Where bitcoin stands
I live in Europe. I have a friend who is politically on the left, progressive on social issues. He’s also skeptical about bitcoin, so when the European Central Bank recently published a blog post forecasting the impending death of bitcoin he took notice and suggested I sell whatever little amount of it I have.
He says I can buy it back when it goes lower. But I’m a hodler, trying to time the market is not me. So, I wrote this piece for him instead, not on holding vs buying & selling, but on bitcoin.
I don’t know if it will help him see things more clearly. His skepticism is rooted more on feelings than reason. I hope he can tap into his inner Mr. Spock/Data to woo the captain Kirk he is. He says it doesn’t really matter if bitcoin is the greatest thing since sliced bread. If the world perceives it as bad, risky, volatile, if a mindless chirp by you-know-who is enough to tank it or boost it, bitcoin is not for him.
So, I also tried to strike some emotional chords he’s sensitive to. Not to manipulate him, but because those emotional chords play out a narrative too often neglected about bitcoin, that hopefully will become more prevalent and immune to problematic billionaires’ mood swings.
The jury is still out on the effect, if any, on my friend. Maybe this will help somebody else’s friend. Good luck.
“Bitcoin’s last stand” is the title of a post recently published on the European Central Bank’s blog by Ulrich Bindseil, Director General of Market Infrastructure and Payments at the European Central Bank (ECB) and Jürgen Schaaf, Advisor to the Senior Management of Market Infrastructure and Payments at the ECB.
The two authors’ aim is to take “a look at where we stand with Bitcoin”. In their fairly brief post, they make a series of claims, forecasting the likely impending demise of bitcoin. Noting the last ups and downs and most recent up in bitcoin price (at the time of their writing) they say it likely is “an artificially induced last gasp before the road to irrelevance”.
In this commentary, I’ll try and fact-check the two authors’ main claims.
After setting up their target, the two authors’ first salvo is that “Bitcoin is rarely used for legal transactions”.
We should make a preliminary distinction between bitcoin and other cryptocurrencies. They are not the same thing. Without getting into the weeds of their qualitative differences, let’s just say that from a quantitative point of view bitcoin presently accounts for roughly 40% of total cryptocurrency capitalization.
To make a somewhat meaningful assessment of the two authors’ claim, let’s try and compare the percentage of criminal activities carried out with all cryptocurrencies vs total cryptocurrency capitalization, on one hand, and the percentage of criminal activities carried out with traditional money vs the world’s gross domestic product (GDP), on the other. This last set of data refers to a time when cryptocurrencies did not exist or had a negligible capitalization, so that whatever slice of the criminal pie is attributable to crypto does not skew the total of criminal activities. It’s not a perfect comparison, but it provides a reasonably accurate apple to apple picture.
According to a 2018 International Monetary Fund (IMF) article, “the criminal proceeds laundered annually amount to between 2 and 5 percent of global GDP, or $1.6 to $4 trillion a year”.
According to the United Nations Office on Drugs and Crime (UNODC), “criminals, especially drug traffickers, may have laundered around $1.6 trillion, or 2.7 per cent of global GDP, in 2009… This figure is consistent with the 2 to 5 per cent range previously established by the International Monetary Fund to estimate the scale of money-laundering”.
So, let’s say 2 to 5% of the world’s “capitalization” denominated in traditional currencies is used by criminals for criminal activities. What about cryptocurrencies, of which bitcoin presently represents less than half?
According to Europol Spotlight — Cryptocurrencies: Tracing The Evolution Of Criminal Finances, a 2021 report by Europol, the European Union Agency for Law Enforcement, “while the use of cryptocurrency as part of criminal schemes is increasing and the uptake of this payment medium accelerating… Criminals and criminal networks involved in serious and organised crime also continue to rely on traditional fiat money and transactions to a large degree.”
Europol also says, “the overall number and value of cryptocurrency transactions related to criminal activities still represents only a limited share of the criminal economy when compared to cash and other forms of transactions,” adding that “the number of cases involving cryptocurrencies for the financing of terrorism remains limited”.
