A Blog by Jonathan Low

 

Apr 8, 2013

Bitcoin: Financial Innovation or Ideological Fantasy?

Bitcoin is a digital currency. It might be helpful to think of it as the gamification of finance. And given how badly the 'real,' allegedly tangible version of finance and banking has behaved over the past decade, the world is certainly open to alternatives. 

But Bitcoin is also a bit of an ideological movement. A libertarian fantasy that supposedly provides the benefits of a currency without the inconvenience of having to submit to regulatory scrutiny or taxes.

In so positioning this concept, its adherents, unfortunately, betray the intelligence, technological competence and self-assurance of those who have more expensive education than actual experience.

The notion of freeing oneself - and the larger society - from the depredations of greedy, heartless bankers, clueless bureaucrats and the vast other is attractive to those who believe they have been ill-served by the status quo. Even if they have actually made out quite well relative to the rest of humanity, but perhaps not in comparison to their ambitions or dreams. And there has been a strong libertarian streak within the tech community based on some of the positive outcomes inherent in the success accorded to intelligence and hard work over the ostensibly corrupt, golf-playing, you-scratch-my-back-I'll-scratch-yours corporate culture that has, mythologically dominated business for most of the past half century. The Bitcoin political narrative is a sort of 'Revenge of the Nerds' Goes to Washington.

The problem with this vision is that it is both myopic and self-deluding. Those who tend to cry loudest about the waste of public expenditures and unfairness of taxes paid to support the allegedly unworthy is that they either forget or never knew to what extent their generally cossetted upbringing was underwritten by others: education, transportation, health and safety are frequently taken for granted by this crowd.

More to the point, as the following article explains, is that such societal oversight, however inconvenient and unwieldy, prevents precisely the sort of risk to which experts believe Bitcoin will fall prey. There may well be a digital currency in the future. Credit alternatives in online gaming and in auto loans, among others, signal that possibility. China's Alibaba is already offering click-through credit. All of which may be beneficial, although probably not without some sort of oversight to prevent Wall Street's own gamification, based on trumped up credit ratings, unfunded options liabilities and the full panoply of financial engineering innovations that sparked the most recent crisis. In the libertarian spirit, it could be instructive to let Bitcoin's supporters find that out for themselves, were it not a virtual certainty that they will demand publicly-funded government bail outs if and when things go wrong.  JL

Stilgherrian comments in ZDNet:

I can understand Bitcoin's appeal. It's supposedly untraceable, allowing you to buy illegal drugs online — or trade in more legitimate products and services without having to pay those pesky taxes. You can make your own Bitcoins out of processor cycles, like some fiscal perpetual motion machine.
The four-year-old digital currency Bitcoin is riding an all-time high right now. As I write this, a single Bitcoin buys more than US$125, valuing the total Bitcoin circulation at more than $1 billion. But I won't be buying Bitcoin any time soon, because it seems little more than hype built on a fantasy.
And, perhaps more importantly, Bitcoin is an embodiment of disruption — in the strange, mutated startup-speak understanding of that word, where disruption is apparently a Good Thing in and of itself.
"Soon, whether via Bitcoin or whatever comes next, it will be possible to strip banking away from bankers and money away from governments," wrote Hugo Rifkind in conservative British publication The Spectator. "There's a whole emerging political philosophy here, similar to the crypto-anarchism of the likes of Julian Assange."
Rickard Falkvinge, founder of the first Pirate Party, went even further, claiming that Bitcoin will change society more than the internet itself. "The net, after all, only allowed people to talk and shop more efficiently. By comparison, Bitcoin eradicates the government's ability to operate," he wrote.
Now, the urge to eradicate governments run deep through internet culture, or at least certain parts of it. I've written previously how Silicon Valley culture was, in part, a collision of the freedom-loving hippie counter-culture and the freedom-loving geek followers of Ayn Rand — neither of whom were fans of The Man. Once more, I recommend Adam Curtis' three-part documentary, All Watched Over By Machines Of Loving Grace. And let's not forget John Perry Barlow's overblown A Declaration of the Independence of Cyberspace of 1996. Read and laugh.
But I don't want my money to make some crypto-anarchist political statement. I just want to use it — to get paid for the work I do, to pay for the stuff I buy — and then get on with my life. I want a currency I can trust — and Bitcoin fails to deliver.
It's not that Bitcoin is a "made-up" currency, because every fiat currency is essentially made up. But when I pull some banknotes from my pocket, it's pretty clear who I need to trust: the nation-state whose central banker's signature sits in the corner. I can look at the world around me and decide that, yes, Australia, or the United States, or Singapore looks like a thing that exists and will last long enough to back up the promise implicit in those coloured rectangles. With Bitcoin, I have to trust some damnably obscure mathematics, and hope that the crypto never gets cracked. Yeah, right.
When something goes wrong with a transaction in boring old traceable dollars, euros or yen, it's their very traceability that helps me get my money back. As F-Secure's Mikko Hypponen tweeted just hours ago, "When you have highly valuable, completely virtual, and almost entirely untraceable currency, there will naturally be a lot of theft". I'm not sure that a decentralised, anonymous network of untraceable anti-authoritarian players will be interested in helping me out.
Even Falkvinge admits that Bitcoin is "still far from ready for prime time", hardly a ringing endorsement. Witness its wild swings in value this week as Mt Gox, the biggest Bitcoin exchange, suffered a denial of service attack. Why did that happen, exactly, and who profited from those sudden surges? The Economist reckons we're looking at a bubble, noting that Bitcoin's price seems to track the number of people searching for it on Google.
And then there's the fascinating little fact that there'll be fewer new Bitcoins available over time. Bitcoin enthusiasts reassure us that early adopters aren't unfairly rewarded by this scheme, and that it's not a Ponzi scheme. But then, they would say that.
"In more pragmatic terms, 'fairness' is an arbitrary concept that is improbable to be agreed upon by a large population. Establishing 'fairness' is no goal of Bitcoin, as this would be impossible. By starting to mine or acquire Bitcoins today, you too can become an early adopter," they write. Gosh.
There may well be an anonymous digital currency in our future, but I'm leaving Bitcoin well alone.

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