Rumours of the Dollar’s death have been greatly exaggerated – The London Economic

Rumours of the Dollar’s death have been greatly exaggerated

David Landon Cole

The bitcoin – a currency based on a hash function – is often touted as the future and a recent article on The London Economic buys into that. I have a few objections with the piece that I’d like to look at.

The premise for the article is an unattributed post on Reddit. The post claims that the US Federal Reserve commissioned research internally into the bitcoin, suggesting that it would overtake the mighty greenback between 2021 and 2026; that is to say, within seven to 12 years. On completing the research, the group was disbanded and the work went down the memory hole.

Various Redditors have already pointed out the very many problems with that post, but the main one for me is where’s the beef? Show us the research. If this research is so red-hot, why can’t we see it so we can look at its assumptions, evidence and methodology? Unless they were operating under quite stringent security measures, it would’ve been easy to take a copy, electronic or physical, for distribution. The supposed leaker claims impressive academic credentials; I would expect them to know the importance of peer review. The paper was, it would seem, a model or set of models of what would happen. As the saying goes, all models are wrong – only some are useful. That latter part may or may not apply here but we cannot know. At the moment, we have a statement with about as much strength as what some bloke down the pub said.

The web

Let’s turn our attention to some of the more general objections I have with the feature. Now, we’re all agreed that the internet’s great. I don’t like making grand predictions, but it does seem that the internet and world wide web may go down among the great achievements of humanity. That doesn’t mean, though, that it is good at everything, or that everything it does is good.

We are told people and corporations are adopting bitcoin as a means of trading. A quick search reveals some impressive names. They are, however, all consumer-facing. It doesn’t seem that business to business transactions are taking place to a significant degree at all; no-one has insured an oil tanker in bitcoin. The figure for the total number of places accepting bitcoin seems, on a quick search, to be somewhere in the range of thirty to forty thousand. In the UK alone, there are 4.9 million businesses.

The dollar

Although the dollar is argued to be an international monopoly that is under threat from the bitcoin, I would disagree. First of all the dollar is pre-eminent amongst currencies but it is not a monopoly. I can tell this by the pounds in my pocket, not to mention the euros in a jar at home, or the global trade in yen, Swiss francs and so on.

Apparently, we are now onto a question of who runs this planet, or the classic ‘1% vs 99% debate. Let us briefly allow that the Reddit post is accurate and that by 2026, the bitcoin has, in some unspecified way, become more important than the dollar. What happens? That is making a very large change to the global economy very quickly. It is very hard to predict what effect that will actually have. It may be that it establishes universal love, but the recent financial crisis has acted in favour of those who already have money. Predicting the effects of a major change to the global financial system a decade in advance seems ambitious.

This is not to say that I am enamoured of the current financial system. I would like to see change to it; as is probably obvious, I would like that change to be gradual. This shouldn’t detract, I hope, from the critiques I’m making.

Viability and credibility

Questions have been raised over whether the viability and credibility of this aspiring money supply has been established. So let us examine these doubts.

The total supply of bitcoins is capped at 21 million. This is, so far as I understand it, an absolute constraint and is not a bug but a feature; a gold-standard libertarian means of dealing with inflation. Even under the gold standard, new discoveries could increase the money supply. Once all bitcoins have been mined – predictions suggest between 2030 and 2040 – the money supply, assuming no bitcoins are lost, is fixed. That encourages hoarding; that worsens the problem we are trying to address.

I would add here that we may have some confusion about terms; bitcoins are often referred to as a money supply. Money supply is usually understood as a measure of liquidity of a currency; it is not the same as a currency.

Bitcoins are not stable; the value against the dollar has fluctuated wildly. Speculation makes up a significant part of that volatility. I would venture that the failure of Mt Gox shows that bitcoins are still vulnerable.

The total market capitalisation of bitcoins is on the order of US$10bn. That is approximately the same size as the estimate of the contribution made to UK GDP by drugs and prostitution. Promiscuous and profligate as Brits may be, I don’t think that a currency whose total value is equal to our appetite for hookers and blow is a threat to the dollar. The highest ever daily trading volume of bitcoins was slightly in excess of US$70 million; in the last 180 days, it has not risen above US$35 million. By way of comparison, the Bank of England’s estimate for currency trading in London – admittedly one of the world’s main financial centres – was US$2.4 trillion per day.

