The failed promise of Bitcoin

The most famed of the cryptocurrencies, Bitcoin, has posted a recent drop of more than 70 percent, which is accompanied by constant turmoil in the organizations set up to make a business of servicing the sector. Bitcoin mining machines are actually for sale on the market at a deep discount.

Crypto was always a house of cards, but those who said so were generally pushed aside as too old, not tech savvy enough, or just too invested in the establishment. They perhaps should have been heeded as purveyors of simple common sense.

The United States abandoned the gold standard for American dollars in the early 1970s when President Nixon announced the U.S. Treasury would no longer exchange a set amount of gold for our currency. Instead, the value of the American dollar floated freely against the currencies of other nations. That wasn’t as bad as it might sound because the United States was, and is, in a relatively strong position relative to its peers.

Nevertheless, it is highly likely that abandoning the gold standard combined with OPEC’s move to increase oil prices resulted in the beginning of persistent inflation that bedeviled the United States for the next decade or so.

Into the 1990s, one could still hear Republican candidates for office declaring the need to return the United States to the gold standard. At the same time, they noted the rise of a vast national debt and cried out for an end to unsustainable spending. Although we would briefly tame the yearly deficit (not the debt) for a short period around the turn of the millennium, the United States returned to running huge deficits and accelerated the course after the 2008 financial crisis. In recent years, we saw our first trillion-dollar deficits and total national debt exceeded $30 trillion.

It is unsurprising that the Bitcoin solution would emerge from the libertarian minds that crest the waves of bleeding edge technology. Bitcoin would solve the problem of governments succumbing to the temptation of the printing press and draining currency of its value by declaring an artificial limit on the supply. Only 21 million Bitcoin can ever exist. The supply is also limited by the technically rigorous process of “mining” the coins (which is also incredibly wasteful in terms of energy). Having created the rule of scarcity and enforced it technically, enthusiasts of crypto thought they had come up with a way to defeat the fecklessness of governments and to circumvent banks.

Although Bitcoin is designed to disrupt the morally hazardous games governments play with money, it also has deceptive appeal. Bitcoin has no underlying value in itself. People talk about “investing in Bitcoin” as though it is a company with a profitable business to support its value or a commodity such as oil which is supported by demand for energy. Bitcoin has neither of those features. Its scarcity is purely contrived.

In addition, Bitcoin was not theoretically designed as a vehicle to create wealth. Bitcoin actually costs a tremendous amount of money in terms of the energy needed to “mine” it. Further, Bitcoin was designed to be a medium of exchange that would improve the lives of the underbanked and that would avoid the problem of inflation to the extent that it derives from fiat printing of money.

In both cases, Bitcoin seems to have failed. During a period of rapid inflation (much of it caused by government fiscal and monetary policy), Bitcoin has not held its value. Instead, it has cratered from nearly $60,000 per coin to around $17,000 per coin at this writing. At the same time, people don’t buy things with Bitcoin. Instead, they hold it like gold.

However, gold has fluctuated far less than crypto and has acted much more like the hedge against inflation it has typically been. For that matter, dollars have held their value better than Bitcoin over the past several months. A little over a year ago, El Salvador adopted Bitcoin as its currency. The experiment has been a notable failure due to the highly speculative nature of an asset that was supposed to provide stability.

The case for crypto appeals to people because it offers an easy solution to a difficult problem. We can’t solve our public finance problems by simply creating a system of private currency. If anything, a major shift to crypto would likely force governments into ramping up regulation until it loses whatever appeal it has.

We need to abandon the hope of techno-magic as a solution for a problem that actually requires political discipline. And the only way we can have political discipline is to embrace the challenge of self-government. Americans have to elect leaders who will responsibly manage real-world constraints and who will avoid the easy temptation to keep leaving bad legacies for future generations to inherit. There is no crypto-shortcut to long-term responsibility.