The world is taking an authoritarian turn, former Merrill Lynch derivatives trader Harley Bassman noted in a December 5 “Convexity Maven” report. Could this, in part, explain the rise of Bitcoin? Or is this just another case of “Tulips for the masses?”

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Couleur / Pixabay

Is the rise of digital currencies correlating with authoritarianism?

In a world of nation-states, there appears to be a decided trend. In China, capital controls exist surrounding one of the most powerful leaders since Mao, Bassman wrote. In India, the country simply canceled most of the cash in the country to gain better control of the economy. In Saudi Arabia, Crown Prince Mohammad bin Salman decided to round-up much of the ruling class billionaires and those potentially in line for the throne in what was reported as a power grab.

But the authoritarian trend isn’t just occurring in traditional hotspots around the world.

In the United States, Bassman notes that Congress is considering placing controls on the US Federal Reserve. This is occurring as President Trump has indicated that controls on a free press and some in Congress have also sought to increase electronic eavesdropping capabilities on US shores.

Digital currencies are rising in popularity along with authoritarianism. While correlation is not always causation, will the US abandon its Greenback for a global version of the same?

Not likely, opines Bassman.

“Rest assured that those wearing MAGA hats have no interest in a currency not fronted by a dead American hero and reversed by a federal building,” he says. “It is extremely unlikely that U.S. Government would sanction as legal tender the use of an anonymous alternate currency it cannot control or tax.”

He addes (emphasis Bassman's):

What mitigates bitCoin’s advancement beyond being a nifty on-line global gambling token, is that by definition, true success in becoming an accepted global currency would literally be an Act of War no less lethal to a nation than a nuclear strike by North Korea.

Is Bitcoin a currency or investment vehicle?

If Bitcoin is a currency, exactly how is it composed?

It is an appreciation for the ultimate denouement of Central Bank currency debasement, as well as a general fear of Government (NSA, currency controls, general capriciousness), that has fed the stampede to bitCoin (and other cryptocurrencies). bitCoin is trying mightily to check all the boxes of what defines “money”:

1) Its supply is controlled or limited,
2) It is fungible/uniform – this is why diamonds cannot qualify,
3) It is portable – this is why land cannot qualify,
4) It is divisible – thus art cannot be money,
5) It is liquid – this means people will readily accept it in exchange.

But is it more a currency or an investment vehicle?

Here Bassman confesses a degree of confusion, particularly surrounding the investments that offer “hedge fund cost schemes.”

But unlike most hedge fund investments, “there are no tools to divine value since there are no underlying economic fundamentals to analyze: No Purchasing Power Parity, no trade balances, and no inflation,” he says. “Perhaps these funds will be structured like CTAs that rely upon momentum and charts; but if that’s the case, let’s just be clear that crypto-currencies then exist purely for speculation.”

The University of Chicago trained monetarist who believes in efficient market theory – they eventually become efficient, “it just may take longer than your patience allows” – has a clear definition.

Bitcoin is “Tulips for the masses,” Bassman says.