When it comes to Bitcoin, this ambivalence of mine has left me particularly on the fence. The debate that has taken place in recent months seems, to have played out on the far poles of opinion on the matter. All we have heard are arguments between the currency's ardent defenders—who seem too strident, too ardent, too zealous for my liking—and its staunch opponents—who seem too categorical, too unimaginative, too closed-minded.
For the most part I've held off throwing my hat into (or keeping it out of) the ring during the recent bout of Bitcoin-mania. This isn't out of ignorance of the currency. Back in May 2011, before most people had even heard of the crypto-currency, I interviewed a man calling himself “The Real Plato” claiming to be on “the world's first Bitcoin road trip” traveling across America paying his way exclusively in Bitcoin. No, it's not ignorance that has kept me out of the Bitcoin arena up until this point; it's ambivalence.
If ambivalence were a power I'd be a superhero. For the longest time I've had the most uncanny ability to see both the potential good and the potential bad in a new idea simultaneously, often in equal measure. Ambivalence is either my fatal flaw or my saving grace. I haven't decided yet.
When it comes to Bitcoin, this ambivalence of mine has left me particularly on the fence. The debate that has taken place in recent months seems, from my perspective, to have played out on the far poles of opinion on the matter. All we have heard are arguments between the currency's ardent defenders—who seem too strident, too ardent, too zealous for my liking—and its staunch opponents—who seem too categorical, too unimaginative, too closed-minded. This is the nature of debate: it presents us with two categorically opposed viewpoints, asking us to choose one side or another. But often these debates leave me feeling like an excluded middle. What if I am not willing to convert my life savings to Bitcoin and vow never to spend another dollar again? And what if I have no wish to condemn this currency experiment as the spawn of the devil? Where does that leave me?
I suspect I am not alone in this. I imagine there are many people, who, like me, remain cautiously optimistic that Bitcoin (or Bitcoin-like currencies) may offer one alternative in what could be a future marketplace that allows for payments in multiple mediums of exchange. In this age where discussion seems to devolve so readily into debate, and the loudest voices are encouraged to become ever-louder for the entertainment of the audience, is there space any more for a calm, rational examination of the strengths and weaknesses of an idea without hyperbole or spectacle?
Proceeding on the bold assumption that there is indeed space for such a conversation, let's attempt to do just that. In my own humble effort to present some of the pros and cons of the Bitcoin idea, I've broken the subject down into some of the areas where I see room for cautious optimism and areas where the claims seem to fall short of reality. I call them the hopes and hypes of Bitcoin, and I hope that, whatever position you have on the subject, you might gain something of value in studying them.
But before we begin the discussion proper, it might behoove us to start with an overview of what Bitcoin is for those out there who are still fuzzy on the details. Bitcoin is a peer-to-peer electronic currency that originated from an idea in a 2008 white paper. It is referred to as a “crypto-currency” because it operates on an open source cryptographic protocol meaning that there is no central authority creating, distributing or maintaining it. Instead, Bitcoins are created via a process called “mining” which, in layman's terms, involves getting computers to crack increasingly complicated mathematical “puzzles.” Bitcoins are generated as “rewards” for that “work” and distributed to the “miners” according to how much “work” they did in solving the “puzzle.” (To replace all of those quotation marks with more technically accurate language, check out the Wiki entry on Bitcoin mining.) Each time new Bitcoins are created, the number of new Bitcoins generated is halved. This process converges on the year 2140, where the total (pre-determined) limit of 21 million Bitcoins will be in circulation.
The heart and soul of this unusual currency is the block chain, a global ledger of all Bitcoins and their current ownership. Owners are identified by “addresses” that consist of an unintelligible string of numbers and letters. Although all Bitcoin transactions are part of this global (and globally distributed) ledger, the idea is that if someone manages their account wisely they could never be personally identified by their address, giving users the promise of anonymity.
So with that (admittedly bare bones) summary under out belts, let's examine some of the hope and hype surrounding the Bitcoin phenomenon.
