Bitcoin, as I have argued, is a store of value that is now more attractive than bad fiat currencies and is likely to become even more attractive over time. It is an innovation that replaces trust in government with trust in a decentralized order— an order run by the miners—who verify transactions over a transparent blockchain. The interests of these miners are well aligned with holders of bitcoins, because the miners are partially compensated in bitcoins. It is this alignment that has sustained Bitcoin’s trajectory to ever higher valuations—a more than tenfold increase in this calendar year alone.
Bitcoin’s market order is strengthening because other markets are arising to improve the function of the underlying market. Yesterday the Chicago Board of Trade provided a futures market in Bitcoin, just it has for other commodities, like gold and oil, and as other exchanges have for fiat currencies.
Thanksgiving is a time to reflect on trust and to be grateful for its presence in our lives. Originally, Thanksgiving was a celebration of trust between two different peoples, the indigenous Indians and the Pilgrim settlers. Despite their different cultures and religions, they were able to trust one another enough to contribute food to a feast and sit down to dine with one another.
Today Thanksgiving is quintessentially a family celebration. At its best, it is suffused with trust because the family is a locus of trust. Because of the bonds among kin, for most of human history much commerce took place among extended families. And most of the rest of it took place between people who were known to one another. Being a repeat player who must live in a community inspires trust in others, particularly past eras when being ostracized was very costly.
But as civilization developed, communities became larger and the opportunities for gains from trade extended beyond those that could be easily satisfied by family, new institutions had to arise to police trust.
As central banks go, the Federal Reserve is one of the best. Much academic literature suggests that one of the reasons for its relative success is its relative political independence and freedom from partisanship. Central banks that are partisan or politicized are likely to engineer booms to elect the candidates of their party even if those booms have unfortunate long run effects on the nation. The classic case is a bank that pursues a loose money policy in the run up to the election to create a false sense of prosperity or to enable the party in power to finance…
The timing could not have been more propitious for Liberty Fund’s conference on cryptocurrency this past weekend. Last week Bitcoin hit an all-time high, even as it decreases in volatility. In their book, The Age of Cryptocurrency, Paul Vigna and Michael Casey offer five stages of the evolution of social attitudes toward Bitcoin. The first is disdain. The second is skepticism. The third is curiosity. The fourth is crystallization, where an understanding of the currency leads to a recognition that Bitcoin is a coherent design that fulfills an important function. And the final stage is comfort with and acceptance of the innovation.
Most people at the conference had passed through the first three stages and are resting at either stage four or five. The reason for this progression is that Bitcoin is earning more trust. It was always theoretically possible that Bitcoin could develop into a more trustworthy store of value than many government currencies, because many governments have proved themselves so untrustworthy. But only time would give people reason to trust an algorithm that was far too complicated for most fully to understand. And Bitcoin itself has worked now for more than eight years, generating more trust.
But even as of 2017 many people had legitimate worries. The greatest was fear of a so-called hard fork—a disagreement about changing the algorithm that results in two versions of the currency going forward.
Kyle Roche and I published an essay on Bitcoin in the Wall Street Journal on Monday, explaining why it is rising in price and becoming less volatile. It gains as national currencies become more risky stores of value. Given the state of the world, that means bitcoin has a bright future! As we say “The instability caused by problems with the euro, Brexit and the many Western democracies’ growing ratio of debt to gross domestic product threatens the value of even established currencies. Bitcoin is likely to succeed so long as the value of other moneys rests on politics.” We could have added that by serving as a hedge against bad politics Bitcoin is also an instrument of liberty.
Some commentators responded by impugning Bitcoin, but they did so on the basis of false notions and confusions. Here are the most common claims and brief rebuttals.
1. Bitcoin is simply an instrument of crime. The argument is that Bitcoin is used because it helps criminals make payments that avoid discovery. This assertion would not explain why Bitcoin continues to rise in price. Moreover, investigators find Bitcoin helpful in tracking down criminals, because it helps them follow money changing hands and connect it to criminal activity. Central banks themselves have concluded that cash better facilitates crime than does Bitcoin.
2. Bitcoin can be hacked. In fact, the record of Bitcoin transactions is kept on thousands of independent computers, making it almost impossible to disrupt its ecosystem.
Modern fiat currencies depend for their value on confidence in the laws of the states that issue them. Some nations, like the United States with its established central bank, inspire substantial confidence relative to nations that may debase for their currency for political objectives. But no nation can absolutely insulate its currency from political manipulation.
