Bitcoin believers have had a great month. Bitcoin is the currency of the future, or the future currency? – became legal tender in El Salvador.
It might be dismissed as a publicity stunt by some that a country with only one third of its population has access to the internet embraces a digital currency. To protest , some Salvadorans marched on the streets. This moment should not be minimized. Esperanto, the language for the future, has never been recognized as an official language in any country.
Bitcoin is a technology that claims to solve many problems associated with traditional national currencies. It’s designed to protect wealth from the depredations caused by inflation, financial intermediaries, and public authorities.
It doesn’t work. Some products are popular simply because they are useful. Bitcoin is popular even though it’s mostly ineffective. The simple fact that Bitcoin’s value has risen dramatically since 2009 is what has made it so popular. This has made some people wealthy and inspired others to ride the rocket.
It is not a virtual currency. It is virtual gold, which can be used to make speculative investments. This was possible thanks to some technical breakthroughs. It is the absurd apotheosis for our financialized economy. This asset is unmoored from any productive function. There were first bonds, then synthetic bonds, and finally Bitcoin.
There is a lot of confusion and uncertainty behind Bitcoin’s popularity and the hundreds of other imitators. It’s difficult to predict which aspects of human life will be improved by technology in this age of technological disruption. Those who didn’t see Amazon’s rise should not be too quick to dismiss the potential future of Bitcoin.
It’s important to be clear about Bitcoin right now.
Bitcoin’s supply is limited by design to avoid inflation. However, this does not mean that Bitcoin’s value is stable. It can rise, which is an advantage not available to traditional currencies. Sometimes, however, the value can fall just as quickly as during hyperinflation. El Salvador has made it mandatory for businesses to accept Bitcoin and promised to quickly convert it into real money. This is not the mark of a useful currency.
Because Bitcoin’s design is so rigid, it can be dangerously difficult to use as a substitute for national currencies. This is part of a long tradition that tries to stop politicians making poor economic policy decisions by stopping them from making any. This is an older example.
It is easy to overstate the security of Bitcoin. It is possible to lose it. It can be lost. According to some estimates, 20% of all Bitcoins in existence are no longer accessible due to passwords being lost or forgotten. After the founder’s sudden death, more than 100,000 people lost their Bitcoin and other virtual currencies to Quadriga in Canada. There was no record of the password.
You can also seize or steal Bitcoin. The German government used Enigma during World War II to protect its code. It was believed impossible by mathematicians. It was broken by the British, who figured out the password. This is also how the federal government apparently obtained a part of a Bitcoin ransom from hackers who had taken down the Colonial Pipeline this year and blackmailed its owners.
Most importantly, Bitcoin is expensive and difficult to use as a currency. If anyone is able to use it, they rely heavily on an infrastructure that is very similar to the traditional financial system. El Salvador contracted a financial company to develop digital wallets for its citizens. These are basically the same thing that used to be called bank account.
Virtual currencies are similar to pickup trucks and are designed for off-road use. However, the majority of users prefer to use the roads and highways.
Although it is possible, it is not likely that the new infrastructure will make the financial system more efficient. For example, it will make it easier to transfer money across borders. However, this has not happened yet. Bitcoin users are essentially a group of cosplay libertarians playing a game on the playgrounds provided by the nanny.
Bitcoin holders don’t see it as a currency. They are in it to make a fortune, which is what Bitcoin has been able to provide.
This is also a reason to be concerned. Bitcoin mining is an environment disaster that requires large amounts of electricity, more than Finland.
Speculative frenzies distract from productive investments and resources.
The bigger the bubble, it is more likely to burst.
I was not worried about Bitcoin until this month. This current frenzy can sometimes be compared with other famous bubbles such as the Dutch tulip craze in the 17th century. Both involve a small number of investors who have money to spare. The majority of Americans have never owned Bitcoin, and the Dutch did not buy tulips.
However, politicians should be more concerned if they start to take Bitcoin seriously. It’s a nice illusion to think that all the problems with the financial system can simply be fixed by replacing it. This kind of escapism is great for internet chatter. The national leaders should be aware of this.