Peter Schiff is a well-known critic of bitcoin, and while he is an excellent resource on many economic and political topics, he misses the mark on cryptocurrency. To be fair, he is right that bitcoin and other crypto assets are high risk and volatile, and he correctly points out that using leverage or going into debt to buy bitcoin could end in financial disaster. However, he makes several errors in his analysis of bitcoin. He is wrong about its scarcity and its ability to hedge inflation, but his largest mistake is his guiding principle: that bitcoin (unlike gold) has no fundamental value.
For example, Schiff is quick to point out that gold has uses outside of being money. It is used in electronics, dentistry, and jewelry, to name a few. Given this, it's easy to see how—as Carl Menger noted—money could emerge in a free market from a state of barter. In short, gold had use cases independent of being money, but over time, it was recognized as a useful medium of exchange to facilitate more complex and indirect transactions. This led people to value it over and above its original use cases.1
Unlike gold, bitcoin cannot be used in dentistry; it cannot be fashioned into jewelry; and it cannot be used in electronics. This leads to Schiff to claim that bitcoin is unlike gold in that it has no fundamental (or objective) value. His mistake is obvious: there is no such thing as objective value, whether we're talking about gold or bitcoin. Value is subjective and determined internally by individuals. Bitcoin has no objective value, but neither does gold. Yes, gold can be used to build electronics, but that only has value because consumers subjectively value electronics (See Menger’s theory of imputation).
Schiff is also mistaken when he claims that bitcoin provides no shelter from inflation. Millions of people across the world have already used it to partly escape their failing currencies. In 2018, for example, the price of bitcoin in Venezuelan bolívares was doubling every eighteen days. It's important to keep in mind that any product can serve as a hedge against a devaluing currency—not just precious metals or cryptocurrencies. In the past, whiskey and cigarettes have been used for this purpose, as have many other consumer products. When a currency is failing, the demand for the currency declines and consumers rush to put their currency into physical products or other currencies.
On the other hand, Schiff may be correct that a dollar crash could lead to a decline in bitcoin prices (at least in the short term), but such an event would be disruptive to many assets. The most recent example of these effects occurred on March 6, 2020. As the US stock market crash deepened, both gold and bitcoin sold off sharply. When the margin calls hit, everything got sold. The simple truth is that anything that's not a dollar or a promise to pay dollars (i.e., bonds) represents a hedge against dollar inflation. This does not make them immune (in the short term) from a collapse of the global reserve currency.
Schiff’s last major mistake concerns bitcoin’s scarcity. The ultimate supply of bitcoin is fixed at 21 million units. Schiff discounts this limited supply by pointing out that thousands of crypto coins and tokens have been created since bitcoin. These copies, he claims, prove that bitcoin is not scarce. Would Schiff extend this logic to reproductions of the Mona Lisa? There is only one original, and it will remain scarce no matter how many copies are made. His stance also ignores the significant network effects that bitcoin enjoys. Like other networks, the value increases as the number of participants grows. Numerous forks of bitcoin have learned this lesson the hard way as their tokens have steadily lost value against the original. Finally, the existence of multiple cryptocurrencies is no more problematic than the existence of multiple precious metals. The total demand is simply divided between silver, gold, palladium, and others. It is likely that we are in a boom stage of crypto like the dot-com bubble. New coins are being created almost daily and most will not survive. It is up to the marketplace to determine if the price of bitcoin will go up or down. The same is true for gold.
- 1Anyone who has played an online role-playing game in the past twenty years has experienced this phenomenon firsthand. Think "Stones of Jordan" in Diablo 2.
