Why we should hope that Bitcoin doesn't succeed
Dec 5, 2013

Why we should hope that Bitcoin doesn't succeed

Most people who currently own bitcoin don't own it to use it in the short term. The amount of uses for people to spend bitcoins is trivial in comparison to the main reason people buy bitcoins: to store them. Some people store them because they are doing short or medium term speculating - this is the group largely driving the massive recent swings in bitcoin's value. Some store them simply because they think it is cool, and get caught up in the momentum as the dizzying valuation increases media exposure which causes more people to dive in. And some store them because they believe there is long term value that will manifest itself in the future.

In the future, however, bitcoin may come to be actually used for things. Indeed, it is precisely a rosy picture of such a future that initially lead to such optimism about bitcoin. Unfortunately, given the nature of bitcoin, this future as a negative consequences, and we should hope that bitcoin does not take off and realize them.

The (brief) history of bitcoin:
Currently, bitcoin has gone through broadly two levels of acceptance.

Level 1: There was an initial period where few had heard of the currency, and the networks of miners and early adopters were plugging away at something that might never have gotten meaningfully off the ground. Anyone investing at this stage was solely doing it because of the potential to take off, but it was at that time a fringe idea with no established uses outside of speculating on its future value.

Level 2: Currently we are in the second level where bitcoin has massively increased its awareness, and massively increased its value as savvy speculators and casuals alike poor in. But it is still a stage where bitcoins are largely unused, and have little current intrinsic value, it is the possibility of price changes in the future that causes people to buy. The main usage for bitcoin recently - at least until Silk Road was shut down - was for illicit goods. There is also a certain allure to the buying of bitcoins; it has a coolness factor, gives a sense that one is part of a futuristic saviour from doomed financial systems or oppressive Big Brother surveillance. These motivations to purchase bitcoin can be considered part of it its current "intrinsic value". Outside of these uses, however, while there are the occasional trendy online outlets like Reddit which are slowly adding small amounts of possible use scenarios for bitcoin, it is largely unused and has little intrinsic value, just stored for the short or long term future. 

The future potential of bitcoin:
The optimists see broadly two future possible levels of acceptance.

Level 3: The more modest future acceptance is one where bitcoin is genuinely used and has an underlying value to the economy. For instance, it would allow very quick, very low cost international transactions, particularly important for remittances. Anachronistic factors in our monetary system make such things very expensive and put in place, in effect, an efficiency tax that bitcoin all but eliminates. So this third level of acceptance would be one where bitcoin is genuinely used and has an underlying value, but hasn't replaced, or come close to replacing, the normal fiat currencies we use today. The combination of its anonymity together with decentralized, trivially low cost distribution that is able to operate outside the current government/banking system is what could provide the use case scenarios and confer a genuine utility advantage. Bitcoin would have uses, but not have taken over.

Level 4: The end goal, for the optimists, is nothing less than the replacement of our current fiat currencies with bitcoin or something like it. We would no longer have a meaningful USD, but do effectively all transactions in such digital currencies like bitcoin. The allure of this potential future which some believe would be a better future but certainly one where bitcoin would jump many orders of magnitude in value, has always been the hope that makes this currency shine in the eyes of some. There is a small chance that any individual currency like bitcoin rises to this level of acceptance, but if it did the return on investment would be so enormous to justify its small chance of occurring.

Why the third level of acceptance is bad:
One of the aspects of bitcoin that its benefactors most enjoy is the anonymity which makes it effectively untraceable. The problem with this is immediate: those who most benefit from the ability to do untraceable interactions are those doing illegal things. It isn't a coincidence that the first major use of bitcoins was Silk Road which facilitated just such interactions. For small crimes (such as the purchase of drugs, as one did on Silk Road) we already have precisely such a method already: cash. Small crimes can't be stopped regardless of whether people pay for them with cash or with bitcoin, but they are usually restricted in size and location as cash needs to be physically exchanged. However, for larger crimes - ranging from larger gang activity up to arms dealers, corporations or even countries - the ability to track financial transactions is one of the few effective methods available to inhibit and catch such crimes.