According to the 2022 Crypto Crime Report by Chainalysis, a US-based company supplying cryptocurrency investigation and compliance services to global law enforcement agencies and regulators, “with the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower”.
Transactions involving illicit addresses represented just 0.15% of cryptocurrency transaction volume in 2021, down from 0.62% in 2020, according to Chainalysis.
“Crime is becoming a smaller and smaller part of the cryptocurrency ecosystem. Law enforcement’s ability to combat cryptocurrency-based crime is also evolving. We’ve seen several examples of this throughout 2021, from the CFTC filing charges against several investment scams, to the FBI’s takedown of the prolific REvil ransomware strain, to OFAC’s sanctioning of Suex and Chatex, two Russia-based cryptocurrency services heavily involved in money laundering,” Chainalysis says.
So, unless illicit activities carried out with traditional currencies have considerably decreased in the last few years, the quota of conventional money used for criminal actions compared with the world’s “capitalization” is between 13 and 33 times higher than the quota of crypto-denominated crimes compared to crypto’s total capitalization, of which bitcoin represents less than half.
Slow, cumbersome, and expensive
The two authors then go on to say that bitcoin is “questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive”.
The two authors don’t make direct reference to traditional credit card networks like Visa, MasterCard and the like to compare bitcoin’s alleged “cumbersome, slow and expensive” transactions, but it’s fairly clear from the context this is what they implicitly refer to when they talk about “payment systems”. This is one of the seemingly more appropriate, yet actually more misleading, comparisons often heard to criticize bitcoin’s alleged inadequacy to facilitate large volumes of transactions compared to Visa, MasterCard, etc.
The comparison to credit cards is wrong because a single bitcoin “transaction,” i.e., the creation of a new blockchain block, includes hundreds of payments to a multitude of payees, clears and settles payments within a very short time, can contain within it payments from second-layer networks, such as Lightning, which in turn have settled countless other direct transactions between participants in the system, enclosing in all of this millions of data points referable to thousands of movements.
The comparison with credit cards does not fit because such payments represent instead a single transaction between two individual parties, where the actual settlement of the transaction between their credit institutions and card-issuing companies occurs weeks or months later.
For its functions of clearing and final settlement of transactions, bitcoin is much more similar to central banks’ systems for payments between credit institutions — something the two authors know intimately, but seemingly fail to see about bitcoin.
For a more accurate comparison, let’s look at the salient features of major payment systems between banks (Real Time Gross Settlement Systems or RTGS) on the one hand, vs bitcoin and ethereum, the two main cryptocurrencies, on the other. The illustrations below are from a 2019 study by U.S. asset manager Donald McIntyre, founder of the management company Etherplan. The thrust of his conclusions is still valid today (at the time of this study both bitcoin and ethereum used a Proof-of-Work protocol that processed a similar volume of transactions based on the same principles and technologies. Ethereum has recently adopted a Proof-of-Stake protocol, which is fundamentally different from Proof-of-Work).
As one can see, the volume of bitcoin transactions is 60% higher than the ECB’s own Target2 system and close to the US Federal Reserve’s Fedwire system — except that bitcoin performs these functions within minutes instead of hours or days, with no need for third parties and no counterparty risk.
In terms of cheap, fast, and simple transactions, bitcoin finda an ideal partner in Lightning, an open-source layer-2 network, built on top of bitcoin’s base-layer, through applications already offered by companies like Cash App and Strike.
The lightning network uses micropayment channels to scale bitcoin’s blockchain’s capability and multiply the number of transactions handled by its blockchain, especially when smaller amounts of money are involved. Transactions conducted on the Lightning network are instantaneous and inexpensive — much cheaper usually than credit card transactions. Payments can be routed to anybody in the system even if two parties do not have a direct channel open between them. Transactions are permanently recorded on the bitcoin mainchain only when two participants mutually consent to close the micropayment channels opened between them.
