Arguing about bitcoin

Last year, we ran a post, Omid Malekan on why crypto is not a scam. After that, I had lunch with Malekan and fellow Columbia Business school denizen Gur Huberman, and Malekan gave me a copy of his book, “Re-Architecturing Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms.”

I flipped through the book and came to this passage on page 215:

Ironically, for all the hand-writing about Bitcoin’s price volatility, it has been the cryptocurrency’s single greatest selling point because, for over a decade, and despite several bear markets, it has always resolved itself to the upside. Put differently, those who have believed in this monetary prowess have been handsomely rewarded. To them, bitcoin’s volatility is a feature, not a bug. Had they held dollars (or any other fiat currency) instead, then they’d be a lot less rich. That wealth creation, along with the titillating prospect of even more to come, has propelled both the coin and the underlying technology forward for over a decade.

Seems descriptively accurate. I continue to think that the medium-term plan of bitcoin, as with other tech innovations, is regulatory capture: get enough well-connected people inside the pyramid so they can ensure government support in some way. But, in any case, yeah, the price of bitcoin has made some early investors rich.

Is “wealth creation” an accurate description of the rising price of a speculative asset? I’m not so sure about that. Sometimes yes, sometimes no, right? If I discover a new talent for painting, and my paintings are popular, and they start selling for a million dollars each, and I make a thousand of them, then, sure, in some sense I really have created a billion dollars of wealth, in that the world has these thousand paintings which people really seem to value. But this argument ultimately relies on the paintings as having this value. If all of them are blank white canvases, and I’ve sold them by convincing people that beautiful paintings will eventually appear on them (with the idea being that I used some special paint that takes years to show up on the canvas), then the argument for creating a billion dollars of wealth seems shakier; we’re more in a conditional zone where the value exists only for as long as people agree that this value is there.

So I think the claim of “wealth creation” leans on the assumption that bitcoin has an inherent value, something other than “the titillating prospect of even more to come.” And Malekan does argue that bitcoin has inherent value, and not just for early investors and criminals. I did not try to evaluate those claims, but that’s really the crux. Making people rich is not by itself wealth creation; it’s just a form of transfer payment.

Another issue that comes up is energy consumption, both the direct substitution effects—energy used in the bitcoin process is not being used for some more direct human purpose—and for the concern about climate change.

Malekan writes something about this, on page 217:

Here we should pause for a second to consider the environmental impact of mining, as it is often presented as a negative. Indeed, other than its (highly exaggerated) use in illicit activity, the Bitcoin platform’s electrical consumption, which we should admit is significant, is the most popular argument against further adoption. As with other critiques against crypto, there is an obvious double standard. Lots of activities negatively impact the environment, especially when measured in aggregate. Tellingly, none are as controversial. The United States uses more power for air-conditioning than the UK does in total, yet there is no shortage of crypto critics waxing poetic from their comfortably cool offices.

Bitcoin’s electrical consumption is a feature and not a bug, the natural evolution of the long-running relationship between money and power. Those who have issued the former have often deployed the latter to preserve its purchasing power. Case in point, one of the primary purposes of the US military—a major energy consumer in its own right—is to protect the purchasing power of the dollar. It does this by protecting unsavory regimes that price their exports in dollars and by dropping the occasional bomb.

Bitcoin’s clever contribution is to make this previously implicit relationship explicit. People trust its coins because they require a lot of power to produce. Human beings don’t value things that are easy to make. That’s why a handmade automatic Switch watch costs one thousand times more than a machine-made quartz one, even though the latter is better at telling time.

The complexity and cost of mining provide Bitcoin with a stronger foundation to grow from. They also allow it to become the rare monetary system that doesn’t rely on coercion, and is strictly opt-in. . . . Anyone concerned about the Environmental, Social and Governance (ESG) impact of mining should consider the social and governance benefits of a monetary system that is universally accessible, fully meritocratic, and not predicated on the threat of violence.

Ummmm . . . I disagree. I’m no fan of air conditioning myself, so I guess I’m with Malekan on that one, but otherwise the above paragraphs make no sense to me at all. Suppose Bitcoin used twice as much energy as it already did? Then would it be even better?? Also, people value many things that are easy to make. People don’t pay much for such things, but that doesn’t mean they don’t value them. I have no idea what it means for Bitcoin to be “fully meritocratic,” and I don’t see how the monetary system that supports the value of the $20 bill in my wallet is “predicated on the threat of violence,” any more than any possession or way of life is predicated on the threat of violence in the sense that if someone tries to violently rob me, some threat of violence might be necessary to deter them.

Again, it’s ultimately a cost-benefit question. Bitcoin using massive amounts of power is a cost, its use in crime is a cost, but, sure, maybe it has benefits too. To deny the cost and act as it’s actually a positive thing—that just seems nuts.

It’s kind of stunning how far apart Malekan and I are on this one. To disagree on the benefits of Bitcoin is one thing. But if he’s saying “Bitcoin’s electrical consumption is a feature and not a bug” . . . is there any possibility of communication at all?