Hope: Bitcoins are not fiat
Although precious metal investors remain (for the most part) highly skeptical of the entire Bitcoin idea, there is one aspect of the currency that should appeal to gold bugs: like the shiny yellow metal, Bitcoins cannot be printed off on a press at the whim of a politician. It was this analogy that no doubt led Bitcoin to adopt the terminology of “mining” for new “coin.” With gold, physical metal is being mined from the ground; with Bitcoin, computer processing power is being used to solve mathematical puzzles. Unlike in our funny money Federal Reserve QE Infinity fiat paradigm, the creation of Bitcoin (like the discovery of gold) is not the result of any politician's itchy printing finger. The total number of Bitcoins (like the total amount of physical gold) cannot be manipulated or controlled by political or private interests.
Of course, the analogy is not a perfect one. The discovery of new gold is essentially random, and while there is a finite amount of gold in the world no one knows what that number is or when it will be completely mined. Bitcoin, on the other hand, is not randomly generated. The creation of Bitcoin is following a pre-defined growth curve, and while there is some randomness over when Bitcoin-generating puzzles will be solved, the final result of the process (21 million Bitcoin by 2140) is a pre-determined outcome.
This means that, unlike Federal Reserve Notes which are injected into the economy whenever Ben Bernanke and the Fed gangsters feel like it, the supply of Bitcoin is relatively predictable. It also means that there is no particular worry about inflation. In fact, assuming a steady growth curve in adoption and usage of the currency, deflation is baked into the Bitcoin cake. This goes some way toward insuring that the value of Bitcoins is tied to their utility in facilitating transactions, not speculating on growth or contraction in its supply. One would think that this would mean that Bitcoin would not lend itself to being treated as a commodity to be speculated on so much as a tool to use for conducting trade...
Hype: The speculative bubble
As anyone who has been watching the BTC-USD valuation will be able to attest, the Bitcoin market is exceptionally volatile. Large one-day swings in price either upward or downward are still commonplace. Partly this is due to the relatively small size of the market and the kinks that are still being worked out of the system. Events like the 2011 hacking of Mt.Gox – one of the largest Bitcoin exchanges – can cause sudden drops in the value of the currency. Conversely, mainstream news coverage that brings new users to the Bitcoin fold can cause value to rise. Essentially, these events cause huge waves in what is still a relatively small pond.
And just like with any other market that's prone to big swings, it isn't long before speculators come along hoping to buy low and sell high in order to make a quick buck. The phenomenal run-up and precipitous drop-off in the value of Bitcoin in April of this year has to be seen in these terms. Nothing drastically changed in the underlying market; there was no major innovation in the technology or change in the Bitcoin supply that would have justified such a surge in price (because no such innovation or change is really possible in an algorithmically controlled crypto-currency). The hype and buzz generated by mainstream reporting on Bitcoin started a feedback loop. As more people learned about it, more became interested in purchasing Bitcoin on an exchange. As more purchased it, prices rose. And as prices rose, more stories were generated about the Bitcoin bull market, thus attracting more new users and feeding into the cycle.
And as with all such bull markets, circuit breakers eventually kicked in to send the currency back down to a more realistic valuation. Speculators sold off to realize their profits and the sell off prompted those who were merely dipping their toe in the market to get out. A story about one of the largest exchanges halting trading didn't help matters either.
What happened in April goes to show that the proponents of Bitcoin are wrong to say that the currency is immune to the volatility one expects in the fiat money world. If it can be traded, it can be speculated on, just like any other commodity. And when people pile on hoping to catch a wave, especially in what has hitherto been a relatively niche market, it can upset the balance for all of the regular users.
Hope: Agorism wins!
There has always been a problem for the more anarchic libertarians out there in using a central bank-generated fiat money to conduct their transactions. Namely that every such transaction can be tracked by the government and taxed. Or at least every legal transaction...
This is where Samuel Konkin comes in. In the 1970s he developed a theory of radical libertarianism called 'agorism' founded on an idea of “counter-economics.” He believed that the only way to really undermine the presumed authority of the state was to grow the “underground economy” (i.e. black market) as much as possible. This minimizes opportunity for government intervention in the marketplace and reduces their tax base, thus restricting their size and ability to act.