Remember, the original Reddit post suggested that very conservative growth estimates were being used. I do not think that growing several orders of magnitude in around a decade can be considered conservative.

It is also operating under an uncertain legal situation, being discouraged by the EU, a unit of account in Germany, banned in China and so on. That has real and serious implications for the adoption of bitcoin. This is also one of the major problems with the original Reddit post, even if we accept it: it is hard to model how states will react to any rise in the use of bitcoin. Finance is not just about economics; it is about politics.

Please don’t take from this that I am opposed to bitcoins; I don’t have a particularly strong view on them one way or the other, but some clearly do not like fiat currency. While I would grant that bitcoin is not a fiat currency in the sense of a currency backed by a state’s promise, it is not backed by a commodity. It is based on trust that the code works – that code has already had problems. It may be a new form of fiat currency, but it is a fiat currency.

Decentralised currency

The decentralised nature of Bitcoin, it has been said, means that any abuses can be quickly identified and acted upon by exclusion from ‘the club’. Given Mt Gox, this is simply untrue.

Nor is decentralisation a panacea; G Hash is the dominant bitcoin mining outfit, currently accounting for just under one-third of all new hashes. If G Hash, or anyone else, were to have more than half of bitcoins, they would effectively be able to double spend bitcoins. They are sufficiently worried about it that they’ve sought to address it, promising never to launch a 51 per cent attack. Someone else with the resources, determination and decent hardware to reach that position might not be so nice.

Continuing:

“Whilst there may be abuses by users, abuse by the purveyors of the service is scant compared to what we have experienced with our current baking system. Over the last decade this abuse has led to a severely impaired monetary system now awash with debt.”

In Yes, Minister, Sir Humphrey mentions the Politician’s Syllogism

1. We must do something.

2. This is something.

3. Therefore, we must do it.

Just because the current system is bad does not mean this is good.

As I said above, I do not like the way the world is. I would venture, though, that states, companies and individuals will still run up debts, whether they’re denominated in bitcoins, dollars or giant stones.

Evolutionary pressures

We’ve been told that our current evolutionary progress means that bitcoin could rise within five years given what has happened in the last ten years. But what has really happened since 2004? The US and the dollar are not as overwhelmingly dominant as they were, but they are still the single biggest players.

If we take the evolutionary comparison, we would expect to see change, experimentation, failure and extinction before success. To pin one’s hopes on the first cryptocurrency to be “the right answer” is going to lead to disappointment.

Nor can we predict evolution’s future paths. Technology has moved on at a remarkable rate and shows no sign of letting up. The cryptological function used to generate bitcoins is a computationally hard problem. What happens if and when someone develops a quantum computer, and that problem is no longer hard? If the rest of the blockchain is deciphered almost instantly, you would have a sudden rush of all the rest of the possible bitcoins – massively deflationary – and then a complete drying up of supply, as well as allowing the 51 per cent attack we mentioned above. Equally, it may be that future developments render the existing security built into bitcoins obsolete.

Above all, the lessons to be learned here is not to take anonymous, unsubstantiated posts on Reddit as anything other than for entertainment purposes only. You shouldn’t base your opinions on single news sources and you should question why people say what they say.

5 Responses

  1. Lee

    Completely agree with this analysis of Bitcoin. It’s not all its made out to be – in short, it lacks liquidity and it lacks real value; regardless of what its proponents might suggest.

    My own experience has been simply to just hoard it; I have no incentive to trade it because I know that with every new hash their value will (hopefully) go up. To my mind Bitcoin doesn’t satisfyingly address the real problem of centralised currencies. To me, this is just one big libertarian experiment. It’ll do nothing to level the playing field, wealth will once again accumulate in the hands of an elevated minority and I think a lot of interest and buzz surrounding bitcoin has been generated by speculators who really just view it as a get-rich-quick scheme.

  2. I am grateful to David for the time he has taken to construct his response and there are several valid points he makes which I respect and agree with. However I wrote the piece from a broader perspective than that which he has chosen to address, as I hope will become clear now.

    If we look at the original post on Reddit it was certainly a ‘taster’ of something to come and therefore limited. However, calling for more data now is perhaps a trifle impatient given the nature of Whistleblower material. Was it no lesser person than Edward Snowden who took his time before ‘coming out’, knowing full well what price he would possibly have to pay because of his act of integrity. How the world has benefitted from his courage and that of similar people with sound moral values.

