Will Bitcoin Survive?

Eli Dourado, author of the most important Bitcoin-inspired article on the web, remains publicly committed to the cryptocurrency’s future. In the wake of the Mt Gox crisis, affecting the world’s largest BTC exchange (based in Japan), he has written a brief defense of the bullish case in Nietzschean vein: what does not kill us makes us stronger.

In just four short paragraphs, Dourado manages to make a significant point. Stress-tested survival has a value. The more ferocious Bitcoin’s environment is shown to be, the more advantageous its competitive position relative to alternative cryptocurrencies, as its resilience is demonstrated and publicized. Actualization of potential (catastrophe) resolves risk, leaving whatever survives augmented by a security premium. “Now it turns out that getting a cryptocurrency ecosystem to grow up is really, really hard — harder than maybe we thought. It follows directly that Bitcoin faces less competition from other cryptocurrencies than we thought. … since it is hard to succeed, if Bitcoin succeeds, then it may be worth quite a lot.”

Dourado’s two links do more work still. The first is to a recent Megan McArdle pre-obituary on BTC, which argues that the reputational damage inflicted by the Mt Gox fiasco will weaken it still further in what was always a Quixotic challenge to State power:

I’ve never been very bullish on Bitcoin, because ultimately, the better it performs at evading government surveillance of currency transactions (and government ability to manage debt loads via inflation), the harder those governments are going to try to shut it down.

Governments like levying an invisible inflation tax, and get angry when people attempt to route around it. (This is all quite explicit, on both sides.) The balance of opportunities within this conflict is too intricate to detail here, but McArdle’s utter submissiveness to government exaction clearly represents an extreme position among commentators. That Bitcoin predictably infuriates state financial authorities is a feature, not a bug.

Dourado’s second link refers to an older and subtler argument by Tyler Cowen, which makes a bearish case against Bitcoin on strictly economic grounds. Insofar as Bitcoin is seen to flourish, competitor cryptocurrencies will be attracted into the market, arbitraging value down to the cost of supply:

There is thus a new theorem: the value of [any -it]Coin should, in equilibrium, be equal to the marketing costs of its potential competitors … In short, we are still in a situation where supply-side arbitrage has not worked its way through the value of Bitcoin. And that is one reason — among others — why I expect the value of Bitcoin to fall — a lot. [Cowen’s internal link is well worth following up.]

As already noted, Cowen’s bearish position is weakened by Bitcoin’s recent travails. Almost irrespective of what happens next, an established reputation for toughness will feature prominently in the market evaluation of any cryptocurrency from now on.

Since Bitcoin won’t have been killed — it is close to impossible to kill — it will have been made much stronger.

ADDED: Time for YellenCoin? (No.)

ADDED: “So is Mt. Gox the new version of Friendster, the early social networking leader that buckled just before Facebook surged ahead? … Bitcoin’s next generation of founders is cleaner, more pedigreed and suited to Wall Street’s and Capitol Hill’s tastes. They are no less libertarian or wolf-like.”

2 thoughts on “Will Bitcoin Survive?

  1. Last I checked, almost all governments, and certainly all modern governments, receive the overwhelming majority of their operating income out of tax revenue. Since tax revenue depends on the economic activity being taxed, governments have a keen interest in just how much economic activity is going on in their jurisdictions. For that reason, no government is going to look kindly on a form of money part of the raison d’être of which is to conceal economic activity.

    This is what I took Ms. McArdle’s point to be. (Or at least some of her point–most of the post you link to and all of her follow-up post focused on reasons to be skeptical of Bitcoin other than the potential for tax evasion.) And it’s a point that applies just as much to neocameralist governments as it does to others. If the government is to be a profit-making enterprise and if its profitability depends on the profitability of its jurisdiction, then it will have no patience with any form of money that can conceal profitability.

    This seems true whether or not a neocameralist government relies primarily on taxation for its operating revenue. And unless neocameralist governments are supposed to have independent sources of income out of which they fund their operations [1] or to rely on donations, they will almost certainly fund their operations out of tax revenue. To my mind, Ms. McArdle’s point is less “submissiveness” tha it is an accurate appraisal of how governments operate, even neocameralist governments.

    [1] To be fair, this is not entirely unknown. Greek and Roman magistrates were expected to pay their domestic and some of their foreign operations out of their own pockets. However, the Greeks and Romans also relied on taxation, especially when it came to military matters.

    • No one expects governments to like it. The ‘submissiveness’ is expressed in the missing step between ‘they don’t like it’ and ‘so it won’t happen’.

      Some kind of Georgist unimproved land value tax would be resilient in a world of highly developed crypto-currencies. Best of all are Pigovian taxes on negative externalities (with polluting activities as the most obvious example). Taxing desirable economic activity is quite literally counter-productive.

      The question is, do governments accommodate themselves to economic realities? Or does economic advance submit to government convenience?

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