But opportunities to participate in this underground economy have always been limited. Such transactions can only take place in cash, generally in face-to-face transactions. But with Bitcoin, the possibility for instantaneous, worldwide, anonymized transactions makes the agorist dream of a worldwide underground economy one step closer to reality.
Indeed, to many Bitcoin proponents it seems almost inevitable that the marketplace of the future will be one dominated by anonymous transactions that completely skirt the would-be regulators of our current nation-state system. After all, what could the governments of the world possibly do about it?
Hype: Where there's a will, there's a government
The idea that Bitcoins lie totally outside the realm of government intervention has been one of the currencies big selling points. As a globally distributed, decentralized, peer-to-peer currency, after all, there is no way for a government to perform a Cyprus-style bail-in or a Venezuela-style devaluation of Bitcoin to suit their political ends, and no one participating in one-on-one Bitcoin transactions will find their Bitcoins being used to fund taxpayer bailouts of too-big-to-fails.
But the idea that Bitcoin is completely untouchable is unwarranted. Aside from speculation about where the currency really originated (the author/authors of the original Bitcoin white paper, going by the pseudonym “Satoshi Nakamoto,” has still never been identified) and its connection to the American intelligence establishment (Bitcoin client developer Gavin Anderson was invited to present on the currency to the CIA's venture capital firm, In-Q-Tel, back in 2011), there are still questions about how governments around the world can/will step in to attempt to regulate Bitcoin transactions.
In fact, the crackdown may already have begun. Earlier this month the US Department of Homeland Security initiated legal action to stop payments company Dwolla from sending money to Mt.Gox, the main Bitcoin exchange. The DHS filing accused Mt.Gox of misrepresenting its activities when it set up a US based account for accepting Dwolla deposits in 2011. Now, the Bitcoin acolytes will (correctly) point out that this is not a threat to Bitcoin itself; Mt.Gox is just one exchange, Dwolla is just one payment service, and other US-based exchanges which are properly registered as “Money Service Businesses” in their filings will continue operating as usual. But still, it does send a message: exchanges that want to facilitate transactions in the US better have their paperwork in order. They are not beyond the grip of Uncle Sam.
“But what about individual transactions?” the Bitcoiners protest. They remain anonymous and completely beyond the grasp of any government to oversee or regulate. Theoretically, this is the case. But the idea of Bitcoin's anonymity has been oversold. Firstly, only tech-savvy users will have any idea how to keep their anonymous address truly separate from the rest of their online activity and how to access and facilitate online transactions in an “anonymous” way (using the TOR router, for instance). To even achieve the hope of being beyond the ability of a persistent government agency from tracking one's activities requires a lot of technical know-how.
And even then, there is a real question about whether online anonymity is really possible at all. There have been potential serious flaws discovered in the TOR system that lead some to the conclusion that the supposedly “anonymizing” online service is in fact an intelligence-designed honeypot...or at least can be used as such. And as veteran cryptographer John Young of Cryptome.org told me in an interview on my website years ago, the idea of online anonymity is “a pipe dream.”
In Conclusion: There is no conclusion
There's a lot to consider when it comes to a new, relatively unproven idea for digital currency like Bitcoin, including much that we haven't covered here. But I hope at the very least that I've given you an indication why I'm not selling the farm and plowing it into Bitcoin quite yet...but why I do have a Bitcoin donation button on my homepage.
Ultimately, I think Bitcoin is not a financial savior nor yet a financial demon. It's merely a tool, albeit one whose utility is currently rather limited. It may be theoretically possible to conduct all of the transactions necessary for one's daily existence using Bitcoin, but it would be exceedingly difficult to do so at this point. And so I will remain cautiously optimistic that Bitcoin (or some other crypto-currency) might be a useful arrow in the quiver of monetary tools for use in the marketplace of the future. While Bitcoin remains useful for facilitating one-on-one transactions across borders, there is still a place for local alternative currencies (mutual credit systems and exchange trading systems, for example) and precious metals in that basket of monetary tools, too.
For those of you who are more prone to conclusive judgments, I hope some of this discussion has helped flesh out your own thoughts on the matter. And for those of you who are prone, like me, to sitting on the fence, I've saved a spot for you there right next to me. I don't see why I have to decide one way or the other yet, anyway.