Wednesdays with Wenzel: Was Wenzel Wrong about Bitcoin
Highly opinionated responses only!
This is a semi regular Wednesday column where we examine the work of the late, great Austrian School of Economics and Rothbardian influenced Robert Wenzel. The content for this column comes from his books, his daily market alerts, and the content of his websites, Economic Policy Journal and Target Liberty.
One could easily misunderstand Robert Wenzel’s position on Bitcoin and cryptocurrencies. He often wrote negatively about Bitcoin and advised extreme caution when it came to investment. Never allocating more than 1% of the portfolio to any crypto was his guidance, though he did recommend as early as 2013 to put 10% in Bitcoin if you are a “river boat gambler.”1
As a subscriber to Wenzel’s EPJ Daily Alert, I can testify that while Wenzel constantly warned about the dangers a government regulatory crackdown, he did recommend Bitcoin trades, and did so profitably. His last one before he passed away was great, getting me into Bitcoin at ~$24,000 and selling near $50,000 in just a few months. Bitcoin ended up reversing shortly afterward and pulling back below $40,000.2
There were also concerns raised about the anonymity of using Bitcoin. This criticism is now widely accepted - that using Bitcoin does not in any way provide the coin’s user with identity privacy. In the early days of Bitcoin enthusiasm, this was a contrarian position, but today pretty much everyone recognizes that Bitcoins can be tracked and their users can be revealed.
Another argument that was often featured on Economic Policy Journal was the question of Bitcoin being a “money.” This seems like a rather esoteric and possibly irrelevant discussion, but understanding this is key to RW’s rather interesting position.3
First, we have to define money. As Austrian School economist Ludwig Von Mises pointed out, this isn’t so easy:
"A medium of exchange which is commonly used as such is called money. The notion of money is vague, as its definition refers to the vague term 'commonly used.' There are borderline cases in which it cannot decided whether a medium of exchange is or is not 'commonly' used and should be called money."
But if we follow along with this line of thinking, Bitcoin has, over the last decade, progressed from a valuable thing to store (to borrow a term from Gary North) to a medium of exchange in limited use to a medium of exchange that is nearing common use.
Why is this important? Because we are starting to enter the territory where Robert Wenzel’s warnings about Bitcoin become more important. Only if Bitcoin is “money” does it become problematic for government.
There are two main ways in which Bitcoin-as-a-money caused major concerns:
If the government decides that Bitcoin is a competing currency with government issued money, it will not hesitate to crackdown. The method of crackdown would likely come from heavy regulatory oversight at first, followed by introduction of a Federal competing crypto coin. Such a crackdown would result in Bitcoin losing a lot of its value and eventually becoming worthless as it is pushed out of existence.
Even worse, Bitcoin has shown government the way, creating the blueprint for a traceable digital currency that could be the ultimate totalitarian tool to control society.
It’s this second point that should really concern libertarians.4
To answer the question posed in the headline, I do think Robert got some things right and some things wrong. Let me go through them one at a time:
As an investment: Robert was right to be conservative in the investment allocation to Bitcoin. Indeed, as competing cryptocurrencies have swarmed in, there have been even better opportunities for profit than BTC itself. And really importantly, we have yet to see how crypto reacts during a money supply growth contraction. Bitcoin has gained major popularity during the boom phase of the Austrian business cycle theory (ABCT). We don’t know yet how it’s going to hold up in a deflationary bust. Yes, money has been left on the table. But what really matters in investing is not losing your investment. Much like there is always a bigger bad-ass, no matter how hard you train, there is always a better investment missed, no matter how much you research.
As identity protection: Score one for RW for being early to understand that Bitcoin was much easier to track and provided less anonymity than expected from early adopters.
On the threat of regulatory impact: I agreed with Wenzel, and I was also wrong. The various banking authorities have been very vocal about their desire to regulate and crackdown on crypto, but they’ve been unable to actually do anything about it. This may change. Interestingly, it seems that they were getting closer to action before Covid hit. And now Covid has given the authorities another way to control us that doesn’t require tracking currency. Instead they can track us by vaccine status and folks have happily complied in most of the world.
On the threat of a traceable currency: But if they are already tracking us using QR codes to see if you have made your donation to Pfizer, then one would think it would be relatively easy for the government to get a traceable currency such as a Fed Coin going. One would think that. But looking at it another way, it’s not quite simple. For starters, introducing a new currency is a rather dangerous idea. If the new currency is not reliable that would be disastrous for the ruling class and possibly an economy destroyer. Crypto is an advanced technology compared with the dollar system, and it requires a technical expertise that is higher than your typical bureaucrat operates at. So while the populace is much more willing to be tracked today than they were in 2019, the technical challenge of doing so via the Fed’s coin is still pretty high. A traceable currency may be in our future but we’re not there yet.
Drop a comment and share your thoughts as I’d love to hear your opinions on Robert’s take and on the future of crypto in general.
Today’s bitcoin price is ~$58,000