4 February 2020

No matter the facts, bitcoiners cling to the crypto creed

By Joakim Book

The unofficial battle cry of Bitcoiners and other crypto enthusiast is to HODL – a mis-spelled, all-caps version of “hold!”. Through good times and bad, the upright bitcoiner “stacks sats” and dreams of utopian citadels.

Much like in other ideological echo chambers, the ideals of the typically nerdy and vaguely libertarian crypto-enthusiasts are well-cemented and impervious to empirical reality. Beyond the central dispute over cryptocurrencies’ ability to satisfy our monetary needs, one of the biggest problems is the tendency of Bitcoin promoters to simply make things up.

Data doesn’t matter. Stats don’t matter. Theory or logic doesn’t matter. Whatever helps the cause must be right.

One recent example of bitcoin self-aggrandising is the idea that over the course of history, fiat currencies have fallen like flies. Several prominent people in the Bitcoin community have argued that the “average lifespan of a fiat currency is only 27 years”. Particularly around bitcoin anniversaries, that claim is put forward as a vindication of the first cryptocurrency.

It’s an argument with decidedly fishy statistical foundations, as the financial writer JP Koning has explained: “The 27-years meme has been used for many years now as a prop for making gold and cryptocurrencies look good. ‘Ha ha, suckers! Only 27 years until your paper is worthless!’.”

We can track its genesis to a decade-old essay ominously titled “The Fate of Paper Money” by a writer named Mike Hewitt, which includes a list of 775 historical currencies. Hewitt summarised the longest-running ones, calculating that half of them had been destroyed by wars, rebellions or hyperinflation, and arrived at an average lifespan of 27 years. The record-holder, pound sterling, clocks 315 years, dated from the Bank of England’s creation in 1694.

Hang on a minute: “pound sterling” as a currency predated the notes issued by the Bank of England – and in any case, designating it as fiat “paper money” would be highly misleading as the banknotes were tied to – redeemable – in silver. The sterling currency is either much older than Hewitt claimed (if we count the use of  silver as money on the British Isles) or much younger (if we count from when Britain abandoned the interwar gold standard in 1931).

That isn’t even the biggest problem in Hewitt’s piece, as Koning finds a number of other inaccuracies and misleading assessments: from placing a one-year value on centuries-old Japanese coins to considering new currencies that overtook previous ones (often even 1-for-1) as collapsing, Hewitt seriously misconstrued the meaning of a currency’s “lifespan”. After all, the euro has so far replaced 23 individual currencies, voluntarily, peacefully and without expropriation of currency holders – hardly the death knell of paper money that bitcoiners so enthuse about.

The obvious statistical misinterpretation aside, my biggest complaint about bitcoiners is their tendency to sound off on topics they know nothing about. The litmus test, argued Bloomberg’s Joe Weisenthal in November on Peter McCormack’s popular podcast What Bitcoin Did, is to ask a bitcoiner about how the repo market works; you are unlikely to receive an accurate or even coherent response.

For those pushing bitcoin, the accuracy of the claims they make is not the point – only the story matters. If a claim makes bitcoin superior to many other currencies, it is taken as authentic in a mental operation wholly at odds with the Enlightenment striving for truth and standard scientific procedure. Putting bitcoin in a favourable light is not the threshold for how civilised society separates what is from what isn’t.

Two other common assertions are particularly instructive: first, that bitcoin’s volatile exchange rate will come down as it grows and second, that its ability to facilitate value transfers around the world surpasses that of legacy banking systems.

The volatility argument has some logic to it: new technologies are untested, and it takes a while to create widespread adoption or deep and liquid enough markets to stabilise short-term trading. As bitcoin use grows, volatility will fall, they argue. At roughly 1% of U.S. dollar outstanding supply, this argument seems believable. However, the leading cryptocurrency remains vastly more volatile than legacy currencies of similar sizes, such as the Colombian Peso, Hungarian Forint or the Czech Koruna.

Undeterred by inconvenient facts, the bitcoin crowd sticks with its volatility creed; through booms, busts and recovery, and entirely invariant to general adoption, bitcoin volatility hasn’t fallen and it keeps churning out impressively large price swings. Still, the conviction of a gradually falling volatility remains intact – evidence doesn’t matter.

Then there’s the assertion about remittances and cost of global transfers. As the banking systems of the 1990s or early 2000s were characterised by slow and expensive services, it did make sense to maintain cheap and unencumbered international transfers as a core use-value for early bitcoin adoption, circumventing that bureaucratic and expensive banking sector.

This is no longer the case. The legacy system against which bitcoin competes has improved enough that for most kinds of transactions, bitcoin no longer has any speed or ease-of-use advantage (especially not if we consider lost keys). Thanks to technology, competitive payment providers and real-time payment systems implemented around the world, international money transfers are nothing like they were even ten years ago; real-time payment systems like the ones in the UK, Singapore or South Korea have allowed their users next-to-instant access to transferred fund (albeit at the expense of intra-day credit risk at their financial institutions). Upstart Fintech firms like TransferWise has captured one-tenth of the cross-border remittance market and 24% of its transfers last year were instant, a number that will keep rising rapidly as more central banks adapt their systems for fast payments.

As for cost, bitcoin’s claim to superiority at first seems believable: a transaction today usually costs somewhere between a third and a thirtieth of a percent – lower even than some of the least expensive cards that transact over the Visa or MC networks, and much lower than when fees were first raised as a prohibitive barrier to crypto adoption.

However, as bitcoins can rarely be spent directly on goods and services the way that funds in legacy banking systems can, recipients must go via bitcoin exchanges before they can translate their digital wealth into actual products. Besides adding another obstacle to the seemingly rapid transaction, a good couple of percentage points are lost in commissions and spread, completely overturning any cost advantage for bitcoin – not to mention the exchange rate risk coming from volatile price changes. At this stage, most benefits of bitcoin as a store of value and international remittance vehicle evaporate.

Are there any areas where bitcoiners’ grand beliefs may still hold? Well, some candidates include underserved banking countries, regions in extreme political or monetary turmoil – or the few instances where so-called censorship resistance matters (legal grey zones or licit but morally dubious trades). That’s nothing to ignore or brush aside, but nor is it the basis for an inevitable global monetary hegemony.

All of these points are well-known and easily verifiable if you care to look. Instead, the religious fervour surrounding cryptocurrencies make bitcoiners say things that fit neatly with their convictions, entirely untroubled by whether their statements are even remotely accurate. Facts, truth, reality, or science are archaic ideals unsuited to an era of bitcoin supremacy. That needs to change.

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Joakim Book is a researcher and freelance writer on banking, monetary policy and financial history