The month of November ended with significant increases in all markets:
- S&P 500: +5.73%
- Nasdaq: +5.23%
- Stoxx Europe: +0.96%
- All Country World Index EUR: +6.76%
- Global Fixed Income Index EUR: +3.14%
Trump’s election as President of the United States was a major boost for the U.S. stock market, though it didn’t have the same impact on other indices. Could potential new tariffs have something to do with this? Another “Trump effect” was the sharp rise in Bitcoin, which increased by 39% in November and by 123% over the year. Why is this happening? How can a digital asset, something intangible that cannot be touched, rise so dramatically?
For some, Bitcoin is the new money that will replace what we know today. For others, it’s a bubble similar to the tulip mania in the 17th century Netherlands, where a cultivated variety of tulip was sold for 12 acres (about 48,000 square meters) of buildable land. Soon after, a severe crisis hit the country because people had gone into debt to invest in this plant.[1]
To determine whether this is absurd or not, we must first understand what money is, its origin, and evolution. I promise not to bore you.
In the early days of transactions, there was no money; exchanges were conducted through direct trade, known as bartering. Families produced what they needed to survive and, if they had surpluses, exchanged them for other necessities such as food, clothing, or goods. For example, if a farmer had wheat and needed shoes, he would find a shoemaker to trade wheat for shoes. However, this type of exchange was inefficient for several reasons, as Murray Rothbard explains in his book A History of Economic Thought[2]:
- Double coincidence of wants: It’s difficult for two people to coincide in time and in their needs.
- Indivisibility of goods: If I want to exchange a chicken for a cow and the cow is worth more, what do I do? Cut the cow in half?
- Impossibility of storing value: If what I have to exchange is perishable food and it takes too long to trade, it could spoil and lose its value.
God gives man the tools of intelligence and willpower to use nature’s resources to meet his needs. Spontaneously and evolutionarily, man begins to think about how to solve these problems, and thus the idea of money emerges. How? Something was needed that met a series of characteristics to solve the aforementioned problems:
- Divisibility: It must allow transactions of varying values, whether for a cow or a chicken.
- Durability: It should last over time without losing its properties.
- Portability: It must be easy to transport.
- Relative scarcity: If the production of this “money” were discretionary and unlimited, the desire to produce it would also be unlimited, likely resulting in a loss of value. This is important because, to some extent, it happens today.
- Acceptability: It should be a generally accepted good.
This was a significant leap forward in transactions, solving numerous problems and making trade much more efficient, allowing goods to reach more people.
But what could this “something” be that met all these criteria? Various goods were tried, such as wheat, barley, shells, salt (hence the word salary), until the idea of using silver and/or gold emerged, materials that met all these characteristics. Eventually, gold replaced silver because it was deemed more valuable.
Gold became the generally accepted money, leading to indirect exchange. If someone sold a cow and the other party did not have a homogeneous good to trade, they would give gold equivalent to the cow’s value. Since gold was valued by everyone and didn’t lose value—because no one could produce it at will—people kept it until they needed to buy another good (chickens, shoes, wheat, etc.).
If someone had large amounts of gold, it wasn’t easy to transport it without the risk of loss or theft. Thus, entities began to store gold and, in exchange for custody, issued certificates that served as a means of payment, certifying the ownership of gold in the respective entity. Human ingenuity continued and continues to evolve according to needs.
This system worked well, but human creativity applies to both good and bad ends, even with the best intentions. European monarchies financed their expenses, typically wars, through taxes that needed parliamentary approval, which was a limitation. So they sought alternative ways to spend more. How? With gold, they could only spend what they had, but by issuing more certificates than the gold reserves, they could have more money. Would everyone come to withdraw their gold from the bank? It was unlikely, opening an interesting avenue for financing these monarchies (a practice that, to some extent, continues today).
Who was the first? The Bank of England, which was private, “temporarily” suspended convertibility[3] between 1797 and 1821 to finance the Napoleonic wars. Essentially, they could issue money without limit. What was the risk? Issuing more than was needed could lead to inflation, with the circulating money exceeding the existing gold reserves (a scenario that persists to some degree today). Other countries followed, such as France, Germany, and the United States. However, there was still a connection to gold, which imposed certain limits. If a country overspent using this method, others would foresee future problems and stop financing it. Even the general public, and this is important for understanding Bitcoin later, would sell the currency and buy something else to maintain value, like art or property.
