Bitcoin

A Critique of Bitcoin

Part VIII of Money as a Reflection of Political Values, Virtues, and Human Order

A Critique of Bitcoin
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Part VIII of Money as a Reflection of Political Values, Virtues, and Human Order

Previous Parts

Critics of bitcoin have claimed that bitcoin is a Ponzi scheme, is environmentally harmful, is used for illicit activity on the dark web, and more (Baldwin, 2018; Sandberg and Lindblom, 2024); that said, the emphasis of the following critique is focused on bitcoin’s monetary design and end goal as it relates to the previous parts of this essay series.

Bitcoin’s main narrative and goal, like “neutral” money, is to remove money from politics altogether; however, as mentioned in previous parts of this essay series, this goal is a political move in itself. What bitcoin does better than “neutral” money, though, is that it codifies political views in its code (Baldwin, 2018). This is a contradiction to the emergent order that is argued to be the basis of “neutral” money, and is in fact authoritative in nature. Contrary to being shaped by the users of money and by emergent, spontaneous interactions, bitcoin was designed by an unknown group or individual to empower a specific set of political and moral views on what an ideal money should be like. Bitcoin was then adopted by niche individuals and groups who share the same ideologies of its creators and then gained greater adoption by institutions who imposed their views via centralized business institutions, manipulative marketing schemes, and lobbying efforts. In fact, while it is touted as a democratic form of money that empowers people, it is far from it, and more of an authoritative money that serves itself, the owners of computational power, and the whales (crypto jargon for individuals who hold large amounts of bitcoin). Those particular interests and political, economic, and social goals tend to be focused on the narrow view of financial freedom and liberty and disregard the broadness of liberty and freedom beyond markets as discussed in Part IV - A Critique of “Neutral” Money.      

The same criticism of “neutral” money on how its forced fixed nature contradicts the spontaneous order can also be applied to bitcoin. Its code-based, inflexible monetary design undermines the common good especially in times of distress and need. As mentioned in previous parts of this essay series, the gold standard’s inflexible nature is one of the reasons that contributed to the Great Depression. In fact, even Milton Friedman, a staunch libertarian, acknowledged the impact and importance of a flexible monetary policy, and has linked the Great Depression to the failure of central bankers to act and increase the money supply (see Milton Friedman - Lessons of the Great Depression). Bitcoin, however, prides itself on the fixed supply of 21 million bitcoins. Technically speaking, bitcoin is just code, and it would be easy to expand the supply. It only requires 51% or more of the miners to agree to make a change (more on this below). However, if the supply of bitcoin is expanded, then all the narrative and foundation around bitcoin being fixed in supply and detached from human meddling will be lost and broken since the bitcoin narrative and foundation is rooted in its artificial scarcity, and the 21 million bitcoins is considered sacred. It is the “scarcity” of bitcoin that drives its popularity and support by many of its advocates, so an interference in the supply would be a huge shock. Put differently, there is trust and faith that there will only ever be 21 million bitcoins and that’s what makes bitcoin appealing to many of its advocates. The point here is that bitcoin’s stringent fixed supply may lead to crises such as the Great Depression, hence it is not an ideal form of money, and, if a financial crisis occurs and the bitcoin community decides to increase the supply of bitcoin, then this action would contradict the foundational ideology of bitcoin, and trust in bitcoin would be broken.

This leads us to an important point. While bitcoin claims to be trustless, as Baldwin argues, it actually only shifts trust from humans to code (Baldwin, 2018). Trust is in its anonymous designer(s), its governance model, and the bitcoin community who keep the bitcoin code running. It is the code and technology behind bitcoin that is trusted, and there is trust that the code behind bitcoin will not be drastically altered by the bitcoin community who oversees the code. As mentioned in Part IV - A Critique of “Neutral” Money, Hayek’s proposition to shift money from government to private institutions only shifts trust. The same applies to bitcoin, but rather than shifting trust from public to private institutions, it shifts trust to algorithms, code, and a decentralized governance model.

It is important to note that bitcoin’s designers were conscious of its vulnerability to be taken over and controlled, so they designed it in a way that would make it difficult to be attacked and to alter the code. The only way to make changes is if 51% or more of the network is controlled by a miner or group of miners. Given its decentralized nature, it is argued that it would be impossible for an entity or group to take control of the bitcoin blockchain and make changes. Nonetheless, in its initial phase, bitcoin mining was done via personal PCs at home; however, bitcoin mining is now a huge industry with dominant players. Technically speaking, the owners of computational power can dominate bitcoin by colluding and taking over the blockchain given their computational power that is not accessible to the public. This is another point as to how bitcoin may in fact be less decentralized than thought, or at least illustrates how it is becoming less decentralized with powerful, controlling figures in the space. From this development, we can see that it only shifts power and trust from certain institutions to other institutions. Moreover, the accountability of how bitcoin is run is far from public oversight and is dominated by technical developers and miners of bitcoin who trust the code and have influence over the code. Oversight is thus far from the average users of money and dominated by the “technocrats” of bitcoin who believe in the established code of bitcoin.

While there are critics of bitcoin who claim that bitcoin does not fulfill the three mainstream functions of money (Baldwin, 2018), a case can be made that bitcoin does not fulfill the overlooked function of money discussed in Part V -The Functions of Money. One of the main goals of bitcoin is to act as a hedge against inflation and to replace inflationary fiat money with money that is not vulnerable to inflation. To reiterate, the narrative is that the limited supply of bitcoin secures against inflation and maintains the value of bitcoin. Not only does it maintain it, but given the deflationary design of bitcoin, it is expected that bitcoin will only increase in value due to its market dynamics. In fact, given that bitcoin is rooted in pure supply and demand dynamics, its advocates promote holding bitcoin and not selling it – HODL (hold on for dear life). HODL is used to push the narrative that no matter what happens, keep holding bitcoin. This highlights the hoarding culture and the fact that bitcoin advocates acknowledge that the sale of bitcoin will result in downward price pressure on bitcoin. While bitcoin allows for peer-to-peer payments, the idea is that bitcoin will retain and increase in dollar value, and it is thus essential to hold and accumulate bitcoin to grow your wealth and profit. This is more evident during the bitcoin halving events when it is expected that the price of bitcoin will increase due to the smaller amount that will be mined until it reaches its supply limit.

