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Since the start of bitcoin in 2009, there has been considerable worldwide interest in cryptocurrencies: digital currencies based on online platforms that use cryptography to enable direct peer-to-peer (P2P) transactions. Cryptocurrencies have the potential to disrupt monetary systems and provide formidable competition to established payment systems (Bhattacharya 2014). The technology behind cryptocurrencies, such as bitcoin-blockchain, avoids the need for intermediation to manage the exchange of funds and allows decentralized, secure and verifiable transactions. While there has been considerable growth in the volume of transactions and bitcoin market capitalization, bitcoin price volatility is equally noteworthy.1 In recent years, the price of bitcoins has recorded a spectacular surge, followed by its dramatic collapse on 21 December 2017. With the proliferation of a large number of bitcoin alternatives, cryptocurrency exchanges and considerable volatility on the market cryptocurrency evaluation , it is worth revisiting a radical 42-year proposal by FA Hayek, an Austrian economist and Nobel laureate.
Hayek (1976) supported the abolition of government monopoly on the currency issue and the provision of unregulated decentralized currency. Hayek's (1999) idea of "good money" as a solution to the problem of inflation and economic cycles involved denationalized money, free from government monopoly and supplied by a competitive private sector. I argue that cryptocurrencies bear a strong resemblance to Hayek's idea of competitive currencies in a free market economy, as well as the operationalization of such currencies. Hayek's insights on how currency scarcity and the stability of currency values would play a role in their widespread acceptance, shedding light on the cryptocurrency market. Furthermore, the uncertainty of the prices of cryptocurrencies and information asymmetries in the unregulated cryptocurrency market also put the validity of the Hayekian logic of the price mechanism as a solution to the problem of dispersed and incomplete knowledge.
Cryptocurrency technology
The technological architecture of cryptocurrencies as bitcoins is based on a decentralized platform of distributed registers – transaction logs distributed over a network of participating computers (Böhme et al 2015). This online platform called "blockchain" was invented by an anonymous person or a group of developers under the pseudonym Satoshi Nakamoto (Nakamoto 2008). The blockchain design allows for P2P transactions that are irreversible and offers a history of public transactions that allows verifiability. The distributed digital register includes a list of "blocks" (hence the nomenclature), which records the history of each transaction in the network. The protocol also reduces the problem of "double spending". The double-expense problem refers to the possibility of a virtual token in an electronic payment system based on twice-used cash. The blockchain uses a number of randomly selected nodes (active electronic devices that maintain a copy of the blockchain, as well as process transactions) to reduce the double expense problem. Design allows transparency, as the distributed ledger requires global consensus to change the rules that govern the blockchain. The transparency of the system is intrinsic to the fact that everyone on the network can view and validate transactions in the global ledger.
The cryptocurrency generated in blockchain is bitcoin. Given the popularity of the market-leading cryptocurrency, namely bitcoin, it is necessary to clarify a distinction between "bitcoin" and "Bitcoin". The cryptocurrency unit that is generated in the blockchain is "bitcoin", while "Bitcoin" includes the blockchain system as well as bitcoin. According to the Bitcoin protocol, only 21 million bitcoins can be extracted. The value attributed to the bitcoin emerges from this scarcity; a scarcity that is "programmable" in the sense that the offer is designed to be scarce. Before understanding the cryptocurrency market and drawing parallels between cryptocurrencies and Hayek's views on decentralized currencies, a brief description of Bitcoin technology is needed. The technological architecture of cryptocurrencies plays an important role in their widespread acceptance as an alternative to traditional payment systems and creates potential threats to transaction security.
As a mechanism to reward honest participation, bitcoins are collected ("extracted") from the system by identifying "nodes". The nodes generate a pair of digital keys. There is a widely shared public key, similar to an account number, to uniquely identify the owner of a specific bitcoin. The system design is such that a message encrypted with a public key can only be decoded by someone who has the associated private key and vice versa (Böhme et al 2015: 216). The encryption mechanism ensures that instructions for transferring money to network participants are authenticated, because everyone can confirm that the instruction actually comes from the sender who has their own private key.
