The price of one Bitcoin is dancing around $1,000, which means it’s time for the mainstream media to start paying attention again. Cue the comparisons to Beanie Babies and tulip bulbs. Even with its meteoric rise, Bitcoin is still a mystery to most people. Oh, Bitcoin—isn’t that what people use to buy drugs online? Doesn’t Bitcoin allow terrorists to launder money? Isn’t it just for computer geeks? In other words, it’s not really my concern unless I want to day-trade it.
What most people are missing is Bitcoin’s potential to impact politics, and therefore everyone’s day-to-day lives. Since its inception eight years ago, libertarians have mostly embraced the cryptocurrency (the term for digital currencies secured by cryptography), while liberals have mostly held it in suspicion (a Democrat senator actually tried to ban Bitcoin and Paul Krugman is no fan, once penning a column titled “Bitcoin is Evil”).
Conservatives have been less sure: should they support a currency that has historical associations with drugs and anarchists? Regardless of political persuasion, it’s time for everyone to understand Bitcoin, a currency and technology that could actually change how governments operate.
Taking on Big Money
Although the U.S. economy is touted as a “free-market” economy, the label is only partially true, with an increasing emphasis on “partially.” The federal government is deeply involved in directing the economy, picking winners and losers as it believes, in its infinite and benign wisdom, is best for Americans. It’s Paul Krugman’s dream world, and we’re just suffering through it. Consider the roaring 00’s: the government encouraged, even pushed banks to offer riskier and riskier loans in the name of “fairness,” and when that policy inevitably failed, the government swooped in with our money—and a lot of newly created money—to bail them out.
The government can do this because it has complete control of the money supply. Most people, even most conservatives, accept this without question. Yet this state of affairs violates the principles of limited government and the free market. Why should our money be controlled by the government? Why not open it up to the free market?
Furthermore, having control of the currency bestows on the government almost unlimited power. How else can it bail out the banks and pick winners and losers? (To say nothing of how this control helps fund unpopular wars.) If we take the money supply out of the government’s master-planner hands, businesses and individuals will be responsible for their own successes and failures. As a completely independent money with a limited money supply, Bitcoin can put a natural limit on the ability of the government to control the economy and our lives.
But what is Bitcoin? How does it work? This is when most people’s eyes start glazing over, but let’s give it a shot. As I wrote in my book, “Bitcoin Basics,” “Bitcoin is a decentralized global monetary system comprised of both an electronic payment network and the digital currency used on that network.” Let’s simplify that even more.
Think about the Internet. In essence, the Internet is a set of “protocols,” which are essentially sets of rules for how computers communicate with one another. Everything that you see and do on the Internet has to follow these protocols in order to work. Most people don’t understand how it happens, nor do they care. They just want to be able to watch funny cat videos on YouTube.
Bitcoin is also a protocol, but while the Internet’s rules cover communication between computers, Bitcoin’s are for transferring value between computers. So instead of protocols to send emails or text messages or videos, the Bitcoin protocol sends “bitcoins,” which is a currency, like dollars or pesos or euros. The Bitcoin network allows you to transfer these bitcoins to anyone in the world cheaply, securely, and quickly.
Who controls Bitcoin? Here is the cryptocurrency’s most subversive feature. As my definition stated, it’s decentralized: no one controls it. Again, consider the Internet. Although Americans like to think they run it (and Al Gore likes to think he invented it), the truth is that no entity truly controls the Internet. It’s made up of a vast number of computers individually controlled but working together based on the rules of the protocols.
If the U.S. government tomorrow passed a law to “shut down” the Internet, it would still continue to function, because people worldwide would continue to run the decentralized network that is the Internet. Likewise for Bitcoin: a network of computers, which can be owned and run by anyone, follows the rules of the Bitcoin protocol and keeps it secure. In fact, so many computers are involved that the Bitcoin network is exponentially more powerful than the most powerful supercomputers in the world.
What gives Bitcoin its value? Here is where we see a true free market in action: Bitcoin has value because people freely see it as a store of value as well as a powerful electronic payment network. After all, what gives anything value? It is the very fact that people find it useful for some reason. And people worldwide are beginning to see Bitcoin as useful both as a store of value and as a way of easily transferring value between people without the need for a middle man.
Storing and Transferring Value
In the socialist paradise of Venezuela, the value of the government-backed currency, the bolívar, has been in a free fall as the government pumps new cash into the country’s economy. This has left the Venezuelan people in a terrible situation, since most basic goods have risen drastically in price, sometimes literally overnight.
Enter Bitcoin. Completely independent of the Venezuelan government’s socialistic meddling, Bitcoin’s value is based on a free market, i.e., what people are willing to pay for it. Further, its money supply is limited and can’t be inflated at the whims of government officials. Like gold, this makes it a store of value in troubled times.
Sure enough, Venezuelans are starting to notice. More and more are exchanging their bolívars for bitcoins for savings and to pay for the necessities of life. Even in America, because the dollar has steadily decreased in value over the years, having an alternative store of value apart from the dollar is worthwhile. A dollar today is only worth $0.16 in 1970 dollars.
In addition to its use as a strong store of value, Bitcoin has revolutionized how value is transferred between individuals. This is something Americans might not appreciate as much as those in other parts of the world. Our payment systems seem to work just fine. You can buy things at Amazon, the coffee shop, and the grocery store with few problems. Sure, there are some issues with identify theft and hacked credit cards, but that rarely appears to impact most individuals’ lives (although there are hidden costs, such as significant bank fees, passed on to the customer).
Bitcoin, however, can fill in where payment systems fail in less developed countries, which are often afflicted by corrupt and poorly run governments that make most payment systems unprofitable. Think of it as expanding entrepreneurship and the free market to the whole world. Case in point: a startup now allows Africans to send money easily to Chinese companies using Bitcoin. Without Bitcoin, sending money to their many Chinese suppliers is often a sluggish and expensive process for Africans. Some even opt to hire middlemen to carry bundles of cash to China by plane. Real-world problem solved—and freedom expanded.
Bitcoin is just the beginning, however. Its underlying design, called “blockchain technology,” has potential applications far beyond what Bitcoin itself is intended to do.
For example, Bitcoin’s fellow cryptocurrency Dash has the potential to have even more direct effects on how we are governed. Its developers have created its own decentralized governance system for managing the development of the currency. This type of governance system could revolutionize how governments work, giving more power to local communities, increasing transparency, and granting people a more direct voice in how they are ruled.
Meanwhile, the Ethereum Project wants to use blockchain technology to revolutionize the legal system. Instead of wasting time and money on lawyers and other legal services for any and all contracts, Ethereum allows for “smart contracts” in which the agreement is guaranteed by computer code. Other than lawyers, who wouldn’t applaud the de-powering of the ever-expanding legal field?
I have no idea if the price of one Bitcoin will reach $10,000 or plummet to $10, and no one else does either. If Bitcoin fails—especially if due to governments over-regulating it or even banning it to maintain their status quo—then a real opportunity for freedom will be lost.
But if Bitcoin and the technology behind it succeeds, it may revolutionize both politics and economics, furthering the conservative values of limited government and a truly free market. As acceptance of Bitcoin continues to grow, its influence may reach much farther than drug markets and computer geek chat rooms. It might end up affecting all of us.