The arguments against cryptocurrencies did not reflect either the current data or the general understanding of the term.
Johns Hopkins University economist Steve Hanke is known in the Bitcoin community for posting countless variations of the same tweet – “Bitcoin is too volatile and has a fundamental value of 0”. (I suspect he hasn’t read my essay on How to Think About Bitcoin’s Value.)
But in a recently published opinion article “How innovative is crypto?” Hanke tried some new arguments. The essay bears the subtitle: “The arguments for crypto as an innovation driver are thin.” In it, Hanke claims to show that crypto currencies are not that innovative. Here I show how it fails.
There are three main problems with his essay. The first is that he only looks at two characteristics of cryptocurrencies: they are digital and they are private. The second is that it relies on an exceptionally narrow and unspoken definition of the word “private” and pretends that it weakens Bitcoiners’ focus on true financial privacy. The third is that his statistics are out of date; more recent data paint a very different picture.
I will tackle the problems one by one.
First, it claims to show that cryptocurrencies are not innovative. He tries to do this by showing that digital, private money already exists. But even if he’s right about that (which is the main focus of the second problem), he’s ignoring all of the other interesting features of cryptocurrencies that proponents point out. With regard to Bitcoin, these features are cryptographically secured, censorship-resistant, inclusive, limitless, non-attachable, restricted on offer, decentralized and without permission. While Hanke is correct in his claims, he has failed to argue that Bitcoin is not innovative in this other way.
Second, he invokes the word “private” but does not define exactly what he means by it and what guarantees its use implies for a long time. “He goes on to point out that bank accounts are becoming more and more digital. That is true. A lot of money exists only digital nowadays.
The feeling of “private” that is important to Bitcoiners is that financial information “must not be shared with or passed on to others”. People with bank accounts have not used private money in this sense; Your bank account details are regularly passed on to authorities or disclosed. Another meaning of “private” is that an asset is “provided or owned by an individual or independent trading company and not by the government”. Private in this sense exists as a contrast to “public”; Your home is your private property while the park across the street is public property. In this case, people used private money; the money in their bank accounts is often created by private banks and belongs to the individual, not the government.
There’s another sense of private money, too, which is money that is generally not controlled by any government (thanks to Aaron Segal for pointing this out). Some Bitcoin proponents care a lot about this feeling of private money. The US government controls the US dollar in the relevant sense, i.e. US dollars in every bank account – or in every pocket! or under any floorboards! – are not private.
Hanke uses the word “private” six times in the next two paragraphs! Each time it means “provided or owned by an individual or an independent, commercial company and not the government” (i.e., the distinction between public and private owned) which is definitely not the kind of privacy that cryptocurrency advocates are talking about . Here are the sentences:
1) “… convertibility of private deposit money.”
2) “The Federal Reserve is ready to convert every private, digital dollar …”
3) “[the Fed] converts private dollars into reserve money … “
4) “… handle private money transactions.”
5) “With the help of the Federal Reserve’s clearinghouse apparatus and various private consortia.”
6) “Private, digital money is nothing new.”
Obviously, neither of them has either of the two meanings of “private money” that Bitcoin proponents are interested in (transaction data protection; free from government control). So Hanke did not show that before Bitcoin there was private, digital money in the form of US dollars in bank accounts.
Third, Hanke’s statistics are out of date. He says, “Academic research has shown that about half of Bitcoin transactions involve illegal activity.” The paper he cited says it uses data “from January 3, 2009 to the end of April 2017”. That was four and a half years ago! A third of the existence of Bitcoin! Things have changed. More recently, Chainalysis notes that illegal cryptocurrency transactions account for only 0.34% of all cryptocurrency transactions and CipherTrace similarly makes up less than 0.5%.
Hence, Hanke’s claim that “the value proposition of cryptocurrencies is largely based on their ability to circumvent the law” is false. More than 99.5% of transactions are legal.
Hanke has been beating the same drum since February 2014 and doesn’t seem bothered by new developments in Bitcoin or the fact that Bitcoin has gone from $ 600 to $ 55,000 since he started beating it.
That brings us to a lesson that we can all learn. People rarely change their minds. This takes a lot of cognitive effort, so we tend to look for evidence to confirm what we already believe. To change our minds, we also have to admit – if only to ourselves – that we were wrong about something. It is much easier, mentally and emotionally, to keep believing what we always believed.
But that doesn’t lead to the truth. Things are changing and we are faced with new evidence. Sometimes we look for evidence and sometimes we don’t. But whenever we come across new evidence, we shouldn’t dismiss it. We should take it seriously and consider whether it should cause us to revise our beliefs. And if it is important to us to believe in the real things in a certain area, maybe because we teach a lot of people about it or because it is important for our own lives, then we should look for evidence that we are wrong and evaluate it with a desire to get to the truth and not a desire to be right. Only when we do that should we be convinced of what we believe.
This is a guest post by Dr. Bradley Knight. The opinions expressed are solely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.