One of the reasons I write blog posts is that I find it interesting to take snapshots of my thinking as a way of documenting how my viewpoints evolve over time. Sometimes they stay relatively stable, and at others they shift quite dramatically. For example, in July 2020 I wrote my thoughts on coronavirus, at a time when vaccines still hadn’t been rolled out, and many countries (including my own) were in some form of hard lockdown. Questions of waves, variants, masks, and so on were going through their first oscillations with public, scientific, and official sentiment wavering back and forth. The debates were just starting to take on political hues. Arguments about censorship, misinformation, disinformation, and so on, were only just beginning to warm up.
When I look back at that post now I find it all to be pretty reasonable, given what we knew at the time (generally, not as much as we would have liked to). The tone is one of prudence and caution, of provisionality born out of ignorance. If I were to summarize my feelings about COVID and the pandemic now, I’d tell you how I’m quite a bit more relaxed about the virus these days, and how my most significant concerns are actually about what we have learned (or failed to learn) about how to respond to extreme incidents. As a society, I think we’ve come out of this traumatic collective experience with our sensibilities, and our institutions, somewhat deranged. I think we now face the twin risks of having primed ourselves to overreact when something happens in the future, while paradoxically also having attained such levels of fatigue that we may not react enough the next time we face a threat.
But this isn’t a post about COVID. It’s about Bitcoin and the topic of cryptocurrency in general. This feels like another one of those highly contentious topics where interested parties, whether they be "crypto maximalists" or "crypto sceptics", are debating an incredibly complex subject with an essentially unknowable future — only time will tell. As I have only engaged with this whole domain in the most superficial manner over the years, I haven’t felt like I had anything noteworthy to write down until recently, and even now, I’ve only just dipped my toes in the water. But of late, Elon Musk has been in the news a lot, and where Elon treads, discussion of crypto usually follows (and precedes) him. Likewise, Lex Fridman has had a couple of prominent Bitcoin intellectuals on his show for multi-hour discussions (examples: Michael Saylor, Saifedean Ammous) that were pretty interesting, and so I’ve been thinking about crypto in a deeper way than I had until now.
Bitcoin first came onto my radar around 2011. Back then, a single Bitcoin cost about $1. I actually tried to buy a couple, just because I found the idea of a recently invented, purely digital, cryptographically-based currency to be nerdily amusing. Tried, I say, because I couldn’t muster the will to actually overcome the various sources of friction and inconvenience that purchasing Bitcoin actually entailed back then; I can’t even remember what the concrete obstacle was that stopped me from pursuing it all the way to the end. I wasn’t going to buy these coins to spend, or as an investment, but simply to have them, because I thought it was cool.
Since then, a lot has changed. Bitcoin’s price shot through the roof, increasing by thousands (or tens of thousands) of percent from its early days, depending on where you start measuring from. It became an object of speculation. The idea was ripped off, copied, modified by — again, literally — thousands of hucksters, would-be innovators, and crypto nerds. Many a fortune was made or lost, both individual and institutional investors made profits or got fleeced, as coins and financial instruments flashed in and out of existence. Heavy hitters bought huge amounts of digital currency — the most prominent example I’m aware of being Tesla, which currently holds over $1B in Bitcoin — and governments and regulators started to show more interest in monitoring and taxing crypto currencies and securities. In a way that is mostly invisible to the average citizen, crypto mining started consuming an "interesting" proportion of energy production, and in a way that was very definitely visible to anybody trying to build a computer during the last few years, it dramatically impacted the availability of GPUs.
As I watched all this play out, my evolving stance was basically that of a crypto sceptic. As an investor, I’m a "buy-and-hold" type, I believe in holding productive assets (like shares in valuable companies), and I’ve never had any interest in speculation. I don’t like complicated financial vehicles; anything more complex than an index fund isn’t really my cup of tea. I couldn’t care less about puts and calls, synthetic instruments, leverage, and so on. To somebody who’s not that interested in the world of cryptocurrencies, Bitcoin itself seemed unpalatably volatile and not that useful for any of the Big Three reasons that are generally cited as "what money is" (that is, a medium of exchange, a store of value, and a unit of accounting). All of the other coins just seemed like absurd Ponzi schemes, mostly developed by people with far too recently acquired knowledge of programming, cryptography, and finance. I was utterly unimpressed by all the companies small and large scrambling to find a way to cram "blockchain" into their product offerings; never did the phrase "a solution looking for a problem" apply so readily. And obviously, the fact that human activity is driving the planet into a climate crisis sure makes the energy consumption of crypto activity look rather dubious. To my eyes, it seems at best frivolous, and at worst downright deleterious.
Anyway, I’ve done a bit of reading of late trying to understand if there are any intelligent arguments out there for why Bitcoin actually is a good idea for humanity, as opposed to just being an elegant technological construct. There sure as heck are intelligent arguments for it not being a good idea. And when you start talking about stuff like NFTs, which to me look patently absurd, you don’t have to look all that far to find some absolute demolitions penned by smarter and more informed people than I. Nevertheless, I’ve been wrong about lots of things in my life — and I’m adding to the list of things I’ve gotten wrong all the time — so it makes sense that I should at least try to find some of the best arguments in favor of crypto, so that I can develop a more nuanced point of view.