The new bitcoins are created as a reward for demonstrating the execution of predefined (proof-of-work or PoW) jobs by "miners" in a network. Miners solve a computationally intensive puzzle that validates transactions and generates new blocks. The block contains the PoW, along with the history of all transactions from the announcement of the last puzzle and a reference to the previous complete block. Once the miners verify the solution, they start working on a new block related to the new transactions (Böhme et al 2015: 217). The algorithm of the system is such that the first node that produces a publicly verifiable PoW is rewarded with a bitcoin. Each new transaction in the network is grouped in a block of recent transactions approximately every 10 minutes and the block is compared to the most recently published block, resulting in a sequence of blocks (hence "blockchain"). This protects against tampering with a block and addresses the "double expense" problem discussed above. The algorithm of the system is such that the first node that produces a publicly verifiable PoW is rewarded with a bitcoin. The SHA 256 hash algorithm is used to map arbitrary size data to a fixed-size bit string (see Dwork and Naor 1993 for a technical discussion of the concept).
Alternative algorithms such as proof-of-stake (PoS) have been developed. In these algorithms, distributed consent is achieved through a mechanism in which users are required to stake a certain number of their tokens, in order to have the possibility to be selected to validate transaction blocks. The miner of the new block in PoS is known as "forgery" and the higher the number of tokens deposited by the forger in the system, the greater the possibility of being selected to validate the transactions. In contrast to the PoW consensus algorithm, the newly created coin is not rewarded by the miners of the PoS system. Rather, validators receive payments in the form of transaction fees. An innovation in the blockchain is the concept of a unit of work, ie a universally accepted and verifiable quantity of computationally intense work.
Since everyone in the network has a copy of the ledger and the transactions are verified and approved by the global consensus, there is no need to trust a third party as in a traditional payment system or a central authority as in context of monetary systems. This makes blockchain a "trustless" system. Verifiable trust, which is fundamental for the universal acceptance of a currency, is established by such a mechanism because each node in the network can be uniquely identified, as the ledger is distributed, compared to being centralized. . In light of the technological innovations incorporated in these decentralized systems, they offer formidable competition to established payment systems (Bhattacharya 2014). However, despite their potential to disrupt payment and monetary systems, there are several limitations in technology that have led to distortion of price signals in the market and security breaches (Gandal et al 2018).
Market structure
The cryptocurrency market has seen a meteoric rise in the last decade. As of December 31, 2017, there were about 1,400 cryptocurrencies and the number is increasing. Finish the monopoly
of Bitcoin, the alternative cryptocurrencies (called Altcoin), based on platforms like Ripple, Ethereum, Bitcoin Cash, Cardano, Litecoin and Stella, have proliferated. Also the cryptocurrency indices have proliferated to trace the main cryptocurrencies. Due to growing competition, Bitcoin's market share fell from almost 60% in December 2017 to 36% (Sharma 2018). Table 1 shows the market capitalization, the price, the volume and the circulating supply of the top 10 cryptocurrencies by market capitalization. The market capitalization of the market leader, Bitcoin, is more than double that of the second currency, Ethereum, and almost six times that of the third currency, Ripple.2 In addition to Bitcoin Cash, all others have a market capitalization of less than $ 10 billion.
Consider the price of bitcoin, the market leader. As shown in Figure 1The bitcoin price has shown extraordinary fluctuations over the past five years. As discussed above, the peaks and falls in the last year are particularly noticeable.
Blockchain technology applications have also diversified beyond the currency into payment infrastructures, smart contracts and digital resources, among others. At this juncture, it is worth examining how the cryptocurrency market resembles the idea of private currencies at competitive prices, as claimed by F A Hayek four decades ago.
Denationalization of money
In his book, Denationalization of money, Hayek (1976) proposed to abolish the monopoly of governments on the provision of legal tender. In support of his radical idea of denationalising legal tender money and the abolition of regulation and control of the supply of money, he argued that it is not necessary to have a single national currency in an area and that a private currency that is not regulated by financial institutions (banks) can be issued. According to Hayek, the coexistence of many types of money, as long as their exchange rates are not regulated, would solve the business problem
cycles, which has attributed to the constant mismanagement of national currencies by governments.
From his point of view, the process of change in the monetary supply of national currencies changes the relative prices in the economy in an irregular way, causing a disallocation of resources due to misinformation, through the distortion of the relative price structure. It is clear that Hayek's conviction is rooted in his controversial thesis that the market price system can solve the problem of knowledge faced by economic agents, and this was the key to his arguments against central planning (Hayek 1945). The radical proposal also reflects his loyalty to libertarian ethics of increasing individual freedom, undermining the power of the government (Hayek 1944).