That is what gives Bitcoin the opportunity to succeed as a currency. But what gives users confidence in Bitcoin? It is precisely the fact that the rules regulating its currency do not depend on the currency law of any nation state. Bitcoin provides an example of order without law or at least without currency law.
Order without law is not unknown to society. Social norms often regulate behavior without the benefit of formal law. Rules of etiquette tell people how to behave at table without causing offense. Coordination rules help people walk down the street without bumping into one another. In a major work, Robert Ellickson showed that social norms, not law, governed responsibility in a community of cattle ranchers and farmers for the damage caused by cattle straying on the range.
But while order without law is possible without software, software can improve on the enforcement of that order. The beauty of Bitcoin’s design is that its mechanism for enforcement can not only be more powerful than the informal mechanisms that enforce social norms but even more powerful in some respects than the formal mechanisms of law.
Bitcoin, the premier cybercurrency, is at an all-time high in price and an all-time low in volatility. In a new article, Bitcoin: Order without Law in the Digital Age, Kyle Roche and I compare Bitcoin to fiat money and show why and how it may succeed in the long run in becoming a currency relied on by millions. In this post, we focus on the flaws in fiat currency that may enable Bitcoin’s success. In the next we will describe how Bitcoin is succeeding.
In 1924, Georg Friedrich Knapp, the father of monetary theory, wrote that “[t]he soul of currency is not in the material of the pieces, but in the legal ordinances which regulate their use.” The state must instill confidence through law that its currency will retain value. And it is the uneasy relation between a state and its currency that gives Bitcoin the opportunity to grow. Citizens in some nations rightly distrust their currencies, precisely because they have little confidence in the legal ordinances and institutions, like central banks, that regulate their use. For instance, in the recent past nations, like Argentina and China, have undermined the value of their currencies and yet also tried to prevent citizens from using other more stable and reliable currencies to maintain the value of their assets.
Bitcoin provides many people in monetarily oppressive regimes with a better alternative.
Bitcoin began as algorithm that created a token of no intrinsic value. But in a few short years it has become a hot commodity, trading now for about 250 dollars for each coin. Nevertheless it does not yet constitute an effective currency. It is still too volatile to be a reliable store of value. Moreover, while 13 million people have used Bitcoins, far fewer use it on a consistent basis. And the total value of Bitcoin is about 3 billion dollars—a fraction of the worth of many companies.
But Bitcoin has room to grow and become a currency. Of greatest aid to Bitcoin is the failure of governments. Already, Bitcoin is a household word in Argentina, where the government maintains an official exchange rate at substantial variance with real exchange rates. Bitcoin allows people to evade these controls by making their purchases via Bitcoin. If economic crisis leads other nations, like Brazil and Russia, to take such illiberal action, which is all too possible, Bitcoin will ride higher and begin to look more like a currency. And even after the crises subside, Bitcoin may well remain in use in such nations because of a distributed trust that does not depend on government and its relatively low transaction costs.
More generally, the less stable are national currencies, the more currency controls are imposed by government, the more inefficient are regulations of payment systems, the more attractive Bitcoin becomes. In short, Bitcoin thrives as a hedge against bad governance of one kind or another.
Nathaniel Popper’s Digital Gold is a wonderfully researched, fast paced narrative of the beginnings of Bitcoin. As its subtitle, The Inside Story of the Misfits and Millionaires Trying to Reinvent Money, suggests, its emphasis is on the colorful cast of characters who got Bitcoin off the ground. In my last post, I described the mechanics of Bitcoin—a potential instrument of freedom from the state. In this post, I describe how the development of Bitcoin itself exemplifies another aspect of liberty– spontaneous order. Different individuals with different interests combine in ways no central planner could direct to transform an idea into a valuable commodity that may someday represent a sufficiently stable source of value to become a currency. It is the story of a Platonic form becoming a reality in the messy cave that is our world.
Bitcoin has no intrinsic value whatsoever. It began as an algorithm that generates tokens in cyberspace. Popper shows that in 2009 and 2010 computer geeks were the first group to take an interest. They mined coins and provided the computer power to verify transactions because they admired the algorithm not because they want to make money. It is an appreciation of beauty that gives Bitcoin its start,
These transactions remained more akin to a game with monopoly money. But another group—people who wanted to engage in illicit transactions– did find an actual value, exploiting the anonymity of Bitcoin.