All Commentary
Thursday, December 7, 2017

What Really Matters about Bitcoin

In the panic rush, let's pause to consider the meaning of it all.

After Bitcoin hit $10,000, it, at last, seemed to dawn on the mainstream financial press that this thing matters. There has been a panic rush to catch up on the meaning of it all. Some have doubled down on the claim that the whole thing is a hoax. Others dismiss it as a bubble (indeed, all financial models would suggest that a correction is needed). Some bigshots have called for it to be banned as if it is even possible to ban a mathematical protocol.

So much confusion out there! Having followed this technology from 2010, here are the ten points I find most salient about Bitcoin and the entire cryptoasset sector.

Good money emerges from exchange and entrepreneurship.

1. It was not invented by government. From the ancient world, it has been claimed that money (right and proper money) is the domain of government, at the very least to guard but also to invent, impose, and manage. In the late 19th century, an entire school of economic thought grew up around it: the State Theory of Money. Georg Friedrich Knapp’s treatise by that name came out in 1905 (English translation 1924) and helped entrench the nationalization of money in central banks. Bitcoin shows that the theory is wrong. Good money emerges from exchange and entrepreneurship, as Carl Menger said.

2. It was not invented by academia. The Bitcoin protocol was released by an anonymous programmer on a small email list and then put into the commons. Economists – to say nothing of political scientists and sociologists – were entirely out of the loop. This is fascinating because mainstream intellectual hierarchy puts academia at the top and everyone else underneath. The black robes rule the course of history and everyone else is their benefactor, it is said, as if there were a structure of production for ideas. The problem with this theory emerged in the age of capitalism, when the practitioners, not the theorists, starting getting all the good ideas. Then the backlash came in the 20th century: the experts would manage society. Now we are finding out something amazing: the best ideas come from those with boots on the ground.

3. It’s not all about Bitcoin. In some ways, the high-flying returns on the headline cryptocurrency are a distraction from the genius of the underlying technology: the distributed ledger called the Blockchain. This technology has spawned a financial sector just as large as Bitcoin itself, with thousands of applications, including every form of contracting. Blockchain could even lead to an upheaval in the relationship between the individual and the state. The critical thing to understand about the technology is this: it is a better way than we’ve ever had to document and enforce ownership claims. If you do not understand what this sentence means, I’m sorry but you do not understand the value of this technology.

Governments are an annoyance, not the authors of history.

4. The old regulations won’t work. This technology is completely new, whereas all existing financial and regulatory machinery is based on muscling legacy technology to perform in a certain way. Retooling the regulations to fit simply won’t work. It is only going to create messes, slowing down but not stopping, progress. Legacy bureaucracies and stakeholders will fight and fight but nothing can stop this revolution, which is borderless and digital, making it impossible to control. Moreover, every regulation reduces competitiveness and entrenches incumbent firms. Do you think if government had banned, for example, horseshoes, electricity, internal combustion, or flight that this would have actually stopped these ideas from becoming reality? Governments are an annoyance, not the authors of history.

5. Money will be competitive. Many people see the current goings-on as a struggle between the dollar and Bitcoin. That is too simplified. The real struggle is between national money monopolies and a newly competitive system. That competition occurs between cryptocurrencies and cryptoassets. People want to know who the winner will be. This too is old-world thinking. The competitive process will never stop. Winning will be temporary, and a new challenger will rise up and take the top spot. This is a new world. No living person knows what this is like because money has been protected from market pressure for so long. In particular, Americans are going to have to get used to a world in which the dollar is no longer king.

New players are crawling out of the woodwork by the day.

6. Banking and credit will change. The whole institution of central banking is premised on the idea of a money monopoly which thereby enables full control and macroeconomic management. Crypto doesn’t have to be number one in order to wreck this presumption. It only needs to bust the monopoly. With a market cap of half a trillion dollars, this might have already happened. Moreover, distributed networks weave together money and payment systems, so old-world payment processors will be next to fall. New players are crawling out of the woodwork by the day.

7. The unbanked have rights. Some people estimate that the unbanked of the world population is two billion. That is surely an underestimate. Think of the developing world but don’t limit it to that. Where I live, the unbanked are everywhere, and they are that way for a variety of reasons. Maybe they fear the privacy intrusions. They have lifestyles and sources of income that fall out of the mainstream. They might have sketchy professions. Or they are too young. Maybe it is a family issue or they fear getting roped into the system. Whatever the case, they still retain economic rights, and Blockchain tech gives them options for the first time. This is the population that will fuel the entrepreneurship in this sector.

No ideology can stop this.

8. No one will be in charge. Blockchain has no central point of failure and no overarching controlling force. Financial intermediaries are not out of the picture but they are not essential. The systems of the past evolved into cartels; the systems of the future will be increasingly decentralized with non-stop disintermediation. Anyone who seeks full control will wake every day to the reality of shattered illusions. This goes for huge financial firms and also governments. Traditional policy rationale is rooted in the presumption of the preeminence of a single vision. The decentralized future will be rooted in the reality of nonstop disruption. No ideology can stop this.

9. It’s a template for everything. Bitcoin isn’t really about Bitcoin. It’s about human liberty. We are not happy to live in cages of anyone’s construction. The goal of human life is to find a way to freedom. Governments and their lackeys laughed and dismissed this whole revolution, circa 2009 to 2017. There is no way the bird can escape, they said. Now it is too late.

10. No one knows the future. No one could have anticipated this would happen. No one can know what lies in store for us. The future will be crowdsourced. This seeming chaos will find itself toward orderliness, and massively improve life on earth. That is how it should be.