Not an investment
The two authors then go on to argue that “Bitcoin is also not suitable as an investment. It does not generate cash flow (like real estate) or dividends (like equities), cannot be used productively (like commodities) or provide social benefits (like gold). The market valuation of Bitcoin is therefore based purely on speculation”.
Many institutional investors seem to disagree with this characterization. According to Bridgewater, the world’s largest hedge fund, founded by guru investor Ray Dalio and with $140 billion in assets under management, “although these remain small markets relative to the most liquid markets in the world, we believe crypto markets are now large enough to allow for positions in sizes relevant to institutional investors”. Bridgewater has announced they are backing a bitcoin fund.
At a high level, Bridgewater sees “institutional investors as still being at the very early stages of developing exposures, but adoption looks likely to pick up in the coming years. The pace of adoption so far has been rapid, especially in smaller institutions (e.g., family offices), such that it bears watching closely. We see institutional investors beginning to access these markets in a few distinct ways for different purposes”.
Accounting firm PWC’s 4th Annual Global Crypto Hedge Fund Report 2022 shows the assets under management of crypto hedge funds were $4.1 billion in 2021, 8% higher than the previous year.
According to PWC, one of the “Big Four” firms in the accounting sector, the “big picture” about crypto is that “digital assets are becoming an important element of many hedge fund portfolios in a sophisticated and interconnected financial system, while developing [their] own digital asset control and operational environment(s) to enable continued engagement and long-term growth”.
And it’s not just hedge funds. Just in the 3rd quarter of 2022, Barclays has bought a stake in self-proclaimed “institutional gate to digital asset investing” firm Copper. Goldman Sachs plans to spend tens of millions of dollars to buy or invest in crypto companies after the collapse of the FTX exchange hit valuations and dampened investor interest. “FTX’s implosion has heightened the need for more trustworthy, regulated cryptocurrency players, and big banks see an opportunity to pick up business”, Mathew McDermott, Goldman’s head of digital assets, told Reuters. A South Korean state investment fund has poured $177 million into metaverse projects.
Blackrock, the largest asset manager in the world with $10 trillion in assets, recently announced its second blockchain ETF, one month after the debut of its first one. Fidelity, fifth largest asset managers in the world with $4.5 trillion in assets, is weighing a plan to allow its brokerage customers — some 34.4 million individual investors — to trade bitcoin. “Soon, the list of institutional investors in crypto will be longer than the list not involved”, according to Cointelegraph Research.
Despite the difficult times bitcoin and other cryptocurrencies are going through, there is a growing interest also from retail investors, according to Retailbankerinternational.com, an arm of business intelligence company GlobalData, whose research by more than 800 affiliated journalists, researchers, and analysts spans more than 80 markets globally.
“GlobalData’s 2022 Financial Services Consumer Survey revealed that consumers around the world are showing interest in the cryptocurrency sector. This interest is primarily driven by the motivation to use cryptocurrency as an investment instrument”, according to Retailbankerinternational.com. The latest survey carried out by Cointelegraph Research among 84 professional investors across the globe indicates that out of $316 billion in assets managed by the respondents, 3.3%, or approximately $10.42 billion, is invested in cryptocurrencies, with 94% exposed to bitcoin — the most sought-after investment among crypto assets.
“The risk-return ratio was the primary consideration when investing in crypto, as 44% of respondents rated this characteristic as ‘highly important.’ Other factors deemed relatively less important were “diversification” and “my company is convinced that the technology will be important in the future,” Cointelegraph says.
These are just a handful of examples by all sorts of investment banks, money management companies, retail investors, and financial firms in general that seem to contradict the two authors’ ECB blog post.
As far as bitcoin not generating cash flows or paying dividends, these are also distorted characterizations.
