Ghost Money: An Introduction to Bitcoin and Cryptocurrencies
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Princeton in the Woodrow Wilson School of Public and International Affairs
The advent of Bitcoin spawned an entirely new perspective on the very nature of money itself. Entirely electronic and almost impossible to track, this new style of currency helped spark a whole new way for people to perform transactions without lots of the possible barriers presented by traditional monetary means. Bitcoin and the other cryptocurrencies based on the former’s open source code have altered much of the financial world as we know it, as well as having real world impacts in the political and international arenas. To help someone new to cryptocurrencies understand the concept, we have compiled a list of articles that are meant to explain things from both technological and political standpoints, as well as some opinion pieces to demonstrate how controversial this new technology can be.
The advent of Bitcoin spawned an entirely new perspective on the very nature of money itself. Entirely electronic and almost impossible to track, this new style of currency helped spark a whole new way for people to perform transactions without lots of the possible barriers presented by traditional monetary means. Bitcoin and the other cryptocurrencies based on the former’s open source code have altered much of the financial world as we know it, as well as having real world impacts in the political and international arenas. To help someone new to cryptocurrencies understand the concept, we have compiled a list of articles that are meant to explain things from both technological and political standpoints, as well as some opinion pieces to demonstrate how controversial this new technology can be.
This article gives a quick explanation on what exactly Bitcoin is before delving into detail on some of the more technical aspects, along with the social community that developed around interest in the currency. Specifically, it describes the implications of Bitcoin being open source and not having a patent while simultaneously having a single development team. Because Bitcoin is open-source, users are free to develop their own currencies without paying royalties to or getting permission from the original developers, allowing users alternative cryptocurrencies should they disagree with the developers of Bitcoin or for any other reason. Although Bitcoin is still the most prominent cryptocurrency, there is a growing community surrounding the concept.
The article also discusses alternative solutions to the issue of inflation and deflation of the currency. Freicoin, for example, sets its growth rate at 5% annually, effectively creating 5% inflation. Other solutions include creating “state-dependent rules for cryptocurrencies,” increasing or decreasing the growth rate depending on a chosen economy.
The article then goes on to discuss the pitfalls of cryptocurrencies, especially their volatility and legal difficulties. Because of their deregulated nature, cryptocurrencies are prone to sudden peaks and bursts, making potential buyers nervous about investing. Also, the legality of the currencies often comes into question. Cryptocurrencies are great for laundering and purchasing illicit goods, and their unfamiliar nature raise into question the usefulness of current financial laws. Currently, the United States does not legally treat Bitcoin as a currency, offering only extremely light regulations, though this also does change per state. The taxation of cryptocurrencies, however, has been far less compromising, and current regulations are inefficient and have hurt the growth of Bitcoin, though there are currently talks to change the laws.
The article next goes on to describe the existence of Bitcoin in the greater financial market, arguing that allowing a private currency free from government printing is ultimately a good thing. Bitcoin will not replace the dollar in importance so long as the Federal Reserve does nothing absolutely ludicrous, and in countries with less stable currency the Bitcoin may prove to be an excellent alternative to assist in economic growth. Furthermore, government regulations have historically caused massive economic difficulties, and private currencies such as scrip have proven successful throughout the world.
The article closes with a list of actions the government should take regarding Bitcoin. They go as follows:
- Focus on general rules concerning contracts, disclosure, and fraud prevention
- Remove barriers to entry in the market for money
- Modify Capital Gains Tax Laws
- Modify statutes concerning coinage to make clear that they do not prohibit honestly making alternative coinage and using it in private transactions
- Address bank secrecy and anti–money laundering laws
- Modify legal tender laws to respect freedom of private contracting
Michael and Dwyer take a heavy interest on the economic front of cryptocurrencies as a whole, focusing on the idea of internet-based currencies rather than just Bitcoin alone. With a goal of creating suggestions for the government in regards to Bitcoin, they give a very optimistic outlook on the value cryptocurrencies may have for the world economy. As a more conservative organization, their suggestions generally include minimizing government impact, with the government acting as more of a moderator for ensuring fair practices rather than directly involving itself into the currency marketplace.
