It isn’t every day that University of Chicago economists Eugene Fama and Richard Thaler see eye to eye. Fama, who won the Nobel Prize in 2013, is one of the best known proponents of the efficient market hypothesis. Thaler, in contrast, champions behavioral economics. Indeed, Thaler spends a great deal of time criticizing the efficient market hypothesis in his recent book, Misbehaving.
Both economists, however, seem to be on the same side when it comes to bitcoin. Commenting on Fama’s recent interview with the Bitcoin Uncensored podcast, Thaler tweets: “Must say I agree with Fama here. Only value of bitcoin seems to be to crooks& [sic] tax cheats. Negative social value.”
Fama and Thaler are not alone. Many regulators worry that, absent sufficient government oversight, cryptocurrencies like bitcoin will be used to conduct illegal transactions and transfers on a massive scale.
For example, Sen. Joe Manchin has claimed that the “clear ends of Bitcoin [are] for either transacting in illegal goods and services or speculative gambling.” Likewise, Sen. Charles Schumer has described bitcoin as “an online form of money laundering.”
But they’re wrong. To date, the black market transactions that trouble Fama, Thaler, and others have been quite limited.
Consider Silk Road, the premier bitcoin-for-drugs website in operation from February 2011 to October 2013. The best available evidence suggests there were roughly $1.2 million worth of transactions made on Silk Road each month. More recent estimates put the figure at roughly $4.7 million per month.
That modest figure hardly made Silk Road the Amazon of drugs, as Gawker once claimed. Amazon averaged roughly $6,204.2 million per month in 2013. That’s more than 370 times the highest monthly transactions volume estimated for Silk Road. Silk Road was not even the Etsy ($112.32 million per month) of drugs.
One might counter that the volume of transactions on Silk Road was low because so few people were using bitcoin at the time. But the volume of transactions on the Silk Road was also small relative to the total volume of transactions conducted in bitcoin.
The monthly transactions volume for the entire bitcoin system averaged just under $16 billion from February 2011 to October 2013. That means that Silk Road transactions were responsible for a measly 0.03 percent of all transactions conducted in bitcoin. In other words, it was not just that few people were using bitcoin, but that of those who did few were buying and selling illegal substances on Silk Road.
What about terrorism? The U.S. Treasury Department itself has found no evidence of bitcoin’s widespread use in funding terrorism. That really shouldn’t come as a surprise. Terrorist groups have much more convenient ways to secure funding outside of legitimate banking channels. Moreover, to the extent that terrorists are located in developing regions, they would encounter the same hurdles to adopting bitcoin that others in developing countries face.
If they aren’t buying cocaine or funding terrorists, what are users doing with all that bitcoin? Answer: a lot of things. They are purchasing flights, Xbox games, and, well, anything sold on Overstock.com. They are paying college tuition. They are ordering satellite television. They are purchasing premium memberships on dating sites and then using Yelp! to find a romantic coffee shop or trendy bar that — you guessed it — accepts bitcoin. They are sending remittances to family members around the world at a fraction of the usual cost. They are donating to support art, open source projects, and foundations. A better question would be: what aren’t they doing with bitcoin?
Contrary to popular opinion, bitcoin is not basically for criminals. It is barely for criminals. In that respect, it resembles ordinary cash — that is, Federal Reserve notes. As a matter of fact, the case is probably stronger for eliminating cash than bitcoin. Harvard economist Ken Rogoff has claimed more than half of all cash in circulation is used to hide transactions from tax or law enforcement authorities.
More formal estimates by Edgar Feige suggest roughly 48 percent of cash held by the public is employed in the domestic underground economy. For those interested in transacting outside the law, cash — not bitcoin — is king.
In short, most bitcoin users seem to be a lot like you and me, if perhaps a bit more tech savvy. They want to purchase legal goods and services and remit funds as cheaply and conveniently as possible. To the extent that bitcoin is more effective than traditional payment mechanisms for making some transactions, it lowers transaction costs, encouraging production and exchange.
In other words, Thaler is wrong: bitcoin has a positive social value.