In general terms, dividends, interests and other types of yields are produced by assets and investments that are liable to counterparty risks. I demand interests for a loan, or a corporate bond or a Treasury because I don’t know if the entity I lent the money to will actually reimburse my capital at the end of the period. I may choose to buy a company stock issuing dividends because I don’t know if that company will be around in 10 years and its stock be worthless. These types of investments produce a yield because they represent a liability I am exposing myself to, for which I may want to be compensated.
Bitcoin, like gold, does not usually generate a yield because it is nobody’s liability. It’s a “pristine”, unincumbered asset that one can directly hold and control. As such, bitcoin is already used as collateral to access loans, generating a yield for the lender, which the borrower has evidently deemed appropriate paying to finance whatever endeavour he/she wanted to undertake — even if they were purely “speculative” or profit seeking, like many traditional investments are anyway.
And this brings us to the authors’ next two claims
Can’t be used productively or provide social benefits
According to Bindseil and Schaaf, bitcoin cannot be used productively or provide social benefits. These are the claims that most clearly expose the authors’ biases towards an entrenched system where only a minority of the world lives. They seem to have no awareness of how steeped in privilege their comments are.
Although, according to the US Federal Reserve, the dollar has lost 96.7% of its purchasing power since 1913, the bleeding has been somewhat gradual and consumers have more or less learned to live with it. Other rich regions of the world like Europe or Japan have also enjoyed the benefit of relatively stable and secure monetary systems. The same cannot be said for some other regions, like Africa, Latin America or Asia.
From 1980 to 2019, the average inflation rate in Argentina was 215.4% per year, according to WorldData.info. In 2020 and 2021 it was, respectively, 42% and 48.4%, while this November it reached an annual rate of 88%. From 1960 to 2021, the average inflation rate in Nigeria was 16.1% per year. In 2020 and 2021 it was, respectively, 13.2% and 16.4%, while in October it touched an annual rate of 21%. Examples of double and triple-digit inflation around the world abound.
Bitcoin prices might seem volatile to many westerners, but volatility is in the eye of the beholder, and it does not seem to concern a growing number of people in the global South. People in local markets of Ghana or Kenya can use Lightning to buy goods or make cross-currency payments with just a phone number. In Nigeria it’s a bit more complicated, but still, in under two minutes one can receive a dollar payment in local naira currency in his/her Nigerian account with just a phone number, bank account number and bank name, with virtually no fees. And if the payer sends $5, the receiver gets the real exchange rate, which now is 715 naira per dollar instead of the “official” rate of 444 naira per dollar that middlemen like Western Union implement.
“For the first time in history, bitcoin is less volatile than both the S&P 500 and Nasdaq,” Yassine Elmandjra, a crypto analyst at ARK Invest, noted on November 4, 2022, while “Bitcoin’s 30-day realized volatility is nearly equivalent to that of the GBP and EUR for the first time since October 2016” as of last November, according to ARK Invest analyst David Puell. Either way, in countries with hyperinflation, even temporary 50% price movements of bitcoin can be preferable to guaranteed purchase-power implosion of salaries and life savings in local currency.
According to the World Bank, 75 countries still limit women’s rights to own and manage assets. Bitcoin and Lightening allow women to pay, be paid, set up virtual bank accounts and businesses where the State discriminates against them. Hungry Afghan women have used bitcoin to sidestep US sanctions, failing banks, and the Taliban in order to work and feed their families. Tools like bitcoin and Lightning allow 1.4 billion unbanked people around the world (counting household heads only; the number rises including family members), 980 million of whom are women, to safely save and make payments minimizing fears that governments, militias or even family members take their money.
The same is true for human rights organizations, which can fund their activities without repressive States seizing their funds, as in Nigeria during protests against the government’s death squads. Bitcoin allows people displaced by war, famines, floods, or other upheaval to safely bring money with them and move it between nations. And to use it to try and re-establish their lives, as with Ukrainian refugees.
Bitcoin allows whistleblowers like Julian Assange to expose government actions against its own people without fear of being de-platformed from the financial system.
