As an advocate for decentralized money, I had been following several projects for years when Bitcoin appeared in 2008. What Bitcoin brought to the space was full automation. Several cryptographic innovations made possible, for the first time, a decentralized ledger of transactions of something called bitcoins, maintained by a network of miners, which are automated machines. The ledger is deemed trustworthy because the miners have a competitive profit incentive — they keep each other honest in their constant efforts to win the right to collect a batch of transactions (a block) about every 10 minutes. Successive blocks are chained or stacked together in such a way that in about an hour or so they become nearly impossible to alter.
What are bitcoins? They are created with each new block and recorded by all miners as being owned by the winning miner. The block creation reward decreases over time and is currently 6.25 bitcoins.
But what are bitcoins worth? Their value is determined entirely by market forces. When I first took notice of the fledgling Bitcoin project, bitcoins were offered for sale by early miners at a rate of $0.10 per bitcoin. They are now offered for close to $40,000 each.
Bitcoin is a negative-sum game, in the sense of game theory. Everyone who makes money speculating on the price of bitcoins does so at the expense of others who lose. And the total losses exceed the total gains by the amount paid to miners. This is exactly how gambling casinos work, with the “house” taking the place of miners. The house always gets a percentage of the gambling volume, while the gamblers are left with what remains to split among themselves according to luck or skill.
Like all other forms of speculation, bitcoin price is driven by confidence. In the case of bitcoins, the belief is that the the price will keep increasing. In the case of gambling casinos or lotteries, the belief is that one has greater luck or skill than other players. Bitcoin speculation is essentially a confidence game, so it is better named Bitcon. There have been many such speculative con games in history, one oft-cited example being the Dutch tulip bulb mania of 1634 to 1637. At its peak, a single tulip bulb sold for ten times the annual income of a skilled artisan. When the price crashed, many investors were ruined and Dutch commerce suffered a severe shock. The difference between a bitcoin and a tulip bulb is that if you plant a tulip bulb, at least a flower will grow. But even if you could actually plant a bitcoin, nothing would happen.
The inevitable ruin of many, if not most, bitcoin speculators raises concern for ethically-minded people, those who do not gamble as a matter of principle because they understand the damage gambling causes society, whatever collateral benefit there may be.
Does Bitcoin benefit society in any way, to offset the harm it causes as a speculative bubble? Yes, it does provide a mechanism for transferring value outside the legacy banking system with all of its surveillance and control. If you buy a bitcoin only for the purpose of transferring it electronically to a recipient who then transfers it back into something of actual value, then during this short period the market price of Bitcoin is not likely to fluctuate very much. The downside of this use case is that the transfer fees are sometimes very high and there can be a substantial delay due to the very limited capacity of the Bitcoin network — a mere 7 transactions per second. Although there have been innovations to Bitcoin and its successors to reduce fees and improve throughput, the inherent inefficiency of decentralized systems will always be greater than well-designed centralized systems. Still, in some situations (both legal and illegal) there are viable use cases.
But what will happen when the speculative bubble bursts? What if the value of mining rewards drop so low that miners shut down and the Bitcoin network is no longer secured by intense competition? The network would become vulnerable to hacking, causing Bitcoiners to lose confidence and sell their bitcoins, thus accelerating the network’s demise. This is an inherent flaw, aside from risks posed by quantum computing and government regulation.
Meanwhile, the inherent inefficiency of decentralized crypto networks adds a resource burden to our planet: countless servers allocated and in some cases such as Bitcoin itself, exorbitant energy used.
The above thoughts come from someone who had high hopes for cryptocurrencies in their early days when the crypto space was dominated by idealists, and who got involved both as a miner and developer. But with dismay I watched the spirit of the space change when speculators and financiers moved in, greedy for profit and caring nothing about benefiting society, only about how many Lamborghinis they could buy. Technology, like energy, is neutral in itself. It can be used for good or ill by humans. It cannot save humans from themselves.
In contrast to what Bitcoin has become, compare it to a local currency. A classic example is the Wörgl Experiment in Austria in 1932-33:
One of the best-known applications of the stamp scrip idea was applied in the small town of Wörgl in Austria in 1932 and 1933. When Michael Unterguggenberger (1884-1936) was elected mayor of Wörgl, the city had 500 jobless people and another 1,000 in the immediate vicinity. Furthermore, 200 families were absolutely penniless. The mayor-with-the-long-name (as Professor Irving Fisher from Yale would call him) was familiar with Silvio Gesell‘s work and decided to put it to the test.