Given that bitcoin’s artificial scarcity results in bitcoin being an asset that appreciates in dollar value, the end goal becomes hoarding bitcoin. If we are approaching bitcoin as a money, then this feature of bitcoin results in less investment in productive assets and takes away from money’s function as a tool to invest in ideas and projects, as holding and storing bitcoin is the end goal in bitcoin’s monetary system. Spending occurs between transacting parties when needed, but it is not designed to be allocated and invested in different projects and ideas – its monetary nature limits it in that regard and the narrative around bitcoin is to hoard it as it is the only true scarce asset out there that allows for wealth accumulation. This design is contrary to using money as a tool of allocation to build physical projects and services that are valuable and necessary for human flourishing and the good life. Taking the example of the light bulb used in Part V -The Functions of Money, if bitcoin is used as a monetary asset, the inventor of the light bulb might find it more difficult to find money to get her idea to life since the value of the money held is expected to increase and so individuals would rather hold an asset that has a higher chance appreciating in price as opposed to investing it in a risky venture; albeit a venture that might result in a better life and human flourishing (see Part III - Values and Virtues and Part V -The Functions of Money). Such a design focused on money appreciating in value results in looking at money as an end in and of itself. It must be highlighted that under the gold standard, the price of gold was fixed. This is an important feature and distinction from bitcoin and what is being discussed here. Furthermore, while bitcoin might secure individual financial freedom and sovereignty given some of its features (see Part VII – Bitcoin and Financial Freedom), it takes away from the freedom of chasing one’s ambitions beyond monetary and financial value. The freedom that bitcoin allows for is limited in nature. In the case of the light bulb inventor again, the inventor’s freedom to pursue her idea is limited due to the lack of means available and the fixation of the monetary system on bitcoin appreciating in price due to its artificial scarcity. Money becomes the product that is valued instead of looking at money as a means to build and create valuable products, goods, and services. Similar to Sison & Ferraro’s approach to the functions of finance getting corrupted by the fixation on “external” goods, the fixation on money as an end in itself corrupts the function and potential of money (Sison & Ferraro, 2017) - (see Part III - Values and Virtues). Bitcoin’s monetary design and its narrow focus on individual financial freedom and sovereignty undermines human flourishing and the good life.

Bitcoin, even though touted as a future currency by its advocates, is now approached as a speculative investment to be held since its value is expected to continue appreciating. This is evident by how individuals are allocating bitcoin as a speculative asset in their investment portfolios and the increase of investment strategies for wealth creation using bitcoin as collateral for example. That said, bitcoin’s value is purely rooted in it acting as a monetary asset that represents a political ideology and justifies itself and its existence by its price appreciation. If, for arguments sake, the value of bitcoin is rooted in its technology as a payment system, then it is extremely overvalued and detached from the “intrinsic value” of the underlying tech, which is awfully inefficient compared to existing payment systems. As for its comparison with gold, gold has some valuable attributes as it is used in electronic devices, and its aesthetic features are what gives it its value among other historical and social factors. While bitcoin’s political and moral views are against centralized government and financial institutions, bitcoin now seeks validation from the same institutions it opposes for price support and celebrates the price milestones it achieves disconnected from any practical use. This is evident by the lobbying efforts to legitimize bitcoin and the celebrations of the bitcoin community around financial institutions adopting bitcoin, such as BlackRock issuing a bitcoin ETF – which was achieved by significant lobbying efforts to force the SEC to approve it. It is events like those that give bitcoin validation and increase its price. Bitcoin’s existence is now purely rooted in its price appreciation, and it is its price appreciation which is empowering and mobilizing the utopian political and moral values behind it, even though it has not necessarily directly achieved those goals.      

Far from being an apolitical money rooted in pure “free market” dynamics, bitcoin advocates are appealing to central authorities to establish an environment that suits their interests, shift monetary power dynamics, and to support bitcoin’s price which is its life blood. Not only does bitcoin aim to create a “neutral" money based on trust in code and algorithms, but it also distorts the function and value of money as a means to achieve human flourishing to a monetary asset as an end in and of itself. Overall, bitcoin is disguised as a monetary system that is democratic, and for the people, and it validates itself and gains adoption and popularity purely by its price appreciation. Bitcoin is thus an archetype of Aristotle’s “non-natural” chrematistics outlined in Part III - Values and Virtues. It is an asset that is designed with a fixed, purely economic telos and lacks an in-depth normative outlook of how money ought to be used (Dick, 2021), and goes against the virtues and values that allow for human flourishing. Those attributes of bitcoin make it unjust.

The last part of this essay series will be a brief conclusion recapping the discussion – Conclusion of Money as a Reflection of Political Values, Virtues, and Human Order

References

  • Baldwin, J. (2018). In digital we trust: Bitcoin discourse, digital currencies, and decentralized network fetishism. Palgrave Communications, 4(1)
  • Dick, D. G. (2021). What money is and ought to be. Journal of Social Ontology, 6(2), 293-313
  • Sandberg, J., & Lindblom, L. (2024). Bitcoins left and right: A normative assessment of a digital currency. In The Philosophy of Money and Finance (pp. 303-320). Oxford University Press
  • Ferrero & Sison, Aristotle and MacIntyre on Virtues in Finance

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