By Gareth B
The prodigious frenzy of speculation in digital currency Bitcoin has taken the financial press by storm in recent weeks. Much has been written on whether the currency, and the decentralized network crucial for its production and transference, could ever become widely understood and broadly used enough to ever qualify the quaint digital token as a fully-fledged money. However, what’s often been downplayed or excluded in the discussion is an old, but fundamentally revolutionary, notion: that money itself could be privately and competitively provided for. And what Bitcoin shows is that, in the modern technological era, conventional physical, geographical and governmental boundaries may no longer be major hindrances to the genesis of new monetary systems.
The Vagueness of Moneyness
Why do we use whatever we use as money? A deceptively simple question, but the interesting point to pondering it is the myriad of answers that can be derived. The formal definition of money is, after all, a notorious vaguery: Any article or substance used as a medium of exchange, or means of payment. This definitional opacity, however, is the basis of the key illumination: that money is fundamentally a subjective construct and is not inherently tethered to any existing, or pre-existing, notions of “moneyness”. That is to say, by definition, money can be anything, even strings of numbers (which is all Bitcoins fundamentally are). All that is necessary to satisfy the definition and utility of money is that the article eventually become primarily specialized and used for the facilitation of exchange. This is wherein the article eventually attains an objective exchange value and would thus become widely used; it would become a fluid medium.
The process of garnering this objective exchange value, however, is not immediately attainable. In the case of Bitcoin, even though it is constructed as a digital version of a scarce commodity, it does not readily have a use-value in and of itself, perhaps beyond mere novelty and its application as the means of transferring value through the distributed network like a receipt or coupon. Whilst this problem of a lack of definitive use-value can be supplanted by substitution (gradually linking prices in existing currencies with an exchange rate for Bitcoins), this means the development of an objective exchange value by integrating Bitcoin into the pricing of goods and production will be subject to exchange rate volatility. In addition, in order for this integration to take place, it would have to become increasingly desirable to hold and transact with Bitcoins, thus their purchasing power would need to increase and they would become relatively more valuable. The irony is the more valuable Bitcoins become the more likely they would be subject to volatility from speculation and hoarding, not to mention heightened risks of fraud and governmental intervention. These factors not only hamper the confidence users and potential users would have with the currency, but the exchange rate volatility would make it difficult to price in Bitcoin reliably, a major hindrance in using the currency and the prices it imbues for the purposes of economic calculation.
From these circumstances then, it seems that whilst Bitcoin may adhere to the Misesian “Regression Theorem” for the genesis of a money, there are numerous hurdles to its potential ascension as a widely-used medium. This is not to say that, over time, integration into the pricing of goods and production as well as broader demand for the digital currency could not come about. However, one is left to ponder whether over such a period of time Bitcoin would not languish given the relatively greater appeal of competing alternative currencies, digital or otherwise.
Web of Incentives
The problems with Bitcoin’s “moneyness” aside, perhaps the most interesting and important aspect of the Bitcoin monetary system is the decentralized, distributed network that is used to generate the fixed supply of Bitcoins, verify their ownership and to facilitate transfers. The open source software’s rules for the network, ostensibly developed by one man, establishes the basis for Bitcoin’s digital commodity characteristics by imposing a scarcity upon the amount of coins that can ever come into existence. Bringing the coins into existence also requires computational energy and time in the process of solving complex equations, the reward for which is Bitcoins. This incentivizes the proliferation of the network itself, which underpins a major utility of Bitcoin- the ease of transfer.
The “miners” of the network, as well as other users, can also devote their resources to facilitating the verification and transfer of Bitcoins. This process is similar to widely-known peer-to-peer protocols synonymous with file-sharing, however those initiating transfers can offer up a commission (the amount of which is left to their choosing) to incentivize potential facilitators on the network to devote their resources towards the transfer, aiding expediency. Among other reasons such as the cryptography of the system, because this transfer process is distributed across the network, it can effectively be made anonymous.
This underlying web of distributed co-operation through incentives is perhaps the most novel, vital and intriguing aspect of the Bitcoin monetary system. It so radically flies in the face of conventional banking and financial structures where patronage and trust in intermediaries (albeit aided by third parties such as auditors and insurers) are a crucial aspect of the way contemporary systems function. The revolutionary, dynamic contrast of the Bitcoin system is stark. With its digital and distributed “ecosystem”, which is merely dependent upon those utilizing and co-operating within it, it is not necessary for the prudence of a central organisation or authority to be relied upon. This is a key virtue of the proliferation of alternative currencies in a climate where governmental currencies are increasingly under suspicion.
Ex Uno Plures
Of course, the reputation of a platform that allows for theoretically limitless and instantaneous transfers of wealth anonymously is easily sullied when its capabilities are used for dubious purposes. Another consequence of this is that it allows for effortless scapegoating by governments, who jealously guard their national currency monopolies and are happy to continue doing so even if for a superficially differing rationale. This risk of government clamp-down, particularly at the more tangible nexus of exchanges for Bitcoins into other currencies, is a key hurdle to Bitcoin’s potential popular ascension and the ascension of other competing monetary systems. A currency monopoly is, after all, one of the most powerful pillars of modern governments. It is for this reason that, at least in current times, any kind of digital currency would always effectively be renegade and under the table. Over time, however, if confidence in national centralized monetary systems wanes (and this is not so fanciful in a time of financial crises, bail-outs and bail-ins as well as a few modern hyperinflations), the appeal of digital alternatives can rise sharply and quickly.
It’s also important to put the development of digital currencies and monetary platforms such as Bitcoin in the context of the internet, which is itself still a young technology. The internet has only really proliferated expansively over the past decade or so, but the uses and innovations that have transpired from it, transpired rapidly. This functionality is especially relevant for less developed economies, where internet and cellular telecommunication have allowed them to springboard over many traditional infrastructural and developmental constraints. Among these may include the constraints of a prudent centralized money issuer and a developed banking system. Thus it is no surprise to see venture capitalists already entering Africa with plans to install and operate Bitcoin ATMs. Perhaps, then, the future for Bitcoin (or other digital currencies) in attaining their stable objective exchange value lies in the frontiers of not just the internet, but of global economies as well.
And whilst Bitcoin may have its fair share of obstacles in its path to monetary ascension, both inherent and external, the redeeming legacy of the quirky currency may just be its trailblazing salvo as the first in line of many online, digital, denationalized monetary systems. It’s still early days for Bitcoin, and the internet at large, but in their wake the old but revolutionary notion of the private production of monies may slowly be undergoing resurrection. And Bitcoin’s enduring contribution may thus be as ex uno plures; that from one came many.
“In sum, freedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Here, too, free men will best and most smoothly supply all their economic wants. For money as for all other activities, of man: ‘liberty is the mother, not the daughter, of order.’”
Murray Rothbard, What Has Government Done to Our Money?, 1980.
(Thanks to Collin and Die Haasboer for their insight)
Gareth B works as a market analyst and economic observer in Johannesburg. He has also lived and worked in the UK and the USA.