The Failed Promise of Bitcoin
The most famous of the cryptocurrencies, Bitcoin, recently published a fall of more than 70 percent, which is accompanied by constant unrest in the organizations set up to serve the sector. Bitcoin mining machines are actually for sale in the market at a high discount.
Crypto was always a house of cards, but those who said so were generally pushed aside as too old, not tech-savvy enough, or just too invested in the creation. Perhaps they should have been followed as purveyors of simple common sense.
The United States left the gold standard for the US dollar in the early 1970s when President Nixon announced that the US Treasury Department would no longer exchange a certain amount of gold for our currency. Instead, the value of the US dollar floated freely against other nations’ currencies. It was not as bad as it might sound because the US was, and is, in a relatively strong position compared to its peers.
Nevertheless, it is highly likely that the abandonment of the gold standard combined with OPEC’s move to raise oil prices resulted in the beginning of persistent inflation that bedeviled the United States for the next decade or so.
Into the 1990s, Republican candidates for office could still be heard declaring the need to return the United States to the gold standard. At the same time, they noted the rise of a huge national debt and called for an end to unsustainable spending. Although we would briefly tame the annual deficit (not the debt) for a brief period around the turn of the millennium, the US reverted to running large deficits and accelerated after the 2008 financial crisis. In recent years, we have seen our first trillion-dollar deficits, and the total national debt exceeded $30 trillion.
It is not surprising that the Bitcoin solution would emerge from the libertarian minds riding the waves of bleeding edge technology. Bitcoin will solve the problem of governments succumbing to the temptation of the printing press and draining the currency of its value by declaring an artificial limit on supply. Only 21 million Bitcoin can ever exist. Access is also limited by the technically rigorous process of “mining” the coins (which is also incredibly wasteful in terms of energy). After creating the scarcity rule and technically enforcing it, crypto enthusiasts thought they had found a way to defeat governments and bypass banks.
Although Bitcoin is designed to disrupt the morally dangerous games governments play with money, it also has deceptive appeal. Bitcoin has no underlying value in itself. People talk about “investing in Bitcoin” as if it is a company with a profitable business to support its value or a commodity like oil that is supported by demand for energy. Bitcoin has none of these features. Its scarcity is purely contrived.
Additionally, Bitcoin was not theoretically designed as a vehicle for wealth creation. Bitcoin actually costs an enormous amount of money in terms of the energy needed to “mine” it. Furthermore, Bitcoin was designed to be a medium of exchange that would improve the lives of the underbanked and that would avoid the problem of inflation to the extent that it stems from fiat money printing.
In both cases, Bitcoin seems to have failed. During a period of rapid inflation (much of it caused by government fiscal and monetary policies), Bitcoin has not held its value. Instead, it has cratered from nearly $60,000 per coin to around $17,000 per coin as of this writing. At the same time, people don’t buy things with Bitcoin. Instead, they hold it like gold.
However, gold has fluctuated much less than crypto and has acted much more like the hedge against inflation that it usually has. For that matter, the dollar has held its value better than Bitcoin in recent months. A little over a year ago, El Salvador adopted Bitcoin as a currency. The experiment has been a notable failure due to the highly speculative nature of an asset that was supposed to provide stability.
The case for crypto appeals to people because it offers a simple solution to a difficult problem. We cannot solve our public finance problems by creating a system of private currency. If anything, a major shift to crypto is likely to force governments to increase regulation until it loses its appeal.
We must abandon the hope of techno-magic as a solution to a problem that actually requires political discipline. And the only way we can have political discipline is to embrace the challenge of self-government. Americans must elect leaders who will responsibly manage real-world constraints and who will avoid the easy temptation to continue to leave bad legacies for future generations to inherit. There is no crypto-shortcut to long-term responsibility.