It’s been a good month for Bitcoin believers. Money of the future – or is it the future of money? – became legal tender in El Salvador.
Some might consider it a publicity stunt to adopt a digital currency in a country where only a third of the population has Internet access. Some Salvadorans took to the streets to protest. But let’s not minimize this moment. Esperanto, the language of the future, has never managed to become an official language in any country.
Bitcoin, for the uninitiated, is a technology that claims to solve a host of problems with old-fashioned national currencies. It is intended to protect wealth against the depredations of inflation, public authorities and financial intermediaries.
Unfortunately, this does not work. Some products become popular because they are useful. Bitcoin is popular although it is mostly useless. Its success is based on the simple fact that the value of a Bitcoin has increased significantly since its introduction in 2009, making some people rich and inspiring others to hope that they can also get on the rocket.
It’s not really a virtual currency at all. It is virtual gold, a speculative investment vehicle made possible by interesting technical innovations. It is the absurd apotheosis of our financialized economy, an asset detached from any productive purpose. At first there were bonds, then synthetic bonds, then Bitcoin.
The popularity of Bitcoin and its hundreds of imitators is also the product of understandable confusion and uncertainties. In this age of technological disruption, it’s hard to say what parts of human life could be improved by the internet, and those who hadn’t foreseen the rise of Amazon, for example, should be hesitant to cancel Bitcoin’s future. .
But it’s worth being clear about what Bitcoin is right now.
Bitcoin’s supply is capped by design, which is aimed at preventing inflation. This does not mean that the value of Bitcoin is stable. Sometimes it goes up, which is a nice advantage that is not usually available with traditional currencies. On the other hand, the value sometimes drops as quickly as during an episode of hyperinflation. El Salvador, which requires companies to accept Bitcoin, has promised to allow it to be converted into real money quickly. It is not exactly the mark of a useful currency.
The rigidity of Bitcoin’s design also makes it dangerously impractical as a replacement for national currencies. It is part of a long tradition of trying to prevent politicians from making bad economic policy decisions by preventing them from making decisions. The gold standard is an older example of this disastrous concept.
Bitcoin’s security is grossly overrated. It can be lost. Indeed, according to some estimates, 20% of all existing Bitcoin is no longer accessible because passwords have been lost or forgotten. In 2018, more than 100,000 people lost Bitcoin and other virtual currencies that they had entrusted to a Canadian company, Quadriga, after the sudden death of the founder, leaving no trace of the virtual vault password. of the company.
Bitcoin can also be seized or stolen. During World War II, the German government relied on a code called Enigma that its mathematicians insisted was impossible to break. The British notoriously broke it, mainly by finding the password. This is also how the federal government apparently recovered part of a multi-million dollar Bitcoin ransom payment from hackers who destroyed the Colonial Pipeline and blackmailed its owners this year.
Perhaps most importantly, Bitcoin is difficult and expensive to use as currency. To the extent that people are successful in using it, they mostly rely on a growing infrastructure that looks a lot like the traditional financial system. El Salvador hired a finance company to create digital wallets for its citizens, which are basically what used to be called bank accounts.
Virtual currencies, just like vans, are marketed for off-road use. But the reality is that the vast majority of users choose to stay on the streets and highways.
It is possible, but hardly obvious, that this new infrastructure will improve the existing financial system – for example, by making it cheaper to transfer money across borders. But it hasn’t happened yet. For now, the people using Bitcoin are basically a bunch of cosplay libertarians participating in a make-believe game at the nanny state playgrounds.
Most holders of Bitcoin, of course, don’t even think of it as a currency. They are there to get rich, which is the only service that Bitcoin has managed to provide.
There are also reasons to be concerned about this. Bitcoin mining is an environmental disaster, requiring large amounts of electricity, more than the nation of Finland.
Speculative frenzies divert resources and attention away from productive investments.
And the bigger the bubble, the greater the damage when it bursts.
But until this month, I wasn’t that worried about Bitcoin. The current frenzy is sometimes compared to other famous bubbles, such as the 17th century Dutch tulip craze. A key commonality is that the two involve a relatively small group of investors with money to spend. Most of the Dutch did not buy tulips; most Americans do not own Bitcoin.
If politicians start taking Bitcoin seriously, however, that would be a reason for greater concern. It is a pleasant illusion that the problems of the financial system can be solved by replacing it rather than doing the hard work of fixing it. This kind of escape allows for entertaining chatting on the Internet. National leaders really should know better.