What Good has Bitcoin Done for the World?
I used to be relatively passive to Bitcoin and crypto-currencies in general. I was long persuaded by Peter Schiff’s argument that Bitcoin was a bubble that would “have a very short life” due to its lack of intrinsic value and speculative nature, and that it therefore does not fulfill Aristotle’s five criteria for good money. As it was a rather new technology, I wasn’t the only skeptic. In the forefront among the crypto-currencies, it thus shocked the world when it hit $20,000 in value in the year-change of ’17/18. What in the world could make it so expensive and popular?
Having tanked ever since, however, one may wonder how this new type of money has impacted the world at large. What else has it done other than to be a speculative bubble and a medium through which people can commit horrific crimes without the authorities being able to do anything about it, as many would have you believe?
As it turns out, only 54% of Bitcoin holders actually use the crypto-currency as a medium of exchange to buy goods and services (and far less on a regular basis), indicating that the major reason to hold it is for speculation/gambling. Financial writer J.P. Koning recently interpreted that to mean that Bitcoin has become,
At its core […] a pure Keynesian beauty contest. People try to guess what other people guess other people guess Bitcoin’s value will be. The price that results from this contest is incredibly unsteady. But these explosive rises and stunning falls provide a fun, challenging, and addictive bet for casual gamblers and deep-pocketed professional speculators alike.
Is this really the only thing that Bitcoin has brought to the world: a fun new way to gamble and earn money at the behest of the consumption of 50-75 terawatt hours per year of energy? Turns out it isn’t.
See, for instance, Eli, a Venezuelan who used Bitcoin to purchase cancer treatment and medical supplies for his mother, which he couldn’t afford with regular currencies like the bolivar (near worthless Venezuelan currency due to sky-high inflation rates) or the American dollar (which the regime has set capital controls on). Some Venezuelans are also using Bitcoin to buy Amazon gift cards for ordering goods (like food) from around the world. This isn’t a small trend either. After the inflation rate reached 800% and the GDP tanked 19% in 2016, the Bitcoin volume went through the roof the year after, increasing by 12,279% in 12 months to a total value of $1.7 billion. With over 80% of the population in poverty and people turning to zoos for food, there sure seems to be a lot of people like Eli – if they even end up as lucky as him. Thus, in the words of a Time Magazine piece on the topic, “For people living under authoritarian governments, Bitcoin can be a valuable financial tool as a censorship-resistant medium of exchange.”
Still, the Venezuelan government hasn’t taken the competition to the Petro, their own crypto-currency, lightly. As recently as February 2019, the Maduro administration set a monthly transaction limit on Bitcoin, as well as charging a 15% tax on transactions. They seem to be dead set on making life a living hell for Venezuelans.
Bitcoin also appears to be a way to get around the idiocy of sanctions (an economically illiterate policy of which only 4 of 115 between 1914 and 1990 could be called a “success”; centralizing power in the hands of the tyrannical countries they seek to destabilize; making their citizens less prosperous and less free; and reducing global trade in the hundreds of billions of dollars). In his trip to Tehran, the capital of Iran, Amazon Analyst Marian Muller turned to Bitcoin when he realized that sanctions by the United States and the European Union on Tehran meant that “no bank in the entire country could accept my credit cards. PayPal, Western Union, bank transfers — all blocked.” He met a web developer called Reza who would offer him Iranian rials for Bitcoin. “For Reza,” according to Muller, “Bitcoin is one of very few options that enables him to conduct business internationally.” He’s not the only one. In December 2017, the BTC volume in Iran reached 67 billion Iranian rials (though that merely totals 79 Bitcoin), and the local exchange price hit $24,000 on Iranian exchanges in September 2018 when the market price globally was at $7,000. The high inflation rate thus makes it difficult to accumulate the savings required to afford the high price for Bitcoin, but if one is able to, it can be relatively effective way to counter sanctions, as well a more stable medium of exchange.
However, Bitcoin might not be a safe-haven for Iranians forever. The U.S. Treasury Department’s Office of Foreign Assets Controls started adding Bitcoin addresses linked to Iranian residents to its Specially Designated Nationals sanctions list in November, indicating that Bitcoin would be the next target for the sanctioning campaign. Some Iranians are still not too worried about the impacts of this. Saad, a Tehran based developer, contended that “When cryptos become so common and globally accepted, these measures don’t work,” as governments can “only” target corporate exchanges, not privately held Bitcoin wallets.
Bitcoin has also allowed for many startups in Africa. A relatively long list of examples can be read here, which provides both financial and educational services through the use of blockchain. Some have also claimed that the continent could potentially “become the new battleground for blockchain and cryptocurrency” due to their “antiquated banking technologies, low rate of financial inclusion, poor confidence in the banking system, and high remittance costs.” Bitcoin is outlawed in some Northern African countries, such as Egypt, Morocco and Algeria, due to being inconsistent with Islamic law (and Namibia in Southern Africa, though that’s a majority Christian country), but it has still been relatively commonplace elsewhere on the continent. Nigerians, for instance, accounts for the world’s third largest holdings of Bitcoin as a share of GDP (after Russia and New Zealand), and use it to send and receive money abroad cheaper and faster and “to hedge against inflation/exchange-related losses of the Naira, the local unit.” Though the central bank governor has likened the crypto-currency to “a gamble”, the parliament has launched an investigation on the pros and cons of adopting Bitcoin as a means of payment.
Though crypto-currencies haven’t been adopted there to a very large degree comparatively as of yet, it may be ripe for an expanding market in the near future. As Rakesh Sharma, a business and technology journalist, phrased it, countries with high inflation rates are likely to opt for crypto-currencies, because “with their paradigm of decentralization, cryptocurrencies offer an alternative to disastrous central bank policies.” We’ve already seen clear examples of that with Venezuela. There are still barriers to this development, such as government regulations or outright bans, and Africa having relatively little access to electricity and the internet in comparison to other continents.
Decentralization of the monetary system in the form of crypto-currencies thus comes, as with most things, with its pros and cons. As economists Armen Alchian and William Allen (2018, p. 91) put it, “Everything in life involves a trade-off between alternative amounts of goods and degrees of achievement of goals.” While it is, on one side, extremely energy consumptive and makes violent criminals near impossible to track, it also provides an alternative platform for financial transactions and services to get around totalitarian policies at home and abroad, which for some makes the difference between life and death.
Alchian, A. & Allen, W. (2018) Universal Economics, Carmel, Indiana: Liberty Fund
This article was sourced from Mises Revived.
Stefan M. Kløvning is a Norwegian high school student studying economics in his spare time, with aspirations of eventually taking a PhD in economics and afterward contributing to growth in the private sector. He’s a follower of the Austrian School of Economics, drawing inspiration mainly from Ludwig von Mises and Murray Rothbard, and blogs regularly about thoughts on a variety of topics, mainly economics and politics, but also philosophy, psychology and history.