To be sure, all these examples and use cases still account for a small minority of situations in the world. Unbanked and underprivileged people in the global South who still don’t use bitcoin are many times more than the ones who do. As bitcoin is still very much a nascent ecosystem, it would be strange if its reach were higher than it is — even if it is comparatively very high (more on this later). Bitcoin’s use for criminal action is minimal. Bitcoin’s social and productive uses clearly exist and are on the rise. Bitcoin’s absolute volume of adoption doesn’t have to be massive to disprove the two ECB authors’ claims at this stage.
Saying that bitcoin “has never been used to any significant extent for legal real-world transactions”, that it “cannot be used productively… or provide social benefits” and that “the market valuation of Bitcoin is therefore based purely on speculation”, apart from being factually wrong, also betrays a neocolonialist bias: if it doesn’t regard the West, if it doesn’t benefit rich countries, it’s irrelevant. If it empowers disenfranchised women, it’s inconsequential. If it threatens Western institutions and financial rails, it’s criminal.
Bindseil and Schaaf are basically saying the half of the world who lives in authoritarian States, flawed democracies and hybrid regimes is irrelevant as it relates to bitcoin, its growing adoption, and its different use cases. This is a huge blind spot, which does not allow them to see that “emerging markets dominate the Global Crypto Adoption Index”, as Chainalysis says.
Using The World Bank’s categorization of high income, upper middle income, lower middle income, and low income countries, Chainalysis found that the middle two categories dominate the top of the index. Out of top 20 ranked countries for bitcoin adoption: ten are lower middle income (Vietnam, Philippines, Ukraine, India, Pakistan, Nigeria, Morocco, Nepal, Kenya, and Indonesia); eight are upper middle income (Brazil, Thailand, Russia, China, Turkey, Argentina, Colombia, and Ecuador); and only two are high income (United States and United Kingdom).
The fact that rich countries are slower to adopt reflects the relative monetary, economic and political stability the West has enjoyed, and many parts of the world are far from accessing. We in the West should not take for granted that freedom, affluence, and human rights will always be there as a matter of fact, or birth right.
But there is also another reason why bitcoin is relevant at the present moment – not just for the South of the World — and that is climate change. This brings us to the last claim by the two ECB authors I will address, about bitcoin mining. Bitcoin mining refers to a computationally intensive process used to reach consensus about the state of a transaction ledger (the blockchain) among a distributed network of participants. In this process, only one participant gets to add a new block to the chain at each turn, being compensated with new bitcoins for the service (until 2140), but all participants contribute to the verification of transactions and security of the system.
Wasteful and Polluting
“The Bitcoin system is an unprecedented polluter. First, it consumes energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Second, it produces mountains of hardware waste. One Bitcoin transaction consumes hardware comparable to the hardware of two smartphones. The entire Bitcoin system generates as much e-waste as the entire Netherlands”, they write.
This is another distorted and misleading argument. Based on what I have tried to show thus far, one might conclude that the energy bitcoin consumes, and the hardware used for it, might well be worth the benefit that people around the world do derive from it. What to spend or not to spend energy on is, after all, a “value” judgment. While social pressures and government incentives or disincentives influence behaviour, people are free to buy and use their energy as they see fit, as long as that use is not a crime. Many products — from dryers to Christmas lights — and many services — from data centers hosting porn sites to videogaming — consume about the same as or more than bitcoin mining. I haven’t seen Bindseil and Schaaf write an ECB blog post on where we stand with Christmas lights yet.
But let’s take their claims at face value and address them on their own merit — both from a demand point of view (energy efficiency) and a supply point of view (energy generation).
Bitcoin is indeed energy intensive. That does not mean it’s inefficient or wasteful as a technology, a network, or an asset. On the contrary, its energy efficiency is very high, as the financial services, infrastructure, and security it provides are unparalleled.
