John Cochrane: prediction

Transcript context

…We need a way to short Bitcoin in your view. That’s probably hard to do right now, but if we had one — Well, you short bitcoin . . . Here’s why I think Bitcoin eventually will die — because it is a pure fiat-unbacked money. It doesn’t have a government that can raise taxes to soak up the extra money if needed. It’s not a promise of anything real. It’s just a thing that’s in limited supply because in order to short it, you have to use up a lot of computer power, but you can create substitutes. It’s classic. I’m very interested to watch the crypto community re-learn centuries of monetary economics. It’s classic MV = PY fiat money. It has value because it has a liquidity use. It’s useful for anonymous transactions, to put it politely, and it’s in limited supply because it takes money to make it. But there’s nothing that stops you from making substitutes, and nothing that stops you from making derivative claims on Bitcoin that trade just like Bitcoin. So, if there’s nothing that stops you from making substitutes or derivative claims, eventually that value has to go to zero. That can take a long time. So this is it. I’ve written about this too. A market can be very slightly inefficient in rate of return and very highly inefficient in terms of prices. Shorting Bitcoin wouldn’t work because it can go up for a long time before it goes back down again. If it costs you even a 10th of a percent per year to short the Bitcoin, and if you don’t have the money to stand the mark-to-market losses on the way, that price can be very far out of line. So, 1 percent inefficiency in rate of return can be a factor of two or three in efficiency in terms of prices, and I think we see that all over the place. Well, let me tell you why I’m maybe not yet converted to the fiscal theory and see if you could change my mind. It’s the same issue with crypto assets as with dollars and T-bills. They’re pretty close substitutes, but they’re not perfect substitutes. If they’re perfect substitutes, we’re in the world of finance. All the curves are perfectly horizontal. Arbitrage determines everything, and there’s one blade of the scissors. But if they’re even somewhat imperfect substitutes, and I think they are — Ether and Bitcoin, dollars and T-bills — then you’re in the Donald Patinkin world with a downward sloping demand curve based on something — it could be liquidity, could be risks, could be whatever — there’s a downward sloping demand curve, upward-sloping supply curve. It’s the world of Milton Friedman, Irving Fisher, something like the old-fashioned quantity theory. The fiscal theory is a special case of that when only one blade of the scissors cuts, but then in a lot of settings, I think both blades of the scissors matter. Now, what am I getting wrong there?…

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