Even in ancient times, the gold or silver content of coins was reduced and replaced with cheaper alloys to create more money. However, the end result was price increases, or inflation. Jesuit Juan de Mariana denounced this practice, stating, “Reducing the metal content in coins is an unworthy fraud by an honorable prince, as it robs subjects under the guise of justice.”[4]
In 1913, the Federal Reserve, or FED, was established as the central bank of the United States to serve as a lender of last resort during banking crises. If a bank faced a liquidity crisis, it would turn to the central bank for funding. The FED is a public-private “independent” consortium from the state (I use quotes because no one really believes that). It is the monetary authority of the country, responsible for increasing or decreasing the money supply (printing money or not) as needed.
Until 1933, the gold standard—a monetary system in which currency was directly linked to a fixed amount of gold—was in place. In 1933, Roosevelt suspended gold convertibility due to the Great Depression, even confiscating gold from citizens and prohibiting its possession—in the UNITED STATES! In 1971, Nixon abandoned the gold standard, giving rise to what we now know as fiat money. What is this? It’s money with no intrinsic value (it’s just paper), whose value depends on people’s trust and acceptance as a means of exchange, not backed by any tangible good, similar to Bitcoin.
This sets the stage for printing unlimited money at the discretion of current politicians. The risk? Creating inflation, or in other words, the depreciation of currency.
To give you an idea of the dollar’s depreciation since the end of the gold standard, when unlimited printing became possible, this chart shows its evolution: a 98% loss in value relative to gold. And this is the dollar, the world’s reserve currency.
Source: Bloomberg
The insatiable state spending has led to a 98% loss of purchasing power. At this point, why do we keep money in our accounts if inflation steadily erodes purchasing power? For one fundamental reason: the state requires us to pay taxes in the national currency, making it legal tender.
Do you now understand why Bitcoin has become famous? Bitcoin was born from the desire for a medium that retains its value and, over time, becomes a generally accepted means of payment. It’s structured in a completely decentralized manner, impossible to manipulate (at least so far, despite attempts), thanks to the blockchain infrastructure, where all users validate transactions in some way. Additionally, the supply is limited to 21 million, and if there’s demand, it will retain value. In other words, it has two characteristics many value when considering a means of payment: that it doesn’t lose value when needed and can be exchanged for goods. No one can produce more at will, and the supply is limited.
But will Bitcoin become the generally accepted currency? Honestly, I don’t know. It has just been born; gold took a long time to be recognized as money. Moreover, its future is uncertain for various reasons, which explains its volatility. This may be the biggest hurdle to hoarding bitcoins.
Therefore, this is not an investment recommendation; I simply wanted to provide a personal explanation of why something intangible attracts so much interest (I am referring to Bitcoin and not to other cryptocurrencies with which I am less familiar). I do not think it is comparable to the tulip bubble for the reasons mentioned; I believe it has much more substance, but only time will tell if it truly becomes a generally accepted means of payment.
Alexandre Dumas once said, “Do not value money either more or less than it is worth, because it is a good servant but a bad master.” Money is a means, not an end in itself. It has enabled greater efficiency in commercial exchanges, facilitating access to certain goods for a larger number of people, including essential items. If we treat money as an end, it would be akin to the rich young man who, although he obeyed the commandments, asked Jesus what he needed to do to attain eternal life. Jesus replied that he should sell everything he had and give it to the poor, and the young man left sorrowful because he had great wealth[5].
I have the impression that Bitcoin is currently being purchased as an end in itself, which explains the high speculation. However, we should not view this as irrational. In my opinion, there is a more important underlying reason: the search for an asset that retains its value against inflation. This could be gold, artwork, real estate, and why not, Bitcoin. It is not surprising that in countries with high inflation, such as Nigeria or Argentina, Bitcoin is purchased the most.
[1] La manía del tulipán: el primer crack bursátil
[2] HISTORIA DEL PENSAMIENTO ECONÓMICO – 3ª EDICIÓN (CLÁSICOS DE LA LIBERTAD) : Rothbard, Murray Newton: Amazon.es: Libros
[3] Se puede emitir certificados sin respaldo del oro.
[4] Tratado y discurso sobre la moneda de vellón: Mariana, Juan de
