I could have called this post, “Why I’m Bearish On Bitcoin”. The draft has been in my notes for a long time. I might as well see if anyone will bother to flesh out the idea, or disagree with me — either reaction is welcome! Digital currencies are on my mind today because I had lunch with my friend Eva Gantz, who is the community manager at Stellar. She is, coincidentally, stellar! Anyway…
Cryptocurrencies like Bitcoin will fail because of the feature for which they are most lauded: theoretically, no trust required. Veteran journalist Felix Salmon has noted this flaw, as has Sidney Sida Zhang. Cryptocurrencies don’t just incorporate anonymity and lack of trust — they depend on it. Unfortunately for the future of techno-libertarian money, trust is what makes human systems work.
I struggle with this in my personal life. I like to be in control, but I have to outsource what I don’t know how to do, or don’t have time to do. For example, someone else grows the food that I eat. Someone else wrote the code for my website. Someone else takes care of plumbing infrastructure. I have to trust all those people to do their jobs. To a certain extent I can verify them, through consumer and political procedures, through tracking journalism, but eventually it comes down to trust. Trust is essential societal grease.
That’s my entire hypothesis, pretty much. Here’s some interesting cryptocurrency reading (in addition to the articles I linked above by Salmon and Zhang):
- Nathan Schneider on the Bitcoin “boom and bust” cycle
- “I Visit Libraries to Sell Bitcoins to Random People from the Internet”
- “A Ledger and a Network” by Quinn Norton
- “Can Bitcoin Conquer Argentina?” by Nathaniel Popper
I emailed Martin Weigert about this a while ago, and he told me, “I have not worried so much about trust when it comes to Bitcoin. But probably that is because I have only bought like a half Bitcoin so far, so there was always the acceptance of a potential total loss.” Then he asked if my qualms were about Bitcoin specifically or the whole technological basis of it. The following is my response:
From what I’ve read, the base technology is pretty sound. People are very excited about the blockchain. The concern is re: wallets and banks. Inevitably you have to trust a third party to “take care of” your Bitcoins, and sometimes that doesn’t go well, when banks are hacked or abscond with the funds. So the third party must be trustworthy. There have to be checks and balances, leading to centralized authorities, which is what Bitcoin enthusiasts wanted to circumvent.
Then I dropped more links into the thread:
- “Bank Hackers Steal Millions via Malware”
- “Bitcoin bank Flexcoin shuts down after theft”
- “Online black market members hunt down $100 million in bitcoins”
- “How to steal Bitcoin in three easy steps”
- “Man charged for running $4.5 million Bitcoin Ponzi scheme”
So? What do you think?