What Tech Evangelists Get Wrong About Bitcoin

http://www.thechiefly.com/features/tech-evangelists-get-wrong-bitcoin/

Speaking about it purely as a product, Bitcoin is a printing press away from being superior to every currency on the planet. A secret, secure financial transaction is the holy grail of the internet and Bitcoin has accomplished that feat. To fully understand what Bitcoin is and how it works, check out this infographic.

Bitcoin is an anonymous means of exchange that uses a currency which cannot be forged; every transaction ever made with a Bitcoin is recorded directly onto each “coin.”The response from the financial world to this new…thing, seems to be a mixture of surprise and bewilderment.

It is a bit mysterious, and all we know about its genesis is the pseudonym of its inventor, Satoshi Nakamoto. But I think that it would be strange if we didn’t have something like Bitcoin at this point; it’s a pretty rational response to the breach of trust that was the financial crisis of 2008. There are plenty of Bitcoin evangelists and investors who have literally bet their lives on Bitcoin, and they can’t wait to tell you about the future.

What They Say It Can Be

“When you use Bitcoin, it’s our contention that Bitcoin will be like Linux for finance, where it’s the back end. It facilitates things, and you’re not necessarily aware of how your car works; you just put the key in the engine and you turn it. And we believe that Bitcoin will be a payment processing solution that a lot of people will find merit with in terms of reducing their costs on their end and providing a better service to you.” – Jonathan Mohan, Co-founder of BitcoinNYC

The main selling point of Bitcoin as a legitimate product is that it is a much more profitable and secure payment processor than traditional credit card processing companies. If a business accepts Bitcoin in exchange for their products or services, it can turn around and sell one coin for $830 (as of this writing). And when those dollars go into their pocket, they avoid paying any taxes (for now) because Bitcoin transactions are not regulated by any government. And this is where Bitcoin begins to run into trouble.

According to Evan True, Bitcoin is “a tool, particularly where it can start to stab a screwdriver into the rusty ol’ tanks of the international banking system.”

You hear a lot of this type of talk from Bitcoin evangelists. Many are libertarians who have grown tired of our corrupt banking and government entities voluntarily taking money out of all of our pockets, and Bitcoin represents freedom from that system. But just because you are free from a corrupt system does not mean you are free from corruption.

What Bitcoin Is

“Bitcoin is a decentralised, black market economy where you can buy drugs online and avoid tax.”

You can’t contextualize Bitcoin’s present utility more accurately than Amir Taaki just did. As a means of exchange, it thrives in the deep internet, which must be accessed with a special browser in order to preserve anonymity (as soon as one of those browsers, Tor, became more well known, the NSA had their fingers inside of it immediately, the first in a long line of major risks to the Bitcoin ecosystem).

More businesses have begun to accept Bitcoin as of late, which is encouraging because its economy must operate in the sunlight in order to survive, but that does not change the fact that this is one of the greatest things to ever happen to those who make their living in the darkness.

Paul Krugman, the Nobel Prize Winning Economist, even called it evil, endorsing Charlie Stross’ sentiments when he wrote:

BitCoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind—to damage states ability to collect tax and monitor their citizens financial transactions.

Krugman and Stross are wrong, it’s not evil. The intent behind its creation is secondary to what it is right now: a medium for any type of trade and a commodity; a commodity that you bet on to hedge against government issued currency. Philosophically, it’s no different than investing in gold (a finite resource in which to store your wealth just in case the world goes kaboom).

Could it be used to subvert paying taxes? Absolutely, but tax havens already exist on nearly every continent. If anything, the presence of Bitcoin should give the world even more reason to reform its near-universally broken and corrupt tax and regulatory systems. Until then, just consider Bitcoin to be a Swiss bank account for the common man.

Why Bitcoin Isn’t A Real Currency

Real currencies have a stable store of value. In ancient times, you knew that even if businesses didn’t take your gold or silver, you could still use it to craft jewelry and other items that could still be traded at a later date. With the U.S. Dollar, you know that as long as the Federal Reserve exists, your dollar is worth what it says it’s worth, and you can always pay your taxes with them. With Bitcoin, what gives it real, intrinsic value?

Nothing, other than the fact that other members of the Bitcoin economy say that it has value. The free market is chaos, and that’s where Bitcoin lives. There are a million concerns about Bitcoin’s long-term value, and that’s before you even address the regulatory environment that will inevitably crop up around the world’s first successful crypto-currency.

For example, what’s to stop another Bitcoin-clone (and there are a lot, including Coinye West, launching January 11th) from taking over the market and establishing itself as the world’s preferred digital currency? What if it only captures a third of the market? Or if a bunch split 50% between them? That’s not a system that changes the world, that’s a land filled with volatility and fraud.

Currencies work well because necessary monopolies allow for their universal application at all times. If you don’t have stability in the bedrock of your civilization, you have something like the Weimar Republic.

Even if Bitcoin does dominate the digital currency market, its long term survival is still at risk because the black market on the deep internet is a significant part of the crypto-currency economy.

If more browsers like Tor become compromised by the NSA, people will flee this market for a safer place to conduct their illegal transactions. The value of a Bitcoin would surely plummet, and this could easily serve as the catalyst for a Bitcoin “bank run” that could destroy the currency overnight.

This is why Bitcoin evangelists are trying to expand its economy outside of the deep internet. Many smaller businesses have already taken the plunge, and now Overstock.com announced that they will accept the currency (then probably sell it immediately and make a handsome profit. How long do you think they’d stick with that policy if it lost over 50% of its value in a week again? I say a month, tops.)

Businesses need certainty that their cash will be accepted anywhere today, tomorrow, and fifty years from now. Bitcoin hasn’t demonstrated that it has that kind of long term value yet.

Lastly, there is a flaw in its basic design that calls Bitcoin’s longevity into question. BitcoinNYC’s Kirill Gourov was boasting about the excellent marketing opportunities surrounding this exciting and mysterious new product, but his words also describe the relationship between Bitcoin and the rest of the dollar spending world when he says that “even if there are only 10 people in the club, you want to have 100 people outside. Bitcoin has that built in. Scarcity means value.”

Unlike a currency that is issued by a central bank, the supply of Bitcoin is limited to an exact amount; capping out at 21 million total Bitcoins. At its current price of $830, the entire Bitcoin economy is wroth at most, $17.43 billion, or one tenth of the United States GDP for one year.

The Federal Reserve’s unconditional guarantee of the U.S. dollar takes the ceiling off of the free market, and provides the rest of civilization with the confidence to plan their lives around the money in their pocket and their bank accounts for generations. You may have the buzz outside of your club, but you make your money off of the people inside of it.

As long as Bitcoin remains a limited, alternative to government backed currencies, it will be too risky for businesses in this country to bet their future on. Sure, some like Overstock.com will jump on board for a quick buck because people have been looking for a quick buck since the dawn of humanity. Unless Bitcoin can integrate itself with existing legal and regulatory systems, it will forever be at war with the law and the free market at the same time. That’s not a path to sustainability.

This story has been revised from its initial posting due to errors in calculation regarding the scope of Bitcoin’s economy as well as a quote from Kirill Gourov which was initially taken out of context. Both errors have been revised as of February 4, 2014.

Jacob Weindling
Pure bred Coloradan with a dash of Masshole (go UMass). Sports and politics junkie. If I've learned one thing in life to this point, it's that stupid loses more games than smart wins.
Jacob Weindling
Jacob Weindling

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