Responding To The Discounting Of Bitcoin And Its Benefits

By Bitcoin News On Oct 27, 2022

This is an opinion editorial by Maximilian Brichta, a doctoral student at the University of Southern California currently working on his dissertation, “Vernacular Economics: On The Participatory Culture And Politics of Bitcoin”

Speculative Bubbles, Technobabble And The Ignorant “Enthusiast”: Part One

There is a strand of academic literature that treats Bitcoin’s advocates and investors as ignorant enthusiasts, dupes and ideologues. Notably, each of these scholars fails to engage with texts that come directly out of Bitcoin culture. Instead, their analyses are largely based on second-hand accounts, mainstream news articles and investing forums that conflate bitcoin with other cryptocurrencies. The result is a flattened image of Bitcoiners and overly simplified, sometimes misleading characterizations of Bitcoin’s social world. In this three-part series, I’ll focus on three such texts and offer a framework that I believe would help academics bring much needed nuance to critical analyses of Bitcoin and its culture.

In his article “In Digital We Trust: Bitcoin Discourse, Digital Currencies And Decentralized Network Fetishism,” Jon Baldwin argues that Bitcoin is not a trustless system as Satoshi Nakamoto claimed. Instead, the trust shifts from governments and banks to algorithms and the security of encryption software. He views Bitcoin as just another technology with an overblown promise to decentralize the web and subvert traditional hierarchies in business and culture — a dream that he suggests has largely evaporated in the corporate-captured digital economy. In general, he cautions that Bitcoin is first and foremost software. As such, it is susceptible to the same sort of breaches and bugs that threaten any other software.

Baldwin makes some astute claims about Bitcoin that are important to consider when highlighting its social implications and examining discourse around it. For instance, he argues that “Today’s digital monies can be viewed as forms of language — or more specifically, writing or code — in their own right.” Code is already a form of human expression. Furthermore, the platforms utilizing that code make some types of actions and interactions possible while constraining others. In other words, whatever uses are not rendered impossible by the code remain feasible.

Another key observation is that, when it comes to analyzing how Bitcoin becomes trusted as an investment and technology, there is plenty of noise in the form of “hyperbole, half-truth and excitement.” There are also dizzying conflations between “bitcoin as a currency, bitcoin as a technology, bitcoin as the free market realized, bitcoin as a commodity, bitcoin as investment, cryptocurrency as in bitcoin, cryptocurrency in general, the blockchain as in bitcoin or the blockchain as in general.” Despite the claims that bitcoin will evolve into a safe-haven asset like gold and may eventually function as a widely accepted form of money, many continue to treat it as a risk-on asset. As such, there is no shortage of hype, schadenfreude, seemingly untenable price targets and ecstatic behavior that are characteristic of language around eye-popping bull runs. Furthermore, you can almost guarantee that mainstream media and lay commentators will bungle or ignore the complexity of Bitcoin. Indeed, it becomes difficult to understand the asset and the network behind the discourse, how it differs from altcoins, and what broader implications it may have on our social condition. There is, as Baldwin suggests, plenty of techno-utopian discourse, grandiose prophesying and noise around Bitcoin.

Despite these valuable observations Baldwin makes about Bitcoin discourse overall, there are significant gaps and ill-supported claims throughout this essay. The title of the article, “In Digital We Trust,” suggests an exploration of this shifting notion of trust “from trust in banks or states to trust in algorithms and encryption software.” He substantiates this claim by recounting Bitcoin’s emergence at the heels of the 2008 financial crisis and citing Nakamoto’s rationale for a system of e-cash that does not rely on trust in central banks. Beyond this, Baldwin does not make a compelling case for where that trust shifts. His claims remain speculative and only tell part of the story.

Baldwin fails to take seriously the most grounded understanding of trust he references in his essay, specifically in reference to individuals who use the network. To explore how trust in Bitcoin arises is a matter of discovering how a variety of actors who use the network — investors, transactors, miners, developers — have come to trust it. Baldwin considers this possibility in a footnote reference to Bill Maurer, Taylor Nelms and Lana Swartz’s article on the “Practical Materiality Of Bitcoin.” These authors suggest that, “Trust in the code does not erase entirely the community that bestows it.” To this, Baldwin remarks that it’s “debatable” whether that community still exists after bitcoin’s price plunged approximately 80% following its 2017-2018 bull run. It’s a dismissive remark, to be sure. And to dismiss the actual users of bitcoin is to miss an opportunity to tease out this question about how trust in Bitcoin arises, which is a more complex social process than he leads us to believe.