Why should private money be valued? According to Hayek (1976), as in the case of legal tender money, any money is valued and widely accepted at the current value by others, because it is known that it is scarce. Money that is "voluntarily used only because it is considered to be held in low esteem by the issuer, and such trust, will increasingly confirm its acceptability to the established value" (Hayek 1976: 112). This raises the question: with several currencies supplied privately in circulation, how would people choose between competing currencies? To answer this question, Hayek argued that the privately issued currencies would compete for acceptance in a free competitive market, where the stability of the value of the currency would be the acceptance criterion (Howard 1977, Ferris and Galbraith 2006). The idea implies that the more stable currencies would be favored because they would reduce the uncertainties on individual price movements, thus improving the predictability of prices.
Some points in common between Hayek's arguments and the basics of cryptocurrency are as follows. First, they both radically question the prerogative of governmental supply of legal money, through a coercive legal currency, as well as the destabilizing effect of fluctuations in the provision of a single national currency. The following excerpt from Nakamoto (2009) is a case in point:
The main problem with conventional currency is all the confidence necessary to make it work. The central bank must be reliable so as not to undermine the currency, but the history of the legal currencies is full of violations of that trust. Banks must be trusted to keep our money and transfer it electronically, but lend them in waves of credit bubbles with just a fraction of the reserve. We must trust them with our privacy, trusting them not to allow identity thieves to empty our accounts. (Nakamoto 2009)
Second, in Hayek's cryptocurrency, money is valued because of scarcity. In the first case, the scarcity is physical in nature, while in the second case, the scarcity is programmable and digital. Third, the broad acceptance of the currencies provided privately in Hayekian's utopian system, as well as in the cryptocurrency market, is driven by public confidence that will maintain scarcity. In the second case, the design of the system and the competition will ensure that the violation of this trust leads to "dirty money" crowded with "good money". Fourth, Hayek's convincing description of how such currencies would be provided is similar in principle to the operationalization of cryptocurrencies. While cryptocurrencies are generated by generalized accounting systems as described above, currencies in Hayek's formulation would be provided by the sophisticated cash registers needed to adapt to ever-changing exchange rates and competitive pressures towards stability.
Hayek not only discussed the transition problems involved, but also emphasized a spontaneous transition to the "new order". The proliferation of cryptocurrencies can be argued as an incarnation of such a transition to the "new order". Of particular importance in the analogy with cryptocurrency is the concern that the competitive forces displayed by Hayek can effectively lead to the emergence of a dominant money supplier (Klein 1974). The dominance of Bitcoin – despite the recent decline in its market share and price volatility – suggests that there is a dialectical tendency in the supposedly free competitive market to concentrate power. Moreover, in the context of the cryptocurrency market, with the prevalence of "mining basins", as well as the considerable infrastructural and energy costs that must be invested in cryptocurrencies, the competitive nature of the market must be interpreted with caution. The criticism of Hayek's opinion on how price stability could be achieved without government regulation (Howard 1977: 6, Friedman and Schwartz 1986) or how the costs of information and transactions might have been underestimated (Howard 1977: 7) , are equally relevant for the cryptocurrency market.
Concluding remarks
In this article, I argue that there is a strange resemblance between the phenomenon of cryptocurrency and the radical logic of unregulated private supply of currencies and the abolition of government monopoly on the supply of money that Austrian economist FA Hayek proposed. Despite the strange similarity, the emergence of a dominant cryptocurrency provider (Bitcoin) and the surprising volatility of bitcoin prices in recent times are issues that raise concerns about the ability of the unregulated cryptocurrency market to create a "new order" , which corresponds to the technological progress that has guided the proliferation of cryptocurrency providers. Given the uncertainty surrounding the regulatory environment around cryptocurrencies, it remains to be seen how governments and traditional payment systems adapt to the disruptive technologies of how the demand for money satisfies its offer in an increasingly digitized world. .
Notes
1 Market capitalization increased from around $ 40 million in the first quarter of 2012 to almost $ 115 billion on June 21, 2018 (CoinMarketCap 2018).
2 In August 2017, in response to attempts by developers to increase the blockage size of the blockchain (1 megabyte), Bitcoin and bitcoin bifurcated by a code change called "hard fork".
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