The Free-Market Cluelessness of Bitcoin Enthusiasts
Hailed as a perfect answer to the evils of fiat money, the virtual currency has come crashing down because the invisible hand is paralyzed without government.
The curtain is being revealed to show that there isn’t that much behind it. The Bitcoin exchange, Mt. Gox, which started life as a place to trade cards from a fantasy game, was hacked. After intruders made off with about $500 million worth of Bitcoin, about 7 percent of the total outstanding, Mt. Gox filed for bankruptcy. Flexcoin, a smaller exchange based in Canada, also shuttered after robbers made off with its inventory. Last November, the Feds shut down Silk Road, an online marketplace for drugs and other illicit activities where Bitcoin was commonly used. In January, the CEO of Bitcoin company BitInstant was arrested on charges of money-laundering. And now it turns out that the creator of the crypto-currency is actually a 64-year-old guy living in Temple City, California, named (wait for it!) Satoshi Nakamoto.
Despite these problems, it still has its champions. Kevin Roose of New York has a good round-up of the ways in which advocates are describing the problems as mere birth pangs—the losers and ne’er do wells are being winnowed out. Marc Andreesen, the Netscape founder turned venture capitalist, offers a coherent defense of Bitcoin. as a technological development on par with the personal computer and the Internet. The Winklevoss Brothers, famous for their rowing exploits and getting cut out of the miraculous growth of Facebook, last year surfaced as Bitcoin evangelists. This week, undaunted by all the drama, the Winklevii announced they had just paid for a ride on Richard Branson’s spaceship vehicle with Bitcoin.
It’s all quite dizzying. Bitcoin may well survive and go on to greater things, to the moon and beyond. It may disintermediate, the dollar, the pound, Visa, Mastercard, and banks.
On the other hand, the rash of headlines highlights the internal contradiction in this newfangled currency and suggests why its future may be limited.
The appeal of Bitcoin lies in part in its novelty and techy-ness. But lots of people—especially libertarians and gold bugs—love Bitcoin because it isn’t tethered to political systems, to nation states, to the whims of central banks and politicians, to regulators, and to existing payment systems. It’s just a piece of computer code, created and traded in a pure free market, backed by nothing more than the power of the invisible hand and the trust of anonymous players freely contracting with one another.
If you’re one of those people that live in fear that a government might do something to debase the value of the currency in which you’re paid—by printing new money, or defaulting on debt, or igniting inflation—then Bitcoin offers shelter in the storm.
Yes, modern central banks conjure new money out of thin air. And, yes, inflation has eroded the value of the dollar over time. You’d need $23 in today’s dollars to purchase the same amount of goods and services that $1 could get you in 1913. But in order to exist, money, currencies, market, and businesses need government. A currency has to be backed by something substantial—it could be a precious metal like gold, or it could be the full faith and credit of the U.S. government.
Make all the jokes you want about the debt ceiling and the bozos in Congress, but nobody who lent money to the U.S. government in the past century has failed to get his money back. Since the creation in the 1930s of the Federal Deposit Insurance Corporation, which requires banks to fund deposit insurance, no small depositor has seen her savings evaporate when banks are looted by their owners, or robbed by thieves. When systemic problems have threatened larger deposits—i.e. in the Savings & Loan Crisis of the 1980s and in the Great Panic of 2008 – the FDIC and other government agencies have stepped in to offer backstops, guarantees, insurance, and bailouts. When companies or people go bankrupt, we have a system that ensures people have an ability to get paid back a portion of what they are owed. If you get screwed, you have to somewhere to turn. None of this holds true for Bitcoin.
But it’s not just financial businesses and markets that need the government to make rules, set standards, protect consumers, and build the systems and platforms that enable growth. Left to its own devices, the free market does not produce the vital infrastructure that undergirds the modern economy. Until the U.S. had a central bank, its feeble banking system routinely collapsed and dragged the country into prolonged recessions. In the 19th century, it was the government that built or financed the canal and railroad systems that created a single internal market, and that developed the basic technology of the telegraph, which allowed managers to run national and global enterprises. The U.S. military opened and protected shipping lanes. And in the 20th century, the federal government built the interstate highway system, without which, say, Walmart, could not exist.
Of all people, finance-oriented technologists should grasp the fact that business and markets are not things that exist outside of regulation and state. They should realize that safe, functioning markets can only exist within the context of an effective legal and regulatory system. What’s more, government support is frequently the precondition for basic and vital innovations. Andreessen began working on his Internet browser, Mosaic, while at the National Center for Supercomputing Applications, a research outfit at a state university, the University of Illinois, that in turn receives a great deal of federal support. Branson’s space travel venture would not be possible were it not for the trail blazed by NASA for decades. In fact, the government invented space travel and built much of the infrastructure, technology and expertise that powers private space flight today.
It’s all well and good to build, invest in, and a use a cool new currency and payment system that answers to no government or set of regulations. The lack of oversight has certainly helped propel Bitcoin’s growth. But in the real world of markets and finance, participants have somewhere to turn when things go wrong, when people steal, when property is stolen, when the system hits a confidence-killing crisis. All Bitcoin has is a wizard hiding in plain sight in Southern California.