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Why Bitcoin Really Matters: Competition isn’t Evil


One of the few things I really know about Bitcoin is that I wish I’d moved all my assets into it at the beginning of 2013: $100 invested in Bitcoin at the beginning of the year would have done better than anything else in my portfolio. Bitcoin is a lot of things. It’s a sensation among critics of the Federal Reserve and government control of the money supply more generally. It might provide the effective check on governments’ ability to play fast and loose with their currencies that Peter Theil set out to create when he started PayPal.

Writing for the New York Times, Marc Andreessen explains how Bitcoin works, why it is important, and what it means for cryptography and security. Bitcoin is a technological breakthrough. That much is true. But is it good? Or is it evil?

In a late December post, Paul Krugman laid aside the intriguing positive debate over whether BitCoin will work and argued that Bitcoin is actually evil. As Brad DeLong (via Krugman) points out, fiat currency is at least "stable" in that you can use it to pay your taxes and the Federal Reserve can buy and retire dollars if they think inflation is getting out of hand.

Krugman then quotes Charlie Stross, who argues out that Bitcoin is driven by an explicitly libertarian political agenda that seeks "to damage states (sic) ability to collect tax and monitor their citizens (sic) financial transactions."

In other words, Bitcoin and other cryptocurrencies can limit the ways governments tax their citizens and invade their privacy. In this, there really is nothing new under the sun: people have historically fled oppression and taxation by moving from jurisdiction to jurisdiction or by moving to whatever frontiers were available. The geographic frontier has closed, so to speak: there really aren’t many habitable places to which one can go and be free from government. For people who don’t want to be bothered and monitored, the frontier has moved online.

In 1976, F.A. Hayek wrote a short volume titled Denationalisation of Money, which appeared in revised editions in 1978 and 1990 (with the wonder of the internet being that you can download and read it for a price of zero dollars, or zero euros, or 0 bitcoins). Hayek argued for a competitive market in currencies; cryptocurrencies like BitCoin show how entrepreneurs have decided to stop waiting for governments.

Governments reduce some transaction costs when they impose a single monetary standard, but they create other costs and incentive problems.

Governments reduce some transaction costs when they impose a single monetary standard, but they create other costs and incentive problems. Hayek called for Denationalisation of Money in response to "(p)ersistent abuse of the government prerogative" to coin money. His proposal was simple, and he put it this way (1990: 17): "...I do not want to prohibit the government from doing anything except preventing others from doing things they might do better."

It’s easy to wonder what all the fuss is about given that countries like the United States have well-functioning banking systems and independent central banks run by highly-skilled economists. As Andreessen points out, the real beneficiaries might be people in poor countries with weak or dysfunctional banking systems who "are excluded from products and services that we in the West take for granted." Combined with a rapidly-spreading access to information technology, Bitcoin could be the key to a more integrated global market in which entrepreneurs have better protection from kleptocrats and central bankers with their foot on the monetary accelerator.

Adam Smith identified one of the fundamental problems with trying to centrally plan anything, monetary systems included, in his first book, The Theory of Moral Sentiments (also available for zero dollars, euros, or bitcoins!):

"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder."

The man of system’s "ideal plan of government" might include specific monetary institutions, and indeed these monetary institutions might be ideal if "he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board." Given, though, that "every single piece has a principle of motion of its own," what look like ideal monetary institutions may find themselves vulnerable to innovations like Bitcoin. Hayek called for governments to denationalize their currencies and to allow monetary standards to be determined by free markets. It may well be that Bitcoin is at the forefront of a market-led denationalization of money.

Patri Friedman, grandson of economist Milton Friedman and son of economist David Friedman, once said that we need "a start-up sector" in governance. Bitcoin and other cryptocurrencies are important players in just such a start-up sector, this one in currency and monetary institutions. Hayek offers the following toward the end of Denationalisation of Money: "A hope one may cherish is that, as competition usually does, it will lead to the discovery of yet unknown possibilities in currency" (p. 126). I don’t know whether Bitcoin will succeed or fail. With the broad sweep of history in mind, though, what really matters is that they be encouraged to try.

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  |     |   Comment #1
I quickly scanned the entire article and was still clueless as to the true definition of Bitcoin.  Is it a private company?  How would I "have invested 100.00 in it" as the article mentioned in paragraph one or two?  In the form of stock?  Again, I was clueless.

I decided to simply google "bitcoin definition" and had my answer. 

While I appreciate the article, I think it should have clearly defined Bitcoin within the first paragraph and why/how an individual could "invest" in it.
  |     |   Comment #2
The author's purpose was not to define Bitcoin, as he clearly stated in his title and opening lines. Rather, he set out to dispel Krugman's vision of government's anointed hand (on the monetary system) and defend Bitcoin against the erroneous and blanketed adjective, "evil," which all too often accompanies the innovations of a free market.

