What Jamie Dimon Got Wrong About Bitcoin and Tulips
(Bloomberg View) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon made news last week by criticizing bitcoin. Asking a bank CEO what he thinks of bitcoin is like asking the head of the post office what he thinks of e-mail. In a perfect world, Dimon would note the reasons why people use the cryptocurrency along with the dangers, and explain how JPMorgan is working to provide its customers with the advantages that come with bitcoin in safer forms. Instead, he denounces innovation as fraud and threatens to fire any employee who trades in bitcoin.
Dimon compared bitcoin to tulips, which is accurate, though not in the way he intended. Popular notions of the 17th century Dutch Tulipmania are derived from an 1841 book “Extraordinary Popular Delusions and the Madness of Crowds,” by a fact- and logic-challenged journalist named Charles Mackay. Mackay confused two distinct eras. He reports stories from around 1610 about high prices paid for individual bulbs. What he failed to realize is that people were not paying for single flowers, but for the entire breeding stock -- or a significant portion of it -- of popular new tulip varieties. People have continued to pay higher inflation-adjusted prices for new tulip and lily bulbs to this day.
A quarter century later, a futures market grew up around fractional interests in low-priced, ordinary tulip bulbs. In premodern Europe investment returns were very high, 20 percent or 30 percent per year on low risk investments, but laws and customs prevented anyone not in the merchant class from taking advantage.
Holland accidentally created a loophole by allowing contracts for fractional interests in tulip bulbs for the convenience of the industry. These were needed because the price of popular new bulbs was higher than even rich individuals could afford. In the early 1630s ordinary people discovered that these contracts could serve as money to support business and investment. These contracts then became “monetized,” as happens to all assets used as bases for monetary activity. That means their value decoupled from the use value of the underlying asset and became determined by demand for money services.
Something similar happened with bitcoin. People began using it in 2009 because it solved problems of the existing money and banking system: inflation, expropriation, taxes, use restrictions, financial repression and fees, especially for small and cross-border transactions. The economic value of these services serves as the underlying base of value, just like the value of tulip bulbs supported the tulip futures contracts. But bitcoin became monetized and its value far exceeds the current use value in transactions. Its value is now based on projected future need for protection against the problems it solves. If this be fraud, all money is fraud.
Dimon went on to claim that governments would suppress bitcoin because they like to control their own monetary policy. This is a strange objection. It seems to assume bitcoin will increase dramatically in value, because it would have to in order to be significant in global money supply. (Full disclosure: I own bitcoins and other cryptocurrencies as well as shares of JPMorgan)
A better reason for governments to suppress cryptocurrencies is that they make it easier for people to evade taxes and regulations. Many of the advantages of a cryptocurrency from a user’s standpoint are disadvantages to people who want to control users. Cash is a far better tool for evasion, and no government has yet outlawed cash -- or even stopped printing it. The most financially repressive governments have not taken effective action against cryptocurrencies. Any efforts to suppress simultaneously make cryptocurrencies more valuable.
Bitcoin values may well collapse the way tulip futures did, either on their own or due to government efforts. But the problems cryptocurrencies address will not disappear with that collapse. People will continue to pursue technological innovations to improve financial services. The eventual winners may be traditional financial institutions that innovate or new entrants. But it’s a safe bet they will not be financial institutions that fire employees who take bitcoin seriously and ridicule customers who try to help themselves without waiting for JPMorgan to take notice of their problems.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Aaron Brown is a former Managing Director and Head of Financial Market Research at AQR Capital Management. He is the author of "The Poker Face of Wall Street."
This reaction is not uncommon among entrenched businesses faced with competition, but disappointing in the most successful financial services executive of the 21st century.
With, however, a genius for titles.
Another irony is these stories all emphasize the fantastic value of the bulbs, and justify the name of the variety — a bridegroom turns down a sumptuous dowry for a single "bridegroom" bulb, a tavern owner trades his successful business for a "tavern" bulb, a breeder commits suicide after realizing he has sold a "black" tulip for far less than its value — these were all clearly fictional advertising devices in an age without widespread literacy. The fact that these stories spread and survived centuries is testament to how successful the bulbs were, how much money the people who paid the high prices made. Judging tulip economics from these stories is like analyzing 20th-century economics by studying the most popular advertising jingles.
In fact, flowers are the only consistently profitable agricultural business in Europe.
Feudal overlords, like modern socialists, did not believe in letting common folk get rich; they wanted to preserve all resources beyond subsistence for the goals of the state.
This was not a problem because physical bulbs had to be in the ground most of the year. People held offsetting long and short positions. They accepted the contracts in order to spend them; the value of the underlying tulips was irrelevant except in May when obligations were cleared.
It's not clear if the threat of legal action caused the crash, or if disruption from the crash led to the legal change. However, since people held offsetting long and short positions, there was no increase in financial distress: no change in the rate of bankruptcies or suicides. Mackay misreported this fact, because his sources were official propaganda pamphlets put out after the fact to discourage popular attempts to accumulate wealth.
Other cryptocurrencies and cryptoassets have since been introduced that solve different problems in different ways.
The base for modern government fiat currencies is their use for paying taxes. A base is necessary because the value of real underlying economics is irrelevant as long as it does not go to zero. In Silk Road, for example, transactions were agreed in dollars, and at settlement time converted to bitcoin at market. Neither buyer nor seller cared how many bitcoin that dollar amount represented; their accounts were fixed in dollar terms. The only problem would be if bitcoin value were zero, because then no amount could be exchanged to equal the dollar amount contracted.
Also, the current problem of most central banks is how to loosen monetary policy; bitcoin and other alternative currencies are ways to loosen. In the future when authorities want to tighten, they might be frustrated by transactions moving to cryptocurrencies. But attempts to reduce cryptocurrency transactions are exactly the kind of policies that make cryptocurrencies more attractive to users. If you think this is going to happen, you should stock up on bitcoin now.
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net.
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