Will Bitcoin Survive?¶
Eli Dourado, author of the most important Bitcoin-inspired article on the web, remains publicly committed to the cryptocurrency’s future. In the wake of the Mt Gox crisis, affecting the world’s largest BTC exchange (based in Japan), he has written a brief defense of the bullish case in Nietzschean vein: what does not kill us makes us stronger.
In just four short paragraphs, Dourado manages to make a significant point. Stress-tested survival has a value. The more ferocious Bitcoin’s environment is shown to be, the more advantageous its competitive position relative to alternative cryptocurrencies, as its resilience is demonstrated and publicized. Actualization of potential (catastrophe) resolves risk, leaving whatever survives augmented by a security premium. “Now it turns out that getting a cryptocurrency ecosystem to grow up is really, really hard — harder than maybe we thought. It follows directly that Bitcoin faces less competition from other cryptocurrencies than we thought. … since it is hard to succeed, if Bitcoin succeeds, then it may be worth quite a lot.”
Dourado’s two links do more work still. The first is to a recent Megan McArdle pre-obituary on BTC, which argues that the reputational damage inflicted by the Mt Gox fiasco will weaken it still further in what was always a Quixotic challenge to State power:
I’ve never been very bullish on Bitcoin, because ultimately, the better it performs at evading government surveillance of currency transactions (and government ability to manage debt loads via inflation), the harder those governments are going to try to shut it down.
Governments like levying an invisible inflation tax, and get angry when people attempt to route around it. (This is all quite explicit, on both sides.) The balance of opportunities within this conflict is too intricate to detail here, but McArdle’s utter submissiveness to government exaction clearly represents an extreme position among commentators. That Bitcoin predictably infuriates state financial authorities is a feature, not a bug.
Dourado’s second link refers to an older and subtler argument by Tyler Cowen, which makes a bearish case against Bitcoin on strictly economic grounds. Insofar as Bitcoin is seen to flourish, competitor cryptocurrencies will be attracted into the market, arbitraging value down to the cost of supply:
There is thus a new theorem: the value of [any -it]Coin should, in equilibrium, be equal to the marketing costs of its potential competitors … In short, we are still in a situation where supply-side arbitrage has not worked its way through the value of Bitcoin. And that is one reason — among others — why I expect the value of Bitcoin to fall — a lot. [Cowen’s internal link is well worth following up.]
As already noted, Cowen’s bearish position is weakened by Bitcoin’s recent travails. Almost irrespective of what happens next, an established reputation for toughness will feature prominently in the market evaluation of any cryptocurrency from now on.
Since Bitcoin won’t have been killed — it is close to impossible to kill — it will have been made much stronger.
ADDED: Time for YellenCoin? (No.)
ADDED: “So is Mt. Gox the new version of Friendster, the early social networking leader that buckled just before Facebook surged ahead? … Bitcoin’s next generation of founders is cleaner, more pedigreed and suited to Wall Street’s and Capitol Hill’s tastes. They are no less libertarian or wolf-like.”