An Alternative Market

“Inflation is transitory.” –

Jerome Powell, Chair of the Federal Reserve of the United States

A refrain of the US Federal Reserve after having ‘printed’ (selling USD bonds) almost 40% of all US dollars in existence in the last 12 months to combat the effects of the Coronavirus pandemic. Although the appropriateness, efficacy and method of the Fed’s monetary policy is often called into question, the vast majority agree that some form of economic stimulus was necessary. To the layman and I, the notion that a government can ‘create money’ out of thin air still boggles the mind; if the amount of currency in circulation denotes the value of a nation’s GDP, the US GDP has surely has not risen by same 40% the M2 money supply has spiked by. While the S&P 500 has almost doubled from its 2020 lows, this debt-fueled bull run and accompanying ‘K-shaped’ recovery disproportionately benefiting the rich at the expense of the taxpayer has sparked the very natural fear of currency devaluation, prompting many (and myself) to think more deeply about what constitutes a ‘store of value’ and what in fact is ‘good’ or ‘hard’ money.

So Bitcoin, which at this point sounds cliché, was what motivated me to read this module on Digital Economies – seeing as Bitcoin is dubbed as ‘Digital Gold’ and recognized as the ‘passive enabler of individuals marker exchange’ (Mellor, 2020); serving as a contra point to Fiat money since Brenton Woods agreement took the US Dollar off the gold standard. Throughout lengthy readings and excellent lectures, I believed that I‘ve begun to grasp the rough outline of forces driving the conception and adoption of Bitcoin. Through continued self-administered ‘indoctrination’ of the libertarian Bitcoin-agenda, been ‘enlightened’ to the boons of an alternative P2P, trustless[1], decentralized, borderless, and most importantly scarce digital currency; I’ll attempt in this reflection to make salient the various possibilities that Bitcoin espouses, from cutting out the middlemen with near-zero exchange fees to disrupting financial institutions through the self-custody of wealth, and even humanitarian relief. Relating such to concepts of Neoliberalism, Hackers & Makers, P2P financial systems and incentivized Co-operativism to understand why it was created and where it was going, as surely its position of challenging the incumbent financial system market heralds one of the greatest ‘shifts’ of history in the making.

With roots in the cryptographic community, I gather that Bitcoin was only possible through the open-source ‘hacker’ culture that pervaded the community. While first proposed by the mysterious Satoshi Nakamoto, it was this community’s collaborative efforts that refined, shaped and built on his initial concept. In his whitepaper, Bitcoin was conceptualized as ‘A purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.’ (Nakamoto, 2009) In essence an alternative financial market. As highlighted in Bauwen’s paper, Bitcoin approaches the ‘association’ mode of allocation, in that Bitcoin’s existence is very much supported by its networks of users/investors and miners; with an incentivized Co-operativism that leads all members of the Bitcoin ‘community’ to profit by acting in the interests of the group, resembling in part a form of digital commons. Based on Blockchain[2] technologies and the Proof-of-Work consensus model[3], democratic by design, Bitcoin miners are incentivized to devote electricity and capital to solve cryptographic hashes[4] that serve to verify transactions and thus making the network secure and reliable. Solving a cryptographic hash and the answer being verified by full nodes[5] rewards the successful miner with the rights to add a new ‘block’ to the blockchain ledger, allowing them to claim a reward of new bitcoins in addition to transaction fees from users seeking to send or receive bitcoin. Conversely if a miner tried producing invalid blocks (blocks that break consensus rules), full nodes would reject them and the miners would not be rewarded. Hence, those involved in the Bitcoin community are incentivized to act optimally as their objective is a higher price per bitcoin and a functioning network to earn the fees (exchanges, custodians etc). As a result, the bitcoin network is seen to be a ‘trustless’ system with low or no counterparty risk, as not only are the interests of all participants aligned and transactions are visible to all on the blockchain ledger (characteristic of open-source projects), each transaction is independently verifiable by anyone running a full node (Ammous, 2018). This market rational approach, as highlighted by Brown, of the designs of the Bitcoin network that amplify individual freedoms and self-governance representative of neoliberal, even bordering on libertarian, values.

Being both a mode of exchange and production, I found that despite resembling Karatani’s Associationism, the ties that bind in Bitcoin were, in theory, economic, pareto-efficient, market rational ones. It is by acting in self-interest, reminiscent of the market’s invisible hand, which lends viability to Bitcoin as an alternative market and fundamentally neoliberal solution as defined by Brown (Brown, 2005). However, by this very difference, Bitcoin falls short of Associationism as the processing power required to solve each following hash increases with the network size, this has led to the unintended(or perhaps intended) consequence of concentrating much of the hashing power into the hands of a few corporations backed by wealthy investors, in a way reflecting the current financial system and hampering the democratic decentralization of Bitcoin as a mode of exchange and production. Although not yet a possibility, this may expose the network to a hypothetical ‘51% attack’ in which attackers would be able to halt all or some Bitcoin transactions and even reverse transactions that were completed while they were in control of the network; opening the possibility of ‘double-spending[6]’ their bitcoins through the selective consensus approval of new blocks.

However, this disastrous scenario for Bitcoin echoes the very real control banks have over financial transactions, due to the nature of layered money[7] and only banks having access to the base layer, they have the autonomy to reverse any transaction not yet conducted on that layer, with most if not all financial transactions passing through such institutions, the control they have over the global monetary system is unprecedented Considering that a hypothetical disaster is a present-day fact in today’s monetary system that banks on ‘the full faith and credit of the Insert Government Here ’ and social trust, it truly makes one question how our monetary system is structured and how our wealth is stored.

