STOCK MARKET WATCH -- Monday, 23 December 2013

[Demeter]

11. Bitcoin, Magical Thinking, and Political Ideology Alex Payne

https://al3x.net/2013/12/18/bitcoin.html



Last week, investor Chris Dixon posed a provocative dichotomy when introducing his employer’s USD $25M investment in Bitcoin service Coinbase:

“The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.”

Now working at vogue venture capital firm Andreessen Horowitz, Dixon is in a fine position to speak for Silicon Valley. But to the extent that the Valley is a placeholder for the technology industry at large, I beg to differ. Bitcoin is “generally viewed” quite differently. Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues. To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress. Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face while lacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.

Regulation and Other Minor Details

Bitcoin owes its present flexibility to a lack of regulation (or, more accurately, a lack of understanding around existing regulations and/or unwillingness to comply with them). If the broader Bitcoin experiment doesn’t implode, the currency will be regulated just as any other. In this best-case scenario for Bitcoin, what of the benefits Dixon claims? We’re told that Bitcoin “fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions.” If by “fixes” you mean “ignores”, then yes: a Bitcoin transaction, like cash, comes with the certainty that a definite quantity of a store of value has changed hands, and little else. How this verifies any “validity” or cuts down on fraud I’m not sure; stolen Bitcoins are spent as easily as stolen cash, which is why theft of Bitcoins has been rampant....


Silicon Valley has a seemingly endless capacity to mistake social and political problems for technological ones, and Bitcoin is just the latest example of this selective blindness. The underbanked will not be lifted out of poverty by conducting their meager daily business in a cryptocurrency rather than a fiat currency, even if Bitcoin or its ilk manages to reduce marginal transaction costs (at scale and in full regulatory compliance, that is). But then, we should note that Dixon wasn’t talking about lifting anyone out of poverty, just “offering them low-cost financial services”. Also notable is that both Andreessen and Horowitz supported Mitt Romney’s failed presidential bid, giving us some insight into the likely level of concern for economic inequality around Dixon’s office.

In Bitcoin, the Valley sees another PayPal and the associated fat exit, but ideally without the annoying costs of policing fraud and handling chargebacks this time around. Bankers in New York and London see opportunities for cryptocurrency market-making. International investors see the potential for arbitrage and are taking advantage of cheap electricity, bringing the environmental destruction of real-world mining to the brave new world of digital money. In other words: Bitcoin represents more of the same short-sighted hypercapitalism that got us into this mess, minus the accountability. No wonder that many of the same culprits are diving eagerly into the mining pool.