I saw this tweet thread by Tushar Jain at Multicoin Capital and it spurred some thoughts:

Why I think it’s a flawed approach:

  1. Investment implies risk of loss
  2. Tax rules for realisation of capital gains/losses
  3. Conceptual confusion about why people hold money

1. Investment implies risk of loss

When you invest in something to earn return, you are risking loss of part or all your investment. This investment is distinct from the money you hold for day to day and short term spending.

You might well hold a diversified portfolio of stocks, bonds, real estate and other assets. But you’d still maintain some level of cash balance precisely because you need to be able to quickly spend on things either for living expenses, or because you’ve spotted entrepreneurial or investment opportunities that you need cash to take part in.

Tushar’s tweet storm implies that we’d all just be selling off some small chunk of our stock/bonds/other tokens portfolio to pay for things and thus would have less demand to hold money itself.

I think this is conceptually flawed, there would still be one most liquid, most saleable commodity. Remember, that commodity would be half of every transaction, and it’d be what we denominate things in. That commodity will be what we call money. It’s our contention as bitcoin maximalists that bitcoin is most likely to play this role.

2. Tax rules on realisation of gains/losses

As I understand it, most countries have legal tender laws and the like, that mean you don’t have to calculate capital gains (Capital Gains Tax) for ‘selling’ your USD or AUD to buy milk. The accepted money isn’t treated as a capital asset on disposal and this generally gives it a pretty big tax advantage. Tushar does mention software selection based on tax treatment, but in practice: in many cases, it would not be beneficial to sell off the non-money token as this would come with a higher tax burden due to CGT.

If this is really how it plays out, your wallet software would compute the costs associated with simply spending the dominant money (no CGT) vs the cost associated with selling some other token representing stocks, bonds, or the ICO token (with its associated CGT cost).

3. Conceptual confusion about why people hold money

Tushar’s argument seems to be that money would not be as highly valued or demanded to be held because people can just transact ‘through it’. In tweets 10 and 11 he makes this argument on the basis that there would be very high velocity:

‘Velocity’ is an irrelevant way to think about this. It’s not about how quickly or not money turns over through the economy, but rather – how those individuals purposefully act to achieve certain ends. And to understand that, we have to understand why people hold money in the first place.

I recommend reading, “The Yield from Money Held” Reconsidered by Hoppe. When people think of cash being ‘good for nothing’, why then, do people hold cash now?

If cash holdings are indeed “good for nothing,” no one would hold or add to them — and yet almost everyone does so all the time! And since all money is always held or hoarded by someone — when it “circulates,” it only leaves one holding hand to be passed into another — money must be continuously “good for something” all the while it is being held (which is always).

Here’s the relevant part:

Based on this fundamental insight, we can state as a first provisional conclusion concerning the positive theory of money that money and cash balances would disappear with the disappearance of uncertainty (never) and, mutatis mutandis, that the investment in money balances must be conceived of as an investment in certainty or an investment in the reduction of subjectively felt uneasiness about uncertainty.

In reality, outside the imaginary construction of an evenly rotating economy, uncertainty exists.

Now if uncertainty exists, and there is a point to holding money, what makes the best money? The one that is most marketable / saleable.

Faced with this challenge of unpredictable contingencies, man can come to value goods on account of their degree of marketability

Money does the best at alleviating uncertainty.

While this brief reconstruction of the origin of money is familiar, insufficient attention has been drawn to the fact that, as the most easily and widely salable good, money is at the same time the most universally present — instantly serviceable — good (which is why the interest rate, i.e., the discount rate of future goods against present goods, is expressed in terms of money) and, as such, the good uniquely suited to alleviate presently felt uneasiness about uncertainty.

Because money can be employed for the instant satisfaction of the widest range of possible needs, it provides its owner with the best humanly possible protection against uncertainty.

Now, with the ability to trade around different assets very quickly or even using a fancy techno-robo-advice-automated-trading – do you think that would alleviate the uncertainty that man feels? Remember, the value of these non-money assets would be constantly fluctuating up and down, relative to the value of the dominant unit of account (again, this would most likely be BTC in my view).

I think once we understand why people hold money in the first place (to alleviate uncertainty), and how the litany of tokens and techno-robo-trading doesn’t actually resolve the uncertainty, we can see that Tushar’s argument doesn’t really work.

I welcome your thoughts though.

Comments (2)
  1. Your point 2 on “Tax rules on realisation of gains/losses” is incoherent. You are suggesting that holding assets in a non-appreciating form is superior to holding appreciating assets because you avoid taxes on the gains. By that logic, no one should ever buy index fund shares – after all, they might go up and cause you to incur taxes!

    Taxes are less than gains. Making money, after taxes, is still making money. The only burden added by holding one’s wealth in an appreciating asset such as a tokenized share of an index fund is administrative. And computers make that easy, as we’ve already seen with the crypto tax websites that calculate capital gains for traders, who already have a taxable event every time they exchange one cryptocurrency for another.

    • Fair point Patri, though I’m referring to the steady gain that money will get in a deflationary environment. Perhaps my thinking here was confusing a little with point 1 referring to the risk implied by investment

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