    It is this, in part, I have tried to address by showing support and encouraging reassurance for what has been postulated. Go knows Whisteblowers need all the help they can get and a much more supportive environment than is currently the case. For the time being this encouragement should extend, in my opinion, to more than an interpretation of their courage as “what some bloke down the pub said”.

    We then move on to the very narrow perspective about the transactions carried out by bitcoins and how small they are in comparison to current trading activity. Current trading activity has taken several thousand years to get to evolve and so the comparison is irrelevant.

    Looking to the broader picture, I would suggest that bitcoins is at a similar stage to the early days of motor cars, flying machines and everything else our ingenuity has developed. The basic infrastructure is in place and feasibility studies show it capable of working. Trials have also shown this but there are teething troubles that need resolving before uninterrupted use. To expect anything new to be trouble free is either naive or political.

    Pounds, Yen, Swiss francs all bow to the dollar as reserve currency and so it has a monopolistic influence. Whether it takes the cryptocurrency 5/10/20/ years to unseat the then reserve currency it is not the point. It is the nature of evolution to breed new ways of living life, obsoleting the traditional in the process and the dollar/Yen etc. will succumb to this omnipotent process in time. (Admit it David 2021/2026 help make good headlines and stimulates controversy ;))

    Neatly sidestepping ‘the running of this Planet’ and the ‘classic 1% vs 99% debate’ ignores an important issue here, and that is the enslavement of the majority by suffocating global debt caused by debt driven money supply. Is this because of a monopoly or have I got it wrong again?! (It is already becoming self-defeating as the young, weighed down by the cost of their education, are unable to take on more debt to buy cars or homes, suitably crippling major industries in the process – not a terribly well run Planet in the opinion of many.)

    To say you are not ‘enamoured of the current financial system’ seems to me to be an understatement of mammoth proportions as we struggle with bankrupt banks and global debt and derivatives that exceed global GDP many times over. I must admit here that you made me smile David in referring to bitcoins as ‘operating under an uncertain legal situation’. And later that ‘it is not backed by a commodity’ and therefore ‘based on trust that the code works’ Is this not the case with the present money supply and currency, since Nixon took the dollar off the gold standard, and just how trust worthy is this government backed system since 2007?

    To quote ‘Yes Minister’, of whom I am a great fan, is genius but sadly avoids the issue of finding a solution by offering that ‘because the current system is bad does not mean to say this is good’. I wrote to stimulate debate, as articles of this nature are designed to do and have partially succeeded with your response, as I would have hoped for some sort of positive contribution to our troubles, rather than just knocking the ducks over and ignoring the broader picture. Already in Scotland they are considering Public Banking if the ‘Yes’ vote wins, and that is certainly a positive move to find alternative solutions to what is currently in place.

    You are right to say we should not try and predict the evolutionary process, sadly letting yourself down by predicting a bleak future for bitcoins. We are where we are technologically and can safely predict we will advance beyond this point to where our understanding and ability possibly take us into the world of cryptocurrency from a different direction. Already physical currency and ‘plastic’ money are being obsoleted by mobile phones and the like as we grow more used to our fledgling digital age.

    Fledgling is very much the word to identify our new world and the tentative steps we are all taking to find our way forward. The ‘bitcoin bashing brigade’ of which there are many, some sponsored by the banks themselves I would wager, are quick to find fault although few, if any, offer practical solutions. Constructive criticism is both essential and invaluable throughout any inaugural process in identifying potential problems and possible solutions, particularly so at present, whereas criticism on its own does not take us anywhere, and is perhaps the lesson to be learned here.

    Postscript: David, I was attracted to your involvement with the Association for the Study of Ethnicity and Nationalism (ASEN). To my untutored eye it will become an invaluable source of data as we move inexorably towards a ‘Global Village’ and I wish you every success.
    http://www.lse.ac.uk/researchAndExpertise/units/ASEN/Home.aspx

  3. David Landon Cole

    I am grateful to David for the time he has taken to construct his response and there are several valid points he makes which I respect and agree with. However I wrote the piece from a broader perspective than that which he has chosen to address, as I hope will become clear now

    Thankyou!

