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.
A currency has three important functions. It provides a medium for exchange, a measure for the cost of goods, and a store of value. It is one of the most important technologies ever invented and like all technologies might be improved. It is also a matter of intense public concern, because the power over money brings with it immense political power.
The computational revolution is bidding to transform our relation to money by replacing fiat money with a digital currency. Fiat money consists of token issued by the government, like the dollar. Its success depends on trust in the government to maintain the currency as a stable store of value. But governments face political temptations to debase the currency for political ends. Just ask people in Argentina how well the peso has operated as a store of value. Even the dollar has dramatically fallen in value, as in the inflation of the 1970s. Moreover, fiat currencies of today often impose substantial transactions costs in the process of exchange. Banks make substantial profits from these transactions.
Thus, a stable currency outside of the control of the state without substantial transaction costs might well both make the economy more efficient and limit the power of government. It could be a wonder of the modern world. That is the potential promise of a digital currency—a form of money that is created and exchanged in cyberspace. The most famous such currency is Bitcoin and Nathaniel Popper has written a superb book, Digital Gold, chronicling its birth and wild rise. In the next post, I will review the book, which has a cast of characters to rival the most improbable of picaresque novels.
But first a short and necessarily simplified summary of the complex mechanics of Bitcoin: