I hate to hit a good coin when it’s down, but bitcoin may have a lot further down to go.
As a longtime technology writer, I see it as an important innovation, but not because the value of bitcoin is going to the moon. In fact, I fail to see why bitcoin is worth much of anything at all.
At the moment it trades just below $11,500, having gone from around $2,000 last July all the way up past $19,000 briefly in mid-December. The highest it’s been since then is $17,000, and it’s on a generally downward trend. If I owned it, I would sell now.
Before the recent frenzy, the way bitcoin enthusiasts described it was as an asset and tool for financial transaction and for the “store of value” that was not under the control of any government or central authority. Many of the progenitors and advocates of bitcoin from the beginning have been those with a libertarian bent. It appeared to be a way to bypass those pesky governments and collectively transact with one another in a spirit of freedom.
But here’s the thing. While governments may often be ineffective, and lately often patently unimpressive, they retain authority. Bitcoin does not exist in a stateless vacuum. It requires exchanges for transactions, and data centers, both of which require physical locations. Governments have to be willing to let bitcoin exist. That willingness now appears to be melting away, as governments become more cognizant of the threat bitcoin poses to their own established systems of exchange and their ability to enforce laws about transactions and moving money.
To invest in bitcoin is to bet on the ineffectiveness of the current form of human order—the national government. That is antisocial.
Investing money in bitcoin is not like investing in the stock of a company, or even investing in a real commodity like silver or pork bellies. The money that a new purchaser puts into bitcoin is not being used to create productive assets, create jobs, or grow the economy. It is being used to enrich those who purchased bitcoin before you.
The process of government awakening about bitcoin is analogous to how many countries woke up to social media. Initially they paid little attention. Then people started to use Facebook and Twitter to organize politically, and in the explosion of the Arab Spring those organizational tools proved critical. This got the attention of governments everywhere. Today, restrictions are tightening and governments are almost as good at regulating and manipulating information inside social media as citizens are at using it themselves.
Every bitcoin transaction is secured by very powerful encryption that requires extensive computer resources. In one of the more elegant features of bitcoin’s design, processing these transactions also results in “mining” new coins, which is the incentive for the miners to create the encryption. But to secure and record each transaction on the associated blockchain and create new bitcoins, the necessary calculations require an enormous amount of energy. The processing power needed, and the energy required to power it, steadily increases as more bitcoins come into existence and the entire ecosystem of transactions and records becomes accordingly more complex.
As much as two-thirds of all the computer power devoted to bitcoin transaction processing is in China. In recent weeks, the Chinese authorities have been clamping down on mining and seem intent on reducing the amount of energy that can be devoted to it, possibly with the intent of ultimately eliminating such activity from China altogether. China has already closed down its bitcoin exchanges.
Among bitcoin’s biggest appeals for the libertarian partisans who champion it is that it enables a secure but confidential and generally untraceable way to move money from one place to anywhere else. That sounds good, except when you ask who really needs such a capability. Criminals will find it attractive. And money launderers. And those moving capital from one country to another to avoid taxes or political controls. China has experienced a lot of capital flight in recent years and has been imposing more rules to restrict the conditions under which its citizens can move their money elsewhere. Why wouldn’t China, the country that perhaps is most savvy about employing technologies for political and national benefit, do everything it could to eliminate this threat to its systemic oversight and control? I expect it will eventually find cause to completely shut down all bitcoin-related activities.
The main reason bitcoin has been said to be moving down in price in recent weeks is because governments appear more likely to impose restrictions on its mining, trading, and use. South Korea is one of the places where ordinary citizens bought bitcoin most frenziedly late last year. Now the South Korean government has been threatening to impose restrictions or even shut down the many bitcoin exchanges operating there.
None of this is to say that there isn’t great reason to be excited about the potential of blockchain-based systems to record and secure all sorts of assets. Shared distributed ledgers, which is what a blockchain is, can bring order, transparency, and decentralization to many spheres of activity, including healthcare, advertising, real estate, and even traditional financial services.
But critically, most blockchain-based record-keeping schemes do not depend on bitcoin’s public blockchain. Nor do other non-bitcoin cryptocurrencies, some of which have promise and some of which do not. These other systems typically presume that some authority, either a company or a cooperative or another form of organized entity, will oversee the system. They are gated systems, not libertarian fantasies intent on bypassing and trumping established states.
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