Has Bitcoin Succeeded?

Bitcoin

BitcoinThe answer depends on what you mean. Succeeded at what?

With the US dollar price of Bitcoin reaching an all-time high above $23,000 this month, and its market cap reaching an all-time high above $400 billion, there has been much celebration among Bitcoin holders about their success at investing. The run-up has accompanied the announcements by large institutional investors Grayscale, MicroStrategy, and MassMutual that they are acquiring hundreds of millions of dollars in Bitcoin for their investment portfolios. There isn’t much doubt that the Bitcoin project has succeeded remarkably at creating a new type of asset.

The developers of bitcoin, particularly Satoshi Nakamoto and the Bitcoin Foundation, however, have said that they want to develop a widely used private alternative to government fiat money. They have not yet succeeded in achieving that goal. Bitcoin is not a commonly accepted medium of exchange.[1] It has even lost one niche where it was the leading medium of exchange, namely in cryptoasset markets. Bitcoin’s use in buying and selling the “altcoins” that constitute the other 35 percent of the total cryptoasset market has actually receded in recent years. That role has been taken over by Tether and other US dollar stablecoins.[2]

Commentators have long confused success as an asset with success as a commonly accepted medium of exchange. In November 2013, economic commentator Edward Hadas offered “A Prediction: Bitcoin is Doomed to Fail.” He followed it up two months later with an article entitled “An early obituary for bitcoin.” These essays have understandably been ridiculed by Bitcoin enthusiasts. But they are worth re-examining because many of their claims are still heard today.

Starting from an (overstated) argument, to the effect that Bitcoin would not become a commonly accepted medium of exchange, Hadas leapt to the prediction that Bitcoin would have zero use and zero market value.  Bitcoin today in fact occupies an intermediate position: it is an uncommon or niche medium of exchange. It is better than other media for making some payments that, even if for legitimate purposes, might be censored if routed through payment systems controlled by national governments and central banks. Human rights activist Alex Gladstein recently tweeted an annotated list of Bitcoin use cases, beginning with: “BYSOL, a grassroots Belarusian human rights org, has moved more than $500k of value peer-to-peer to striking workers inside Belarus, in a way the regime can’t stop. Activists or protestors normally get their bank accounts frozen.” His other examples include fundraising by activists in Nigeria, Hong Kong, and Russia; savings expatriation by people fleeing Venezuela; remittances into Iran; and peer-to-peer transfers within China among people seeking to avoid state financial surveillance. Such uses (together with forecasts of wider future use) are enough to sustain Bitcoin’s positive market value.

On the other hand, Bitcoin is far from being a commonly accepted medium of exchange in everyday use. It is not on one side of many transactions for goods and services. Coindesk columnist Jill Carlson has recently noted that, apart from people holding Bitcoin for speculation:

Real use of cryptocurrency products and applications remains limited. … Only about 2,500 merchants accept bitcoin in the United States. Adoption is trending the right direction, but it is still early.

In the United States and in other economies as a whole, then, Bitcoin has not achieved widespread acceptance as a medium of exchange. In a recently published paper, Peter K. Hazlett and William J. Luther put the point another way, observing that there exists only “a small corner of the internet where transactions are routinely conducted with bitcoin serving as the medium of exchange.”

I say that Hadas’ argument was overstated not only because he overlooked the possibility of a niche transactions demand for Bitcoin, but because in the first-listed piece he wrote:

The developers of bitcoin are trying to show that money can be successfully privatized. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Misconceptions permeate these sentences. Nobody needs to show today that money can be privately issued, because history is replete with examples. Private gold mints had a successful track record in the United States. In most developed countries, redeemable paper currency was mostly privately issued before the First World War. In the US, private banknotes continued in parallel with Federal Reserve notes until the government abrogated the banks’ right to issue. In Scotland, Northern Ireland, and Hong Kong, private banknotes continue to this day. In the US today, most money is issued by commercial banks, in the form of checking account balances (currently 66% of the narrow M1 measure of the US money stock), rather than by government.

Whether or not Bitcoin or another cryptoasset succeeds at gaining wider monetary use as a medium of exchange, privately issued money is not limited to that form. Money not issued by governments but by private banks, in the form of silver- and gold-redeemable checkable accounts and banknotes, spread across the globe over the centuries after 1200 AD and so cannot be “doomed to failure.” Money cannot be “inevitably a tool of the state” when privately issued money has historically so often succeeded. Money has evolved from private payment innovators striving to serve the convenience of merchants and households, not from the efforts of a mythical entrepreneurial state. Bitcoin and its competitors continue to evolve.

Like some other critics, Hadas apparently wanted Bitcoin to fail because it exemplifies a free-market ideology that he does not favor. But that is not a good reason for thinking that it must fail, either as a portfolio asset or as a commonly accepted medium of exchange. He wrote: “Bitcoin exemplifies some of the problems of private money. Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith.” It should be noted that uncertainty of value (highly volatile purchasing power), and the possibility of a loss of value due to a loss of faith, are problems shared by many government-issued fiat monies. They are not shared historically by private commodity monies. Any unclarity of Bitcoin’s legal status is the fault of legislation and bureaucratic rule-making, not of Bitcoin, and the responsibility for removing it lies with government.

Hadas continued: “Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system.” That vulnerability is a problem, but it is odd to consider it a fault of private money, rather than a problem due to inadequate limits on government power.

At the end of his 2013 piece, Hadas derided Bitcoin users as criminals, geeks, and speculators. But then (and again in his 2014 piece), despite having predicted Bitcoin’s failure in both senses, he recognized another motive that gives Bitcoin a future: “People can be excused for thinking that governments, including central banks, have run the money system so poorly that non-governmental money might be better … Bitcoin appeals because governments are not fully living up to the responsibility that comes with state-sponsored money. Bitcoin, or something like it, will thrive until the authorities do better.”

Revisiting Bitcoin in 2017 after its price topped $10,000, Hadas conceded: “For now, bitcoin is working out well for speculators, if not for society.”

People can indeed be excused for thinking that central banks have done poorly at preserving the purchasing power of money, and at preserving financial privacy. And people can be excused for thinking that Bitcoin is potentially a more viable money than a non-governmental commodity standard in a world where governments have been allowed to suppress commodity-money payment systems. Bitcoin is vulnerable to government surveillance and prohibitions that could quash crypto exchanges and drive trades underground. But it arguably could survive underground better than could a banking system based on commodity redeemability that must be openly accessible to be trustworthy. If Bitcoin will continue to thrive as an investment and medium-of-exchange-in-waiting “until the authorities do better” at managing fiat money (and at allowing financial privacy), then Bitcoin may thrive for a long time to come.

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[1] A “medium of exchange” is an asset acquired in one trade for the purpose of trading it away for something else. Anything that serves as a “commonly accepted medium of exchange” is a money in standard economics usage, although some textbooks confuse matters by giving equal billing to two subsidiary roles: “unit of account,” which derives from the CAMOE role, and “store of value,” which fails to differentiate money from bonds or real estate or any other asset. To avoid definitional disputes over “money” here, I focus on which roles Bitcoin has and has not achieved.

[2]The cryptoasset exchange Binance reports that 91% of its trades are currently conducted in USD Tether, only 4% in BTC.