Ep89[1/2]: Brian Hanley: The False Premises and Promises of Bitcoin.

Welcome to episode 89 of Activist #MMT. Today I talk with author, researcher, and entrepreneur, Brian Hanley, about his paper, The False Premises and Promises of Bitcoin. The paper, published in 2013 and last updated in 2018, is essentially a summary of Bitcoin and cryptocurrency through an MMT lens. (Here’s a link to part two with Brian.) I’ve always been interested in Bitcoin but never took the time to understand or read about it. I just noticed the strong and even emotional views about it online, both for and against. On May 12, 2021, however, a tweet by Tesla CEO Elon Musk, caused the worldwide price of Bitcoin to decrease by 17% in two hours. This caused the wealth of every single Bitcoin holder to lose a total of $170.6 billion. I suddenly became extremely interested in Bitcoin. I initially thought – actually, strongly suspected – that Musk’s tweet was part of an effort to deliberately manipulate the price of Bitcoin. My guest disagrees. Regardless, it’s obvious that if such devastation can be caused in only a couple hours, by a single tweet by a single billionaire, then the very foundation on which Bitcoin and cryptocurrency sits must be called into question. My fascination with this incident eventually led me to Brian’s paper, among other MMT-informed sources about Bitcoin, links to which you can find in the show notes. Setting aside energy usage, there is nothing inherently wrong with Bitcoin or cryptocurrency. It’s something to invest in and if you know what you’re doing and choose to do it, then you can make a bit of money off of it. The problem comes in falsely believing that Bitcoin and its ilk are in any way related to the money issued by national governments, and especially that Bitcoin can somehow replace the money of a government – or even more absurdly, the entire world. It betrays a fundamental misunderstanding of how modern economic systems work. Were a government to adopt Bitcoin as its official currency, as just tragically (kind of) happened in El Salvador, then the government would make the personal wealth of every citizen vulnerable to another potential tweet by another billionaire. Those who choose to invest in Bitcoin choose to take that risk. Those who are unlucky enough to be among the nearly 7,000,000 citizens of El Salvador, that risk and vulnerability was just foisted upon all of them. Bitcoin is backed not by gold or state power, but entirely by the group psychology of all Bitcoin holders and those that influence them. In other words, Bitcoin only has as much value as its holders believe it has, not unlike any other fad or mania, such tulip bulbs in the 1600s and Beanie Babies in the 1990s. [For more on this concept, see Brian’s June 2021 post, Bitcoin is mania, pure and simple. ] A topic Brian and I discuss that I don’t think we cover sufficiently is the double-spending problem. When a dollar bill or nickel is spent, it physically changes hands. This is something we can keep track of easily and know for sure that it was only spent once. Digital money – digital anything – can be easily duplicated many times over. So how can it be ensured that a Bitcoin was only spent once? This is where the blockchain comes in. Every transaction ever made, with every Bitcoin, is permanently and publicly logged onto the blockchain. Although it’s impressive that Bitcoin has solved this problem, the solution is also a reason why Bitcoin is so inefficient and energy hungry. Every few seconds, a new transaction is added to the blockchain, a process that must traverse every existing transaction, duplicating the information onto every block in the chain. This algorithm is central to the system and the foundation to eliminating double spending. The other reason it’s so energy hungry is the manner in which new Bitcoins are generated, with each new coin requiring more computing power than the last. Finally, the process must also gracefully handle multiple simultaneous attempts to update the blockchain, as well as deal with potential failures without corrupting existing items. Here’s a crucial and related topic you’ll hear Brian and I discuss: Modern society is only possible because of credit. Credit is the ability to obtain goods or services before payment is made. In other words, a loan or an IOU. Your boss obtains your labor before you get your paycheck. You pull out a credit card to buy a candy bar and soda, but you don’t actually pay for it until the bill comes due at the end of the month. I commit to purchasing a house, but don’t actually pay for it until months later when seated at the closing table. And I don’t really pay for it until my final mortgage payment thirty years later. Were Bitcoin to replace a government or bank’s money, it would only be possible by eliminating the very concept of credit. Were this to happen, it would bring us back to the days when lords had vaults filled with gold and gave their customers certificates to obtain it on demand. As long as these forerunners to banks properly calculated the number of people who actually wanted to redeem their gold, they should be fine. If they estimate incorrectly, then there could be a run, and the lord will have to literally defend their stock of gold, potentially running out if everyone wanted it back. In addition, gold certificates are also desirable because gold is heavy and inconvenient. It’s also easier for regular people to hide and secure a certificate than an actual piece of gold. Critically, however, banking based on Bitcoin would be just that scenario but without the certificates. Banks would literally only have gold. Customers could only deposit and withdraw and borrow actual gold. So the population and its needs continue to grow, but the amount of gold remains unchanged (see the below graph, with thanks to Brian). It means that society is forced to become a 100 percent pure barter economy. In other words modern banking, and therefore modern society, is made impossible. Finally, note that Bitcoin certificates (or Bitcoin credit, or what Brian calls virtual Bitcoin) are impossible not because it’s technically infeasible, but rather because the concept is simply anathema to the supporters of Bitcoin, resulting from a very libertarian, anti-government point of view. To close, I’d like to share a quote from Nathan Tankus: The very fact that Bitcoin’s 'price' gets quoted in fiat shows that crypto-currency is an adjunct to state money. I’ll take the idea that pure cryptocurrencies are a threat to state money not when Bitcoin’s dollar price gets very high, but when its dollar price is irrelevant. And now, onto my conversation with Brian Hanley. Resources The MMT view of Bitcoin: 2013 post by Eric Tymoigne, The Fair Price of a Bitcoin is Zero (Quote from this post: "By the way, just for full disclosure, those who organized the hunt collected a bunch of eggs before the forest opened to the public.") L Randall Wray: Bitcoin is not money. From Pocket Change Warren Mosler about Bitcoin in 2012 2015 paper by Brian P Hanley, A zero-sum monetary system, interest rates, and implications. The definition of "hodler" Stamp Act Regarding anonymity: 2016 paper Sarah Meiklejohn, Marjori Pomarole, Grant Jordan, Kirill Levchenko, Damon McCoy, Geoffrey M. Voelker, Stefan Sa, A fistful of Bitcoins: characterizing payments among men with no names The VC article about Bitcoin that Brian finds crazy 1852 book (1932 reproduction) by Charles Mackey, Extraordinary Popular Delusions And The Madness Of Crowds Nassim Nicholas Taleb Shellacks Bitcoin and Cryptocurrencies (his 2021 paper for New York University: Bitcoin, Currencies, and Bubbles) Brian’s 2013 book, Radiation - Exposure and its treatment A modern handbook 5he story and capture of Dred Pirate Roberts