I'm glad, though, that you were successfully able to navigate the Google search tool and find what you were looking for. 
  |     |   Comment #3
Read the story about the "Dutch Tulip Mania in the 16th century."  I believe bitcoin will be no different.
  |     |   Comment #5
But that just addresses one facet of the Bitcoin phenomenon. Bitcoin is more than a simple speculative market whose value is derived from the arbitrary whims of investors. It's a medium of exchange that offers significant potential for merchants and consumers to make transactions at fractional costs (compared to the current payment system), and it is building an infrastructure that can be described as nothing less than an altogether alternative monetary system. The tulip, though lovely, hardly created a mania akin to Bitcoin.
  |     |   Comment #16
Is it really? It is pretty useless as of now outside of speculation. I see the appeal of bitcoin as a ticket for people that like to risk a lot. As for exchange medium? Way too unstable. It has enormous competition from other cryptocoins that  seemingly can be started by anyone and are functionally the same or very similar - the only major difference is lack of media hype. Legal status is unclear (which is important as government ban on acceptance can make them useless very quickly). Idea has potential. Gimme gold/oil whatever backed cryptocoins. Their value would be clearly defined which would make investing into them a lot less risky. Bitcoin value is one big unknown.
Russ Nelson
  |     |   Comment #18
True, Overstock.com doesn't take Bitcoin, nor does Adafruit.com, nor does any number of other businesses large and small. It helps to know the facts about Bitcoin before having an opinion, doesn't it?
  |     |   Comment #22
Not yet, anyway.  Time will tell.
  |     |   Comment #26
#18, Russ Nelson didn't know his facts and was spreading false information. 
  |     |   Comment #4
On a related note....

Business Insider: CEO of BitCoin Exchange Arrested for money laundering

Regardless of whether BitCoin itself is evil, we can always count on people to do evil when they perceive a benefit to themselves.
  |     |   Comment #6
Print X amount of some random paper with a denomination on it and then say its the NEW BETTER MONEY, come buy me, pay up large for it, and say its better than the old money.

If they did that you'd laugh, Because of the obfuscation of the high tech aspect of BTC , you genuflect.
  |     |   Comment #7
Could it be that some country thought their currency was superior to all others?  Maybe the United States' was at one time, before it went off the "gold standard".  Now we print "fiat" money along with the rest and disagree with any new competition which may become superior as an internationally recognized currency.
  |     |   Comment #10
In what possible way does my post -- citing the arrest of a BitCoin Exchange CEO for money laundering -- suggest to you that I am genuflecting to BitCoin? I am not very knowledgeable about it, but my gut tells me it is the latest incarnation of "The Hot New Thing" (or "the emperor's new currency"), and I am steering far clear of it. I am probably even more skeptical of BC than you are, and yet you make unwarranted assertions. Next time, try sneering in the direction of a post or commenter that deserves it.
  |     |   Comment #14
Don't be so sensitive, I was referring to the  writer of the article, and more generally to the masses that have embraced btc.
 I've mocked BTC since it was $10, but realized early on that it was a plaything of money launderers, drug dealers, and get rich quick loonies.
  |     |   Comment #20
"plaything of money launderers, drug dealers" is more descriptive of the US dollar than bitcoin, actually.
  |     |   Comment #8
What does this article promoting right wing economic ideology (Hayek, Friedman, etc) and criticizing Krugman have to do with interest rates?  Depositaccounts.com has provided great information about banking products over the years, but now seems to be demeaning itself by including political posts.
  |     |   Comment #12
I asked almost the same question sometime back.  Since asking, I came to the realization that interest rates and politics go "hand in hand".  The Federal Reserve Board members and their Chairman, who controls interest rates, are political appointees.  That explains it pretty well.
  |     |   Comment #27
The article is promoting, based not on economics but on politics, the Bitcoin trend and and criticizing Federal Reserve Notes (paper dollars), the uniform national currency for the last 100 years.  It does not discuss the Fed, interest rates or banking products and would not seem appropriate for this website.  
  |     |   Comment #11
Mr. Carden is a 100% free markets, individual liberty, limited government advocate and works or writes for organizations of a similar mindset. Accordingly, It is no wonder that he brooks no confidence in the Paul Krugman's of the world.

