When bitcoin first hit $1,000, I figured that all the arguments about its authenticity as a scarce and valuable good would be over. I was wrong of course, but I learned the following. You either get it or you do not. Plus, people are incredibly attached to their own theories of how the world should work. If you think bitcoin is a scam, you will always believe that, even if it hits $1 million.
I later learned that many early enthusiasts felt that way when the new asset/money hit just $1. Some of the original people involved were so amazed that they sold their holdings, figuring that their innovation could never plausibly be more valuable per unit than the world’s most valuable currency. Clearly, even early users had underestimated its potential.
My first piece on the topic appeared in print in February 2013. Bitcoin was $10. My “ah ha” moment came when reading a massive attack on the asset as printed in the now-discredited publication Wired. In passing, they mentioned that there are only a certain number of bitcoins that can be created according to the protocol that governs the technology.
That was it. It was then that I realized that bitcoin had solved the problem that had vexed every other attempt to create money for the digital age, namely the problem of double spending, proprietary control, and thus hacking, and the forever problem of having to trust the provider. A digital value carrier with a fixed supply that couldn’t be hacked stood a real chance of success.
Bitcoin as a public ledger that ran itself had none of the issues that have doomed every fiat currency in history and every digital currency, too. By making its spreadsheet public, and building in a system of currency creation on a distributed ledger that could not be manipulated, it would avoid the problem of previous attempts.
The use of double-key cryptography would keep the senders and receivers pseudonymous, and the system itself could never be hacked. Wallets have leaked and exchanges have crashed, but the ledger itself has never been hacked.
It seemed very clear to me at the time that the dream had been realized. There would, in fact, be a money that would exist independently of the state, both in terms of its valuation and its control. It would be global. It didn’t even necessarily rely on a functioning internet. Anyone could access their holdings at any point with a physical passkey, so long as the blockchain itself could be accessed at some point in time.
Through the years, government has tried everything to gain control. In the same year that I took public interest, the U.S. government started regulating what it called exchanges, the institutions and individuals that would make it possible to trade bitcoin to dollars and back again. If the government could not control the digital asset, it could surely control the onramps and offramps. That effort began in earnest, and the casualty was the instant death of thousands of startup businesses.
The regulatory efforts have only intensified since then. Even today, some vocal lawmakers have tried floating the idea of an outright ban on exchanges completely and the abolition of private wallets. They have resisted going there simply because it would be impossible to enforce.
In the background of all of this stands the entire history of money and the state. There is no question that historically, money itself was the creation of the market alone. It is not something that government causes to exist. It is an organic outgrowth of exchange relationships in which people desire something more sophisticated than pure barter, which has its limits.
With a good you acquire in order to exchange rather than consume, you have the beginnings of money, which makes possible accounting, which, in turn, makes possible rational economic calculation and the rise of prosperity.
But governments always and everywhere want their cut of the stuff. Ideally, they seek a monopoly. They have usually gotten their way. In every country and in every episode of history, they have figured out a way to do this. Usually, it happens via the guarantee of the banking industry—originally established to warehouse money and serve as a clearinghouse of money substitutes and loans—of an exclusive monopoly in exchange for which the bankers serve the government. That tried and true method usually ends in the monopolization of the currency, which is the beginning of the end of a genuinely free market.
Economist F.A. Hayek had worked his entire career hoping for a separation of money and the state as the only possible way to get rid of the problem of business cycles and inflation. By 1974, and following his Nobel Prize in economics, he finally said his dream would only be possible if the markets themselves started from scratch and created their own money that was independent of the state. It was a fine idea, but it wasn’t very practical because such a scheme would always involve trusting proprietary institutions.
The creation of distributed networks on a ledger changed that completely. Bitcoin was the result. The original promise was of a hand-to-hand currency that would be independent of the state: fast, inexpensive, and user-controlled. That’s what the white paper of bitcoin originally promised. But as the new unit grew increasingly popular by 2015 and following, that, too, became a problem because the ledger became too crowded and slowed down and the charges for using the service grew and grew.
With the throttling of the network, adoption slowed but the price rose. Forks in the network began to develop with varying levels of success. But the original bitcoin had the network dominated by then, and no other option could compete. That’s when the rationale for the entire asset was changed. It no longer aspired to be a hand-to-hand currency but rather a base currency on which trading would take place thanks to new layers and services.
Bitcoin has hit a new high in terms of price, and the explanation here unusually traces to the vast institutional and investor interest provoked by the approval of bitcoin exchange-traded funds, which are being gobbled up by the biggest financial players in the world. Maybe that accounts for it, but even if we leave that aside, the original truth still pertains: This is an incredible innovation, and bitcoin was the first mover in the space.
There is also the problem that inflation of the dollar doesn’t seem to be ending. Even the latest price data gives no case for optimism. We might be lucky to be dealing with 3 percent and 4 percent inflation for the duration. There is also the risk of repeating the 1970s with three distinct waves of inflation, each worse than the last. There is a reason that gold, too, has obtained a new high.
The arrival of the big shots into the bitcoin market has meanwhile entirely changed the ethos of the digital asset. It was once infused with an ideal: that of freedom for the world. Maybe that will result eventually—that slogan “Bitcoin fixes that” is still bandied about—but that’s not why people are in the markets today. They are there for one simple reason: the expectation that the valuation will rise and rise.
And that’s perhaps correct. Certainly, every debunker of this innovation has been wrong now for 14 years. The people who have bought at any price have won their investment back. But keep in mind: There will be yet another correction at some point, and it could be as wicked as the last ones. And once again, bitcoin will be declared dead, as it has already been declared hundreds of times.
In the old days, people used to call bitcoin the Honey Badger because nothing could stop it. The moniker still applies. It’s not the answer to all our problems, and it is not the dream unit about which Hayek once theorized, but it is something very important. What’s more, it is no longer designed to be a replacement system for transaction clearing and monetary use that we hoped it would become, but it does point the way toward the possibility of finally separating money and the state.
Someday. Not yet. In the meantime, a lot of big shots see it as a real winner in the money-making game. And they are probably correct about that.