As shown above, as a payment system, Bitcoin’s processing capacity is similar to the FED’s and higher than the ECB and the Bank of England’s put together. But that’s only a small part of the picture. If one wanted to make a more even comparison between the energy consumption of bitcoin and that of traditional payment systems between banks, one would have to include at least part of the energy footprint of the global banking, monetary and financial world — that is, the energy used to power countless banking activities and locations around the world, plus at least a share of all that is consumed by the security apparatus that protects it, including the military’s consumption to safeguard the Breton Woods system and the petrodollar system (the U.S. Department of Defense is the single largest institutional consumer of oil in the world). That’s because bitcoin provides for all intents and purposes an autonomous, decentralized, and secure alternative to the established monetary plumbing of the world. It allows the existence of an open, distributed, global, neutral asset, network, and technology, i.e., an asset not controlled by anybody and that is nobody’s liability, which comes with unmalleable record-keeping capabilities, freely accessible by all, from anywhere, with its own built in governance structure.
As much as I like Austria as a country, taking its energy consumption, or any other county’s consumption, as a term of comparison obfuscates things more than revealing anything. It’s comparing apples and oranges.
In the meantime, bitcoin is getting cleaner and cleaner.
According to the Bitcoin Mining Council (BMC), a US-based association of bitcoin miners representing 45.4% of the global bitcoin mining network with members spread across five continents, its affiliates and the other participants in a quarterly survey are currently utilizing electricity with a 67.8% sustainable power mix, defined as wind, solar, hydro, or nuclear. Based on this data it is estimated that 59.4% of the global bitcoin mining energy mix was made of sustainable electricity in the 3rd quarter of 2022. Its energy mix has been more than 50% sustainable for now more than one year and a half, making it one of the most sustainable industries globally.
Bitcoin now uses 0.16% of then world’s energy and generates 0.1% of the world’s emissions — less than a rounding error for global estimates.
If one doesn’t trust the data from a bitcoin’s trade association, the Cambridge Centre for Alternative Finance (CCAF), a research centre at the University of Cambridge Judge Business School, estimates bitcoin’s electricity consumption at 0.41% of the world’s total or 0.14% of the world’s total gross power production.
As far as e-waste, the authors’ claim is simply bogus. They take their information from already debunked arguments by Alex de Vries and Christian Stoll. If one wants to read more about how and why their claims are false, Michael Saylor, Nic Carter, and Darin Feinstein have written a letter to the US Environmental Protection Agency addressing the issue.
From an energy generation point of view, I would like to flip bitcoin’s energy-guzzling, climate-destroying common narrative on its head and argue that bitcoin could be a key enabler of the energy transition to renewable energy and the electrification of our economy and communities.
Bitcoin mining can actively contribute to the transition to increasingly flexible and renewables-powered electric grids. There can’t be a transition to renewable energy without the electric grid being able to work much more flexibly than in the past, allowing a continually adjusting balance of distributed supply and demand. The Electric Reliability Council of Texas (ERCOT) is already studying and experimenting with the integration of bitcoin mining for demand response services to provide grid reliability. Miners can modulate their activity exactly at the required time and to the required extent, at a moment notice, to provide utilities and electric grids with H24 flexibility, providing services that would be difficult for traditional factories or power plants to offer.
But bitcoin doesn’t just have the potential to help established utilities work better by consuming energy when other customers don’t want it and by cutting its own consumption when other customers need it.
Mining could also help in at least three other scenarios. It can harness revenues and help financially sustain power generation in remote locations with stranded energy sources, which, absent bitcoin mining, would never be developed in the first place due to their remoteness and lack of transmission and distribution infrastructure. In the case of stranded gas & oil sources, bitcoin can also be used to finance the closure and environmental remediation of stranded wells.
Secondly, it can also harness revenues and help financially sustain power generation by newly built renewable energy plants waiting to be connected to the grid. This offset the costs of long connecting cues for operators and it makes it financially easier for them to develop new renewable energy capacity.
