Bitcoin: A Hedge Against Bad Government

Bitcoin began as algorithm that created a token of no intrinsic value. But in a few short years it has become a hot commodity, trading now for about 250 dollars for each coin.  Nevertheless it does not yet constitute an effective currency.  It is still too volatile to be a reliable store of value.  Moreover, while 13 million people have used Bitcoins, far fewer use it on a consistent basis.  And the total value of Bitcoin is about 3 billion dollars—a fraction of the worth of many companies.

But Bitcoin has room to grow and become a currency. Of greatest aid to Bitcoin is the failure of governments. Already, Bitcoin is a household word in Argentina, where the government maintains an official exchange rate at substantial variance with real exchange rates. Bitcoin allows people to evade these controls by making their purchases via Bitcoin. If economic crisis leads other nations, like Brazil and Russia, to take such illiberal action, which is all too possible, Bitcoin will ride higher and begin to look more like a currency. And even after the crises subside, Bitcoin may well remain in use in such nations because of a distributed trust that does not depend on government and its relatively low transaction costs.

More generally, the less stable are national currencies, the more currency controls are imposed by government, the more inefficient are regulations of payment systems, the more attractive Bitcoin becomes. In short, Bitcoin  thrives as a  hedge against bad governance of one kind or another. And given the amount of bad governance in the world, I think Bitcoin is likely to succeed at least to a modest extent. Enough people will use it for real transactions that its value will stabilize and that stability in turn will propel even more frequent use. The process may take longer than its greatest enthusiasts imagine. But such delay is not atypical of technological innovation. The internet was around a long time before it took off. We tend to overestimate the short-term impact of technology and underestimate its long term-impact.

And if takes off, it will probably endure. While other crypto-currencies may rise to challenge it, it has a first mover advantage. And its open source software is  always being improved. Satoshi Nakamoto already recognized that Bitcoin could make transactions like escrow easier by building special features into its software, like multi-signatures.

And such inbuilt and continuing  innovation may be the greatest lesson of Bitcoin. It is part of a more general trend of what Marc Andreessen has identified as “software eating the world.” It should not ultimately surprise us if software designed and refined by human ingenuity can provide a more effective currency than gold or government fiat.