“Without Drugs, What’s the Point of Bitcoin?” wonders the Atlantic. I answer author of the piece, Matt Schiavenza, with two words: central banks. It’s no coincidence “Satoshi Nakamoto” created Bitcoin in 2009 as the financial world dangled on a precipice of the central bankers’ making.

On February 11, 2009, Satoshi wrote:

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.

Schiavenza juxtaposes bitcoin and the battered ruble, claiming the Russian currency has held up better because “Moscow can rescue through manipulating interest rates and instituting capital controls.”

But a currency is supposed to collapse if its fundamentals are bad. That’s why Bitcoin was created as an alternative to the government-managed and -manipulated currencies that cloud the honest workings of the economy. “Bitcoin’s lack of a central bank means there’s nothing to stop it from sliding even further.”

What will stop Bitcoin from falling is its “saleableness” or “marketability,” as Carl Menger called it. Writing in 1871, the father of the Austrian school of economics was less than politically correct when he wrote, “Gold nuggets extracted from the sands of the Aranyos River by a dirty Transylvanian gypsy are just as saleable in his hands as in the hands of the owners of a gold mine, provided the gypsy knows where to find the right market for his commodity.”

What Menger pointed out that most people don’t understand—including Nobel prize-winning economists—is that money evolves through an entrepreneurial process. The more savvy individuals determine what goods are, or will be, most saleable. As the transactions spread among these traders, a limited number of goods—the very most marketable—become money. It is economizing interest that leads to this discovery, as Menger writes in his Principles of Economics: “[H]e is led by this interest, without any agreement, without legislative compulsion, and even without regard to the public interest, to give his commodities in exchange for other, more saleable, commodities, even if he does not need them for any immediate consumption purpose.”

Brute force through central banking can only slow down the inevitable. At a time when the monetary mandarins were thought to be holding the planet’s economic fortunes in their steady hands, the Swiss National Bank (SNB) cried uncle and let the franc rise above €1.20, a policy it had kept in place since September 2011. To hold the peg between the currencies, the Swiss had to buy lots of euros in an attempt to keep their country’s exports competitive. The SNB took a huge loss, but it chose to panic early, beating other central banks to the exits.

“Why is Bitcoin so volatile?” asks Schiavenza. It’s only been volatile lately. In fact, the Bitcoin chart looks like the graph of two government-sponsored currencies. Maybe Bitcoin was the currency canary in the coal mine.

The Atlantic reporter goes on to ridicule bitcoin miners who ramped up mining, “a process that involves using supercomputers to solve difficult mathematical equations,” by borrowing what he calls “real” money to invest in computing power. This worked dandy in 2013 when bitcoins were going for $1,000 apiece. Not so much now.

Yes, that’s the way it should work. When money is more valuable, whether it be gold, silver, or the cyber variety, the market is sending a signal that more of it’s desired. Money producers get busy and create more. As more is created, the market recognizes this, and its value drops. Entrepreneurs being entrepreneurs and lenders being lenders, too much credit is granted, too much product is made, and if the market is allowed to work, eventually a heavy price is paid.

Unfortunately, the world’s central banks are allowed to operate indefinitely (so far), oblivious to market signals. In fact, central bankers, equipped only with equations, graphs, and theories, think they control the market. For the moment, they have their way: rock stars who win awards and accolades while on the job and earn six figures for speeches in retirement.

The Federal Reserve quadrupled its balance sheet and gunned the money supply—the primary buyer of its nation’s debt that can’t possibly ever be repaid, and the world inexplicably considers the dollar a Grade A choice currency, at least at this writing.

The Bank of Japan has tried to create inflation for decades and recently stepped up its money-printing efforts. “We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target,” BOJ Governor Haruhiko Kuroda told a news conference, reaffirming the BOJ’s goal of pushing consumer price inflation to 2% next year.

Never mind that economists Carmen Reinhart and Kenneth Rogoff—who wrote the book on modern financial meltdowns—consider a 90% debt-to-GDP ratio (a measure of a country’s ability to make future payments on its debt) troubling. Japan’s debt-to-GDP ratio is now 227%. Reasonable people would call that a bankruptcy waiting to happen. Yet the 10-year JGB yields all of 19 basis points. The Japanese government can borrow for 30 years at a rate of 1.06% as I write this.

It’s hard to know who is more trapped by hubris: central bankers, or investors who risk everything based on what they think central bankers are capable of. Some investors “apparently just assumed the Swiss would let the franc go down with the Eero ship and sold short the currency at leverage ratios up to 20 to 1,” writes Joseph Calhoun. Bankruptcies ensued. Calhoun, writing for Alhambra Investment Partners, uses the bet on the Swiss central bank to point out first of all, “The dollar index is up almost 18% since last summer and there is, at last estimate, approximately $9 trillion in outstanding dollar denominated debt outside the US.”

But then—and more important—he writes:

We like to think that the rise in the dollar is due to our virtues but it could just as easily be others’ vices that are driving the dollar higher. Dollar liquidity is drying up as the Fed’s QE has ended and oil prices have dropped. So keep an eye on the dollar and if it starts to rise rapidly, brace yourself because the dollar lever is a lot longer than the Swiss franc one.

And needless to say, both of those levers are exponentially longer than the leverage used to mine bitcoin (if there was leverage used at all). After all, only so many bitcoins can be produced per hour. More computing power simply allows a miner to create them before competitors do.

Will the last currency standing be of the government fiat variety? It will be an historical first if it happens. All governments (and their central banks) have ultimately sent their money to currency heaven. It’s more likely to be a product of the market that survives, as Menger explained. It could be the same yellow metal prized by gypsies and aristocrats alike. Or, in this age of technology, it will likely be gold 2.0: Bitcoin.


This article first appeared on Casey Research.