Peter Schiff Explains ‘How Bitcoin Works’, Crypto Community Responds

On January 24, Peter Schiff, a well-known financial commentator and one of the harshest critics of cryptocurrency, took to social media platform X to express his skepticism about Bitcoin.

Schiff is a well-known American financial commentator, stockbroker, author, and radio personality. He is best known for his bearish views on the U.S. economy and his advocacy for gold and precious metals as investments. Schiff is often associated with libertarian and free-market economic views. He is the CEO and chief global strategist of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut.

Schiff described Bitcoin as a creation with no inherent value, whose scarcity is artificially limited. He suggested that the perceived value of Bitcoin is based on a collective pretense, with people buying into it as they see its price rise. Schiff’s critique hinges on the idea that Bitcoin’s value relies on continuous collective belief in its worth, without any intrinsic value underpinning it.

Schiff’s Comparison with Fiat Currency

In a subsequent tweet, Schiff acknowledged that his criticism could apply to any currency. However, he differentiated fiat currency from Bitcoin by noting its practical use as a medium of exchange and unit of account. He emphasized that fiat currency is universally needed for paying taxes, thereby having a tangible utility that, in his view, Bitcoin lacks.

Here is how #Bitcoin works. We create something with no value, then artificially limit its supply. Then we all pretend it has value and buy it. Other people see the price going up and they buy it too. Then we all keeping #HODLing it hoping everyone keeps pretending it has value.

— Peter Schiff (@PeterSchiff) January 24, 2024

Schiff’s comments sparked a range of reactions from the crypto community on X:

1. Comparison with Schiff’s Gold Fund: One user responded by likening Schiff’s description of Bitcoin to his gold fund, implying that gold, like Bitcoin, has value because people collectively agree it does.
2. Gold and Bitcoin’s Agreed Value: Another user echoed this sentiment, stating that gold’s value is also based on a collective agreement, similar to Bitcoin. They argued that Bitcoin is no different in this regard.
3. The Nature of Money: A more detailed response outlined the historical evolution of money, from seashells to gold. This user highlighted that all forms of money derive value from collective agreement, provided they meet certain criteria like scarcity, difficulty to counterfeit, and divisibility. They noted that gold is losing its monetary value due to digital age challenges, whereas Bitcoin, backed by a vast computer network, gains value through its digital attributes. However, like previous stores of value, Bitcoin’s worth is contingent on collective agreement.
4. Comparison with the Dollar: Another user drew a parallel between Schiff’s description of Bitcoin and the U.S. dollar, suggesting that fiat currencies also rely on collective belief in their value, especially as governments move away from backing them with tangible assets.

In a recent video, crypto analyst Joe Burnett discussed the notable decline in Bitcoin’s value, pointing out its drop from $49,000 to below $39,000 after an ETF was approved. Burnett brought attention to the issue of Bitcoin’s volatility in the face of such a significant price fluctuation.

Burnett contends that, despite its fluctuating price, Bitcoin is fundamentally stable. He notes that Bitcoin does not have the usual factors that drive volatility, such as a CEO, a management team, or competitors, which makes it one of the most stable assets internally.

He further elaborates that the stability of Bitcoin is comparable to that of a tangible asset like gold, which does not carry counterparty risk. Burnett emphasizes the consistency of Bitcoin’s block production, which happens every 10 minutes regardless of its value in dollars or the number of miners in the network. He also points out that Bitcoin maintains its essential qualities – such as being portable, durable, divisible, fungible, and having immutable scarcity – irrespective of the market’s external conditions.

Burnett attributes the volatility in Bitcoin’s price to human behavior rather than to the cryptocurrency itself. He observes that a large part of the global capital is still figuring out how to properly value Bitcoin. As more individuals come to view Bitcoin as a superior form of currency and start investing in it, its value in comparison to the dollar rises, which contributes to its volatility.

When discussing the growth rate of Bitcoin, Burnett points out its compound annual growth rate of 141% over the past 13 years, which he considers extraordinarily high. He speculates that if Bitcoin were to consistently grow at a rate of 141% per year, it would result in an unsustainable bull market, which would eventually be followed by a significant bear market. According to Burnett, it is this cycle of rapid growth and subsequent correction that is the main driver behind Bitcoin’s high volatility.

Featured Image via Pixabay

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