Elsewhere, Baldwin leaves significant holes open in his argument about this notion of shifted trust. Consider this passage in which Baldwin relates trust to value:

“[W]hat backs up the value the bitcoins seemed to have on paper? Essentially a new form of trust: ‘The primary value of the coins was the expectation that they would be worth more in the future, allowing current holders to cash out for more than they paid’ (Popper, 2015, p. 285). Should the trust and willingness of market participants to exchange fiat currency for bitcoin erode and end then this will result in the potential for permanent and total loss of value of bitcoin. In this sense, bitcoin can be argued to resemble a Ponzi scheme.”

First, it is unclear what Baldwin is claiming to be “new” about this form of trust. He seems to be arguing that bitcoin’s value is akin to a collectible that is bare of any non-fungible or useful characteristics. For Baldwin, a bitcoin is “a pure token devoid of any connection to underlying material substance,” a “simulacra without reference to the real.” Devoid of intrinsic value, its price relies on pure speculation within the market. Perhaps this is a new form of trust — market participants must accept that Bitcoin, which at its most basic level is information, is a form of property. How might this affect the nature of trust that participants grant bitcoin? Baldwin does not take his analysis this far. He stops at the unexplored assertion that bitcoin’s value is a mere product of the shared belief that bitcoin will appreciate.

Later in the article, Baldwin considers some of the use cases and disruptive capacities that bitcoin might be able to fulfill but makes it clear that he is not interested in entertaining any of them: “on one hand, there is interesting potential to be explored in Bitcoin and a challenge to established financial power,” and on the other, empty techno-utopian rhetoric and a venture capitalist cash grab. In short: This argument is based on the presupposition that Bitcoin has no value. His tone further suggests that the typical people on the opposing side of this claim are hardly worth taking at their word.

Baldwin’s claim that bitcoin resembles a Ponzi scheme appears to be based on this assumption. Ponzi schemes are a form of investment fraud in which wealth is redistributed from new investors to existing investors. As such, the earnings are illegitimate. The scheme collapses when new investors stop buying in and earlier investors cash out. As with every other time I’ve heard bitcoin called a Ponzi scheme, Baldwin makes no attempt to prove it as such.

When I read commentators calling bitcoin a Ponzi scheme — which usually reads as a cheap skewer rather than a thoughtful critique — I have analytic questions about this comparison: How does bitcoin resemble or differ from a Ponzi scheme? Ponzi schemes are typically organized by a leader. Who fulfills this role? What does that organization look like? Also, Bitcoin is a public ledger with data about every transaction that has taken place on the network. Based on this data, how is wealth distributed? Does it resemble the sort of distributions characteristic of Ponzi schemes? What is the social value of the underlying network regardless of bitcoin’s price? Baldwin asks none of these questions. The reader is asked to take him at his word.

Another term that Baldwin leaves unanalyzed, despite regarding it as a key analytical issue, is this notion of “security.” While the features of the protocol are foundational for making a secure blockchain possible, trust is also distributed to a decentralized crowd of actors. Motivated actors play a tremendous role in the security and viability of Bitcoin as a monetary network. The question Baldwin leaves unconsidered is how the code incentivizes perpetually honest participation in the network and how these economic incentives are at the core of constructing trust. In addition, he notes that folks rely on noisy and turbulent discourse around bitcoin. Ultimately, trust relies on an ongoing narrative process pertaining to the network. For instance, at the time of writing, there was an avid discussion within the Bitcoin community regarding trust around the implementation of a new bitcoin improvement proposal, BIP119.

Here are some key questions underlying this debate: Who is trusted to code Bitcoin upgrades? Who is trusted to authoritatively comment on them within the community? To what level of scrutiny must the community subject proposals to? And can the nodes who validate these upgrades be trusted to understand the change they are making to the protocol? Clearly, the case for shifting trust is far more complicated than Baldwin leads his readers to believe.

The discourse around Bitcoin is featured as a key topic explored in this essay, however Baldwin appears to base these claims off a narrow selection of secondhand sources. In the section titled “Bitcoin Discourse,” the quotes he pulls are mostly hypertext borrowed from David Golumbia’s book “The Politics Of Bitcoin” and Nathanial Popper’s book “Digital Gold.” In fact, the only primary source he cites as Bitcoin discourse is alleged “ideologue” Brian Kelly’s book “The Bitcoin Big Bang.” The rest of the section draws on a selection of cultural and technology critics which he leverages to make claims about this abstracted discourse. While these claims may or may not hold up, the reader is left with a framework for thinking about digital culture and technology in general and not Bitcoin in particular….

Read More: Responding To The Discounting Of Bitcoin And Its Benefits

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