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Binyamin Appelbaum
Bitcoin Cosplay Is Getting Real
Mr. Appelbaum is a member of the editorial board.
It’s been a good month for Bitcoin believers. The currency of the future — or is it the future of currency? — became legal tender in El Salvador.
Some might dismiss as a publicity stunt the embrace of a digital currency by a country where only a third of the population has internet access. Some Salvadorans took to the streets to protest. But let’s not minimize this moment. Esperanto, the language of the future, never managed to become an official language in any country.
Bitcoin, for the uninitiated, is a technology that purports to solve a host of problems with old-fashioned national currencies. It is designed to safeguard wealth against the depredations of inflation, public authorities and financial intermediaries.
Unfortunately, it doesn’t work. Some products become popular because they’re useful. Bitcoin is popular despite being mostly useless. Its success rests on the simple fact that the value of a Bitcoin has increased dramatically since its introduction in 2009, making some people rich and inspiring others to hope they can ride the rocket, too.
It’s not really a virtual currency at all. It’s virtual gold, a vehicle for speculative investment made possible by some interesting technical innovations. It’s the absurd apotheosis of our financialized economy, an asset unmoored from any productive purpose. In the beginning were bonds and then synthetic bonds and then Bitcoin.
The popularity of Bitcoin and its hundreds of imitators is also a product of understandable confusion and uncertainties. In this era of technological disruption, it’s hard to tell which parts of human life might be improved by the internet, and those who didn’t foresee the rise of, say, Amazon should be hesitant to write off the future of Bitcoin.
But it’s worth being clear about what Bitcoin is right now.
The supply of Bitcoin is capped by design, which is meant to prevent inflation. That doesn’t mean the value of Bitcoin is stable. Sometimes it goes up, which is a nice benefit not generally available with traditional currencies. On the other hand, sometimes the value goes down just as fast as during a bout of hyperinflation. El Salvador, which is requiring businesses to accept Bitcoin, has promised to make it possible to rapidly convert it into real money. That’s not exactly the hallmark of a useful currency.
The rigidity of Bitcoin’s design also makes it dangerously impractical as a replacement for national currencies. It is part of a long tradition of trying to prevent politicians from making bad economic policy decisions by preventing them from making any decisions. The gold standard is an older example of this disastrous concept.
The security of Bitcoin is greatly overstated. It can be lost. Indeed, by some estimates, 20 percent of all the Bitcoin in existence is no longer accessible because the passwords have been lost or forgotten. In 2018, more than 100,000 people lost the Bitcoin and other virtual currencies they had entrusted to a Canadian company, Quadriga, after the founder died suddenly, leaving behind no record of the password to the company’s virtual vault.
Bitcoin also can be seized or stolen. During World War II, the German government relied on a code called Enigma that its mathematicians insisted was impossible to break. The British famously broke it, basically by figuring out the password. That’s also how the federal government apparently recovered part of a Bitcoin ransom payment worth several million dollars from hackers who took down the Colonial Pipeline and blackmailed its owners this year.
Perhaps most important, Bitcoin is difficult and expensive to use as a currency. To the extent any people manage to use it, they mostly rely on a growing infrastructure that looks a lot like the traditional financial system. El Salvador hired a financial firm to create digital wallets for its citizens — which are basically what used to be called bank accounts.
Virtual currencies, much like pickup trucks, are marketed for off-road use. But the reality is that the vast majority of users choose to stay on the streets and highways.
It’s possible, but hardly evident, that this new infrastructure will improve upon the existing financial system — for example, by making it cheaper to move money across borders. But that hasn’t happened yet. For now, the people using Bitcoin are basically a bunch of cosplay libertarians participating in a game of make-believe on the playgrounds of the nanny state.
Most Bitcoin holders, of course, don’t even see it as a currency. They’re in it to get rich, which is the one service that Bitcoin has managed to deliver.
There are reasons to worry about this, too. Bitcoin mining is an environmental disaster, requiring vast amounts of electricity — more than the nation of Finland.
Speculative frenzies divert resources and attention from productive investments.
And the bigger the bubble, the greater the damage when it pops.
But until this month, I wasn’t all that worried about Bitcoin. The current frenzy is sometimes compared to other famous bubbles, like the Dutch tulip craze of the 17th century. One key commonality is that both involve a relatively small group of investors with money to burn. Most Dutch didn’t buy tulips; most Americans don’t own Bitcoin.
If politicians start taking Bitcoin seriously, however, that would be reason for greater concern. It is a pleasant illusion that the problems in the financial system can be solved by replacing it rather than doing the hard work of fixing it. That kind of escapism makes for entertaining chatter on the internet. National leaders really should know better.
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