I am a member of the (growing) minority of economists who prefer to put their trust in the private banking tradition over the central bank alternative. But it in no way follows that Bitcoin-type digital currencies are preferable to either (really) private or state-owned central banks.
Still, digital currencies have taken root, sometimes with government support, and sometimes in spite of it, around the world. One reason may be the possibly erroneous belief that trading in funds (as if such “funds” were in the same family as shares or bonds) and the use of digital “money” as means of payment or stores of value/units of account can be kept invisible to tax and regulatory units in the typical national government, East or West.
Don’t you think so. I certainly don’t.
Think about it. Inquisitive minds in public office do not need to develop super-smart ways to penetrate the fog of computer tricks used to hide the “backtrack” of, say, a sum of “money” spent by you, but being investigated and discussed in a courtroom at where you and the tax authorities are present.
All the prosecuting attorney for the tax collection side needs to do is ask the question, “Do you conduct any of your cases using any kind of digital ‘means’?” The penalties for perjury are generally more severe than for tax evasion. Your sweaty palms and red face will give you away at that moment.
And if you get away with it for now, you’ll forever be haunted by the idea that one day, somehow, tax hounds will hack into even the most cleverly designed (for example) Bitcoin hiding scheme.
Madoffs and Minotaurs
Also, and more to the point, financial faith in digital currency by any standard design is ill-placed. To put a value on “money” like (say) Bitcoin is to rely on a Ponzi scheme, albeit a cleverly designed one.
Articles warning against digital currency too often get lost in the weeds of a discussion about blockchains and server networks. I settle for cutting to the middle of the thing.
Because Bitcoin is a Ponzi scheme, it can not only protect against inflation/recessions, it exacerbates the problem.
The bogus complexity of Bitcoin-like schemes reminds me of the maze of financial entities, like the 23 money management giants (at least that many; see the court records released after his trial) whose job it was to feed billions of dollars into the maw of Bernie Madoff, who, like the Minotaur of old, feasted at the center of the labyrinthine network.
That is, he enjoyed himself until a combination of stealth and Theseus-like investigators cut his way to the center. Madoff died in prison in 2021, serving only part of the 150-year term he was sentenced to in 2009.
Bitcoins have value in the same way that Madoff’s investments turned a profit: Money coming in was used to pay dividends and, when necessary, pay back money that went out of his “investment fund.” He took a cut from the middle.
The mysterious complexities that protect Bitcoin, such as blockchains and countless servers, will one day fail with the help of innovative attacks (Theseus walked in and out of the Minotaur’s cave, aided by a ball of string provided by Ariadne; Alexander the Great did not bother to unraveled the Gordian knot: A sword stroke was sufficient).
We know one thing about the chaos that accompanies bubble-bursting moments that trigger recessions: In such times, the financial market’s general rule of diversity and covariation (some prices always go up, while other prices go down at the same time) fails completely. Everything goes one way: down. No portfolio mix of uppers with downers will work.
No value
Bitcoin will be no exception. Even “good” investments (like a house to live in, or a farm with rich, fertile soil) will beg for buyers because everyone has lost (almost) everything. Bitcoins all the worse, since, like all Ponzi assets, they rely on the bigger fool theory: Buy at almost any price, because tomorrow a bigger fool will pay even more.
Bitcoin suffers from Gertrude Stein’s succinct remark: “There’s nobody there.”
Stein was born in 1874, and her bon mot was published in 1933. I mean no old age when I say that, when it comes to the financial operations I discuss here, her advice has the simplicity and wisdom of a grandmother: Bitcoins do not represent any underlying value whatsoever. Even pure paper money, when issued by a government, is “backed” by that government’s taxing power.
(Such power may become insignificant in times of crisis, but it exists in theory.)
I am not suggesting that China’s regulatory authorities have in mind an obligation to protect capitalist trading markets along with the kind of speculators who may have ridden the roller coaster of Bitcoin from its officially recorded low of $72 in 2013 (some say was worth just 9 cents in 2010) to a high (November 10, 2021) of $68,000 per unit. (Price today is $44,400+.)
But it may be remarkable (or ironic or unexpected) to note that China, unlike its capitalist competitors, seems to be better able to recognize and act to offset the inherent instability that digital currency can bring to investment markets.
