Later today, I will be speaking at this year’s Cato Annual Monetary Conference in Washington, DC. The theme of this year’s conference is positively eye-watering for proponents of private money: “Alternatives to Central Banking: Toward Free-Market Money.” I will be speaking on the first session, “The Bitcoin Revolution”. So will I be expanding on how bitcoin will revolutionise money and change the world as we know it? Well, not exactly. My topic is: Bitcoin will bite the dust. Bitcoin will collapse, and probably soon.
The core of the argument is simple. To work as intended, the Bitcoin system requires atomistic competition on the part of the ‘miners’ who validate transactions blocks in their search for newly minted bitcoins. However, the mining industry is characterized by large economies of scale. In fact, these economies of scale are so large that the industry is a natural monopoly. The problem is that atomistic competition and a natural monopoly are inconsistent: the inbuilt centralization tendencies of the natural monopoly mean that mining firms will become bigger and bigger – and eventually produce an actual monopoly unless the system collapses before then. The implication is that the Bitcoin system is not sustainable. Since what cannot go on will stop, one must conclude that the Bitcoin system will inevitably collapse. The only question is when.
I could go on at length about how this centralizing tendency will eventually destroy every single component of the Bitcoin value proposition, knocking them down like a row of dominos: the first domino to fall will be distributed trust, Bitcoin’s most notable attraction; instead, the system will come to depend on trust in the dominant player not to abuse its power. This player will become a point of failure for the system as whole, so the ‘no single point of failure’ feature of the system will also disappear. Then anonymity will go, as the dominant player will be forced to impose the usual anti-anonymity regulations justified as means to stop money laundering and such like, but in reality intended to destroy financial privacy. Even the Bitcoin protocol, the constitution of the system, will eventually be subverted. Every component of the Bitcoin value proposition will be destroyed. For bitcoin users and investors, there will be no reason to stay with the system. Plus the large mining pools, or at least one of them, are already a major threat to the system and the system has no effective way of dealing with this threat.
The whole thing is a house of cards: there will be nothing left within the system to maintain confidence in the system. If you have money invested in Bitcoin, best get out now before it collapses, because collapse it will.
Before going further, let me stress that I have not changed my support for private money one jot: researching and promoting private money has been my life’s work. Am I against Bitcoin? No. I just don’t think it is unsustainable. Am I against the alt currencies, the blockchain etc? Not at all. For the record: I support all experimentation in the private money space. My point is that some experiments will fail, and Bitcoin will be one of them.
Informal feedback on my and Martin Hutchinson’s paper on which the presentation is based leaves me in no doubt that our message will provoke outrage amongst the more extreme Bitcoiners: indeed, it already has. We have no axe to grind against Bitcoin and no desire to offend the Bitcoin lunatic fringe. However, one has to follow the logic of one’s argument as one sees it: Hier stehe ich, ich kann nicht anders. If others disagree, well, that’s just the way it is.
I would ask everyone involved in this controversy to note that Martin and I are making a prediction, made before the event: Bitcoin will bite the dust. The more extreme Bitcoiners say it won’t: they say that Bitcoin will reach the moon. They are welcome to their views, but only one side of this argument is going to be proven right. So let’s wait and see who is right and who gets egg on their face. If we have to eat humble pie afterwards, then so be it, but we don’t think so.
Our best guess is that we are facing a mass extinction in the cryptocurrency ecosystem. However, the competition for market share will continue and we expect that that ecosystem will soon repopulate. If the experience of life on earth offers any guide, we could expect to see such cycles of proliferation and extinction occurring again and again. For all we know, cryptocurrencies might still be in their Ediacaran Period, when a wonderful diversity of multicellular life had first colonized the seas, but many of these organisms are about to become extinct. No, correction: many of the alts have already bitten the dust – the mass extinction is well under way.
The undeniable achievement of Bitcoin is that it demonstrates the practical possibility of fully decentralized monetary systems based on the principle of distributed trust rather than central authority: it shows that they can fly, but the problem is that it does not demonstrate that they can stay in the air for too long. Where Bitcoin falls short is that its model is not sustainable thanks to the contradiction between the decentralization on which it depends to work properly and its inbuilt tendencies toward centralization. I therefore regard Bitcoin as an instructive creative failure, but I am hopeful that the lessons to be drawn from its impending demise will lead to superior cryptocurrencies that are free of its major design flaws. Designing such systems would be a challenge worthy of a new Satoshi Nakamoto – or possibly the old one if he is still out there somewhere and looking to complete the project that he didn’t quite get right the first time.
Pity about the conference date though. Had the conference been yesterday, I could have gone dressed as Guy Fawkes or a Catherine wheel.