Bitcoin and Anarchy

A lot of people think that if Bitcoin is adopted it means anarchy.  I don’t think that is correct.  I was reading “Is Bitcoin The World’s Next Major Currency?” in Chicago Booth’s Capital Ideas magazine. Sorry, no link to the article.

Booth asked economists Randy Krozner and Tyler Cowen about Bitcoin.  Krozner was formally with the Federal Reserve.  Cowen is at George Mason.

Currently, the price of Bitcoin has rallied 21% in four days.  I don’t think these kinds of price moves are good for markets, but because of low liquidity they happen.  Ironically, the Chinese stock market had a mini flash crash today but the moves aren’t correlated.  Bitcoin is a niche market right now, but it has staying power.

Cowan said he thinks Africa is the most fertile ground for Bitcoin.  They already transact by phone.  He also sees the blockchain as a threat to the American legal system.  The blockchain is a network-the legal system is hierarchy.  He also doesn’t think Bitcoin replaces fiat currency, and thinks Bitcoin needs a killer app.

Krozner is also looking for a killer app.  He looks at Ebay and Paypal, and wonders what that would look like with Bitcoin and blockchain.  He correctly cites the legal uncertainty surrounding Bitcoin.  Is it a currency?  Is it a commodity?  The outcome of Bitcoin will revolve around how regulators look at it. Currently the US IRS views Bitcoin as property.  That means it’s not subject to the same rules and regulations as foreign currency.  It is subject to capital gains taxes.  However, world governments don’t have a standardized way to view it.  Krozner concludes that without a clear set of legal frameworks in place, the next wave of Bitcoin evolution will be arduous.

What makes it go from niche to movement?  I don’t think it needs the legal aspect.  I think the legal aspect will always be catching up once a clear use case is deliberately built, or discovered.  Bitcoin also isn’t the only cryptocurrency out there.  It might be a different cryptocurrency that makes the breakthrough.

Usually with technology, it happens where you least expect it.  Innovation isn’t a clear, linear path when looking ahead.  It is when you look backward.  Africans already have solved their problem with M-Pesa and other currencies.  Why would they switch to Bitcoin?

Krozner is onto something.  Where is there a place like Ebay looking for a way to transact efficiently?  Looking further, what markets could open up if they utilized Bitcoin instead of traditional fiat currency?  If we think about Bitcoin’s pluses they are

  1.  Low/no fees
  2. Guarantee of payment (no bounced checks, no fraud)
  3. 10 minute transfer of value

Many of the negatives Bitcoin has are solvable over time.  Right now, Bitcoin is looking for product/market fit.  But, it also needs a stable place to transact and hold assets.  Coinbase seemed to be the place, but now there are some concerns.

Certainly, a place like a customized derivative market where there is counter party risk could be a home for Bitcoin.  I wonder a lot about commodity markets.  Many industries that have been blown up by the internet.  In the Industrial Age, they went from dispersed to centralized.  In the Information Age, they are decentralizing again.

Here is a quick example.  Prior to 1848, farmers would bring their grain to Chicago to be graded.  The markets were P2P, as a grain merchant found a buyer for a particular farmers grain.  Someone realized that grain was basically all the same-and created a warehouse receipt.  That begat a futures market and everyone could hedge their risk.  They were assured of grain quality because of a centralized clearinghouse operation.  Could Bitcoin/blockchain create a new P2P market that eliminated all the costs of the middlemen?

What about in other countries?  What about international supply chains?  What about internal cost accounting chains?

I go back to a Milton Friedman video in which he explains how the price system creates the necessary market/production coordination to make a pencil. Bitcoin/blockchain creates a transparent price with no/low fees.  What markets are inefficient today, or could be created that need that sort of technology?

I don’t think anarchy is a pre-requisite for Bitcoin.  Most of the time, when anarchy prevails, the people that are rioting aren’t powerful enough, or rich enough to worry about currency.  Look at the total collapse of socialist countries in Central and South America.  Bitcoin hasn’t taken hold in Venezuela, Brazil, or Argentina.  But, merchants in those countries really want US dollars.

Even financial distress isn’t a clarion call for Bitcoin.  Greece is in horrible shape.  Merchants there aren’t switching over to Bitcoin as a substitute for fiat currency.

That being said, I think Bitcoin has a pretty bright future.  The ecosystem around it has to be developed.  It’s not a hammer in search of a nail yet.  It’s early in the technology.



5 thoughts on “Bitcoin and Anarchy

  1. Pretty good articles and thoughts! What you are referring to towards the end as Bitcoin is really the blockchain’s calling- Bitcoin being part of it.

    I certainly like to see more P2P examples like the one you have cited.

    I am alarmed that the Chinese can move the price so easily. It shows that the markets are still volatile and demand/supply is not globally balanced. That may also be related to the next Bitcoin halfing which is coming up, so that has already priced itself ahead of the event, in typical fashion.

    1. It’s hard to explain the bitcoin exchange prices by any rational factor, or by enthusiasm from a particular group. I don’t think the Chinese exchanges are all reporting truthful information on volume, to begin with. Price is hard to falsify, but even there I have trouble understanding why there should be a continual premium in btc/rmb based on usd exchange rate. It is rather reminiscent of the Gox USD premium circa 2011 – 2013, which we now know definitively was due to fraudulent self-dealing by Gox rather than the more innocent alternative explanations offered at the time. Not saying the rmb premium on btc is pure BS, but there is a whiff of it there and I would be interested to see some more hard-hitting analysis of the possible reasons for this discrepancy.

  2. As the size of bitcoin market has increased, volatility appears to have decreased (e.g., comparing peak activity in 2011, 2013, and 2016 rallies). But I wonder if we could be in for a surprise coming up. Coinbase exchange getting safer for US-based pros is potentially a huge new conduit for dollars to enter the market. At the same time, no one agrees on how to value bitcoin objectively based on data. There’s a lot of manipulation and “stories” built around events — reward halving, blocksize “controversy” etc. — but what’s the fundamental story for why a bitcoin should be worth X? I mean, I obviously have some ideas to sell, but you shouldn’t buy them b/c the people with big $ to spend on bitcoin could take a long time to agree with me, if they ever do.

Comments are closed.