To byte a bitcoin

The furor over the collapse of the Mt. Gox bitcoin exchange and the identity of the Bitcoin protocol creator obscure the important questions about the currency. Essentially, is a currency with the given Bitcoin parameters, namely, privately generated and managed, non-physical, cryptographic proof-based and bank-less a viable alternative to the received wisdom in this regard. If indeed, the philosophy behind Bitcoin is of a libertarian nuance, then is a libertarian currency in this format, namely a means of payment exclusively, supportive of libertarian ends and/or of capitalism?

The paper presenting the Bitcoin protocol itself describes potential ways in which it could be attacked: “as long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.”[1] The solution the protocol proposes for preventing double-spending is based on making it computationally impractical to “rebuild” transaction sequences. To be able to double spend, an attacker would have to modify a time-stamped data block representing a past transaction and all the data blocks generated by the protocol in subsequent transactions, a task whose difficulty, according to the paper, increases CPU usage exponentially. The attacker would then have to catch up with and surpass the “honest” chain of transactions being created and perpetuated (up to a point where a new one needs to be initiated for storage space or other reasons) by the honest nodes in the network running the Bitcoin protocol and present it to the other nodes as the “true” transaction chain in order to be able to spend the forged amount. This is the Bitcoin equivalent of verifying a gold coin by biting.

While technologically clever, philosophically this seems to assume what it tries to prove. In an environment that is private, free, distributed and anonymous, the honest nodes should prevail (almost) always since all participants are assumed to pursue an accumulation of wealth secured by Bitcoin. That is not undoubtedly the case: well-heeled “nodes” and governments (even those which are implementing…pole taxes[2]) are apt to have different aims than pure economics or immediate wealth-accumulation for disliking an alternative currency. They could muster the power to undermine its protocol, according to its author himself. Further, and more computationally practical, these entities may focus on areas outside the protocol proper and in-system transactions, e.g., on exchanges, physical storage of bitcoins/wallets (there may be “an app for that”[3] including physical vaults–another chink in the Bitcoin armor), etc. While there may be value in a protocol that maintains a unidirectional, non-duplicate transaction log for further computer science purposes and applications, “the currency revolution” however looks canceled, or at least postponed.

Looking at the problem from a monetary system angle, purporting to be a means of exchange only and eliminating financial institutions/banks may be detrimental to libertarian ideals precisely insofar as they overlap with a capitalistic order (according to some, it is the capitalistic order). True, Bitcoin mainly tries to eliminate the financial institution qua trust central authority. The question, however, remains: without banks, can a capitalist system work? More specifically, using a Schumpeterian framework, can credit be created and extended? Not that the protocol demands that, but trying to frame the thinking around the degree of “revolutionness” of Bitcoin.

To recall, Schumpeter’s view of capitalism is founded upon the ability of financial institutions to extend credit. His is therefore a credit theory of money[4]—credit is the “differentia specifica distinguishing the ‘capitalist’ system from other species, historical or possible, or the larger genus defined by the two first characteristics.”[5] True, there are shortcomings in the system, and they were fully visible in the latest financial crisis, as banks can create money, if not directly cash, by crediting their customers’ accounts, as Mervyn King would say: in theory, a central bank tries to control and limit this power of the banks[6] and reign in foolish lending.[7]

This argument is different from Krugman’s or DeLong’s[8] which come from an admittedly grudging Keynesian perspective. Keynes, as Nicholas Georgescu-Roegen characterized economists in general[9] and Bridgman considered their major handicap[10], was an opportunist of sorts, choosing to deal with the economic problems of his own time in his own country. Money-as-a-store-of-value/ holding money apart from in an “insane asylum”/ storing wealth is explained by Keynes in psychological terms[11] so, in that respect, Bitcoin is aligned, just like the dollar, gold, etc. However, Keynes did subscribe to the “theory that is not open to question”, namely, the quantity theory of money albeit with some brilliant nuancing.[12] That may have been a way to sooth England’s situation at the time but this only strengthens the assertion that Keynes’ was “English advice, born of English problems even where addressed to other nations” exalting “what was at any moment truth and wisdom for England into truth and wisdom for all times and places…” To draw Schumpeter’s conclusion then, “if only people could be made to understand this, they would also understand that practical Keynesianism is a seedling which cannot be transplanted into foreign soil: it dies there and it becomes poisonous before it dies”.[13] How does Keynesian advice apply to Bitcoin?

DeLong’s analysis of exogenous floors/ceilings of the dollar (or specie) in contrast to bitcoin seems to fall short, though. The philosophy of Bitcoin is indeed that there are no (exogenous) guarantees (and, based on recent hacking events, no “endogenous” ones, either)—so this comes with bitcoins by definition. The absence of a floor on the value of this currency, indeed of any guarantees regarding value at all, is built in; and so is its use—a choice made in liberty by informed human beings/economic agents. The prescriptive glasses seemed to have been already on: all currencies should have a ceiling and a floor set by some external criteria or entity. In the case of Bitcoin, the floor is zero because the value of bitcoins is set by a free market in bitcoins themselves. Self-referential—perhaps; evil—perhaps not. The analysis therefore reflects mainly an ideological dislike for Bitcoin.

