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May 16, 2011

Filed under: politics»issues»economy

Bitcoin Bankruptcy

With a post on Boing Boing this morning and a decent amount of chatter on Twitter, BitCoin appears to have hit the Internet mainstream. CNN will probably run a story in a week, although they'll be hard-pressed to make it seem any sillier than it already is, because BitCoin is the seasteading of economics: a bizarre scheme created by technolibertarians to address a problem nobody needed solving with a solution that nobody will ever find practical.

The site went down when the first flurry of links hit (a tremendously comforting state of affairs for an entirely-digital currency, I have to say), but here's the gist of BitCoin: it's a monetary system where you earn money by letting your computer "solve" large, complicated mathematical problems. The exact difficulty of these problems is adjusted by a peer-to-peer network to keep the rate of money generation at a planned level. Once created, each "coin" is a cryptographically-signed hash that can be passed from one person to another using a form of public key encryption. The theoretical advantages of this whole scheme are that:

  • There's no inflation, because the supply of coins is strictly constrained. In fact, they're designed to deflate over time. (As if this is a good thing?)
  • The coins can't be tracked, so the Man won't know what you've been buying. (This strikes me as a surpremely dim view of The Man's capabilities and/or motivation.)
  • It's all digital, so it supposedly can't be taxed. (And yet somehow we developed taxation before the invention of the electronic funds transfer.)

If these seem like they hit the all the standard talking points for crazy people who read Cryptonomicon and thought it was non-fiction, you're not far off. Avery Pennarun's explanation of its flaws has caught a lot of attention (as well as a lot of derision from the pro-BitCoin crowd, although I have yet to see anyone rebut it with anything more convincing than "nuh-uh!").

I'm not an economist, but I play one on the Internet. And from my point of view, the biggest strike against this, or any other alternative currency, is simply that it'll never get more of an audience than conspiracy theorists and utopians. Normal people won't use BitCoin because you can't buy lunch with it. Businesses won't use it because normal people don't use it. And banks won't use it because they already have a perfectly usable system of moving money around electronically, and because they have no incentives to switch unless businesses and normal people demand it, which they won't. Much of the argument for BitCoin seems to be "well, good, we didn't want banks or banking to exist anyway." At that point, the only reasonable response is to back away slowly toward the nearest exit.

Despite the fact that it's completely bonkers, I feel like it's a bit of a shame that BitCoin's so obviously useless. Not because we need a global, untraceable currency that eliminates useful governmental controls on the market, but because our current options for spending money online are so limited. If you pay for something over the Internet, chances are that your transaction went through one of the big credit card companies--they've become the de facto standard platform for remote purchases. That's a huge cash cow, built on a framework with little transparency or real competition. As we move more and more of our economy online, their dominance is basically a license for a small number of corporations to print money.

But mostly BitCoin just leaves me melancholy. It's a dream by and for people who have missed the real lesson of Internet commerce, which is that it succeeded not because it was independent of the real world economy, but precisely because the two could be linked. Sites like eBay and Amazon were revolutionary because they were built on the same basic mechanisms as regular commercial networks: reputation, reviews, consumer feedback... and of course, plain old dollars. BitCoin (much like seasteading) tries to reduce the messy, human parts of economics to a set of sterile game mechanics. That's not even really libertarianism--it's nihilism, masquerading as a political philosophy.

I'm no great fan of money for its own sake, and I think we could stand to tweak our economic systems a bit, but the concept isn't broken in and of itself. If I thought BitCoin had a chance, I'd probably be worried. But despite its extreme principles, it still has to compete in the same marketplace of ideas as everything else--and I'm pretty sure nobody's buying what they're selling.

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