As if to make the point about kakistocracy, Senator Cynthia Lummis (R-WY) has introduced a bill to sell a portion of American taxpayers’ gold to buy Bitcoin. While taxpayer gold exists physically in Fort Knox, the cryptocurrency Bitcoin exists virtually only in zeros and ones on computers. Bitcoin, also unlike physical gold, has competitors. Bitcoin is one among many crypto currencies. An improved substitute for Bitcoin can come any time. Bitcoin is not unique in the way gold is. Indeed, Bitcoin, unlike gold, has questionable intrinsic value. So, for American taxpayers, what could possibly go wrong?
Senator Lummis proposes in her bill to acquire one million Bitcoins, or almost 5% of the outstanding coins, currently valued at over $101,000 each. The cost to taxpayers would be over $101 billion at current market prices. Much higher if Senator Lummis’ bill passes and investors try to rush in ahead of government buyers.
The law of large numbers teaches that if a roulette wheel has the number zero on it, and you spin it enough times, eventually the ball will land on zero. It happens in the investment world often enough. As my modest SkyTel (then Worldcom) investment taught me years ago, substitutions in technologies (improved cell phones for pagers; fiber for long distance) can spin the wheel to zero fast. If Congress authorizes the crypto investment under proposed Republican legislation, the zero for bitcoin, or at least a much smaller price than the $101,000 price each now, could come when least expected. Taxpayers who watched their physical gold traded out of Fort Knox for Bitcoin, will then watch again in anguish. For many, it will come as a shock.
Analysts with the World Gold Council have shown that “a gold allocation reduces volatility while providing improved returns and does so consistently even with an increased level of allocation. However, that is not the case for bitcoin. The more you allocate, the higher the risk.” (Joe Cavatoni and John Reade, “Why bitcoin isn’t the new gold,’” Aug.2024.) Indeed, they continue: “When you expect protection against significant market moves, bitcoin tracked risk assets.” The authors conclude Bitcoin: “adds risk through increased volatility and returns comparable to high-risk equity assets.” Bitcoin is not a gold substitute for taxpayers.
Moreover, gold has unique properties that give it intrinsic value: there will always be demand for gold for jewelry as the world’s most beautiful metal. And gold will always be useful in electronics because of its excellence for electrical conductivity, resistance to corrosion and malleability.
Gold is also unique in human experience because no one has ever been able to craft a substitute (although since the Middle Ages many an alchemist has tried). Even quality diamonds can be made now to gem quality in the lab to increase the supply. Not so gold. Only gold has unique, intrinsic value that can never be substituted. Gold will not fall to zero as someone will always need gold for jewelry or electronics or to shield a space lander from radiation.
The thing Bitcoin has going for it is anonymity for transactions. Hence, it is the refuge of digital blackmailers and tax evaders. Is that really of intrinsic value? Well, for many in this age of widely accepted (and unpunished) dishonesty, the answer is yes. And for speculators betting on the greater fool theory at tulip mania levels, the answer is again for a while, yes. Otherwise, for normal taxpayers, no.
And who will benefit from the Republican bill? The billionaire friends and oligarchs of the coming kakistocracy hanging out there on huge Bitcoin bets. They want you to provide them a floor to stand on if Bitcoin turns out not to be truly finite as advertised, but substituted by new, improved algorithms adding vastly to the overall crypto supply. Not only that, but substitutes that could be more secure from theft from crypto exchanges, easier to produce in volume, less expensive in electricity, noise and the environment, more transparent to regulators, and better.
Under the law of large numbers, there is almost certainly a zero, or at least a lot closer to zero, than the $101,000 plus today, in Bitcoin’s future. It will be a long way to fall. Taxpayers should not bear the risk. We need Republican Washington Senators, especially from a fiscally conservative state like Mississippi, in a Republican dominated Senate, to tell Senator Cynthia Lummis of Wyoming: NO. NO to a taxpayer funded bailout for Bitcoin billionaire friends and oligarchs.
Robert P. Wise is a Northsider.