I’m not going to list all the things I’ve picked up here in this blog post. If you want to hear some articulate and well-informed advocacy for Bitcoin just start with the two podcast episodes I linked to earlier and go from there. But I do want to describe a couple of interesting points that they made which I don’t think I would have arrived at on my own. These points aren’t necessarily facts as such because this whole terrain is contested territory: economists, intellectuals, and other "experts" don’t even necessarily agree how economies work and how they are best run, even in the present moment. And the area of dispute here is even harder than that — it’s not just about what is but what will be. The future is clouded with uncertainty, and while we’re talking about "crypto" here, all of this is embedded in complex social and economic systems whose future is yet to be seen. We make predictions, we can even try glimpse the future by modeling systems in more or less rigorous ways, but this business of predicting the future is fundamentally speculative by nature.
So, with that proviso out the way, these are the things that I’ve found interesting in my recent explorations.
The first is about Bitcoin as money and not as an investment. Saylor would phrase this as the distinction between "property" (a thing you buy, like a house) and a "security" (like a stock). Ammous would make an argument about the Big Three: it’s not yet true that Bitcoin indisputably checks all the boxes, but he would say that, of all the cryptocurrencies that have existed so far, it is the one that will. In fact, he seems so certain that it will, that if your time horizon is long enough (ie. that you’re planning to hold the coins for long enough, on the scale of years) that you may as well consider it to be true. For both of them, the fact that the quantity of Bitcoins in existence is only growing slowly and, ultimately, is capped, is key here, because it makes Bitcoin extremely resilient against inflationary forces. In the short term, the market is still small and volatility is high, but the thinking is that in the long term, Bitcoins will be much better at holding their value than any fiat-based currency (or even a gold-backed one or similar) can ever be, because the supply is categorically constrained.
An additional point they make, and which I am inclined to agree with, is that describing inflation in terms of a single "scalar" value that is regularly redefined to suit the whims of the agencies responsible for measuring it, is woefully inadequate, and that the real inflation that we all experience is quite a bit higher than what this number tells us. As an investor in the stock market, I’ve long felt like I’m barely treading water with respect to inflation, despite the reportedly low figures quoted by official entities; there is indeed the sense that one’s money is evaporating before one’s eyes, and it’s only by exposing it to significant risk that one can have any hope of actually storing that value for later consumption. I haven’t held any bonds for a while, and in the current panorama I don’t see anything which would make it compelling to do so. People most often hold bonds in their portfolios as a way of dampening volatility. Right now, crypto swings up and down so violently that one couldn’t really expect it to serve a dampening role like that in a portfolio; it behaves much more like a risky tech stock than a reserve currency. But if folks like Ammous are right, though, that may not remain the case: Bitcoin may one day make sense as the "cash" component in a portfolio. That would be cool because existing forms of cash kind of, well, suck when it comes to being a stable store of value.
The second argument that I found to be rather surprising is the one about proof of work (ie. the thing which drives the energy usage in the Bitcoin algorithm) as actually being a good thing. When asked what he thought about Bitcoin using more energy than some countries, Ammous said, "It’s worth it". That one floored me. From my point of view, all those kilowatt-hours had struck me as egregiously profligate. For Ammous, Bitcoin mining is intrinsically valuable, because it is what makes Bitcoin work (ie. it is what makes it a truly distributed system without any privileged actors able to impose arbitrary modifications or do nefarious things like change the rules of the game or abscond with the funds of the beguiled), and Bitcoin working is a good thing in the world because it is the most perfect form of money (again, referencing the Big Three) yet invented, standing to free us all from the maladies of inflation and crude Keynesian economics. Since the advent of electricity we’ve been using it for all sorts of things that aren’t strictly necessary for survival, but which make our lives better. Ammous claims that Bitcoin is just one more life-bettering technology whose benefits justify its costs; you just have to know a bit about economics and monetary theory to connect the dots and see why.
I wasn’t expecting that. I was expecting something along the lines of proof of stake being the solution; like, just as John the Baptist paved the way for the coming of Jesus H. Christ, Bitcoin with its proof of work is a premonition for some improved cryptocurrency with proof of stake at its heart instead. Maybe a layer on top of Bitcoin, or maybe some kind of successor. But no, that’s not the argument at all. In fact, Ammous thinks proof of stake is totally bogus. It might solve the energy problem, but it does so at the cost of jettisoning the single most important property of Bitcoin and proof of work; namely, that nobody controls Bitcoin — there is no way for any single entity to fuck things up because it really is distributed (ie. no central authority) and there’s no way of changing the rules. You can hard-fork, but that’s not changing the rules, it’s just changing a copy of them, and network effects make Bitcoin’s preeminent status effectively unassailable. As thousands of failed coins demonstrate, none of these copies have gotten critical mass behind them.