    If we look at the original post on Reddit it was certainly a ‘taster’ of something to come and therefore limited. However, calling for more data now is perhaps a trifle impatient given the nature of Whistleblower material. Was it no lesser person than Edward Snowden who took his time before ‘coming out’, knowing full well what price he would possibly have to pay because of his act of integrity. How the world has benefitted from his courage and that of similar people with sound moral values

    Snowden didn’t take his time before coming out. He waited four days from the original leak. What he did do was take time to gather what he then leaked. I do not think it is impatient as we have not had the whistle blown; what we have is an unsourced, unverified and possibly unverifiable post. I could post something on Reddit saying that I had worked on a project that found exactly the opposite with precisely the same amount of weight.

    It is this, in part, I have tried to address by showing support and encouraging reassurance for what has been postulated. Go knows Whisteblowers need all the help they can get and a much more supportive environment than is currently the case. For the time being this encouragement should extend, in my opinion, to more than an interpretation of their courage as “what some bloke down the pub said”

    I submit that your preference for bitcoin is clouding your judgement.

    We then move on to the very narrow perspective about the transactions carried out by bitcoins and how small they are in comparison to current trading activity. Current trading activity has taken several thousand years to get to evolve and so the comparison is irrelevant

    It is not irrelevant. We have the issue of path dependency; bitcoin has to compete against what there is now in a way that the US dollar did not have to when it developed.

    Looking to the broader picture, I would suggest that bitcoins is at a similar stage to the early days of motor cars, flying machines and everything else our ingenuity has developed. The basic infrastructure is in place and feasibility studies show it capable of working. Trials have also shown this but there are teething troubles that need resolving before uninterrupted use. To expect anything new to be trouble free is either naive or political

    How do you know bitcoin is Betamax and not VHS?

    Pounds, Yen, Swiss francs all bow to the dollar as reserve currency and so it has a monopolistic influence. Whether it takes the cryptocurrency 5/10/20/ years to unseat the then reserve currency it is not the point. It is the nature of evolution to breed new ways of living life, obsoleting the traditional in the process and the dollar/Yen etc. will succumb to this omnipotent process in time. (Admit it David 2021/2026 help make good headlines and stimulates controversy ;))

    According to the IMF, just over sixty per cent of FX reserves were in US dollars (http://www.imf.org/external/np/sta/cofer/eng/). It’s just not a monopoly. It is very important, but it is just not, definitionally, a monopoly.

    Neatly sidestepping ‘the running of this Planet’ and the ‘classic 1% vs 99% debate’ ignores an important issue here, and that is the enslavement of the majority by suffocating global debt caused by debt driven money supply. Is this because of a monopoly or have I got it wrong again?! (It is already becoming self-defeating as the young, weighed down by the cost of their education, are unable to take on more debt to buy cars or homes, suitably crippling major industries in the process – not a terribly well run Planet in the opinion of many.)

    Sure. What does that have to do with whether bitcoin will actually work in general or displace the dollar in particular?

    To say you are not ‘enamoured of the current financial system’ seems to me to be an understatement of mammoth proportions as we struggle with bankrupt banks and global debt and derivatives that exceed global GDP many times over. I must admit here that you made me smile David in referring to bitcoins as ‘operating under an uncertain legal situation’. And later that ‘it is not backed by a commodity’ and therefore ‘based on trust that the code works’ Is this not the case with the present money supply and currency, since Nixon took the dollar off the gold standard, and just how trust worthy is this government backed system since 2007?<
    I do tend to understate; it's meant to be for comic effect but it rarely works. It is not the same as traditional currencies after the Gold Standard. In what way do traditional currencies have any legal uncertainty at all? You may not like it, or think that it is a tissue of lies, but the law doesn't seem to have any problem with currencies. Traditional currencies are based on trust, ultimately, in the underwriting state. That is different to trusting in the code and, on reflection, for a different thing; bitcoins don't have an intrinsic value.

    To quote ‘Yes Minister’, of whom I am a great fan, is genius but sadly avoids the issue of finding a solution by offering that ‘because the current system is bad does not mean to say this is good’. I wrote to stimulate debate, as articles of this nature are designed to do and have partially succeeded with your response, as I would have hoped for some sort of positive contribution to our troubles, rather than just knocking the ducks over and ignoring the broader picture. Already in Scotland they are considering Public Banking if the ‘Yes’ vote wins, and that is certainly a positive move to find alternative solutions to what is currently in place

    I wasn’t trying to find a solution; I was trying to show that your piece and the Reddit post it was based on were, I’m afraid, weak.

