Sunday, December 22, 2013

"Bitcoin, Magical Thinking, and Political Ideology"

From Alex Payne:
Last week, investor Chris Dixon posed a provocative dichotomy when introducing his employer’s USD $25M investment in Bitcoin service Coinbase:
“The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.”
Now working at vogue venture capital firm Andreessen Horowitz, Dixon is in a fine position to speak for Silicon Valley. But to the extent that the Valley is a placeholder for the technology industry at large, I beg to differ. Bitcoin is “generally viewed” quite differently.
Most charitably, Bitcoin is regarded as a flawed but nonetheless worthwhile experiment, one that has unfortunately attracted outsized attention and investment before correcting any number of glaring security issues.
To those less kind, Bitcoin has become synonymous with everything wrong with Silicon Valley: a marriage of dubious technology and questionable economics wrapped up in a crypto-libertarian political agenda that smacks of nerds-do-it-better paternalism. With its influx of finance mercenaries, the Bitcoin community is a grim illustration of greed running roughshod over meaningful progress.
Far from a “breakthrough”, Bitcoin is viewed by many technologists as an intellectual sinkhole. A person’s sincere interest in Bitcoin is evidence that they are disconnected from the financial problems most people face while lacking a fundamental understanding of the role and function of central banking. The only thing “profound” about Bitcoin is its community’s near-total obliviousness to reality.
Regulation and Other Minor Details Bitcoin owes its present flexibility to a lack of regulation (or, more accurately, a lack of understanding around existing regulations and/or unwillingness to comply with them). If the broader Bitcoin experiment doesn’t implode, the currency will be regulated just as any other. In this best-case scenario for Bitcoin, what of the benefits Dixon claims?

We’re told that Bitcoin “fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions.” If by “fixes” you mean “ignores”, then yes: a Bitcoin transaction, like cash, comes with the certainty that a definite quantity of a store of value has changed hands, and little else. How this verifies any “validity” or cuts down on fraud I’m not sure; stolen Bitcoins are spent as easily as stolen cash, which is why theft of Bitcoins has been rampant.

With those risks in mind, are the fees that existing card networks and payment processors charge – Dixon’s “roughly a 2.5% tax on all transactions” – outrageous, or are we perhaps collectively subsidizing the cost of fraud prevention and regulatory compliance? In what plausible universe will legitimate Bitcoin transactions be allowed to take place without such protections, and thereby without the associated costs? (Incidentally, you can expect to pay a similar “tax” just to reclaim some semblance of the anonymity that Bitcoin fails to provide in the form of mixers, a zingy term for money laundering.) To be sure, the credit card companies have fattened their margins beyond the raw cost of moving money around, but we have a miraculous salve for this called regulation.

If Bitcoin’s strength comes from decentralization, why pour millions into a single company? Ah, because Coinbase provides an “accessible interface to the Bitcoin protocol”, we’re told. We must centralize to decentralize, you see; such is the perverse logic of capital co-opting power. In order for Bitcoin to grow a thriving ecosystem, it apparently needs a US-based, VC-backed company that has “worked closely with banks and regulators to ensure that the service is safe and compliant”.

And Coinbase certainly feels, uh, compliant. It took me over a week to use the service to turn US dollars into a fraction of a Bitcoin, an experience that coupled the bureaucratic tedium of legacy consumer financial services with the cold mechanization of notoriously customer-hostile PayPal, but with the exciting twist that I have no idea from moment to moment how much my shiny new Internet money is actually worth.

Magical Thinking
While most of the claims around Bitcoin are merely wince-inducing, there is one that deserves particular attention: that Bitcoin is “a way to offer low-cost financial services to people who, because of financial or political constraints, don’t have them today.”

Economic inequality is perhaps the defining issue of our age, as trumpeted by everyone from the TED crowd to the Pope.....MORE
HT: naked capitalism who also says about another piece, Why I want Bitcoin to die in a fire, Charlie’s Diary. "Must read.".