Thirdly, as bitcoin computing equipment produces heat as a by-product, by co-locating not just with power utilities, but also with other activities, it can use such low-grade heat for both commercial and residential applications. Businesses like greenhouses or distilleries co-locating with mining can use and are already using the heat for their activities and to complement their revenues. Homeowners have connected small mining rigs into their heating systems reducing their energy bills. There are countless applications for both power and heating where bitcoin mining is built into each user’s business model can be countless.
What this implies in the longer term is that bitcoin mining could be a way to turn an economic model based on a self-reinforcing cycle of debt, overconsumption, inflationary money and environmental/climate degradation into a more sustainable economic model based on equity, savings, hard money and environmental/climate preservation.
As I have tried to describe in another article, I do think that fixing the money can help fix some of the worst underlying structural dynamics pushing the world towards monetary, climate and environmental degradation. It might not be exactly a case of “fix the money, fix the world”, as Jeff Booth would say. Many problems would likely remain, but I think a scenario of “fix the money, fix the monetary incentives steering most economic and political decisions” is plausible. Or something along the lines of “fix the money and tether economic and political choices to fundamental physical laws and realities that will help us not wreck the Earth”. Bitcoin will not magically reform oppressive government policies or human being’s worst inclinations. But it could help decrease the wide imbalance of power presently separating States and their citizens, especially in flawed democracies and autocratic regimes.
Obituary N. 467 — Bitcoin is dead, long live bitcoin
Concerning bitcoin’s impending demise, as bitcoiners know by now, the ECB’s Bindseil and Schaaf are in very good company. As of this writing, bitcoin has been declared dead by many critics 467 times since its birth.
Meanwhile, even after falling below $20K in the last period, bitcoin is still the best performing asset among all assets since its inception. And its rate of adoption surpasses those of all new technologies at the time of their inception, like the Internet, smart phones, social media, automobiles, land-phones, electric power, cellular phones, radio, and tablets at equivalent stages of their respective development.
Global bitcoin adoption will break past 10% in the year 2030, according to a recent study on the characteristics of the typical adoption patterns exhibited by disruptive technologies, by Blockware Solutions, a company providing blockchain infrastructure and cryptocurrency mining.
Will this forecast pan out? Time will tell. But unless some kind of fundamental shift happens to bitcoin’s value proposition and potential, its adoption is more likely to increase than decrease or stall in the next 20–30 years.
Last, but first
Progressives, liberals, European style social democrats are also uneasy with another aspect, which Bindseil and Schaaf did not mention, but that arises from some of the arguments I made contesting their claims. And that is the role of the State in regulating economic actions and providing social services vs the ability that bitcoin would give individuals, groups or even other States to avoid governmental controls — and by extension evade taxes or generally skirt those collective commitments at the base of a solidaristic and well functioning society.
If antagonistic NGOs, political dissidents and other protesters are already using bitcoin to avoid being financially frozen by hostile governments, what’s to stop, for instance, tax evaders from doing the same, undermining the role of both the State and its citizens in keeping their ends of the social contract? One could give a technical answer based on the transparency of blockchain and the relative traceability of bitcoins transactions, which make illicit activities inherently more difficult, while still providing unparalleled financial access and autonomy. This type of answer is relevant, but it does not provide an equally fundamental, yet more philosophical type of response.
Bitcoin alone cannot solve issues of oppressive government policies or selfish human behavior, like tax evasion, but it has the potential to help reduce the significant power imbalances between States and citizens, particularly in flawed democracies and autocratic regimes. Bitcoin should not be faulted because it’s unlikely to solve on its own problems like tax evasion. The balance of power between States and their citizens is a very delicate issue. Tools that State entities are developing like central bank digital currencies (CBDCs) have the potential to tilt the balance even more in favour of an all-controlling State. That might be a way to reduce tax evasion. But is a panopticon type of State the best solution? Bitcoin goes in the opposite direction, putting State and citizens on a more even level, while still providing a more transparent ledger of all monetary transactions. That seems enough to safeguard autonomy and accountability, both for States and their citizens. Beyond this, fixing problems like tax evasion is a very human endeavor, that needs to be addressed without compromising individual freedom. Does this mean that State authority would necessarily be undermined by bitcoin?
