Bitcoin may be many things: a cheaper and more efficient payments mechanism, a decentralised form of QE, an extreme way to break through the ZLB, a worthy private substitute for cash, an opportunity to stick it to the man or even a speculative investment opportunity of a lifetime.
What it isn’t, however, is a fair distribution of income.
Steven Englander at Citi comes to a similar conclusion, despite previously appearing a tad more enthusiastic about the idea of a private currency gaining traction.
As he noted on Monday:
With Bitcoin again over USD1000 on reports over the weekend of interest in Bitcoin by US hedge funds, real estate firms and online gamers, it seems churlish to be skeptical on how Bitcoin will evolve. Nonetheless, we are less excited about Bitcoin as a store of value and alternative to fiat currencies than about its potential use in facilitating transaction and improving payments efficiency. We also argue that seignorage gains on either Bitcoin or its clones lead both to fiscal losses for governments and very unstable price dynamics, Net, net, we like small-‘b’ generic bitcoin as a payments technology more than big-‘B’ brand-name Bitcoin as a store of value.
A fair observation, we think.
After all, no one can question the truly innovative aspects of Bitcoin on the payments side. As Felix Salmon notes, any advances are more than welcome, because the current state of the industry is dire — incumbents have a monopoly and very little interest in overhauling failing and decaying networks to make anything more efficient or cheaper. Central banks can drop hints and cough loudly to try to encourage the industry to move in the right direction, but since it’s a private market, they can’t enforce anything at all.
In Salmon’s mind, however, the solution is unlikely to lie in new stores of value, or further fragmentation of the currency or payments system. What we want is ubiquity.
Which is why we think the best thing that could happen would be if the central bank borrowed from the lessons of Bitcoin and allowed its official money to be distributed digitally in a similar way. The only difference would be that supply would be mined and controlled by the central bank, not network miners.
We’ll have more on that in an upcoming post drawing on a conversation we had with Miles Kimball.
But it’s worth revisiting one of the key problems with the Bitcoin system as it stands: the fact that seigniorage revenue currently flows to a very concentrated pool of individuals. Worse still, that a lot of these individuals have no interest in printing for wider distribution. Their aim ultimately is to enhance seigniorage revenue with outright appreciation meaning that they, unlike central banks, are also speculators, motivated to “print” coins as much for hoarding purposes as for seigniorage returns.
As Englander notes:
Best estimates are that there are about one million holders of Bitcoin; 47 individuals hold about 30 percent, another 900 hold a further 20 percent, the next 10,000 about 25% and another million about 20%, with 5% being lost. So 1/10th of one percent represent about half the holdings of Bitcoin and 1 percent close to 80 percent. The concentration of Litecoin ownership is similar.
Most of the big wallets have been in place from early on, so sitting back and watching your capital grow has been a very successful strategy. The distribution of Bitcoin holdings looks much like the distribution of wealth in North Korea and makes China’s and even the US’ wealth distribution look like that of a workers’ paradise. There are estimates of a Gini coefficient of 0.88 for Bitcoin, but if anything the estimates are low if big holders own multiple wallets and the overall concentration of Bitcoin wealth is greater than in the sample used to estimate the coefficients . The most recent estimate of Gini coefficients of wealth concentration does not show any country above 0.85 , but this sample did not include North Korea.
And as Englander also observes:
Seignorage generates strong incentives for holders of the original Bitcoin to encourage its use, but it also generates incentives to create many alternative currencies, and mine them early and often. The hope is that one or several of these currencies will either a) take hold as a store of value or b) become so fashionable that the early miners can cash out. One element of the tulip bubble that is always ignored is that it was a boon to tulip farmers in addition to speculators. Given how specialized mining has become, the seignorage gains to Bitcoin follow-ons will accrue heavily to a narrow swatch of tulip farmers technology mavens who are in a position to mine each successive alternative currency while the going is good and cheap.
Fiat currency seignorage allows governments to spend more than their revenue raising capacity would permit. Citi’s Willem Buiter argues for ‘four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money’ . If the seignorage accrues to early adopters of Bitcoin or its lookalikes, less will accrue to the government.
No surprise then that so-called “Bitcoin experts” tend to be extremely dismissive of alternative crypto currency systems in the market.
God forbid others get the chance to benefit disproportionately as early entrants in an asset-less scheme that has the capacity to exploit the internet’s capacity for viral memes and fads.
We thought the following quote from Johnathan Turrall, chief technology officer at Metalair, a cryptocurrency start-up based at the University of Sussex, about plans to introduce an altcoin themed around Kanye West kind of said it all in terms of irony.
From the BBC:
However, one Bitcoin expert urged caution in investing in new virtual currencies that were as yet untested in public use. “There’s been a number of people who have put out ‘joke’ currencies in the past,” said Johnathan Turrall, chief technology officer at Metalair, a cryptocurrency start-up based at the University of Sussex. “There were some coins in the past that seemed to be a ‘pump and dump’ operation.
“In one case, the original developers launched on obscure websites, but when they took it mainstream, and the price spiked, they sold up and disappeared. Estimated earnings in one instance were $800,000.”
Yup. In the free-market world of crypto currencies all private alternatives to fiat are theoretically equal, but some are more equal than others. Meaning in the eyes of the Bitcoin community it’s okay for some people to be able to mint themselves free money and encourage its acceptance for real-world goods, but it’s not okay for everyone to be able to do the same — in line with competitive free market principles.
The irony that Bitcoin must become as totalitarian as fiat currency if it’s to survive, is apparently lost on Bitcoin’s freedom-loving community.
Luckily, the free-market spirit of the internet provides. Indeed, following in the footsteps of dogecoin’s success — a comedy coin — the internet has finally figured out that epic altcoin proliferation is best handled the same way epic cat video proliferation was handled. Via the creation of ever more successful and viral memes!
In fact, on coingen.io anyone with a good enough coin-themed meme can have a go at trying to make it the next big thing (H/T Justin Cormack) .
It’s an important development! Not least because it exposes the fundamental nature of the altcoin movement: it’s all a giant internet-based popularity contest, wherein those who amuse others successfully are rewarded with clicks or high velocity transfers not dissimilar to any other contagious meme.
Of course, it’s not entirely insane that internet memes and money should have ended up being fused in this way. Money has viral qualities of its own, while memes — born of a velocity effect — remain a store of value for as long as the crowd stays enticed by the concept.
We’d suggest that in an abundant age where wealth distribution according to old values based on rewarding those who create more material stuff only hurts the system by creating supply shocks or resource squeezes, there’s even some sense in rewarding those who have the power to capture anyone’s imagination.
But if we are going to make money and finance into a farce, it would be nice if we could at least do it in a way that allocates wealth to more deserving causes than Bitcoin miners. For example, initiatives like Plastic Bank, which is attempting to turn discarded plastic into a currency in an effort to incentivise people to clean up and ideally distribute a little wealth to the world’s most impoverished, seem like a much better idea.
Alternatively, why not start a currency based on good deeds, wherein supply is controlled by the number of public approvals needed for the deed in question?
In any case, here’s a meme-based coin idea of our own: Hitcoin