Although my last article on Bitcoins was never meant to be a two-parter, the volume of discussion it generated on this blog, Reddit, Twitter, and elsewhere was more than enough to warrant a response. Among Bitcoin’s detractors, the consensus was that the article didn’t go far enough, whereas Bitcoin’s supporters responded with a wide array of criticism. Most of the coherent arguments though, boiled down to two points: First, Bitcoins are software and their technical issues can be corrected over time, and second, the idea that I was fundamentally wrong about deflationary currency and that it is in fact a good thing. Although the responses to these arguments seem intuitive, it is understandable that fanatics and people buried under the weight of thousands of dollars in sunk-cost fallacy Bitcoins could see otherwise. But that article was never meant to convince the Bitcoin zealots, it was meant for those of you on the fence, caught up in the excitement of logarithmic growth charts and fancy mining rigs. If that’s you, and you haven’t quite yet drunk the Kool-Aid, keep reading.
The first assertion, that Bitcoin’s technical problems are a non-issue because it is merely software and subject to correction is the one that is the most transparently ridiculous. It’s not ridiculous because it’s wrong; it’s ridiculous because it’s so obviously true. Of course you can change the Bitcoin protocol on even a fundamental level if you can get the majority of Bitcoin users to agree to the change, but the same could be said of the US Dollar. Don’t believe me? Just look at the history of the US Dollar. Bitcoiners and goldbugs alike are quick to point out that the Dollar is just fiat currency, since Nixon took us off the gold standard in 1971. But that’s the entire point. Any currency is subject to change if majority of its users actively support that change; Bitcoin is not unique in this. What matters isn’t that Bitcoin can change into some mythical form in which all its problem are resolved, but simply that it isn’t in that form now and is unlikely to ever take that form.
The issues with generating meaningful change are further compounded by Bitcoin’s great selling point, its decentralized structure. Despite the unified front they take in its defense, Bitcoin’s supporters are hardly a unified bunch themselves and getting 51% of them to agree on any fundamental changes to the Bitcoin protocol is highly unlikely. As with any other bunch of revolutionaries, the one thing they have in common is their disapproval of the status quo. There’s still debate among the Bitcoin community whether Bitcoin is a currency, an investment, a commodity, or something entirely new; getting them to agree on the shape of the Brave New Bitcoin World is entirely out of the question. The variety of often-contradictory criticism to my last article is itself a testament to this problem. Even seemingly obvious modifications to the Bitcoin protocol, such as speeding up its block generation and confirmation rates in the same vein as Litecoin, still haven’t been done and would likely produce intense debate. If Bitcoiners believe that they can produce more than minor modifications to the Bitcoin protocol, they’re going to have to prove it. If hand-waving and “it’s possible” are enough to radically alter a currency, then why not start with the US Dollar?
The second vein of criticism with the last article fell more along the lines of, “Nuhuh, nuhuh, deflation is awesome and you’re stupid, I’m like rubber and you’re like glue, etc.” As one commenter noted, “There are quite lengthy and well-reasoned debates about the merits and flaws of a true deflationary currency.” That’s not really true (there are arguments for targeting zero inflation/deflation, but no one outside of crackpots believes that long term deflation is a good thing), but even assuming it were true, you could make the same statement of controversial positions in any of the sciences. There are lengthy and well-reasoned arguments against vaccination, evolution, the Big Bang Theory, and more, but with all those there’s also a strong consensus that most educated people accept. The same is true of economic theory; there are isolated arguments in support of deflationary currency, but the overwhelming majority of economists don’t agree.
A single link to a large Wikipedia article is hardly going to convince anyone though, so let’s get to the real meat of the deflation argument. As far as most Bitcoiners see it, deflationary currencies are a time-tested economic system that was abandoned due to temporary national insanity and the machinations of the evil Federal Reserve. Fiat currencies, they claim, are a system that is doomed to failure as a result of instability and inflation. One commenter even said as much, summarizing, “Deflationary currencies have worked for hundreds of years. In fact they have a much better historical record than inflationary ones.” Again, they are just flat out wrong here. The truth is there has never been a purely deflationary currency that has existed as such for an extended period. There have absolutely been currencies tied to the value of specie, like gold and silver, but those currencies are just as subject to inflation as deflation. In fact, most currencies tied to specie experienced a general inflationary trend over time, as a result of increases in the supply of gold and silver. It is generally accepted, for instance, that one of the contributing factors to the collapse of the Spanish Empire was skyrocketing inflation due to gold and silver from the New World. Even looking at the US Dollar, it trended as a generally inflationary currency and experienced massive fluctuations in value while still on the gold standard. Although the long-term value of the dollar was less prone to change while on the gold standard, the wild, year-to-year seesawing between inflation and deflation had a deleterious effect on the economy. (Does that sound at all similar to any other currency whose extreme value fluctuations make it difficult for merchants to establish a reliable cost for their goods?) In the end, the simple fact of the matter is that long-term deflation is universally accepted as terrible among economists and that it’s so toxic to the health of a currency that there simply isn’t any precedent for such a currency.
Still, let’s pretend that you’re not yet convinced about the damaging effects of deflation though, and that you remain convinced that deflationary currencies are the way to go. Well, as it turns out, Bitcoins aren’t really deflationary at all. Although the total number of Bitcoins that can ever be produced is capped at 21 million (assuming that this isn’t changed by hand-waving, magical community action like all Bitcoins other flaws), this cap won’t be reached until the year 2140. What that means is that Bitcoins will continue to experience inflation for the next 127 years. Not only that, but right now Bitcoin is actually experiencing toxic levels of inflation. In fact, from 2008-2010, Bitcoin had a higher inflation rate than the much joked-about Zimbabwe Dollar experienced over the same period. Currency of the future, right? Even after the most recent halving of the block reward, Bitcoin will still continue to experience over 15% inflation up until 2017. In fact, it won’t be until about 2025 that the block reward halves to the point that Bitcoin’s inflation rate will be below the US Dollar’s historical inflation rate. I’m sure Bitcoin won’t have any problems surviving a decade plus of sky high inflation rates, hmm?
If there was one bit of criticism that was right about my last post, it came from the Bitcoin bashers: I didn’t go far enough. The truth is, I targeted only those points which I thought were so fundamental and toxic to Bitcoins that no further commentary was necessary, but it would be a mistake to believe that those are Bitcoins only problems. It doesn’t take much research to discover that Bitcoin is plagued with scammers, its currency exchanges operate as unlicensed and illegal operations, and that security and convenience issues make it impractical for the average user to own. Even many of the ancillary points of my first article are enough, in themselves, to leave Bitcoin unviable. For instance, I previously touched on the problem of not allowing chargebacks (something Ars Technica kindly elaborated on) in order to point out the challenge that this and deflation presented to the establishment of a solid Bitcoin economy. In response, one loyal Bitcoiner directed me to the Bitcoin Wiki’s Trade page, in order to shut me up. I’d recommend you visit it too, and then consider this: Would you rather have a $5 Amazon gift card (it’s can also be freely-exchanged quickly across international boundaries with no fees) or $5 in Bitcoins? Unless you’re really interested in buying child pornography, drugs, or “several varieties of anarcho-capitalist flags“, I’m guessing you’ll go with the gift card. Like I said before, I don’t expect to win over any diehards, but if you’re on the fence about buying that first Bitcoin or cashing in that Reddit Bitcoin tip, do yourself a favor and walk away.
If you liked this article, please follow us on Twitter and Facebook, and send donations to the Trendon Shavers Defense Fund at BTC Address 17aacoJaduwjJd6dh9cxgsRLMc5CkB2b9n