Amongst the many ways Bitcoin is a neoliberal enabler, its P2P nature increases individuals access to cross-border transactions, sidestepping the monetary systems of clearinghouses and banks. By retaining control over transactions on the base layer, the banks and clearinghouses also gate access to cross-border, cross-currency transactions and can act, or be forced to act, to block certain transactions. Bitcoin circumvents this control by suggesting an alternative monetary system with a common currency and its own ‘layers’. With layer 2 systems such as the Lightning Network[8], Bitcoin has been used for humanitarian efforts[9], allowing funds sent via the Lightning Network to sidestep corrupt governments and banks to be directly distributed to the people who need it most. Furthermore, as Bitcoin allows for greater freedoms such as self-custody of one’s wealth with a mix of ‘hot’[10] and ‘cold’ wallets[11], hence providing an option for those fleeing from cruel regimes a means to secure their assets and avoid seizure by the authorities. Despite its potential positives, the fact remains that Blockchain technology is but a tool, and if in the wrong hands can be used to rob individuals of their autonomy, rights and wealth.

Briefly on the dystopian side of things, Blockchain technology might also allow for increased infringement of the individual’s rights. Some governments, i.e. China, are attempting to co-opt Blockchain technology which Bitcoin and larger cryptocurrencies are based on to develop a Central Bank Digital Currency (CBDC). This blatantly heretical act allows governments can leverage the ledger system to exercise full control of the funds of an individual. As they would own the keys to their populace’s wealth, enabling the tracking of transactions and even seizure of assets with impunity, increasing the encroachment of the government on the individual ­– Essentially this further centralizes power to authoritarian regimes and impinging on individual freedoms.

Ultimately, as with every new endeavour, Bitcoin is fraught with risk, and this risk is reflected in the volatility of its price as pegged to fiat currency, of course, the incumbents will also do all in their power to discredit Bitcoin as a legitimate currency, for its very neoliberal nature presents itself as a threat to mainstream monetary systems. By its very reliance on its network, Bitcoin might also easily be completely worthless[12] if the network loses faith in it. Therein lies the struggle between the individual, governments, and bank/corporations; with competing interests such as individuals seeking to safeguard wealth and the freedom to transact, while governments seek to maintain the sovereignty of their currencies, and some others like El Salvador[13] seek to escape it, banks/corporations seeking to retain control of at least a semblance of influence of whichever monetary system comes on top, we are living in a shifting paradigm, and if history is any indicator, I believe that it will be our onus to understand the systems we are subject to as to, as much as possible, stay on the right side of change.

Bibliography

Mellor, M. (2020, May 31). Bitcoin and the Myths of Neoliberalism. Retrieved from Australian Humanities Review: http://australianhumanitiesreview.org/2020/05/31/bitcoin-and-the-myths-of-neoliberalism/

Nakamoto, S. (2009). Bitcoin: A Peer-to-Peer Electronic Cash System. Retrieved from Cryptography Mailing list: https://metzdowd.com

Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking. Wiley Publishing.

Brown, W. (2005). Edgework: Critical essays on knowledge and politics. Princeton, NJ: Princeton University Press.

[1] But not really, as outlined in this article, Bitcoin DECENTREALIZES trust does not eliminate it [2] Do refer to these videos for more details on Blockchain Technologies: But how does bitcoin actually work? & Bitcoin flaws EXPLAINED (with subway cars) – this actually explains the blockchain technologies but is disappointingly phrased as clickbait. [3] Do refer to these videos for more details on Proof of Work: What is Proof of Work? [4] Difficult one-way Mathematical problems that require vast amounts of computing power, usually GPUs and now Application-Specific Integrated Circuits (ASICs), and electrical energy to solve. This expenditure of resources is the ‘Proof’ in Proof of Work. [5] A Bitcoin node is any computer that runs a Bitcoin implementation and stores the entire blockchain. Nodes validate each block and transaction before adding them to the blockchain. [6] Double-spending occurs when a blockchain network is disrupted and cryptocurrency is essentially stolen. The thief would send a copy of the currency transaction to make it look legitimate or might erase the transaction altogether. [7] The world’s financial system is built with ‘layers of money’ on which transactions occur, transactions are only final once cleared on the base layer(i.e.Fedwire), lower layers are characterized by slow but secure transactions and higher layers with fast but less-secure transactions. For more information listen to BTC010: Bitcoin & Layered Money W/ Nik Bhatia. [8] The lightning network is a second layer technology applied to bitcoin that uses micropayment channels to scale its blockchain's capability to conduct transactions more efficiently. [9] For more information listen to BTC023: Bitcoin's International Impact W/ Alex Gladstein [10] A cryptocurrency wallet that is connected to the internet and allows one to receive and send tokens. It is connected to the internet and can be accessed from anywhere with a. working internet connection. It is less secure as compared to cold wallets and is at a higher risk of being hacked. [11] A cryptocurrency wallet that cannot be compromised because it is not connected to the Internet. Also called a "hardware wallet" and "offline wallet," the cold wallet stores the user's address and private key and works in conjunction with compatible software in the computer. [12] Bitcoin too is fiat money [13] El Salvador has officially adopted bitcoin as legal tender as of 7th September 2021, this itself has been seen as indicative that some governments are beginning to see the value proposition of Bitcoin. Notable projects include: ‘Bitcoin Beach‘ where the adopting of bitcoin by a small seaside community, despite small hiccups, has reaped much positive change