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The Bear's Lair: Gold is libertarian, cyberspace isn't

March 3, 2014

Assessing the sustainability of Bitcoin amid recent controversy.

The disappearance of the Bitcoin trading website Mt. Gox caused consternation among younger libertarians, who had seen cryptocurrencies like Bitcoin as a vital weapon in the struggle against Big Government. For those like myself with almost as much suspicion of the tech sector as I have of Washington, it caused a smile of grim satisfaction. In reality, Bitcoin represents the world of Mikhail Bakunin more than that of Adam Smith; for true libertarians, it fails on a number of criteria that sound money must fulfil.

I wrote about Bitcoin in December in a piece "Mississippi Bitcoin" comparing it to John Law's 1718 Mississippi Scheme (another radical new monetary invention). An open source "crypto-currency" devised in 2009, Bitcoins are created by solving algorithmic problems that get progressively more difficult, with a finite overall all-time limit of 21 million. This restricts the overall Bitcoin money supply and is supposed to ensure that their value will over time increase, since their creation cost also increases.

The a priori attraction of Bitcoin to libertarians was obvious, as was its attraction to speculators. If the supply is limited and the price has a strong upward trend as its finite supply attracts new users, libertarians see Bitcoin as an exciting technological equivalent of gold. Speculators such as the Winkelvoss brothers see it as an investment asset with the odds stacked heavily in the investor's favor. Bitcoin reached an outstanding capitalization of $10 billion late last year, and the only question seemed to be whether it would become a true rival of gold, which has an outstanding capitalization at present prices of some $7 trillion.

The Mt. Gox fiasco indicated both the economic and philosophical disadvantages of Bitcoin. Economically, it must be an iron law of computer programming that any program which can be written can be hacked, and hence there is no completely secure store of value in cyberspace. Furthermore the barriers to entry for new cryptocurrencies are laughably low, so there are now more than 60 such items, each sucking up some of the potential support for Bitcoin. In spite of the best endeavors of Bitcoin's creators, the supply of Bitcoin is not truly limited, holdings of Bitcoin are not truly secure and, since the currency is as attractive to scam artists as to anyone, it will inevitably attract scams, at least so long as it appears to represent substantial value.

Philosophically, Bitcoin fits nicely into the anarchism of Bakunin (1814-1876), the great rival of Karl Marx, who advocated for the state to wither away and be replaced by federations of self-governing workplaces and communes. Unlike gold, Bitcoin is not self-organizing. It and its cryptocurrency competitors are classic examples of self-governing communes, which create their own laws and customs.

Bakunin fell out with Karl Marx at the fifth congress of the International Workingmen's Association, held at The Hague in 1872, which resulted in Bakunin's expulsion from the workingmen's movement. Indeed there is no question that Bakuninism isn't Marxism and likewise that Bitcoin isn't Marxist. But neither of them bears much resemblance to the free market, to libertarianism or to freedom in general.

Bakunin's communes organized their own laws and practices, like cryptocurrencies. They contained no system of private property so, as in George Orwell's "Animal Farm" in its early stages, each commune generated an increasingly complex system of rules governing usage and maintenance of items of value. To create an effective cryptocurrency, complex rules of money creation are likewise required, as are even more complex algorithms to prevent the system being hacked and "bad guys" removing much or all of the Bitcoins' value.

A gold standard is quite different. Gold is gold; there are no special rules required to create it, and ordinary property rights cover the ownership and transfer of gold. It cannot be "hacked" and there are no complex algorithms regulating the amount of it available. If the price of gold rises, then mining activity will naturally increase.

A gold standard imposes no rules on society. You can either have a central bank managing the financial system or, like Scotland and Canada before 1932, you can do without one. In practice, imposing too many rules of monetary policy, in an attempt to smooth out market fluctuations, imposes costs of its own. The Fed discovered that in 1927-32, when it first fought the natural market tightening from the Wall Street boom, then imposed too tight a policy artificially during the crash.

Unlike gold, Bitcoin is created artificially and must therefore be subject to rules as to its creation, and to its management when hiccups occur. Each cryptocurrency is a Bakuninite commune, with common ownership of the means of currency production and complex artificial rules governing its exchange. You can see the effect of this in the values of the currencies, or properly their exchange rates against the dollar. Not only do crypto-currency values fluctuate wildly, but some like Bitcoin have a tendency to appreciate, whereas others like Dogecoin are governed by a crazed algorithm apparently inspired by Rudolf von Havenstein (the central banker of the Weimar Republic). Dogecoin's value has thus collapsed to $0.00096 as of this writing, so that even with 54 billion Dogecoin outstanding, more than any other crypto-currency, their total value is only $52 million.

The problem for Bakunin's communes comes in their relations with the outside world. Unless each commune is going to have a gang of thugs who can beat up other communes if necessary, the communes will need an outside third-party regulator who governs relations between communes and inevitably affects relationships within them. Even if a particular commune wants to exist in a state completely without property rights and with wives/husbands equally held in common, the state will have an interest in that commune's business dealings with the wider world and will want to ensure that nobody's rights in the commune are being repressed and that the children of the commune are being looked after and to some degree educated.

You end up with two sets of laws, one within the commune and one imposed from outside the commune, with the outside set imposing restrictions on what laws can operate within the commune. You are in other words further from libertarianism or indeed true governmentless anarchy than you started. The model is unworkable.

Similarly in a world of cryptocurrencies, outside authorities will want to impose restrictions on how they work. They will want to ensure that the currencies are not being used to finance terrorism or organized crime. When a collapse occurs, such as that of Mount Gox, the authorities will want to investigate whether crimes against their own laws were committed, and whether fraud was involved. Those injured in the Mt. Gox collapse are now calling for outside regulation of cryptocurrencies as a whole, and even—heaven help us—bailouts. Indeed, that is not entirely unreasonable. If Bitcoin had a market value of $1 trillion instead of $10 billion when the Mt. Gox collapse happened, its failure would have been seriously destabilizing to the global financial system as a whole, and "bailouts" might (wrongly!) have been thought necessary.

Bad luck, Millennials. Your new and clever scheme to replicate the old-fashioned virtues of gold in the cybersphere appears to have fallen apart. Like other Millennial enthusiasms, such as Edward Snowden and Wikileaks, your "libertarian" creation has turned out not to increase liberty and well-being at all, but simply to destabilize a gimcrack, Baby-Boom-designed system that was already in deep trouble because old-fashioned virtues had been ignored for too long.

There's one consolation for us old-fashioned types: the collapse of Bitcoin, if it fails to recover, will be good for the gold price. Unlike Bitcoin, gold requires no complex computer management systems to measure it, just an accurate scale. Unlike Bitcoin, gold is not subject to seizure by the NSA (or the KGB's successor the FSB, which sensible non-Millennials worry about much more). The Fourth Amendment is quite clear on the point: If I have gold buried in my back garden, the Feds do not have the right to dig it up without a warrant. Unlike Bitcoin, gold does not require an ersatz central bank, setting artificial rules of money creation; it is created by mining and smelting in the free market and ideally requires no central bank at all. Unlike Bitcoin, gold is not subject to destruction by a solar flare, an EMP attack or even the 1666 Great Fire of London, wiping out the precious code in which it is stored.

In short, the free-market solution to the awful mess which self-indulgent Keynesian Baby-Boom monetary policies have created lies not in cyberspace but in the mountains. Millennials wishing to make their fortune should don not the neck-beard and hunched posture of the software developer, but the hard hat and confident, athletic stride of the mining engineer and head for the nearest gold-bearing mountains.

It will be better both for their physical health and for the world's financial health.


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