Bitcoin is arguably the biggest thing in the technology space to catch the public’s imagination since
the smartphone. As a computer scientist, a libertarian and an amateur economist, one would think
that I’d be massively enthusiastic about cryptocurrencies. After all, isn’t it a private initiative to break
the monopoly on money by a central banking system that cannot be trusted with the value of our money?
That it is, unfortunately there are a number of reasons I believe that Bitcoin will not replace our fiat
currencies and will instead go down in history as the 21st century version of Tulip Mania.
the smartphone. As a computer scientist, a libertarian and an amateur economist, one would think
that I’d be massively enthusiastic about cryptocurrencies. After all, isn’t it a private initiative to break
the monopoly on money by a central banking system that cannot be trusted with the value of our money?
That it is, unfortunately there are a number of reasons I believe that Bitcoin will not replace our fiat
currencies and will instead go down in history as the 21st century version of Tulip Mania.
To understand why Bitcoin will not work as money, we have to understand where money comes from.
Before money, goods and services were exchanged for each other in the highly inefficient barter system.
The butcher would give the baker a steak in exchange for two loaves. Within this system, some
commodity is eventually bartered for that is not directly needed, but because it is highly exchangeable
for other commodities, this is the birth of money.
Before money, goods and services were exchanged for each other in the highly inefficient barter system.
The butcher would give the baker a steak in exchange for two loaves. Within this system, some
commodity is eventually bartered for that is not directly needed, but because it is highly exchangeable
for other commodities, this is the birth of money.
Any commodity can be money. Indeed the earliest forms of money where food, especially livestock
and grain, because of its near-universal acceptability. Different commodities have different qualities that
can make it better or less well suited for use as money. Wheat spoils and is very bulky to transport and
store. Cattle is more portable and lasts longer than wheat but must be kept alive and a cow cannot be
divided without destroying it. It is widely accepted that there are eight properties a commodity should
have to be ideally suited for use as money. Gold and silver were money for 3,000 years precisely
because of these qualities.
and grain, because of its near-universal acceptability. Different commodities have different qualities that
can make it better or less well suited for use as money. Wheat spoils and is very bulky to transport and
store. Cattle is more portable and lasts longer than wheat but must be kept alive and a cow cannot be
divided without destroying it. It is widely accepted that there are eight properties a commodity should
have to be ideally suited for use as money. Gold and silver were money for 3,000 years precisely
because of these qualities.
The commodity should be durable, gold doesn’t expire like wheat and cattle. A Bitcoin too, is permanent.
It should also be recognisable, gold’s heavy weight and yellow colour make this relatively easy. In this
area too, Bitcoin has no serious issues. Both gold and Bitcoin are also divisible to very small fractions,
this allows for very small transactions. At a purity that is easy to assess, one gram of gold is exactly like
another, just like one Bitcoin is identical to another. This homogeneity is important to prevent people
paying their debts with their oldest and sickest cattle.
It should also be recognisable, gold’s heavy weight and yellow colour make this relatively easy. In this
area too, Bitcoin has no serious issues. Both gold and Bitcoin are also divisible to very small fractions,
this allows for very small transactions. At a purity that is easy to assess, one gram of gold is exactly like
another, just like one Bitcoin is identical to another. This homogeneity is important to prevent people
paying their debts with their oldest and sickest cattle.
The commodity must also be portable. Gold has a very high value density, so you can carry a large
amount of value in gold with you. Bitcoin is ethereal, so you could carry it around without issue, however
transacting in Bitcoin is a computationally intensive process that reduces its portability. Gold can be
exchanged via an intermediary or receipts, so one can transact in gold or silver without actually moving
it around.
amount of value in gold with you. Bitcoin is ethereal, so you could carry it around without issue, however
transacting in Bitcoin is a computationally intensive process that reduces its portability. Gold can be
exchanged via an intermediary or receipts, so one can transact in gold or silver without actually moving
it around.
The commodity must also be acceptable, while gold was accepted for goods and services for thousands
of years until Nixon closed the gold window in 1971, Bitcoin is not accepted. You might disagree there, so
perhaps I should explain. If you buy something on the Internet using something like BitPay, you are not
exchanging Bitcoin for whatever it is, you are using a service to sell your Bitcoin and use the money for
the purchase. This can be done with any commodity, this is not the same as the vendors quoting their
prices in Bitcoin and accepting and holding the currency. That only happens with few small vendors
whose owners happen to be speculating in Bitcoin. This is not a deal-breaker for Bitcoin, as this might
still develop, as the proponents insist.
of years until Nixon closed the gold window in 1971, Bitcoin is not accepted. You might disagree there, so
perhaps I should explain. If you buy something on the Internet using something like BitPay, you are not
exchanging Bitcoin for whatever it is, you are using a service to sell your Bitcoin and use the money for
the purchase. This can be done with any commodity, this is not the same as the vendors quoting their
prices in Bitcoin and accepting and holding the currency. That only happens with few small vendors
whose owners happen to be speculating in Bitcoin. This is not a deal-breaker for Bitcoin, as this might
still develop, as the proponents insist.
Malleability is another property that will promote a commodity's use as money. If once I turned my gold
into a ring, it was stuck that way forever, this will make it less useful in exchange if the new owner
couldn't refashion that ring into a tooth filling or a bar. Bitcoin isn’t malleable.
into a ring, it was stuck that way forever, this will make it less useful in exchange if the new owner
couldn't refashion that ring into a tooth filling or a bar. Bitcoin isn’t malleable.
