Robert Murphy, op-ed via The Hill, Sun, 11/03/2019
Oct. 31 marked the 11th anniversary of the release of the famous bitcoin whitepaper. It is worthwhile to take stock of the first crypto-currency’s impressive achievements to date, while also warning of the future perils it faces.
Bitcoin has defied the critics repeatedly, being declared “dead” many times over. (In this respect it’s appropriate that it was born on Halloween.) Although its price has been volatile, it’s currently trading at a market cap of $170 billion – more than McDonald’s, and comparable to CitiGroup.
Along the way, internecine battles led to a “hard fork” and the creation of “Bitcoin cash” (in August 2017), but the cryptocurrency community emerged wiser. As for the future, ironically a piece of otherwise good news – faster computing power – may pose serious problems if the promise of “quantum supremacy” should be fulfilled.
An estimated 5 percent of Americans hold bitcoin, and the global number of users is probably around 25 million. More impressive (and precise) details concern the financials: as of this writing, some 18 million bitcoins have been “mined” — the metaphorical term describing the procedure by which a new bitcoin becomes recognized as belonging to someone’s address on the blockchain — and a single bitcoin currently fetches a market price of about $9,450. For something that critics derided as a tech fad that would soon evaporate, that’s a rather impressive accomplishment.
The disputes between bitcoin and bitcoin cash concerns the trade off between speed of transactions and the diffusion of transaction approval among a greater number of players in the network. These debates are of intense interest to crypto-enthusiasts and merchants, but for me they underscore some of the confusion in the original “marketing” of bitcoin to the public.
The fundamental achievement of bitcoin was its genuine peer-to-peer payment system; no person or even institution was “in charge” of bitcoin. In a financial system lacking trust, it seemed a “trustless” transaction network was just what the doctor ordered.
Yet as the acrimonious debates and eventual “hard fork” showed, dominant personalities indeed appealed to public opinion, at least where “the public” referred to the community of bitcoin miners. To be sure, a tremendously important difference exists between the way the blockchain (its system of rules) works and (say) credit card purchases.
But just as it was misleading when some proponents originally described bitcoin as “anonymous” — since “pseudonymous” is a better term — it was likewise misleading when some claimed that changing the rules of bitcoin would be as impossible as changing the laws of arithmetic.
It would have been more accurate to say that changing the rules of bitcoin would be like changing the rules of grammar: much more stable than the IRS code, to be sure, but ultimately malleable as the whole community’s behavior evolves.
As an economist I have argued that bitcoin is even “harder” than precious metals because in principle humans might discover an asteroid laden with silver, or scientists might figure out a cheap way to transform baser matter into gold. In contrast, the bitcoin protocol locks in an ultimate limit of 21 million bitcoins that will ever be mined. (It’s true that even this “rule” could in principle be changed, but that would be akin to English speakers deciding to consistently start sentences with verbs instead of nouns).
However, the possibility of quantum computing poses a threat. This isn’t unique to bitcoin; the encryption currently safeguarding internet transactions in general is vulnerable. In the grand scheme, it will be of immense value to humans if a new type of computer can perform in seconds what would take a classical computer millennia. However, when the security of bitcoin had originally been promised by saying, “Why, it would take a mainframe a thousand years to reverse engineer your private key,” there is obviously a concern.
In the long run, financial transactions can be hardened even against attacks from quantum computers. Even so, Google’s recent announcement of a milestone in quantum computing means the adaptation will probably need to be accelerated.
On its 11th birthday we should celebrate bitcoin as an amazing accomplishment of human ingenuity and financial innovation that forced several disciplines — including economics — to adapt. Those of us studying its evolution have become wiser, but crypto currencies will need to continue their evolution as the rest of the world progresses.