Following my debate with Andreas Antonopoulos on ABC Late Night Live, graduate students of mine (at the University of Texas) were kind enough to piece together a related Q&A reflecting my views on BTC. Read on…
What is Bitcoin (or BTC for short)?
It is a beautiful algorithm.
If Einstein, von Neumann and Nash were the beautiful minds of the 20th Century, BTC is the 21st Century’s beautiful algorithm. A brilliant answer in search of a worthy question. A breath-taking solution to as yet undiscovered problems! But democratising and de-politicising money will not be one of them, I am afraid. It will not replace government issued money and it is not about to enfranchise the world’s billions that live in poverty, contrary to the lofty pronouncements of its evangelists.
What makes the BTC algorithm ‘beautiful’?
It makes possible a decentralised network within which trust is built because everyone is monitoring everyone else. There is no sentry. No guardian. No Leviathan who may become tyrannical or fall asleep on the job (as regulators did prior to 2008). Instead there is a type of benign Benthamite Panopticon where everyone is kept honest because everyone else is watching every activity, every exchange, every transaction. It is truly splendid. But it is not a sound foundation for an alternative monetary system.
How big/significant is BTC?
It is tiny in size and macro-economically insignificant. Its total global value in real money is less than the bailout money ‘given’ by European taxpayers to a smallish Greek bank last year. Of course, BTC enthusiasts will argue that what matters is its growth potential. I am not convinced. (See also my post The dangerous fantasy of apolitical money)
More broadly, there is a terrible disconnect between BTC enthusiasts and economists. Economists do not understand the ground-breaking potential of the BTC algorithm (one which I plan to write about extensively in the future). At the same time, BTC enthusiasts are relying on a primitive theory of money. It is important to bridge that chasm – for the sake both of economists and of BTC enthusiasts.
In an attempt to effect this ‘bridging’ a few comments are in order: Recall that people want to hold a currency for two reasons: one is to use it to buy stuff with (Nb. this is called the ‘transactions demand for money’). The other is for speculative reasons – for instance, you buy yen because you think that the yen-dollar rate will go up (the so-called ‘speculative demand for money’). BTC activity is, to date, mainly of the ‘speculative demand’ type.
Currencies, that are growing as currencies, are typified by a rapidly increasing ‘transactions demand’ which reflects growing real economic activity transacted with this currency. But the bulk of the growth in demand for BTC is speculative (only a tiny and, indeed, falling proportion of BTCs is used to buy stuff), indicating that, while BTC may be an asset, it is no currency. To paraphrase Keynes, it is a bubble on a whirlpool of speculation, rather than a growing stream of enterprise.
Two separate problems: The Security Problem and the Economic Problem
We should not confuse BTC’s Security Problem with its Economic Problem, even though both point to how dangerous the fantasy of non-government money really is.
- The Security Problem is that a hacker can hack into your computer and disappear with your BTCs. And if you entrust your BTCs to an unregulated BTC bank, it is the banker that may run away with your BTCs or be hacked himself – the equivalent of a bank robbery. The Mt Gox experience.
- The Economic Problem is entirely separate. Whereas the Security Problem may wreck BTC, if BTC is not wrecked and takes over a large macro-economy (as people abandon government issued money for BTC), it is BTC that will wreck the economy. Why? Because it is designed to mimic the Gold Standard – the monetary system that caused one depression after the other, from the 19th Century until 1929, and which was replaced because capitalism cannot breathe under a fixed quantity of money.
Mr Nakamoto, BTC’s creator (whoever he, she or they may be) used ‘built-in scarcity’ in order to ensure that BTC would grow in value relative to the dollar, the euro, the yen etc. and thus attract ‘disciples’ to the BTC community. Unwittingly, however, Nakamoto was reinventing a deflationary currency by simulating a Gold Standard through the BTC algorithm. So, if the Security Problem does not shoot down BTC first, and BTC or something similar ‘takes over the world of money’, we are on our way to re-engineering the crashes of 1884,1890,1896,1901,1907 and 1929…
On BTC’s ideological drive
It is quite touching and not altogether unwarranted that the coders and practitioners of crypto-currencies feel that they are writing history. That their work is the laboratory of the future. In a sense it is. But not as they imagine it.
The LWD (Libertarian Wet Dream) is based on the conviction that almost every imaginable miracle can be accomplished through individualistic, decentralised action and that free enterprise is, somehow, exempt from tyranny, abuse of power and downright inefficiency. Well, 1929, the sorry state of the American health system, and the Gold Standard like Eurozone are three examples of how dangerous this dream is. Markets without state intervention crash and burn. Period.
Lastly, it is helpful to remember, whenever we encounter ideological evangelists of new technical fixes to old-fashioned socio-economic problems, and who make a point of addressing the world in the name of the ‘dispossessed’, the ‘oppressed’ and the poor, not far behind them there usually lurks a selfish aristocracy. The BTC community is no different!
BTC’s insights into possibly helpful interventions in the Eurozone: my FTCoin proposal
I admire the BTC algorithm and I think we should all try our hardest to find good problems to throw it at. As one who has been engaging in the Eurozone debates, it was natural that I would begin to think of ways that BTC-like technologies could be utilised in that context. In the Eurozone, nation-states are asphyxiating in the straitjacket of the Gold Standard-like design of the euro. They need more monetary room in which to breathe, especially so as Europe’s surplus countries seem unwilling to move in a rational direction. To this effect, I suggested (see this post) that nation-states organize their own crypto-currencies based on future tax credits expressed in euros – coining the term FTCoin (as in Future Tax Coin). FTCoins could, I argued, help fiscally stressed Eurozone states win that monetary ‘space’. Why a crypto-currency? Because its algorithm is uniquely suited to creating the trust that is sadly missing in much of Europe. Given that Greeks (in particular) but also Italians, Spaniards etc. will need to trust that the state will not over-reach into the future tax pool when selling tax credits today, it is important that every citizen has access to the tax credit ledger. Enter FTCoins, which can be designed as government tax credits to be distributed and traded as a crypto-currency, complete with its blockchain (but created through an algorithm that connects their quantity to, say, a fixed portion of the nation’s GDP).
The idea is at a very early stage of development. But it points to ways in which BTC technology can be combined with fiat money in the context of a process that is placed both under democratic scrutiny and community monitoring.