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Next January will be 12 years since Satoshi Nakamoto, the pseudonym creator of the peer-to-peer cryptocurrency bitcoin, established the first digital transaction in the system by mining the so-called genesis block.
As bitcoin begins testing its 2017 record price of $ 20,000, it’s time to assess whether this new system has withstood its self-imposed challenge. Has it really provided, as promised, a more solid and honest alternative to a seemingly corrupt central banking system? Or has it turned out to be a haven for scammers, expropriating more of their wealth than helping them make it through?
The answer, as always, lies somewhere in between. The initial vision of bitcoin advocates was to create a decentralized network where anyone could be their bank and where the cost of transactions would be negligible. The puzzling reality for early idealists is that 12 years later, the bitcoin ecosystem has more in common with the reigning one it hoped to replace than that original utopian view.
Even before it became properly regulated, bitcoin’s structural inefficiency, complexity, energy intensity, and risk made it economically impossible for it to compete with the permanent system on price.
With the added cost of regulation, the system has become increasingly comparable to the luxury goods market – where people are willing to pay more for services or products due to ideological, trend, or lifestyle reasons – than it has to do with a more efficient or cheaper mass market system.
Bitcoin took another step to become just another highly brokered and heavily regulated financial service when PayPal began offering select US account holders the option to hold it since October. Users cannot make payments in cryptocurrency yet, only keep them. As long as they can’t, the move does more to boost speculation than actual trading does.
So, was it really worth creating? Surprisingly, for a long-term critic, I will say yes. Here because.
My longstanding criticism has centered on three fundamental points. The first is that people don’t really want to be their own bank for practical division of labor reasons. Most are busy with their professions and therefore naturally predisposed to trust specialists to worry about the intricacies of managing cryptographic keys or bitcoin security on their behalf.
Unsurprisingly, then, bitcoin’s path to the masses has seen it adopt both gatekeepers and regulatory protections in an effort to generate broad public trust. These are the factors that account for the cost in the payment system. What it reveals is that neither bitcoin nor any of its imitators – despite their supposed “trustless nature” – have really solved the problem of trust.
My second criticism was related to bitcoin’s structural obsession with immutability and pre-scripted offering. Where the architects of currency saw virtue only in rigidity and non-adaptability, I saw only cost and incompatibility with human fallibility. More fundamentally, I saw it as an inherently volatile and inelastic form of money that transferred the full weight of a rebalancing shock to the real economy in an extremely destabilizing way. That’s why, outside of dark markets, it was hard to imagine bitcoin ever taking off as money. And it isn’t.
Finally, I have always been cynical of the idea that a stable monetary system could exist without a guarantee from the lender of last resort backed by the state. It was, in my opinion, the ability of the state to tax its own currency that created demand (and thus stabilized support) for its own currency.
All of the above remains true. Yet there is a scenario that changes everything: a world in which no government is ready to defend true civil liberties or free enterprise. Such a concept is, of course, unlikely.
But for some, the government’s responses to the Covid-19 pandemic have sparked nightmarish fantasies of a future where the world slides into authoritarianism and civil liberties cannot be taken for granted. For those of that inclination, bitcoin’s anonymous security serves as a hedge against the worst dystopian reality.
It could be an extremely expensive and energy-intensive solution, but at least it provides a rationale for bitcoin’s existence. To be clear, I don’t believe in the risk of global authoritarianism painted by the most ardent advocates of cryptocurrency. But as a doomsday emergency system, I’m glad someone created bitcoin just in case.
