Many crypto enthusiasts completely miss the irony of using a currency made in response to American financial institutions’ reckless speculation in the mid 2000’s to recklessly speculate.
About two weeks ago Dan Olsen over at Foldable Ideas on Youtube released his magnum opus: a feature length deep dive into the crypto sphere called ‘Line Goes Up - The Problem With NFTs’. A lot of what I’m going to discuss here builds on his work, and I recommend the video to everyone - whether you’re a cryptohead, a skeptic, or completely new to the subject. I’ve been skeptical towards crypto currencies and the wider crypto sphere for years, and if you’ve followed the blog you might’ve read posts where I make similar arguments against crypto to those I’m about to put forward here. I want to start the discussion on a conciliatory note though, at it’s heart at its inception the original crypto currency, Bitcoin, was a reaction to the fallout of the Great Recession. In the monetarist view, made famous by Milton Friedman, ultra loose monetary policy will necessarily reduce the value of each unit of currency; or to put it simply: printing money always creates inflation.
In its white paper, a sort of mission statement and an explainer of how the system works Satoshi Nakamoto (widely believed to be a pseudonym) seems to be not trust the banks and payment providers who acts as intermediaries in online transactions, stating: ‘Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. [...] What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.’ Distrusting financial institutions makes perfect sense around the Great Recession, it was undoubtedly the short-sightedness of the American financial institutions which caused the crisis and the misery it brought. Interestingly though, in the 13 years since Bitcoin launched it seems the distrust has shifted from investment banks to central banks. Don’t get me wrong, many crypt enthusiasts still very much distrust mainstream financial institutions but the main argument for crypto being superior to conventional money has shifted from being a tool to circumvent the big banks and payment providers to being a tool to protect your wealth from inflation wrought by central banks; with the American Federal Reserve or Fed being the most vilified.
Bitcoin.org’s FAQ section states that there’s a cap built into Bitcoin restricting it to a total of 21 million bitcoin ever being created. As technically impressive as its blockchain is, it’s clear from Bitcoin’s white paper that the creation of Bitcoin was viewed by its creator(s) as a purely technical challenge. The document uses the word currency once, and doesn’t mention any of the three major functions of money in economic theory, i.e. unit of account, medium of exchange, and store of value. Deflation is never mentioned, despite being a real and pervasive if not yet serious issue, and inflation is mentioned precisely once: ‘Once a predetermined number of coins have entered circulation, the incentive can transition entirely to transaction fees and be completely inflation free’. I mention this to support one of Dan Olsen’s points in Line Goes Up: there were no economists or political scientists involved in the making of Bitcoin, nor it seems Ethereum. Any first year economics student could tell you why most developed economies have central banks with 2% inflation targets: to make sure there’s an incentive to use money to either spend or invest. It’s obviously okay to debate the legitimacy of the 2% target, and there are economists who believe commodity based currencies are superior to fiat currencies. My point isn’t that Nakamoto committed the sin of making a currency which is based on different principles than the standard,, my point is that Nakamoto made a currency without considering what the decisions made would mean. By making a currency with a maximum cap of 21 million units and by making a system where if you lose the password to your bitcoin wallet you lose your Bitcoins you de facto made a system with baked in deflation, whatever your intentions were. Ethereum on the other hand has plans of stabilizing issuance at a low rate to make up for lost units to make a stable maximum cap which is neither inflationary nor deflationary. While that is an improvement the Ethereum whitepaper is also devoid of any discussion of the economics of what Vitalik Buterin created.
The crypto pioneers made something they didn’t fully understand. Nakamoto and Buterin made utopian new currencies free from the evils of central banks and intermediaries, which should have solved the issues traditional currencies have, but in the end all their innovations were meaningless for the vast majority of regular people; the people who in crypto enthusiast’ views investment bankers and central bankers prey on. By focusing on the technical challenges of making a digital currency and focusing on perceived risks like man-in-the-middle attacks (see Line Goes Up for more on this) they created a marvel of computer science, but despite their efforts it keeps disappointing in terms of retail adoption. I don’t know anyone who has paid for a physical good or service in any cryptocurrency, and I bet neither do you. If you don’t count things which are on a blockchain like NFT’s and other crypto currencies there is remarkably little to do with your shiny currency of the future. 13 years after launch according to Usebitcoins.info there are only three businesses in Sweden which accept Bitcoin as payment, two restaurants in Stockholm and an online crypto exchange. If you can’t pay for ordinary goods and services the only remaining use for your so-called “currency” is speculation. Many crypto enthusiasts completely miss the irony of using a currency made in response to American financial institutions’ reckless speculation in the mid 2000’s to recklessly speculate.
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I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover Photo by Worldspectrum from Pexels, edited by Karl Johansson
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