He had a long list of projects he wanted to accomplish (re-paving the streets, making the water distribution system available for the entire town, planting trees along the streets and other needed repairs.) Many people were willing and able to do all of those things, but he had only 40,000 Austrian schillings in the bank, a pittance compared to what needed to be done.
Instead of spending the 40,000 schillings on starting the first of his long list of projects, he decided to put the money on deposit with a local savings bank as a guarantee for issuing Wörgl’s own 40,000 schilling’s worth of stamp scrip. He then used the stamp scrip to pay for his first project. Because a stamp needed to be applied each month (at 1% of face value), everybody who was paid with the stamp scrip made sure he or she was spending it quickly, automatically providing work for others. When peoople had run out of ideas of what to spend their stamp scrip on, they even decided to pay their taxes, early.
Wörgl was the first town in Austria which effectively managed to redress the extreme levels of unemployment. They not only re-paved the streets and rebuilt the water system and all of the other projects on Mayor Unterguggenberger’s long list, they even built new houses, a ski jump and a bridge with a plaque proudly reminding us that ‘This bridge was built with our own Free Money’ (see photographs). Six villages in the neighborhood copied the system, one of which built the municipal swimming pool with the proceeds. Even the French Prime Minister, Édouard Dalladier, made a special visit to see first hand the “miracle of Wörgl.”
It is essential to understand that the majority of this additional employment was not due directly to the mayor’s projects as would be the case, for example, in Roosevelt’s contract work programmes described below. The bulk of the work was provided by the circulation of the stamp scrip after the first people contracted by the mayor spent it. In fact, every one of the schillings in stamp scrip created between 12 and 14 times more employment than the normal schillings circulating in parallel. The anti-hoarding device proved extremely effective as a spontaneous work-generating device.
Wörgl’s demonstration was so successful that it was replicated, first in the neighboring city of Kirchbichl in January of 1933. In June of that year, Unterguggenberger addressed a meeting with representatives of 170 other towns and villages. Soon afterwards 200 townships in Austria wanted to copy it. It was at that point that the central bank panicked and decided to assert its monopoly rights. The people sued the central bank, but lost the case in November 1933. The case went to the Austrian Supreme Court, but was lost again. After that it became a criminal offence in Austria to issue “emergency currency.”
… does it sound familiar? Only a central authority saviour can help people who are not allowed to help themselves locally. And as all economists will point out, when there is enough demand, supply always manifests in some way. Even if you have to import it. During the Anschluss of 1938, a large percentage of the population of Austria welcomed Adolf Hitler as their economic and political saviour. The rest is well known history.
This is what real decentralization is about, reverting power back to local communities. Bitcoin is a global currency, not a local currency. It is decentralized only in a limited, technological sense. Trust in it is based on the questionable assumption that automated machines are more trustworthy than personally known, trusted community leaders like Mayor Unterguggenberger. Bitcoin is a step toward transhumanism, where machines compensate for the perceived flaws of natural humans.
Now, paper scrip like that used in Wörgl could be digitized to bring it into the computer age, but there is no advantage to using decentralized technology such as the blockchain; a simple centralized network in each community, under the control of trusted community members, would suffice and be more efficient. The scrip monetary system itself is already decentralized to match a fractal social structure; no additional technological decentralization is necessary or productive. Trust is placed in people who have earned it from their neighbours, not in automated machines competing for a reward.
Addendum
A question to ponder: The Wörgl experiment resulted in immediate, dramatic benefits for the community. Fourteen years on, is the world a better place because of Bitcoin?
Thanks for explaining my concerns so plainly. I always just said "I don't trust it", but I couldn't give a good example of why I didn't. The comparison to gambling perfectly illustrated it.
Excellent stuff.
Kevin Muir has several great writings about BTC on his subscription Macrotourist substack. A really good free one is here:
https://talkmarkets.com/content/currenciesforex/my-great-bitcoin-bungle?post=136834
And we haven't even mentioned Tether!