The source of bitcoin | The trump
While it’s clear that cryptocurrencies are here to stay, it remains to be seen what economic role they will – or should – play. In the case of bitcoin, the success of the technology lies entirely in what it promises, rather than what it can actually deliver.
With the price of Bitcoin reaching new highs, and El Salvador and Cuba deciding to accept it as legal tender, cryptocurrencies are here to stay. What implications will this have for money and politics?
Money depends on trust. It is only accepted in exchange for goods and services because people can confidently assume that others will accept it in the future. This is as true for the US dollar as it is for gold. To claim that cryptocurrencies like bitcoin are just a trust game – or a speculative bubble, as many economists have pointed out – is to ignore their popularity.
And yet, cryptocurrencies lack the stable institutional foundations needed to build public confidence in them. Confidence comes and goes as well, making them fragile and volatile, as Bitcoin’s wild gyrations have amply demonstrated.
Additionally, with bitcoin and other cryptocurrencies that rely on ‘proof of work’ mechanisms, transactions must be continuously verified and recorded in a decentralized ledger (in this case based on blockchain). This requires millions of computers to be constantly running to update and verify transactions – work that is prompted by the possibility of being rewarded with newly created Bitcoin.
The energy consumed in these “mining” operations now exceeds that of a medium-sized country like Malaysia or Sweden. Now that the world has awakened to the dangers of climate change (and the misery of our response so far), this massive waste should make bitcoin very unattractive.
And yet, despite its volatility, fragility, and massive carbon footprint, five factors have combined to make bitcoin an attractive proposition to many: its political narrative; the criminal activities it allows; the seigniorage that it distributes; the techno-optimism of the current era; and the desire to get rich quick at a time when few other economic opportunities present themselves. Consider each in turn, proceeding in reverse order.
We live in a time when the economic outlook is bleak. Even workers with a university degree can no longer count on a stable job with a good rising salary. When economic opportunities are so scarce, get-rich-quick schemes become particularly appealing. Unsurprisingly, an entire industry is now devoted to telling people that they too can find gold by investing in bitcoin. Money has poured into cryptocurrency because millions of people in the United States and around the world believe they can reap significant returns from it.
The narrative of massive returns for both amateur and retail investors in a cryptocurrency is in keeping with our tech-obsessed age. We are constantly told that technological ingenuity creates a better future. And at first glance, it cannot be denied that Bitcoin is a marvel of technological innovation. It took genuine creativity and mastery to create such a complex decentralized system, capable of operating without any government oversight or enforcement.
Another factor in the attractiveness of bitcoin is seigniorage, or the additional purchasing power conferred (usually on governments) by controlling the money supply. When the US government puts new money into circulation, it can use it to buy services or pay off debt. The prospect of acquiring seigniorage is very appealing, and probably helps explain why there are now over 1,600 listed cryptocurrencies. In the case of bitcoin, the lack of centralized authority means that seigniorage is distributed, thus spurring mining efforts (which are now led by over a million people around the world).
A dedicated source of demand can help a new currency establish a reliable base. For cryptocurrencies in general and for bitcoin in particular, this anchor is firmly anchored in the criminal world. In its early days, the demand for bitcoin was driven by dark websites like Silk Road, which allowed all kinds of illicit transactions. To date, criminal activity accounts for almost half of bitcoin transactions, according to some estimates.
Each of these four factors has artificially boosted bitcoin. Obviously, the economic ills of our society will not be solved by people making money with bitcoin. The prevailing techno-optimistic vibe has also not been confirmed in the real world. And whatever the benefits of distributing seigniorage through mining, they are more than outweighed by the massive waste of energy.
That leaves the political argument for bitcoin. Will this free us from undue state power over the economy? Not really.
Granted, the US Federal Reserve sometimes acts in mysterious ways, and the Wall Street bailout during the 2008 financial crisis was rightly seen as internal work that benefited banks and bankers at the expense of ordinary people. The desire to reduce the excess of power of politicians and decision-makers is therefore understandable.
But bitcoin is not the answer. It appeals to a childish libertarian ideology in which a lone genius fights against a disproportionate state to unleash individual excellence. Indeed, the real-world person – or the people – who designed bitcoin and wrote its inspiring manifesto under the pseudonym Satoshi Nakamoto deserves the label “visionary” even more than the fictional John Galt (the hero of “Atlas Shrugged From Ayn Rand). .
Yet the vision itself is pure fantasy. The risk of Western governments producing runaway inflation or undermining the international monetary system is extremely low. The real existential threat today lies in political polarization, the erosion of democracy, and the inability of democratic political systems to control economic elites and authoritarian politicians.
A new currency will not solve these problems. What is needed are measures to ensure that the politicians, bureaucrats and tycoons of Silicon Valley and Wall Street act responsibly. It requires democratic participation and active civic engagement. Gadgets like bitcoin are a distraction from the real work that needs to be done.
Daron Acemoglu is professor of economics at MIT.
Copyright: Project union