“Bitcoin Bites the Dust,” said the Huffington Post. “Bitcoin Future in Doubt,” said the Los Angeles Times. “Mt Gox Meltdown Spells Doom for Bitcoin,” said Bloomberg.
And that was only the beginning. The blogging fools who became interested in Bitcoin in the last year, just to oppose it for whatever reason, but have not bothered to do any serious study of the technology, immediately declared victory over their great enemy.
We’ve been here before, many times. Every bit of unsettling news gives rises to outbursts about the death of the cryptocurrency. It was this way after the price crash in April of 2013, the regulatory intervention a few months later, the takedown of Silk Road, and so on.
Bitcoin has a way of speaking back to these voices. Before the Gox crash, the dollar exchange rate had dipped as low as $400. But after Gox went fully down and the website replaced with vaguely worded communications, the price began to recover. In the 24 hours after the Gox crash, Bitcoin was at $575 again. In other words, the value of the currency unit grew, contrary to the claims of all these headlines.
For those who have followed the Bitcoin community, we all knew that this whole event would be treated as wonderful news. Gox was a legacy case, an early mover in the Bitcoin space long before the currency really mattered to anyone outside the uber-geek community. People have feared its management and worried about its institutional incompetence. People have especially worried in the past about its former dominance over what was an otherwise decentralized system.
Truly, people have been counting the days for Gox’s demise for some 24 months. Thus was there widespread celebration earlier in 2013 when Gox lost its majority stake of the money-exchange business. As an exchange, it had finally been bested. There were plenty of warning signs for many months of where all of this was headed.
It is not unusual for the early mover in any sector to get creamed once an industry grows up. This is who capitalism works.
Think back to the great company called Commodore, which made the first truly mass marketed home computer. Its main product came out in 1982 and dominated the industry. It was a spectacular success. But over the next ten years, things started to go wrong. It began using intellectual property lawsuits rather than product improvements to maintain its leading status. On April 29, 1994, just on the cusp of the great expansion of home computer and the mass distribution of the web browser, it declared bankruptcy.
Gox followed a similar path but what precisely happened at Gox is still not entirely clear. The allegations of the outright theft of 740,000 coins were everywhere but some experts in the field suspect that they might just be locked away and inaccessible to the management. That seems like a lot of coins but only because of their value today. Four years ago, this amount might not have seemed like that much. Regardless, the management was not forthcoming with customers about its problems, and waited too long to confess. There are echoes here of Enron, which was brought down by market doubts about its solvency.
In any case, this process of creative destruction is actually wonderful for Bitcoin, which has once again shown its to be the ultimate anti-fragile currency. What that means is that it is not just a survivor but that it is strengthened through testing and upheaval. The upward price momentum in the days following the crash is a reflection of that. It just keeps defying expectations.
However, and this is frustrating for those of us who have marveled at the technology, the punditry class that keeps declaring its death never quite apologizes or backs down. They just grumble and move on to other topics once events reveal them to be hopeless prognosticators. Such is the nature of the opinion industry: its absence of humility in the face of market realities is its most notable feature.
But, truly, it does get worse. Consider the announcement of some politician from West Virginia named Senator Joe Manchin. His letter for federal regulators has to be read to be believed. Of course he cites all the usual reasons of money laundering, drug trade, illicit traffic of all sorts — even though the dollar is a vastly greater source of all of these than cryptocurrency.
What is especially hilarious and incomprehensible is the following section:
“There is no doubt average American consumers stand to lose by transacting in Bitcoin. As of December 2013, the Consumer Price Index (CPI) shows 1.3% inflation, while a recent media report indicated Bitcoin CPI has 98% deflation. In other words, spending Bitcoin now will cost you many orders of wealth in the future. This flaw makes Bitcoin’s value to the U.S. economy suspect, if not outright detrimental.”
Ok, scratching my head here. He is saying that Bitcoin grows in value. That’s what he means by deflation. If we save Bitcoin, it becomes more valuable over time. That means that our wealth increases. However, if you spend it now, you get whatever you bought, knowing full well that you might have bought even more at a later date. This system incentivizes saving — unlike the system of dollars in which the currency falls in value.
Where is the harm? There is no harm. In fact, a currency that becomes more valuable is a natural situation in the market economy, as shown by price trends between 1870 and 1900. We’ve just forgotten this because we live in an age of inflation. Inflation causes us to think more short term, to spend now, to value stuff over saving money. It makes us marginally more consumerist and materialist at the expense of long term planning. Bitcoin actually holds out the prospect of changing that.
So instead of praising this feature, the Senator claims that it is an intolerable vice! Is Manchin of the opinion that anything that falls in price relative to the prevailing currency is detrimental to the economy? If so, he should have long ago come out against the software industry, home computing, the cell phone, and virtual memory too.
There is a further problem with the Senator’s policy prescription. Ban Bitcoin? It lives on a globally distributed network. It is an open source protocol made of code. It works with cryptography. It would require the total state plus unprecedented coercion to ban Bitcoin, and, even then, there is no possibility for achieving final success. You can’t ban a distributed code any more than you can ban knowledge of math.
I will say this. Bitcoin has exposed the technological illiteracy and sheer arrogance of the punditry and political classes. It is outsmarting them all. And it’s just begun.