Are you intrigued by Bitcoin? It’s a digital currency much in the news these days. It even got a hearing on Capitol Hill last month. Surprisingly the foundation overseeing Bitcoin came out relatively unscathed. Some places are accepting Bitcoins as payment for actual goods and services. They do so on the assumption the currency has value. Like any other currency it has value because some people assert it has value.
Which raises the question, what is its value? There are clearly things you can do with Bitcoin that are convenient. It’s a sort of digital cash for our electronic age. Only it’s not really cash. Real cash doesn’t leave fingerprints. You make a Bitcoin transaction and the transaction is recorded in the coin itself.
If there is value in Bitcoin, maybe it is from the faith we place in its math. There is not much we trust anymore, but you can still trust math, and Bitcoin depends on math, not to mention encryption algorithms, to assert its value. The number of Bitcoins has a finite limit because of the power of math and algorithms. Each attempt to mint a new Bitcoin requires lots of computers to spend lots of time and use lots of energy. For all its electronic novelty, it’s hardly an environmentally friendly currency. In fact, it’s bad for the environment.
You can’t say that about gold. Granted, the process of getting gold out of the ground is often bad for the environment, but once you have it, there it is, probably to sit in highly protected bank vaults and never to be actually moved or for that matter seen. A Bitcoin is entirely virtual but it depends on lots of computer hardware to mint and to assert its value. You won’t be creating one of these with a pad of paper and a slide rule. In fact, a Bitcoin is entirely dependent on computers and high speed networks. No wonder then that it was abruptly devalued last week when China blocked Bitcoin transactions. Keep it from being used in the world’s most populous country and it has lot less utility. Of course, it’s useless to anyone without a computer or some sort of digital device, not to mention some network so you can trade the currency. So it’s not even universal. You can’t say that about the U.S. dollar.
The larger question is whether a currency built on nothing but math really can have value. It does have value at the moment, as I can actually trade Bitcoins for U.S. dollars, which in my country is what everyone accepts as currency. In the long run though I think Bitcoins are going to be worthless. I don’t plan to own any of them and maybe I can make a case why you shouldn’t either.
First, there is whether counterfeit Bitcoins can be created. New ones can be minted if you have the computer horsepower and these are “legal”, but if they can be created for virtually no computer time then they would be counterfeit. Call me suspicious but I bet either the NSA has already figured out a way to hack it or will soon. In short, to trust a Bitcoin you must buy into its assumption that it can’t be hacked. Since the dawn of the computer age, hackers have demonstrated their ability to hack anything. They love the challenge. It’s reasonable to believe that Bitcoin is going to be hacked one of these days.
Second, there’s the question of what its value represents. I’ve discussed the value of money before. My conclusion is that money essentially represents faith that the country coining the currency will remain solvent and viable. I based this conclusion on the observation that currency value falls whenever these assumptions are shaken. Having a currency based on the gold standard doesn’t seem to make any difference, as the United States has been off the gold standard since the 1970s. Printing new currency doesn’t seem to be that big a deal either, providing the new currency is used to acquire assets of value. This is what the Federal Reserve has been doing since the Great Recession: creating money (none of it actually printed, apparently) and using it to buy long term securities like mortgage-backed securities. Curiously, just printing money is not inflationary when it is used to buy tangible goods. This is providing that the institution printing the money is trusted, and the Federal Reserve is trusted. In any event, investors can value or devalue a currency based on examining its monetary system and the country’s economy. With Bitcoins, you can’t do this. It is backed by no country, which is its appeal to its adherents.
What is Bitcoin really about then? It’s about a political idea; more specifically it’s about libertarianism. It’s trying to be a means by which libertarianism becomes institutionalized. If you are not familiar with libertarianism, it’s all about freedom, buyer beware and minimal (and ideally no) government. Libertarians (at least the committed ones) are vesting their wealth in Bitcoins because it’s how they show loyalty to the cause. They want money to be frictionless and outside governmental control. Arguably, Bitcoin does a good job with this, providing buyers and sellers will accept it as having value.
But libertarianism is an idea, not a thing. Libertarianism is really more of a verb than a noun. A currency though has to be based on something real. The U.S. dollar is essentially backed up by the collective wealth of all of us who possess dollars, or assets valued in dollars, or really any property within the United States. It’s based on something tangible. You buy a house in dollars instead of Bitcoins because everyone in the transaction has faith that those dollars mean something. This is because everyone else is trading in dollars too to buy real goods and services. If the U.S. dollar gets too low, there are things we can do about it. We can petition Congress or the White House to take action. There is no one to go to to complain about the sinking value of your Bitcoins. Assuming the currency cannot be counterfeited, its only value is its finiteness, enforced by math and increasingly expensive computational processes to make new coins. That’s it. As those libertarians say, caveat emptor (buyer beware). Bitcoin buyers, caveat emptor!
This tells me something important: Bitcoin is a bogus currency, at least in the long term. Yes, you can buy stuff with it now, but only from a very limited number of sellers: those who have faith in the idea of a libertarian currency. It’s obvious to me that libertarianism is just not doable as a sustainable way of governing. I have no faith it in whatsoever because its philosophical underpinnings do not actually work in the real world.
I would like to see it in Glenn Beck’s libertarian community, however, if it ever gets built. One thing is for sure, no one is going to build it for Bitcoins. They are going to demand U.S. dollars.