The article begins with an overview of the blockchain, the process by which Bitcoins are transferred. Essentially, the blockchain is a system by which two individuals with no knowledge of each other can securely exchange cryptocurrency for free and without the use of a third-party. Essentially, a worldwide collection of computers acts as a single powerful entity to ensure exchanges are done legitimately and successfully. This invention, the authors argue, is far more important than Bitcoin itself and can allow for more accessible and cheaper financial dealings, giving greater potential to economic growth.
The article then goes on to explain how the Blockchain is evidence of technology’s march towards empowering the individual, and how the free-flow of ideas leads to greater technological innovation. Basically, by removing the middle-man, the Blockchain allows easier access for people to transfer valuable items quickly and securely, thereby empowering the little man by removing his reliance on a tertiary corporation. Furthermore, the authors argue, the invention only came about because of the deregulated nature of the internet. By allowing the free-flow of information, the internet has quickly evolved, creating stronger and more advanced innovations.
Analysis:
Tile and Kaushal focus on one specific aspect of cryptocurrency, though instead of giving a technical overview or showing its immediate impact, they view it through a much more general lens. The main point is less about the Blockchain itself, but more about the pro-individual nature of technological progress and an argument against strong regulations of information.
The article gives an overview of the Blockchain, and then argues that this specific piece of technology has proven far more useful than Bitcoin itself. It has been adapted into lots of societal functions that rely on electronic communications such as the stock exchange and the music industry.
This short piece gives a quick overview of the Blockchain as well as some of its uses. This piece serves as more of an explanation of the piece of technology than anything really analytical.
“The Market for Cryptocurrencies” by Lawrence H. White, published by The Cato Institute
The goal of the article is to describe the main economic features of the cryptocurrency market, and to discuss whether or not the market is a bubble. The article begins by describing cryptocurrencies as a whole, comparing Bitcoins and other cryptocurrencies to currencies issued by governments, as well as describing the growth of the cryptocurrency market. It also describes cryptocurrencies potential as a cheap and easy way to exchange other currencies, assisted by its free-entrance and accessibility. Next, the article describes how cryptocurrencies compare to Hayek’s theoretical private currency. Namely, Hayek believed that should a private currency come into circulation, it would ultimately be destroyed by its own creator. Essentially, when the currency caught on, the creator would (quite legally) produce a large amount of the currency to quickly spend, thereby destroying the value of the currency by eroding the public’s trust. Bitcoin solved this problem in several ways, namely by programming a maximum possible number of Bitcoins that can possibly exist. The article describes the various types of cryptocurrencies on the market, explaining their innovations and sometimes niche purposes.
Next, the article discusses the crux of its message about whether or not cryptocurrencies are economic bubbles. There have been many crashes in the market already, with losses of value over 99% in several cases. However, this does not mean that cryptocurrencies are necessarily bubbles. First of all, Bitcoin holds noneconomic value to some people just because they like the concept for whatever reason. People want to say “I hold $100 in Bitcoin!” or what have you, thereby giving Bitcoin actual value. The article then discusses other possible avenues of a crash, and how Bitcoin has or has not evaded them. Counterfeit, for example, is a non-issue as the Blockchain disallows one coin to be spent multiple times. Also, while alternate currencies may eat into Bitcoin’s market share, the market continues to grow and so Bitcoin has grown more powerful, even as it loses total market power in the cryptocurrency field. The article then goes on to compare Bitcoin to fiat currencies. It states that, although the two are identical on the demand side, insofar that they are not actually backed by any tangible good, they are quite different on the supply side. Unlike physical currency, Bitcoins are free to produce and have a total cap in quantity, creating massive deflation, while at the same time the cost of maintaining the project is quite high, though this maintenance is mostly completed by volunteers. Also, the author makes note that, with few exceptions, the only vehicle into the altcoin market is through Bitcoin.
As for policy, the author essentially says that any intervention would ultimately slow the development of the field, and basically cryptocurrencies should be left alone.
