The Truth About Bitcoin

Tyler Cowen has yet another post up about Bitcoin. The topic is becoming an obsession with a certain type of libertarian academic. The mere mention of it has them thinking about how great it would if they were John Galt, just without all the hard work and danger that comes with it.  Whenever the topic comes up, they began chanting the all of the usual lines, like they are incantations. The comments sections of Bitcoin stories always have a weird cult-like vibe to them, but libertarianism is pretty much a cult now anyway.

The basic thrust of Cowen’s post is that Bitcoin is like any other commodity. Once a sufficient number of others get into the crypto market, the price for all of these currencies will fall to cost plus some tiny profit. In other words, he sees crypto as something like trading sheep or shiny rocks in the market place. Since the currency has no intrinsic value and there is no authority to set the value, the market sets the value based on utility or popular fads or some large manipulator buying or selling large quantities.

Putting aside my complaints about Bitcoin as a currency, the main problem with these digital-currencies is the same problem we saw in the Free Banking Era. Central governments hate the idea of a currency they cannot easily manipulate. That has been true since Pheidon. If you control the money, you control the people. Naturally, ruling elites will seek to control the money as a top priority. There’s also the issue seigniorage, which is no small thing. Wars have been fought over control of a single mint.

It has nothing to do with economic efficiency and everything to do with order. Order is what allows the best citizens of the polity to rise and remain at the top of the status system. It is also what allows the less talented to live something close to a sane existence. Order is how humans guard against the anti-social fraction that exists in every human population. Despite the fevered dreams of libertarians and anarchists, you cannot have a society without order. There has to be rules and enforcement of rules.

This natural desire for order naturally leads to a ruling class that is the final authority on everything, including the value of money. That authority, in order to be an authority, needs a method to control the people and thus the society over which they rule. Controlling the money is a great way to accomplish this. Controlling land or monitoring individual transactions is unworkable over the long haul.  The cost exceeds the benefit.

One simple way to control the populace is through the coining of money. That makes taxing easier for the authorities and it gives them control of trade and labor. It allows for the authorities to audit the citizenry to ensure compliance. There’s also the issue of seignorage, which has always been an important aspect of rule. Wars have been fought over control of a single mint. Having a bunch of competing currencies works against order and against efforts to impose order, therefore can never be tolerated.

Think about it this way. Let’s say I come up with a digital heroin. That is, a drug that can be transmitted on-line that you load on a flash drive, shove up your bum and get amazingly high for eight hours. Obviously, I’m not getting a lot of takers initially. The lack of customers means I’m losing money every time I make a batch. I manage to get a few takers to try it and begin to build a client base through word of mouth. I hit the same spots at predictable times and sell my digital heroin the old fashioned way.

This goes on for a while and no one is the wiser. The cops don’t care as it looks nothing like criminality from their perspective. The drug gangs don’t care at first because I’m not doing business on their turf. They are unaware of the threat I pose initially. But, they notice a drop in sales eventually as I build my business. Eventually they will figure out that someone is taking their customers. They may figure out it is me before they figure out what I’m selling or it may be the other way around, but at some point they put it together.

The drug gang will have three choices. Obviously, they can kill me, but that will require knowledge they may lack. They may know I exist, but not exactly where I exist. I could have advanced to the point where I’m selling my drug on-line. Drug dealers are not fools and they will recognize their lack of knowledge and see that as a risk in itself, perhaps a bigger risk. Killing me could create unknown problems. After all, I could be part of some much larger enterprise as unknown to them as the magic drug I sell.

The second choice is to figure out what I’m doing so they can either muscle in on my business or come up with a better way to compete. There is a reason we have such an array of street drugs. A clever guy creates a new product and the drug gangs eventually take it over and add it to their portfolio. The same guys controlling the weed sales in one area control the heroin sales too. Maybe they cut their prices or find some way to improve their product. Maybe they invent a new drug that is better than my drug.

The third option is to enlist the state to take out my business. I’m conducting business and that means taxes are involved. It also means a mountain of rules and regulations. My drug may be legal, but not paying taxes on sales is illegal. Not filing for a business license and not abiding by the laws governing record keeping are against the law. If I have employees, then I need to pay them and that means taxes, workplace laws, social security, Medicare and unemployment taxes. As any small businessman knows, there are a lot of rules.

Here we ultimately see the problem with Bitcoin. Disruptive technology is not ignored by the folks at the top of the established order. In the drug example, the established authority is the drug game, which served as a proxy for the state. In the above ground world, the state will defend itself from the threat posed by Bitcoin and they have many tools at their disposal. They also have tanks, planes, missiles and other military goodies. Bitcoin can only exist as long as the state allows it to exist. That means it will have to serve the interests of the state to survive, which brings us right back to where we are now.

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9 years ago

[…] year ago I wrote a post critical of BitCoin. At the time, it was trading at $1000 and all the smart people were saying it was the future. A […]