    You are right to say we should not try and predict the evolutionary process, sadly letting yourself down by predicting a bleak future for bitcoins

    I don’t think I did; I raised uncertainties.

    We are where we are technologically and can safely predict we will advance beyond this point to where our understanding and ability possibly take us into the world of cryptocurrency from a different direction. Already physical currency and ‘plastic’ money are being obsoleted by mobile phones and the like as we grow more used to our fledgling digital age

    Safely predict? That seems ambitious. I would be interested to see your working.

    Fledgling is very much the word to identify our new world and the tentative steps we are all taking to find our way forward. The ‘bitcoin bashing brigade’ of which there are many, some sponsored by the banks themselves I would wager, are quick to find fault although few, if any, offer practical solutions. Constructive criticism is both essential and invaluable throughout any inaugural process in identifying potential problems and possible solutions, particularly so at present, whereas criticism on its own does not take us anywhere, and is perhaps the lesson to be learned here

    As any birdwatcher would tell you, fledglings often die. It may well be that those bashing bitcoins are bonus-baring banks, but to discount their arguments on that basis is an ad hominem. Equally, I don’t have to find a solution if what I’m doing is looking at someone else’s suggestion.

    Postscript: David, I was attracted to your involvement with the Association for the Study of Ethnicity and Nationalism (ASEN). To my untutored eye it will become an invaluable source of data as we move inexorably towards a ‘Global Village’ and I wish you every success

    I am indeed and thankyou! I’m one of the co-chairs for the 2014/5 academic year. We have a new website launching next month and recordings of our events at http://www.youtube.com/asenevents. Take a look!

  4. Philip Benton

    Good article David and I very much agree with your points, similar to many I raised in my article I wrote a couple of weeks ago reviewing a talk I attended on Bitcoin – http://www.thelondoneconomic.com/2014/08/04/rebuilding-our-economy-with-digital-currencies/

    In short, Bitcoin is a making a strong impact and one of the most intriguing innovations since the creation of the world wide web. But I see Bitcoin being used alongside US$ as a cheaper way of transferring money internationally and used in physical form as a niche currency comparable with the Brixton or Bristol pound.

    It’s unrealistic to expect a digital currency to take over from the world’s largest currency in such a short time period. ATM Machines have been around since late 1960’s but my grandmother still takes her money direct from the bank! This might be an extreme example but I see the next innovation being mobile commerce reaching its ‘tipping point’ (it’s already close) and then the rise of ‘e-money’ services such as the one Facebook has registered for as having a bigger impact in the foreseeable future.

    As I pointed out at the end of my article, Bitcoin could have a bigger impact on emerging countries and their currencies rather than the US$.

  5. Firstly sincere apologies for delay in responding David, have been away from the screens for a couple of days. Once again I am indebted to you for your detailed interest in my post as I believe our time is the greatest gift we have to bestow in this life.
    I have also taken time to look generally at the writing around this subject and it has certainly stirred things up a bit. Why I wonder? If it is in the general interest for an alternative currency to replace what we have now, you are not a total supporter as I understand it, why such intensity to decry bitcoins. It is no longer the playtoy of nerds and has even received judicial support. That the banks are looking closely at it also seems to indicate a certain credibility.
    We are in unprecedented times as a species and whilst I would certainly concede that the prediction of when cryptocurrencies become dominant is pure conjecture, so is their demise, only time will tell. I come out on the side of evolutionary change, and bitcoins is showing all the signs of being the way forward in this respect, but again time will tell.
    I also have respect for anyone who has the courage to speak out about the status quo, although their methods may not have been well thought out initially. Again time will tell.
    I stand by my original piece as a thought provoker and stimulant for debate, which it certainly has achieved. By encapsulating my views in the immediate moment offers validity to what you are saying, of course it does, and if you see your position as simply standing in judgement, without offering a way forward that is fine.
    All innovation attracts criticism, rightly so, vested interest and a fear of the unknown is an inherent part of Life. It is those who pursue new goals and succeed that history records, rather than the naysayers. Therefore my friend I must agree to differ with you and continue my support of innovation and all attempts at innovation, that is how we evolve. In so doing I fully respect and welcome the valid contribution you and others make to sound warnings, provided neither is too adamant upon something only time will educate both of us about. Enjoy your weekend.

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