| “Exclude the impossible and what is left, however improbable, must be the truth.” |
| — Sherlock Holmes |
Monetary premium: Crypto wins on this made-up metric
Last week, gold was truly reintroduced as money when Russia reportedly stole several tonnes of it in order to pay Iran for $1.75 billion worth of military drones.
Gold, of course, hasn’t been used as a medium of exchange in such a way for a very long time, but the fact that it can still be is evidence that its “monetary premium” is legitimate: gold’s use potential as money means the ultimate metal has priced excess of its metal function.
And that so many millennia have passed people rarely questioned it: “Gold is money,” J P Morgan famously stated to Congress in 1912. “Everything else is credit.”
Alot of people thought this was no big deal because, for most of recorded history, gold had just been money and didn’t require lots of explanation.
Neither was there any term for what gold was worth as money (call it 80% of valuation, or whatever).
That is, until recently: but a few years ago bitcoiners created “monetary premium” to explain the valuation of bitcoin as opposed to gold.
At least, that’s what I assume after lots of Googling and ChatGPT-ing: However basic the concept appears to be, “monetary premium” is not a term you’ll discover in any Econ textbook–academics just don’t seem to use it.
The search even has me reshuffling my attention: I wanted to look up the first academic reference of monetary premium, but all there is are a couple Google Scholar results of “monetary premium theory” — which illustrates the way that differential interest rates lead foreign investment flows into and out emerging markets.
Now, you might try to relate this to crypto by turning blockchains into nation-states… but that would be a stretch so I doubt it is the ancestral concept we are all waiting for.
Not a single search of JSTOR, Econlib and EconLit.
I finally found the online catalog for the National Archives and did a search for “monetary premium” — two results, both of which appeared to be completely unrelated (by comparison, I got 241 pages of results when I searched just “monetary policy”).
The first (non-hallucinated) reference I came across was from a 2010 study, a paper on the demand for US government debt, in which the authors calculate Treasurys as receiving a “monetary premium” of 72-basis points over other instruments because they can serve as such a close proxy for US dollars.
If you can be cadged five dollars to the politics of some emperor, why wouldn’t that happen with gold which is volatile in dollar terms but buys much more over a period of decades.
But not ultimately much instructive for bitcoin.
If we were to apply the same level of premium — which was over 1,000bps (that is 100%!) in the case of bitcoin — to Treasurys, one would have to make an argument that investors think it is worth all the funds upfront to be carried forward and their main usecase for holding USDs has been extremely volatile currency risk.
I think bitcoiners didnt endure multiple 80% drawdowns just to receive a Treasurys-like return in US dollars.. they’re likely expecting to make more than that.
If true, bitcoin’s trillion-dollar valuation explains more by way of speculative premium than it does monetary value.
In my view, the only genuine case for a monetary premium is one of subtraction — nothing else about bitcoin’s current market value seems to merit branding.
It’s hardly the most scientific method of deduction (Sherlock Holmes wasn’t real, after all), but you can see how we ended up here.
There are fees paid to the Bitcoin network but no ingoing mechanism for these fees to flow back to holders (they all accrue entirely to miners, the vast majority of whom sell them immediately for dollars in order to pay dollar-based expenses).
This is what Bitcoin becomes a public good (or bad depending on how you look at it) and of course no valuation metrics available to non-profits can apply, hence the creation of the unlikely “monetary premium” metric.
I say “unlikely” because so far it has been almost entirely unearned — bitcoin is never used as money (beyond the degree to which a way of exchange or unit of account).
It may be, of course, and that might be the best explanation of bitcoin’s market price: its current speculative premium may just be the capitalisation upon its future monetary premium.
Or the speculative premium may just last so long, it becomes a matter of unquestionable fact that bitcoin is money similar to gold.
We are not there, yet — but we might be just one bitcoin-paid Russian-Iranian drone contract away from it.
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