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“Exclude the impossible and what is left, however improbable, must be the truth.”

— Sherlock Holmes

Crypto’s made-up metric: Monetary premium 

As of last week, gold is officially money again after Russia reportedly delivered several tons of it to pay Iran for $1.75 billion worth of military drones. 

The precious metal hasn’t been used as a medium of exchange like that for a long time, but the fact that it still can be is evidence that its “monetary premium” is well-earned — gold’s utility as money makes it worth far more than its utility as metal. 

It’s been that way for so long (millennia even) that people have rarely questioned it: “Gold is money,” JP Morgan told Congress in 1912. “Everything else is credit.”

Most people have agreed with him for most of recorded history — gold was simply money and it didn’t need much explaining why. 

As a result, there was no term for the portion of gold’s valuation that’s attributable to its utility as money (about 80%, probably).

Until recently, that is: “Monetary premium” explains the valuation of gold, but it was invented by bitcoiners just a few years ago — to explain the valuation of bitcoin.

That, at least, is my conclusion after much Googling and ChatGPT-ing: As foundational as the idea seems, you won’t find the term “monetary premium” in an Econ textbook because economists don’t seem to use it.

I went to Google Scholar to find the earliest academic mention of monetary premium and found nothing other than a couple of references to “monetary premium theory,” which explains how interest rate differentials drive capital flows in and out of emerging markets.

You might relate this to crypto by framing blockchains as nation-states, but it would be a stretch, so I don’t think it’s the ancestral idea that we’re looking for.

Searches of JSTOR, Econlib and EconLit returned nothing at all.

The online catalog of the National Archives returned two results for “monetary premium,” both of which seemed entirely unrelated (“monetary policy,” by comparison, returned 241 pages of results).

The earliest (non-hallucinated) mention I could find was in a 2010 study of the demand for US government debt, in which the authors estimate that Treasurys receive a “monetary premium” of 72-basis points because investors value them as a near substitute for US dollars.

This logic seems applicable to gold, which is volatile in dollar terms, but holds its purchasing power over long stretches of time. 

For bitcoin, though, it seems mostly instructive in so far as it’s not applicable. 

To extrapolate from the 72bps premium observed in Treasurys to the 1,000bps (aka, 100%) premium observed in bitcoin, you’d have to argue that investors value bitcoin as an extremely volatile substitute for US dollars.

I don’t think bitcoiners have suffered multiple 80% drawdowns just to end up with a Treasurys-like return of US dollars — they’re probably expecting to do much better than that.

If so, bitcoin’s trillion-dollar valuation might not represent a monetary premium so much as it does a speculative one.

The only real case for a monetary premium, in my opinion, is one of elimination — there appears to be no other explanation for the market value of bitcoin.

This is not the most scientific way to deduce things (Sherlock Holmes wasn't real, after all), but it’s easy to see how we got here.

The Bitcoin network charges fees, but there’s no mechanism for those fees to be returned to holders — they accrue entirely to miners (most of whom will sell them for dollars to cover their dollar-based expenses).

That makes Bitcoin a not-for-profit public good (or bad, depending on your point of view) and it’s of course impossible to apply any traditional type of valuation metric to a non-profit — hence the invention of the improbable “monetary premium” metric.

I say “improbable” because it’s so far mostly unearned — bitcoin is hardly ever used as money (in the sense of a medium of exchange or unit of account). 

This could change, of course, and that may be the best explanation of bitcoin’s market value: Bitcoin’s current speculative premium might be the present value of its future monetary premium.

Alternatively, the speculative premium might simply persist for so long that bitcoin becomes, like gold, unquestioningly perceived as money.

I don’t think we’re there yet — but we might be just one bitcoin-denominated, Russian-Iranian drone deal away.

— Byron Gilliam

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