Some brief thoughts on Bitcoin

Today’s commentary

2013 has been a breakout year for Bitcoin, the virtual payment system. I haven’t written anything on it to date but I have been following the market. Here are some ideas on Bitcoin based on what I have seen.

First, Bitcoin as an idea is something that proponents view as an alternative to state money, which many believed is unreliable or manipulated by government for contentious political aims. Irrespective of why proponents of Bitcoin reject state money, Bitcoin is intrinsically a symbol of freedom. The Bitcoin movement is anti-government in nature then, something that sees freedom as inherently linked to freedom from government oppression or control. In today’s age of universal Internet surveillance, one can understand the sentiment. I have my doubts about the current dollar standard as well. The best expression of my thinking on this came in to posts called “Government tax coercion versus fiat money liberty and More on government tax coercion versus fiat money liberty. I highly recommend reading those two posts to get a sense of where I come from on the political/philosophical side of the Bitcoin debate.

Those who are most likely to see state money as a positive and useful tool for government to stabilize the economy and meet communal desires for “life, liberty and prosperity” reject Bitcoin. This goes to the role of government, especially in a period of economic distress like the present one. Underneath the Bitcoin movement is a desire to escape the conditions imposed by the state that are supposedly in advancement of the community. Therefore, one could argue Bitcoin represents values that are to a degree ‘anti-community’, selfish if you will. I would argue, however, that what we are seeing is a diminishing trust in the state as an effective governor of communal interests, in even the most developed countries. It is a tricky issue because it really depends on one’s philosophical predisposition, the view of the state’s role, and the degree to which freedoms should be relinquished for communal interest.

It is also tricky to gauge where this growing mistrust comes from but there are likely multiple threads. One is the growing gap between rich and poor over the past generation. This delegitimizes government’s use of state money on two fronts. On the one hand, it makes plain that whatever government is doing has not ‘trickled down’ and that corporatism and cronyism may be at play. On the other hand, those who have benefitted from the divide do not want government to use state money to ‘correct’ the increasing division. Advocates of Bitcoin seem to fall more into the latter category, even though many of them have not benefitted from the increasing divide in income and wealth.

Another thread that shouldn’t be discounted is the North-South split in the US and in Europe. These groups still have different cultural value systems that have become antagonistic as a result of the financial and economic crisis. The desire to act ‘communally’ then has eroded and this has led to a general distrust of government and everything it does. That’s a quick summary of my present thinking about Bitcoin philosophically.

Notice also that I didn’t call Bitcoin a currency because it is disputable whether it is a currency given its tremendous fluctuation in value. Wikipedia describes the term “store of value” well with this phrase:

“To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved.”

When I think of a currency, its ability to act as a store of value is important. And in this sense it can be saved and “be predictably useful when retrieved”. Large fluctuations in value are antithetical to this predictability and make Bitcoin a poor store of value. But let’s overlook this for a moment because the reason Bitcoin has come into existence and prominence is because it represents an alternative to the dollar-based fiat system that has grown up after the Bretton Woods system.

The question then is whether one day Bitcoin’s value fluctuation will calm down enough to warrant thinking about it as a store of value. I am sceptical because the price chart for Bitcoin shows it to be a clear mania, something driven by animal spirits and speculation, not by people looking for value. And because bitcoin is not backed by anything, it is susceptible to state ban. Right now it is tolerated by governments in North America and Europe. But what happens when it gets banned? What happens when law mandates Bitcoin registration to track tax payments? We will need to go through that period before we can know if Bitcoin is a store of value or simply a mania.

I strongly believe that the Bitcoin mania will end in a collapse in price. And when that happens, we will be in a different world. It’s hard to say if Bitcoin will be seen as a store of value once this occurs. I will keep an open mind.