This is the level where the advantages of bitcoin provide genuine utility. Cheap, instant, international transactions are one such thing - useful for remittances, for instance - but I fear they will be dwarfed by the advantage that comes from taking something as anonymous as cash, and scaling it so that location and distance don't matter, and quantity doesn't matter. Despite the checks in our current financial system, it is already quite porous, with the ability to move drugs, weapons, and humans around the world. Bitcoin would be opening the floodgates and eliminating any resistance that we currently have and making the only means of detecting and stopping being the physical products moving, not in the currency that pays for it.

I understand that many people like the anonymity that comes from bitcoin. We live in world with a large distrust for our government. Some of this quite rational; we saw, for instance, in the massive NSA revelations, that the actions of our governments do go too far when it comes to following and tracking our own citizens. Bitcoin eliminates this distrust and discomfort. That said, I believe we should work towards having genuinely transparent and accountable governance. It is why I am a progressive, as I believe that government does have a positive role to play. In this case - that of being able to track financial transactions to prevent crime - with the use of robust body of standards and accountability, such as needing warrants, the benefits far outweigh our worries of privacy.

Why the fourth level of acceptance is horrible:
Imagine what would be required for bitcoin to truly achieve its fourth level of acceptance, where it genuinely replaces fiat currencies. It would require, at the very least, a massive transfer of wealth. So much of the world economy is intrinsically tied up in fiat currencies - some 75% of the 200 odd trillion dollars of capital floating around are bonds. That would be eliminated, or at least vastly reduced, as everything transferred to the digital currencies. That transaction would have massive winners, and massive losers. For instance, anyone owning long maturity date bonds (such as almost all retirement funds) lose, while all the early adopters today would be massive winners. The very best one could hope for is that this enormous wealth transfer happens incrementally and slowly enough not to have a massive crash of the world economy as a result of this pretty arbitrary transfer.

It is actually precisely such a crash that people have such hope in bitcoin. Namely, some people believe that the current fiat system is hopelessly unsustainable and is destined to fail in the future. Bitcoin then gets to be the savoir that picks up the failed global capital system into a new era of financial stability devoid of the perils of inflation and economic uncertainty (and those lucky ones that invested now becomes fabulously wealthy). Namely, it is a critique of the failures in our current system and the belief that it will fail that motivates this love for bitcoin.

If this is the case, though, we should all hope that bitcoin doesn't replace fiat currencies in all but the remote future. Namely, we should hope that the requisite financial collapse that precipitates bitcoin's rise to power doesn't happen. It is only if one believes that the pain and suffering this would cause is inevitable that this could possible ever be desired. Well, we should hope it is not inevitable, that we don't have to go through the economic pain of such a transition, even under the best of terms of it being slow and incremental (thus not causing economic collapses).

As long time readers of this blog will know, I largely reject the Austrian view of monetary economics. In particular, I am not a subscriber to the alarmist view that we are facing some inevitable monetary collapse, a view often promoted by the Libertarian community. Should bitcoin become the default currency, many of the modern monetary tools we use these days simply can't be used. For instance, Keynsian monetary stimulus during recessions, or the benefits from having a stable and minor inflationary environment (bitcoin is inherently deflationary in a growing world economy after it caps out at 21 million coins). Usually those who believe in inevitable monetary collapse will scoff at the suggestion that either of these things are actually beneficial, but there is substantial evidence they are. Regardless, the world in which all of this takes place is a world very, very different form our current one and speculation as to macroeconomic advantages and disadvantages are going to be sketchy at best. The optimists of bitcoin are putting a whole lot of hope in something with a pretty enormous risk of being disastrous or - as if this is much better - needing a disaster to come to being.

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