December 7, 2019

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Opinion

Bitcoin's limits keep it from working as real currency

Chris Ratcliffe / Bloomberg files</p><p>Bitcoin's backers say it's the future, but the way the cryptocurrency operates is actually more like digitized nostalgia for what real money used to be.</p>

Chris Ratcliffe / Bloomberg files

Bitcoin's backers say it's the future, but the way the cryptocurrency operates is actually more like digitized nostalgia for what real money used to be.

Bitcoin changes prices too quickly to be a currency and processes transactions too slowly to be a payments system, but it is just right for teaching libertarians everything they don’t know about economics.

Not that they’re paying attention.

If you listen to Bitcoin’s biggest backers, it’s supposed to be our gleaming future, one where we can make money just by holding it, move it anywhere in the world for free, and no longer depend on banks or governments to do the right thing.

If you look at what Bitcoin actually does, though, it’s more like digitized nostalgia for a pre-modern past where money was discovered rather than printed, economics was a simple subject where markets never failed and you never had to trust anyone you didn’t know. It works, then, the way libertarians think things should — which is to say not at all.

The first thing they don’t understand is that money isn’t just a store of value. It’s also a medium of exchange, or what we use to buy things. And if it’s going to be much of one, then it not only has to avoid losing too much value, but also gaining too much. Otherwise, why would you ever spend it?

You wouldn’t. You’d just hold onto it as long as you could in case, like Bitcoin, it went from being able to buy $900 worth of stuff one year to $19,000 the next. Which, if it ever did replace the dollar, would bring the economy to a halt while everyone stopped buying anything other than the essentials and waited to become bitcoin millionaires.

To stop that from happening, you’d need to be able to increase the supply of bitcoins as the demand for them did. This is more or less what is known as "printing money," and, as is often the case, it can be either good or bad depending on whether it’s done appropriately or not.

Bitcoin is set up under the assumption that people — or, more accurately, governments — can never be trusted to do this, and that pretty much anything that reduces the value of a currency is by definition bad. That’s why its pseudonymous creator decided there would only ever be 21 million coins, even though that hard limit has meant prices have zoomed up and down and back up again as interest in bitcoin has itself.

The second thing they don’t get is that trust makes economies more, not less, efficient. Bitcoin, you see, is best understood as an attempt to rewrite the rules of our money and our financial system so that your savings are safe no matter what happens in Washington or on Wall Street or whatever digital version of them springs up. To make it so nobody has to trust anybody.

But it’s an ideological point of view that Bitcoin takes far beyond any technological need. The real genius of Bitcoin — and there’s plenty of it — is that the process of "mining" new coins creates a public record of every transaction it’s ever been used for. As a result, you can send things online without needing a bank to tell you who has what to send. So goodbye, transaction fees, and hello, Bitcoin!

Well, except for one little thing. The number of transactions Bitcoin can process is extremely limited by the fact that it’s chosen not to put much memory into its system. Indeed, Bitcoin can only handle a maximum of seven transactions per second, compared to the 56,000 that Visa can. That means that even though Bitcoin’s transaction line isn’t very long — not many people use it, after all — it still takes a long time to get through it. Unless, that is, you’re willing to pay the US$28 it now costs to skip to the front. But what’s the point of using Bitcoin then?

Even in a world where Bitcoin actually did work, it still might not be worth using. At least not from a societal perspective. That’s because it’s not just a matter of how much bitcoins cost people to use, but also how much it costs everyone else when they do — which could be quite a bit. The type of computers that can quickly solve Bitcoin’s cryptographically complex equations aren’t cheap to run. In fact, they’re energy hogs. They already consume more than 0.1 per cent of all electricity (or about as much as Denmark), which is remarkable when you consider how little Bitcoin is actually used right now.

The important thing to understand is that the more bitcoins cost, the more incentive there is to "mine" for them, but the more that happens, the more computing power you need to win new coins. So the amount of energy it uses should go up hand in hand with its price.

Bitcoin’s strictly limited money supply harks back to a time when money was a shiny rock you dug out of the ground, not a piece of paper with a dead president (or treasury secretary) on it. And its attempts to insulate miners from the forces of economic rationality are akin to nobles’ old feudal protections.

Bitcoin is only the future if you think 1789 wasn’t in the past.

Matt O’Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at the Atlantic.

— Washington Post

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