Bad Bits

Block chain technology could be the great innovation that gets us over a serious hump into a low-work society. Or, it could be a clever idea that has no practical use. That’s thing with technology. It’s often not as useful as people assume initially. Many times the technology ends up in something completely different from what the inventors originally imagines. The microwave over is the best example.

The idea of a digital currency is fine as it already exists to a certain extent. The use of cash has declined, because people now charge everything or use a debit card. That’s an electronic version of your home currency. This is made possible by the vast digital network that allows you to engage in commerce digitally. Specifically, it allows people to convert their currency into a digital representation for transmission around the globe.

One of the primary attributes of currency is portability. Cash and coins are more easily transported than sheep or bales of hay. Converting sheep into coins, means the shepherd can turn his labor into something he can tote to the next village and trade for something produced by some other farmer. Currency makes the value of labor quantifiable and portable, which means it then move around in society as property.

Another primary attribute of currency is it is not easily destroyed. Coins are hard to destroy. If one is damaged, it can be exchanged at the mint for a new one. Similarly, paper money is quite durable. It does not decay over time if properly cared for by the holder. This is the bulk of what the US Bureau of Engraving and Printing does every year. Currency is durable and the replacement of that which is destroyed is predictable and orderly.

In this age, we have figured out how to increase the amount of currency in circulation to keep pace with natural attrition, but also the increase in labor. That’s a long topic that can be debated forever, but in theory, a slowly expanding money supply reflects growing efficiency and growing value of labor. In a perfect world, there would be no inflation and no deflation, as the amount of money would grow and shrink in sync with labor.

That last bit is what gets lost in discussion about Bitcoin. A crypto-currency has a finite supply. The cost of getting the first “coin” is X. The next coin is X plus some small additional amount. The next coin is X plus a slightly larger amount. This continues on at a predictable rate until the final coin is minted. The cost of minting increases with each coin so the cost of minting coin X is less than the cost of coin X+n.

This means the coins increase in value over time. A single currency unit of labor, for example, will increase in value. Put another way, the amount of lawn work I can buy with a currency unit today will be less than I can buy tomorrow. That makes the currency deflationary by design. In times of great technological progress, it will be wildly deflationary. In this way, it has the same defect as hard money. It’s cyclical.

Now we have another big problem with Bitcoin. It is easily stolen. The QR code *is* the money, not the bit of paper on which it was printed. Try stealing a coin on paper currency through the television and see how that works for you. For better or worse, stealing hard money, so to speak, means physically taking to from the holder. There are no special precautions one need take to keep their money safe when it is physical coin or paper.

With Bitcoin, there’s no truly safe place. Worse yet, you don’t know it is stolen, in this case, unless you try to use it. There’s also the problem of the vault where you keep your money suddenly disappearing. If you keep your coins locally and your hard drive fails, you coins are gone. If you store in the cloud and the cloud company disappears, your money disappears with them. Bitcoin is by definition, a fragile storage of value.

Now, this raises two other issues. One is the currency is not self-validating. I can examine a coin or paper and determine if it is real. I do not require a third party. Bitcoin requires validation of each transaction. That third party is a network of computers, but they are not anonymous. To work, they must keep a record of every transaction of every coin. That means the third party tracks your every move in order to function as a validating authority.

Everything about Bitcoin says it cannot be a widespread currency. At best, it can be a short-term transition point. Person X wants to give Person Y money, without using the above ground financial system. Person X then converts money into Bitcoin, sends it to Person Y, who immediately turns it into real money. if you are a drug dealer or a revolutionary, this is useful. To everyone else, it is a pointless novelty.