As Bitcoin Falls Apart

It seems Bitcoin is skirting disaster. They need to increase the amount of memory allocated per block, but have refused to do so. The result is that transactions can take hours to occur. To manage this, fees for bitcoin usage are increasing, to the point where it costs more than a credit card. (Accepted by a lot less people, and costs more. The upside is…?)

One proposed solution is to, oh, increase the memory, but doing so is opposed by three of the five members of the people with access to the code base, and by the Chinese miners who control most of the “mining” which creates Bitcoins. (You can read about the adolescent infighting details here).

Now remember, Bitcoin was a Libertarian experiment in money. You have to “mine” it using computers which do nothing worthwhile except mine it. There is a built-in limit to the number of bitcoins which can ever be created, to  ensure that, in the long run, Bitcoins will be deflationary. All in all, it’s structure was designed to create huge, first-mover advantages and no governance worth speaking of (because that will all just “sort itself out”).

Or, as Daniel put it:

Fitting end: Libertarian currency is collapsing because of unresolved collective action problem. https://t.co/apoK4JEMog #cdnpoli

— Daniel (@DanFmTo) January 16, 2016

Yeah.

Now, Bitcoin was about the worst way possible to do something which REALLY needed to be done, which is to create a peer-to-peer payment system which cuts out the middleman. You do this so that banks/credit card companies can’t get what amounts to unearned money (the amounts of which are far more than the cost of the service provided), and also so that companies and governments can’t shut down the ability of people they don’t like to send and receive money, a power which has been terribly abused–especially by the US Treasury Department.

Bitcoin, minus Libertarian assumptions, with a bit of decent governance, could have really changed the world in a good way.

It didn’t, though the underlying technology of blockchains may yet. We’ll see about that, because what I’m hearing from the blockchain world is that banks are investing in it highly because they think it may help them with “know your customer,” “anti-money laundering,” and reduce transaction costs (for them, obviously, not necessarily the clients).

A “revolutionary” technology, thus, is likely to wind up reinforcing the status quo, though we’ll see.

Another contributing factor in all this is that, in addition to Bitcoin being a way for early movers to get rich (and for speculation), it’s real use has been primarily moving money in and out of countries.

It is important in China and tolerated, not just because the miners cluster there, but because the Chinese (including many of their officials) want an unofficial way to get money out of the country. Everyone has known China was going to run off the Mercantalist cliff, and people have wanted to get money out of there (the US dollar spiking like it is almost always a sign of flight to safety and presages a global recession).

Bitcoin got its first spike of fame outside tech circles by helping people get their money out of Cyprus when their banking sector had its collapse.

Political theory, which includes economic theory as a subset, matters. Bitcoin was based on libertarian theories which do not and cannot work in the real world. That is why it has not and will not live up to the utopian dreams of its early political backers.

We will see how the Blockchain is used by other cryptocurrencies, and whether any of them manage to create a functional peer-to-peer payments system.

I hope they do.

The failure of the Bitcoin dream (as opposed to the actual creation) doesn’t make me happy. We can use it as a lesson, the first of which is: “get your motives straight,” and the second of which is “Have a workable political and economic ideology.”

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