The other defense he proffered was that most energy powering Bitcoin mining is cheap (ie. plentiful, abundant) energy, precisely because competitive forces will naturally drive miners towards the cheapest energy. As such, a lot of it ends up being green. Now, I’m aware that this is a contested point, kind of like "vaccines are worth the downside risks", but it is a reasonable point. I couldn’t help but thinking of the Neal Stephenson novel, Fall; or, Dodge in Hell where, spoiler alert, humans end up building massive solar panel arrays in orbit (with the eventual trajectory leading humankind in the direction of building a Dyson sphere, completely enclosing the sun and capturing most of its energy output). In the novel, this energy ends up being used to power a computationally expensive simulated reality in which the scanned-in souls of the dead end up running in the cloud, enjoying a kind of "life" after physical death. Now, that irreal existence seems rather pointless on some level — not unlike endlessly computing block hashes to keep a virtual currency running — but the dividing line between biological and computational processes is rather blurry in this book. Just say you figure it’s worth burning all that energy on eternal digital life, then maybe it’s not unreasonable to also consider it worth burning a huge quantity to enable "eternal" digital currency. Fiat currencies are already pretty divorced from actual circulating specie, as most of the monetary supply is created out of nothing via credit; it’s not clear that that is any more "real" than Bitcoin is. At least Bitcoin is the product of mathematics, a well-defined algorithm, and an element of randomness. Fiat currencies, on the other hand, are driven by utterly arbitrary and unpredictable dynamic systems comprised of incomprehensibly complicated configurations of individual agents, institutions, governments, and markets.
In conclusion, I find these arguments to be quite reasonable, but not compelling, because they’re contingent on the future unfolding in a particular way in which more and more participants in the system converge on Bitcoin as being the ideal hard currency and store of value in the long term. All the frothy shitcoins, Ponzi schemes, and "smart" contracts need to stay where they belong, on the fringes, such that they don’t destabilize the rest of the system. There can be no crisis of confidence, or at least, no fatal one. This is a system that as much requires solid psychological support as it does utterly robust technical foundations. Bitcoin is already a reasonably good store of value, and even a not-bad medium of exchange; for any more complex demands other structures can be layered on top — the bit that really matters is that it needs to be a durable store of value. If we can really liberate ourselves from the ever-present menance of wealth-destroying inflation, that would be pretty darn neat. Companies need to stop trying to ram blockchain-shaped pegs into round holes where they don’t belong; they’re just creating a distraction. More and more agents need to start treating Bitcoin as a long-term, inflation-resistant alternative to fiat cash, enough of them such that Bitcoin starts to take over from bonds as a means to dampen volatility; note that to do this, participants in the system need to treat Bitcoin less like a high-risk speculative investment and more like ballast — unglamorous, uninteresting, predictable. We need to create more and cheaper sources of clean energy, and while we’re at it, find ways to meet consumer demand without crypto hardware purchases drastically distorting the market. Lots of things can and may go wrong on the way.
Overall, if everything turns out the way the proponents proclaim, I think that would be great. Right now I’d put the odds at 50% (plus or minus 25%) that things do head in this direction over the next couple of decades. But those aren’t very certain odds, and not the kind that I would want in order to sink my life-savings into this stuff. I’m pretty conservative when it comes to my investment choices, so I wouldn’t put anything but "play money" into Bitcoin, and nothing into any other crypto. In any case, I’ve never had any play money in my investing life, so this is all hypothetical. And even if things do go according to the rosiest of predictions, there remains the fact that securing crypto assets feels like a step backwards into some kind of dark age prior to modern banking and federally insured deposits; keeping your private keys safe from theft, damage, or loss feels not unlike securing physical gold. I don’t relish the idea of having many thousands of dollars’ worth of digital assets under my physical custodianship any more than I like the idea of trying to somehow safely stash a bunch of gold coins under my bed. There is something comforting about the various checks and balances implemented by old banks to make sure that the numbers tallied against your name in their ledgers stay securely and exactly where you put them, without tampering. I couldn’t care less about crypto’s touted benefits of anonymity and its illusory freedom from government vigilance and expropriation. Those risks are real in the current fiat-based system, but seem so utterly distant and unreal to me in my cozy European life in the bosom of the EU. In short, the idea of having personally to safeguard any significant amount of crypto assets scares the crap out of me, and I can’t begin to imagine how elderly or non-tech-savvy folks might navigate these waters if crypto assets end up expanding to occupy a significant chunk of the monetary and financial pie in the future.
So there you have it — my mid-2022 snapshot of what I think about Bitcoin. I’m still very early on in my research of both the for and against arguments in this arena, but I intend to keep studying. It beats reading about COVID, or Ukraine, or the Depp-Heard trial, and I’ll be interested to revisit this post some years from now and see if the world, or I, have moved on at all.
And out of economy, I’ll be using the shorthand "crypto" a bunch of times in this post, even though it always irked me that it’s an appropriation of a word that was previously used to designate the broader field of "cryptography" itself. Sometimes you’ve just got to accept when these linguistic battles are won and lost, and go with the flow. I still remember how I used to call blogs "weblogs" for years after everyone else stopped doing so, simply because I stubbornly hated the laziness of the contraction… ↩︎
In my experience, few things that people tack the prefix of "smart" onto end up being so. ↩︎