A distinction is needed: while the type of currency in a capitalist system may be specie, paper/full-faith and credit, or, perhaps, something else, what actually matters for the system is purchasing power. And this quite apart from the problem of inflation which diminishes “the value” of that currency. (Bitcoin addresses inflation in monetarist fashion, by setting a “predetermined number of coins”[14] to ever be put into circulation). Originating purchasing power funds entrepreneurial endeavors which drive the creativity which innovates and destroys unto creation.[15]

A money that is designed specifically and exclusively as a means of payment with an express prohibition of banking appears unable to do that—at least not “out of the box” insofar as any bank money creation is prohibited. Ensuring in this way the anonymity of payments does not preclude arrangements outside the Bitcoin environment, of course, such as buying a villa in Bali[16] or various contracting. How would credit work in this context? Paraphrasing Mervyn King, the crediting institution would be crediting money denominated in bitcoins to its customers’ accounts—but that is not possible: the crediting institution would be unable to create bitcoins to put into circulation in the Bitcoin environment at will, unless it becomes a dominant miner, with all the accompanying threats to the very essence of Bitcoin. Since bitcoin-denominated credit would presumably remain outside the environment and the bank cannot inject its credit into it, anonymity takes a substantial hit. This hints to the underlying weakness in Bitcoin as currently understood—it is mostly independent of direct capitalist economic change. From that standpoint, it may react only to “general economic conditions” rather than directly support the engine of the capitalist economic process.

What if, then, one thinks along the lines of the Modigliani-Miller proposition 1: why not forget credit in the sense of bank-created purchasing power that issues into an IOU to the bank by the customer and look at the possibility of making all capitalist investments inside a Bitcoin world as 100% equity investments? The enterprise value is independent of its financing under MM1 by assuming away the benefits of debt. Would this work? Probably not in the current implementation: the venture capitalist would have to possess a very large amount of bitcoins to make his investment. The term sheet would also affect the anonymity as it would stand outside of the Bitcoin environment. In principle, the investee would be able to make anonymous purchases with the bitcoins it receives from the VC—but the nature of the environment would again limit the possibility of many competing VCs as it implies an accumulation of a substantial number of bitcoins. On the other hand, anonymity itself creates barriers to crowdfunding—how would a “small” investor know who the recipient of the investment is and whether it is scam or not? Again, the contract/term-sheet/solicitation would stand outside the environment.

In the end, Nakmoto “himself” called Bitcoin an “electronic cash system.” As such, it exhibits the same characteristics and limitations in a capitalist order as other forms of cash (physical or electronic[17]), some of the more specific ones hopefully made clear above.


 Alin Voicu

  1. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, 24 May 2009
  2. L. Isar, “Irationala ‘taxa pe stalp’ ataca insasi coloana vertebrala a economiei Romaniei”,
  3. E. M. Rusli, “Latest Bitcoin Craze? Actual Bank Vaults”, The Wall Street Journal, 13 March 2014
  4. See J. Schumpeter, Théorie de la monnaie et de la banque, Editions L’Harmattan, March 2005; M. Messori, “Credit and Money in Schumpeter’s Theory”, in Money, Credit and the Role of the State, ed. R. Arena and N. Salvadori
  5. J. Schumpeter, “The Instability of Capitalism”, Economic Journal, Sept. 1928, 361-386
  6. Mervyn King, “Speech, 23 October 2012”, Bank of England,
  7. Martin Wolf, “The Fed is right to turn on the tap”, The Financial Times, 2 November 2010
  8. P. Krugman, “Bitcoin is Evil”, The New York Times, 28 Dec. 2013
  9. N. Georgescu-Roegen, “Energy and Economic Myths”, Southern Economic Journal, 1975
  10. P. W. Bridgman, Reflections of a Physicist, New York, 1950, qtd. in NGR, “The Institutional Aspects of Peasant Communities”, 1969. NGR goes on to say that “no other profession has committed the sin of theorizing in a vacuum as often and with as complete ingenousness as the economist of the Classical and, especially, the Neo-Classical tradition.”
  11. J. M. Keynes, The General Theory, 1936: “what an insane use to which to put it! For it is a recognized characteristic of money as a store of wealth that is barren; whereas practically every other form of story wealth yields some interest of profit.”
  12. J. Schumpeter, “John Maynard Keynes 1883-1946”, in American Economic Review, Vol. 36, Sept. 1946
  13. Ibid.
  14. Nakamoto, p. 4
  15. J. A. Schumpeter, The Theory of Economic Development, 1911 (2008), passim
  16. R. Sidel, “Bitcoins Buy a Villa in Bali”, The Wall Street Journal, 19 March 2014
  17. See, for comparison, Chaum’s eCash/DigiCash in Chaum, Fiat and Naor, “Untraceable electronic cash”, in Proceedings on Advances in Cryptology (Santa Barbara, California, United States), S. Goldwasser, Ed. Springer-Verlag New York, 1990,

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