Alan Kohler is one of Australia’s better business journalists – so this piece on Bitcoin is uncharacteristically bad.
And having watched it for a while, and considered the matter carefully, I think the analogy is apt. That was a bubble then, and this is one now. In fact it’s worse: it’s a giant scam.
Or else it’s a sort of global counterfeiting conspiracy, carried out by anarchists intent on bringing down the global system of money and government.
Now Kohler is talking about so-called ICOs (Initial Coin Offerings) and cryptocurrencies – where Bitcoin is the most well-known of these.
I think to argue that a market may be over-heated and to argue that something is a scam are two very different things. What makes his argument even harder to understand is his attempt to separate out Bitcoin from the blockchain.
That’s not to say blockchain, the technology behind cryptocurrencies, is also a scam, far from it. In fact, it looks a truly revolutionary technology that is likely to change the world through mass disintermediation — but not disintermediation of government.
Here’s the thing – the blockchain was developed in order to create a cryptocurrency that didn’t suffer from the double-spending problem. Kohler, however, is more or less correct here – the blockchain is the far more valuable innovation than the cryptocurrency itself. Innovators and entrepreneurs are exploring what this new technology can and can’t do. Some investors will make a lot of money and some will lose money. That is how any market works and that certainly does not make Bitcoin or ICOs a “scam”.
Now Kohler spends a great deal of time debunking the notion that Bitcoin could or should become a global form of legal tender. We have argued here before that Bitcoin doesn’t have all the characteristics of money. Cryptocurrency can be used as a medium of exchange – it can also be used as an investment vehicle that allows for ex post settling up in self-executing contracts.*
The point to emphasise is that “legal tender” is a modern invention – people have used various commodities and conventions as money for thousands of years. Long before the emergence of central banks and fiat currency and the like. Government can pass any law it likes, but it cannot prevent the emergence of alternate exchange media.
Then Kohler appears confused by the notion of mining bitcoin.
And what about the weird mining process, in which algorithms churn through trillions of calculations, burning gigawatts of power. That’s no way to run a monetary system, you would think.
The thing to understand here is that “mining” is a somewhat misleading term. But “mining” sounds so much better than accounting and auditing. If you had a choice would you prefer to say that you’re a Bitcoin miner or a Blockchain accountant? Remember IT-types call themselves web-masters and not server technicians. The blockchain is a distributed ledger – people who maintain that ledger and secure its content are “miners” – but actually what they’re doing is accounting and auditing.
All up Alan Kohler has a long and confused argument against Bitcoin and cryptocurrencies becoming legal tender and not being “money” (he also has some confused, if not contradictory, arguments about what money is and the benefits and costs of the current monetary regime). He doesn’t like the fact that the originators of cryptocurrencies are anarchists. But innovation is often, if not always, revolutionary. At the same time he recognises the innovative potential of the blockchain. To my mind the two concepts – the blockchain and cryptocurrency – are interrelated and come as a package.
*My RMIT colleague Jason Potts and I are working on a paper that sets out this argument in greater detail. In the meantime read another of our papers on the topic.