This article offers an interesting view into the general cryptocurrency market and the possibilities it holds. It does offer a very optimistic outlook on the market as a whole, with heavy implications that the currencies will soon begin to be used in everyday life such, referencing debit-card-like implementation and the use of the coins as avenues to exchange fiat currencies.
“Cryptocurrencies and a Wider Regression Theorem” by Peter St. Onge, published by The Cato Institute
The article plays around with Bitcoin’s role in the Menger-Mises Regression Theorem which essentially states that for something to be a currency it must have some intrinsic value. Detractors claim that Bitcoin breaks this rule, while Graf made the claim that Bitcoin has intrinsic value as a sort of status symbol among “geeks.” St. Onge argues, essentially, that Bitcoin’s value comes simply from its ease of use. Just like China’s “flying cash,” the popularity and therefore the value of the Bitcoin comes from the advantages it provides as a form of currency. Basically, so long as people continue to accept it as currency, it will carry value.
Though small, this article is extremely dense in economic ideas and theories. It’s an interesting read, though it views Bitcoins in a far more theoretical light through an economic lens.
“The Bitcoin Money Myth” by Frank Shostak, published by The Mises Institute
This articles argues that Bitcoin will never replace paper money, because Bitcoin uses paper money as a basis for its value. Without other currencies, Bitcoin would be useless. This is because all currencies are based on a tangible good, such as the dollar’s historical association with gold, and so the only thing that gives Bitcoin value is its association with the dollar.
This article is certainly a far cry from most of the other articles hyping up the potential for cryptocurrencies. It offers a fairly pessimistic, limited outlook on the potential value that cryptocurrencies will have on the greater market.
The Bank of England had made proposals to institute their own cryptocurrency, but have decided not to do so. The article then goes on to explain why the bank having a cryptocurrency would hurt the market, entrenching the bank into an even greater position of power, and so he sees their decision as a relief.
This article is incredibly libertarian, basically arguing that the central banks are responsible for economic troubles and bubbles. In fact, the article is more of an outcry against central banks in general than anything really having to do with cryptocurrencies.
Jonathan B. Turpin’s essay “Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework” is designed to promote the acceptance of Bitcoin by world governments, arguing that, while regulation may be useful, total illegalization of the cryptocurrency is both impractical and counterproductive.
The essay begins with an overview of Bitcoin, describing its history and how it works as well as the benefits the currency brings to economic development. Explained in very easy-to-understand terminology, this part serves its purpose tremendously well, and even readers without even a cursory knowledge in computers or the internet should be able to understand. This section is followed by an examination on the inherent risks of Bitcoin’s electronic and anonymous nature. The volatile nature, along with the potential for scams and theft as well as its use in illicit activities are all the most prominent obstacles to the widespread use of Bitcoin. The next section examines the economic implications of Bitcoin. It presents the advantages Bitcoin presents on the market to vendors and merchants, as well as its relation to other more accepted currencies.
Finally, Turpin reaches the crux of his essay, describing government interest in Bitcoin as well as the problems with illegalizing it. First of all, he argues, as Bitcoin does not fit nicely into any legal framework already devised by law, and because of the sluggish nature of legal bodies, creating a legal framework for any laws surrounding Bitcoin will prove difficult. Furthermore, given the anonymous nature of Bitcoin, catching criminals using the currency has proven difficult, and all major successful incarcerations have been made using traditional detective work, using physical evidence and paper trails left by the criminals instead of any Bitcoin transactions themselves. Furthermore, in authoritarian nations with hefty censorship laws, Bitcoin may prove useful to rebellious figures, as the currency would give a solution to the problem of finding a way to anonymously pay for the services they require without having their identity discovered by government forces.
While this essay does give an interesting though not particularly startling for the benefits of Bitcoin, it is most useful as an introduction to the currency for those without a background in computer science or any other sort of related field. Using this essay as a jumping-off point for the details of Bitcoin along with the politics and other sort of implications previously described is where this paper shines.
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Silicon Valley, Wall Street and Washington