Undermining the State as an institution is not a problem for libertarian, anarchist and other non-statist bitcoiners. For them, the fact that bitcoin can limit the State’s reach is actually a key feature, not a bug. They would point out that bitcoin was created in the wake of the Great Recession of 2008 exactly to challenge and provide a decentralized alternative to irresponsible, centralized State institutions. But maintaining a well-functioning State — capable of providing effective services such as European style health and education — is still a legitimate issue for many progressive bitcoiners around the world.
As a progressive bitcoiner, whatever that means, I think this is a valid concern. But I believe this fear is applied to the wrong context, to the wrong level of the political-institutional infrastructure stack. It misses the essence of bitcoin. And in so doing it puts on bitcoin an ethical onus that does not belong to its sphere and that bitcoin per se can neither directly promote nor suppress.
I have addressed this issue in another article, but, in a nutshell, I think bitcoin does not necessarily affect the specific shape or configuration of political institutions. Bitcoin’s essence is based only on energy and mathematics. Although it comes with a distributed, decentralized structure, it can adjust to different degrees of decentralization/centralization, and in principle, even if it may sound like a contradiction in terms, it could be adopted even by, say, a communist regime bent toward “scientific communism”. Bitcoin could adapt to whatever institutional arrangement each person happens to prefer along the continuum between anarchy and totalitarianism. The reason for its wide adaptability is that the underlying, universal nature of energy and mathematics make bitcoin primarily a basic building block. As such, it lends itself to any socio-political-economic construction.
The potential discontinuity that bitcoin aims to introduce compared to any existing institutional formation is the separation of money and State — this is the new, basic configuration that bitcoin endorses. A communist, totalitarian or other extreme form of government could theoretically decide to accept the constraint posed by the separation of money and State as it accepts that 2 +2 = 4 or that energy is the fabric of the universe — while still maintaining its peculiar ideological architecture in all other respects.
In a configuration where money and State are separate, States would arguably have to behave more cautiously, responsibly and effectively vis a vis their citizens regarding money, whose issuance States would not control or control less. If bitcoiners and societies in general are able to avoid some of the pitfalls of traditional financial systems, such as the most extreme fractional reserve, derivative, leveraged, rehypothecation schemes, States would have to rely mainly on taxation and treasury issuance — relative to a fixed or much more stable monetary base — to finance their activities, without or with less “money printing”. This would arguably make them more responsive to the needs of the bulk of their constituencies and would tend to weed out unfair, wasteful uses of public resources. There would still be many political decisions to be made in response to ethical or economic questions that bitcoin per se does not tell us how to answer. But its underlying monetary plumbing and deflationary economic incentives — more prone to saving and investing than debt-fuel consumption — could arguably push the State towards more sustainable, productive solutions, and broader-based and fairer services than in the past.
In this respect, bitcoin mining can function as a multi-purpose cornerstone for any type of economy and society — as long as they are willing or constrained by circumstances to function without State control of money creation.
On its own, based as it is on universal laws of energy and mathematics, bitcoin is neutral, politically agnostic, fundamentally non-aligned. The flip side of the coin is that it can be adopted to support many different narratives — just as energy and mathematics can support any type of endeavour.
Detractors like the ECB’s Bindseil and Schaaf leave any positive, constructive narrative around bitcoin in the hands of bitcoin supporters, whoever they might be. Detractors do this at their own risk, a risk they are likely underestimating. From a risk-management point of view, refusing any exposure and going against the upward trend in bitcoin monetary adoption is unwise — as it was unwise to dismiss or bet against electricity, the automobile, radio or cell phones in the early stages of their developments. From a socio-political strategy point of view, it’s equally unwise to let one’s competitors run away with positive bitcoin narratives, which can and will be used to perfectly suit one side’s objectives against other sides’ needs.