The last property is stability. If I found an ancient gold coin (discounting any historical or numismatic
value the coin may have), the value of the gold it contains would pay for a remarkably similar amount of
goods and services today. If you owned a large chest of gold in ancient Rome, you were rich, the owner
of the same chest today would also be rich. Bitcoin doesn’t have a long history, but so far it has been
extremely volatile and so it is not possible for people to set prices or wages and sign contracts
denominated in Bitcoin.
value the coin may have), the value of the gold it contains would pay for a remarkably similar amount of
goods and services today. If you owned a large chest of gold in ancient Rome, you were rich, the owner
of the same chest today would also be rich. Bitcoin doesn’t have a long history, but so far it has been
extremely volatile and so it is not possible for people to set prices or wages and sign contracts
denominated in Bitcoin.
The ultimate issue with Bitcoin, is that there is no inherent value to store. Gold is a real physical
commodity with use in decoration, medicine, electronics and others. The blockchain might have many
applications, but Bitcoin is not the blockchain, which leads me to the next big problem: inflation.
commodity with use in decoration, medicine, electronics and others. The blockchain might have many
applications, but Bitcoin is not the blockchain, which leads me to the next big problem: inflation.
Inflation, as classically defined, is an increase in the supply of money. These days it is equated with an
effect of inflation, which is an increase in prices. Fiat currencies, particularly the Dollar, the Euro and the
Yen have suffered a lot of inflation in their history, particularly lately. New gold can only be mined out of
the ground at a slow relatively constant rate. Bitcoin cannot be created easily and there is a fixed limit on
the number of Bitcoins that can be mined, however there is no limit to the number of cryptocurrencies
that can be created. If Bitcoin is so valuable, it is too easy to create Fitcoin, Gitcoin, Hitcoin, etc with
exactly the same properties as Bitcoin, or perhaps improving upon them. Indeed, it wasn’t the first
photocopier company, Xerox that won out in the end, nor the first major social network MySpace. So
why should Bitcoin be worth anything in the future?
effect of inflation, which is an increase in prices. Fiat currencies, particularly the Dollar, the Euro and the
Yen have suffered a lot of inflation in their history, particularly lately. New gold can only be mined out of
the ground at a slow relatively constant rate. Bitcoin cannot be created easily and there is a fixed limit on
the number of Bitcoins that can be mined, however there is no limit to the number of cryptocurrencies
that can be created. If Bitcoin is so valuable, it is too easy to create Fitcoin, Gitcoin, Hitcoin, etc with
exactly the same properties as Bitcoin, or perhaps improving upon them. Indeed, it wasn’t the first
photocopier company, Xerox that won out in the end, nor the first major social network MySpace. So
why should Bitcoin be worth anything in the future?
Bitcoin is not being used as a currency, it is being used as a speculative asset. People are not buying
Bitcoins to transact in them, they are buying them because they are going up (or at least were going up).
The massive hunger for speculative assets which has sent cryptocurrencies, stocks, real estate and
collectables to record levels is fueled by a long period of the most dovish global central bank policies in
history. Anecdotal evidence that it is a bubble include dodgy ads on Youtube and Facebook and a sudden
interest in cryptocurrencies by people who have never invested their money before. Even a taxi driver in
Germany who barely spoke English was trying explain to me why Bitcoin was going even higher.
Bitcoins to transact in them, they are buying them because they are going up (or at least were going up).
The massive hunger for speculative assets which has sent cryptocurrencies, stocks, real estate and
collectables to record levels is fueled by a long period of the most dovish global central bank policies in
history. Anecdotal evidence that it is a bubble include dodgy ads on Youtube and Facebook and a sudden
interest in cryptocurrencies by people who have never invested their money before. Even a taxi driver in
Germany who barely spoke English was trying explain to me why Bitcoin was going even higher.
There are genuine uses for the blockchain. However, tokens that have no intrinsic value, digital fiat, will
not be used as money. A cryptocurrency backed by come real commodity (and therefore with 3rd party
risk) would work. A cryptocurrency backed by gold would be ideal. Unfortunately, the crash that seems
to already have begun in the Crypto bubble will make unregulated non-government money look bad and
make the flawed, ugly government fiat currencies look good in comparison.
not be used as money. A cryptocurrency backed by come real commodity (and therefore with 3rd party
risk) would work. A cryptocurrency backed by gold would be ideal. Unfortunately, the crash that seems
to already have begun in the Crypto bubble will make unregulated non-government money look bad and
make the flawed, ugly government fiat currencies look good in comparison.
It should be remembered that government action (massive easing) caused the speculative mania in the
first place. Also, that all fiat money is flawed and that one day we will return to that standard of value we
used until 1971: gold. An amount of gold is a good measurement for value, just like the meter is a good
measurement for distance. Having government decree our measure of value makes as much sense as
having them decree the length of a centimeter, a privilege they would abuse by shortening it every year
and thus making their private parts ‘bigger’.
first place. Also, that all fiat money is flawed and that one day we will return to that standard of value we
used until 1971: gold. An amount of gold is a good measurement for value, just like the meter is a good
measurement for distance. Having government decree our measure of value makes as much sense as
having them decree the length of a centimeter, a privilege they would abuse by shortening it every year
and thus making their private parts ‘bigger’.
Boston, February 19th 2018
TLDR: Bitcoin is a bubble, get out while you can.
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| I can't believe they're still fixing this bridge |
