as we know them.  It wouldn’t.


That blockchain eliminates the need for intermediaries and rules in markets and transactions/contracts.  It doesn’t.


That the cryptocurrency/blockchain bubble is like the dot.com bubble.  It’s not.


That network effects are enough to sustain the value of a currency.  They aren’t.


That a low barrier to entry and endless replicability does not reduce the value of cryptocurrencies to zero.  It does.


The true value of cryptocurrencies is zero, as many are soon enough going to painfully find out. Some more discussion on why here – Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin




Of Bitcoins and Balance Sheets: The Real Lesson From Bitcoin

The monetary systems of nations operate on two types of balance sheet expansion:

  1. National, where the government spends into the economy expanding a national balance sheet
  2. (The sum of) banks’ balance sheet expansions, where bank loans create deposits

The asset side of both of the above are traded around as “money”.

The national government creates the numeraire for the system (the “Dollar” in the US, the “Pound” in the UK etc.) and in addition to spending directly in to the economy in that numeraire, the government allows a public/private system (publicly regulated private banking system) to operate with the same numeraire. This creates a single system for the public but in fact arises from two separate but linked balance sheet expansions.

But why do the tokens from either of these balance sheet expansions have and maintain value?

The government maintains the value of its balance sheet tokens by demanding that some of its tokens, once a year, must be paid back to the government. This guarantees that everyone in that nation will accept and value the tokens from the national balance-sheet expansion.

The tokens that arise from the public/private bank balance-sheet expansion maintain their value analogously – by the obligation to repay bank loans.

Together, the obligation to pay taxes and the obligation to repay bank loans maintain the value of a currency. Note that both of these rest on the government/legal system of a nation.

An organized, effective government with a sound legal system that does not use foreign currencies can always maintain the value of its currency. (Hyperinflations are always the result of governments and their legal systems becoming corrupted or destroyed in some way, and never the result of runaway money creation).

What does this mean for Bitcoin and other cryptocurrencies?

Bitcoin is not the result of a balance sheet expansion. There is no inherent obligation for repayment of bitcoin to any government (taxes) or to extinguish private debt (banking system). There is no in-built demand for bitcoin (or any cryptocurrency).

Bitcoin is worth zero dollars (or Yen or Pounds etc).

National currencies will always do two things 1) extinguish tax obligations and 2) extinguish private debt obligations. Even if you have neither, there are always enough people with tax and bank debts that you can be sure that your money will be voraciously sought after by merchants of all types. Unless we are in Mad Max territory, they will give you a loaf of bread for it.

Bitcoin is not part of a balance sheet. It does not inherently extinguish debt of any kind – neither a tax obligation nor a bank debt. Nor do other cryptocurrencies. Once the fad for them subsides, the realization that you can’t pay taxes or repay a debt with them will become evident and their true value of 0 will become evident.

Because they don’t understand money or balance sheets, bitcoin collectors and cryptocurrency creators don’t understand why their tokens are inherently worthless. They won’t understand why, when the fad passes, no one will be willing to take their play tokens for real goods.

The only benefit from the bitcoin fad may be a better understanding of the balance-sheet nature of national economies, and the relationship of this to the real resources of a nation. This will prove to be the real lesson from bitcoin. The sooner it is learned the sooner nations can get on with the real work of using their national balance sheets and good legal environments to improve the real economy.


P.S.  A common refrain is that yes, Bitcoin and cryptocurrencies are worthless, but Blockchain is really a big deal.

Well, not so much…

The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

Ten years in, nobody has come up with a use for blockchain

As I have said before – blockchain is going to turn out to be the Wankel engine of the finance world. Interesting concept but not that useful in real life, never quite filling a real need.

Check out my new book “1000 Castaways: Fundamentals of Economics,” Aetiology Press. 

A renegade band of Modern Monetary Theorists has overturned mainstream economics in part by emphasizing that there is not one, but two systems of modern money, the “vertical” and the “horizontal.” They conclusively demonstrate how unifying our understanding of these is crucial for grasping modern economics.

“the key to understanding Modern Monetary Theory is this vertical-horizontal relationship”

(Warren Mosler)

1000 Castaways develops Mosler’s statement into a concise, book-length treatment that is accessible to all readers, starting from first principles and, step-by-step, leading the reader up to the complexities of the real world.

Our one thousand castaways develop, before our eyes, a “perfect” economy, and demonstrate how the horizontal and vertical systems of money naturally emerge from even more fundamental organizational needs of a large society.

1000 Castaways then contrasts the Island’s “economics” with real-world “economics,” in an enlightening illustration of the last few steps in our common economic understanding that we must take in order to run our modern economies in a way that maximizes wellbeing.

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