I think I will stick with the Krugman's of the world. I have seen limited government and individual liberty through having the unfortunate job of helping to clean up the Savings & Loan debacle and the most recent Financial Crisis(Lehman, GM,etc.) Limited government "ain't pretty" when it causes unlimited amounts of time and money to correct the unlimited mess left behind.
  |     |   Comment #13
LOL -  but boundless govt is "pretty". It's hard to believe we have posters worrying that we have too much individual liberty. Our founding fathers would be spinning in their graves to see how Americans take for granted the freedoms and individual liberties they bequeathed to us.
  |     |   Comment #15
Could these Bitcoins have anything to do with my local bank putting up a sign today concerning our putting any cash in anyone else's account other than our own?  Bitcoins are a form of cash and I wonder if they are protecting themselves incase they actually are used in the US?  The manager said the sign is to try to prevent money laundering and I noticed they mentioned the coins being used illegally in certain cases.  Just wondering.
Russ Nelson
  |     |   Comment #17
Wait, so you mean that the government didn't cause the Savings and Loan debacle by changing the rules in a more-or-less insane manner? When Dr. Carden wants free markets, he wants *really* free markets, not the kind where the government ties up the sheep and frees the wolves.
  |     |   Comment #19
Yeah, the private sector doesn't always get it right, no surprise there. But guess what, the govt has wasted more money and has tolerated more corruption from within than anything we have ever seen in the private sector. I will choose the private sector over govt to produce the goods and services that still makes America one of the most prosperous countries in the world. If you think govt is so effective or morally superior try spending some time in Cuba, North Korea or the old Soviet Union.
  |     |   Comment #21
Despite the article's title of "Why Bitcoin Really Matters," the ensuing article really doesn't do much to make any argument to the regular reader here of why it should or might matter -- other than engaging in a long series of quotations from other economists on issues of economic theory. My personal and not so-well-informed view of Bitcoins, at present, is that they're a fad and potential kind of monetary scam that some countries have actually moved to outlaw. While I understand the economic theory of an argument for something other than nationalized currencies, this particular article didn't do anything to convince me that's the right way to go, or that Bitcoins are part of a better approach.
  |     |   Comment #23
no one is saying that Government has to control everything. There has to be a balance of individual liberty and Government regulation. Mr. Carden (you possibly?) and the free thinkers in Washington always want Government out of every part of our lives, except when it fits in to the libertarian world view. So oil, coal and farm subsidies in the billions are ok--but stimulus money to repair our infrastructure that is falling apart and dismal compared to China, Japan, etc., is not ok.

Classic example is West Virginia. Adamantly against practically all safety and environmental regulations involving its favorite industry, coal. They will run anyone raising coal, environmental or gun regulation out of town on a rail. Yet, how many times over the years is West Virginia in the news because of mining or environmental disasters? This free thinking, anything goes state is one of the poorest and most illiterate and unhealthy(chronic illnesses abound) states and receives more federal(tax payer) money from the bad, big spending U. S. Government then practically any other state. And the list of states can go on. You generally find that the "live free or die states" (that have no oil or gas revenues), suck money out of Washington at a higher rate than the "regulatory" states and are at the bottom in health, education and business markers. Give me liberty and "balance".
  |     |   Comment #25
While I remain undecided on Bitcoin overall, this article has helped me along with my thinking.  Anything Krugman (aka, "the ferret") dislikes and criticizes must be pretty good.  That guy is a consummate idiot!

Now if only I had access to an inexpensive source of electric power.  Heck, I could rule the world!  Way I figure it, if Bitcoin takes off, eastern Tennessee will absolutely blossom with Bitcoin mints.  

Alternatively, you could outfit the top of a tractor-trailer with solar cells, fill the inside with (the right) computers, and drive the thing to wherever the sun shines longest and strongest.  One problem:  cooling all that gear.  I guess a fixed location in TVA country might be better after all.  :-)
Art Carden
  |     |   Comment #29
Thank you all for interesting comments. As recent events have shown, BTC isn't terribly stable. Again, though, whether it will work or not is of secondary importance: if anything, people who want to experiment with BTC shouldn't be prevented from doing so. There are a lot of large retailers that take BTC now, and other alternative currencies (like Dogecoin) are developing their own followings.

Historically, governments have been susceptible to the temptation to debauch the currency, so to speak: a start-up sector in currency and "the denationalisation of money" is one way to constrain governments facing this temptation; the erratic behavior of BTC suggests that we have a long way to go.
  |     |   Comment #30
Bitcoin is speculation on overload and early "adopters" love their so-called "gains". Caveat Emptor because Bitcoin is subject to more volatility than one can imagine. Easy come, easy go may be the watchword of the day...http://money.cnn.com/2014/02/24/technology/security/mtgox-bitcoin/

Humor and currency manipulations aside, there's a reason people still flock to the "full faith and credit" of the United States. We may plod along through boom and gloom but take a step back, view 100 years of economic and political history, and ask yourself where you'd like to pitch your tent. Bitcoin is alluring but when potholes appear after a painful winter your taxes will be out there pouring asphalt. Bitcoin won't repair the roads; it will, however, happily finance your kid's drug habit.       

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