Old school monetary activist has 3 lessons for Bitcoiners

Money is a social technology and has been thoroughly explored throughout the last 2 1/2 Millennia and understanding it goes very far beyond the simplistic revelation that modern money is 'no longer' 'backed'. Yet for the last six years I have watched as cryptographers, teenagers and business people have grappled with monetary ideas, and applied limited, simplistic and sometimes just wrong thinking in their attempts to understand the monetary role of cryptocurrencies.

In fact it took me a couple of years to reach my own understanding of what Bitcoin was; to untangle the rhetoric, the dogma, the technology. To me now, Bitcoin seems very close to a fiat currency, especially in the way it comes from nothing, to circulate indefinitely, how it is viewed by the market as a commodity, and its price ever subject to the whims of supply and demand. That volatility discouraged its use by people who actually wanted to make payments, which meant that in practice Bitcoin wasn't for the most part performing the most important function of money.

With that in mind, here are the three things most cryptocurrency nerds need to understand, but don't!

1. A social technology has to be governed.

With bank-money and legal tender money, the bank and government are needed for the currency to function and hold its value. Abuse by those institutions can lead to the erosion of your savings money. Bitcoin allowed no such abuses, all the coins being released according to a predetermined algorithm and not being subject to political interference. Furthermore users held their own Bitcoin wallets rather than trusting banks. Thus is was said to be trustless. But the trust was simply moved away from the known entities onto more nebulous entities. Never mind that natural market movements invite manipulation and redistribute wealth all over the place. You could own your Bitcoin but you still had to trust that the market would be liquid when wanted your dollars back, and that the miners wouldn't collude and that the algorithm was secure, and that it wasn't secretly a black Pentagon project!

The Quantitative easing that Satoshi Nakamoto deplored certainly was an abuse of the currency, but it was also (and still is!) a desperate short-term measure to prevent the economy imploding. A deeper analysis shows that abuse of power was not so much in the government printing of money but in the systems of private bank credit creation which inflated the original bubble. History shows that banks find a way to do this regardless of whether the currency is said to be backed.

Another approach to the problem of financial institutions losing our trust is to build new institutions which would have to earn our trust rather than granting them legal privileges which give us no choice but to trust them. Removing trust from the monetary equation also removes the ability to negotiate, to respond to real-world circumstances, to make certain kinds of corrections or management decisions. Better to make social arrangements which actually reflect where trust exists and which reward socially beneficial behaviours.

1. Most payments in history and indeed now are made using credit. Money is only used for settlement.

Aristotle and David Graeber tell us that the right and proper use of trustless currency (gold) is when trading between jurisdictions, or in war, when the value of the state's money is questionable, and deferred settlement might not be possible. But trustless money is by nature possessed commodity, and if you don't already own it you must pay to borrow. Within jurisdictions where there is law or even trust, credit-money is a much better option because it is elastic, free to issue, and its value can be adjusted by the government to suit the needs of the economy. Credit is extremely divisible, transportable, measurable, and here's the smart part: parties who are both buying and selling need never handle money because the credit cancels out to nothing and no payment i.e. troublesome movement of a valuable commodity, is required.

1. Understand that accumulation necessitates something valuable while exchange only needs a ledger.

There's an assumption or maybe a definition in economics that in order to be money, a thing has to perform the three functions reasonably well. But before the Bank of England these functions were rarely collapsed into the same financial instrument. Ideally a store of value should be valuable, like a house or a lump of gold, or a business or many things. It doesn't have to be very liquid. Conversely insofar as we can say that the economy is about exchange, a great many transactions can be cancelled out against other transactions and a valuable currency becomes a burden. Further, a currency that really encourages exchange will decline in value over time to encourage it to be spent and not hoarded. A store of value needs to be somewhat scarce and desirable, but a medium of exchange needs to be sufficient and available when needed, which strongly implies credit. In trying to fulfil all these functions, Bitcoin and its clones replicate many of the problems of fiat money, doing none of these functions well. I wrote more about this in OpenDemocracy.

In conclusion it seems to me that the main reason for Bitcoin's meteoric initial success was the way it made its holders rich as the price went up. Not then because it was a good currency but because it was a highly volatile investment which made a few geeks unexpectedly rich. As a money geek coming from a different tradition, I want to see less exciting monies which are stable in value because they are adjustable in quantity, and which are of no interest to speculators. To me, a currency that piles up instead of flowing is not a currency and is not serving the economy at large.