From Under Dog to Top Dog: What People Failed to Understand About Bitcoin

As I write, the Financial Times reports that ‘2020: the year that Bitcoin went Institutional’. From the polarized cyberlibertarian beginnings of this project in 2009, to the point where some of the biggest names in the financial industry including wealthy individuals, banks and hedge funds are jumping on the crypto bandwagon in 2020, this is a key turning point for both digital currency and the future of understanding money. How money is perceived and treated by society is fundamentally changing. Fund managers are now changing their perceptions of crypto and taking new positions on investments, whilst a new crypto industry is rapidly developing with financial institutions embracing decentralised tech in an unprecedented fashion. People are finally awakening to their misunderstandings and misinterpretations of Bitcoin, and of money in general.

We have witnessed much debate over the last 12 years on the question as to whether Bitcoin is ultimately money, with many commentators harking back to the rule of three, the distinction of whether Bitcoin is: 1. A store of value 2. A medium of exchange and 3. A unit of account. I will not divulge into these arguments as they have been exhausted by both proponents and critics of Bitcoin alike. But more importantly I argue — who cares, it doesn’t actually matter! Let me explain.

Back in 2002 Nick Szabo published a book Shelling Out: The Origins of Money in a bid to discover what money actually is and how it has been defined in history. Szabo explained that dating right back to palaeolithic times that shells were used as a medium of exchange, and he mapped how the medium of exchange developed from native American use of money which occurred in the form of shells, fur and teeth, through to the Europeans use of cattle, gold, silver and weapons as money. Szabo himself had a vested interested in understanding monetary form and using his skills as a cryptographer and computer scientist, attempted to develop his own electronic money — Bit gold.

Whilst Bit gold was never implemented, it set the breeding ground as a precursor for modern digital money. Szabo developed a cryptographic puzzle method to ensure time stamped verification for digital coins, to prevent double spending by participants. In other words, so that digital money could not be faked or reproduced by users. This method would be adopted for the well-known Bitcoin digital currency, which was to become the first ever successful decentralised cryptocurrency project.

For many years since Bitcoins inception, as a general rule of thumb the ‘respectable’ western financial press have evoked caution and cynicism around Bitcoin, whilst proponents were side-lined to fringe outlets and social media forums to exchange Bitcoin narratives. Aside from bitcoin technicalities among developers, these narratives told of hopes and dreams of a utopian cyberspace of financial freedom where people were ‘free’ to undertake their economic lives in privacy. This would be away from the governance of the prying eyes of both the state and the domination of the capitalist corporate structure, which represented the blood line of the mainstream financial system in the West. Ironically, little did anyone expect that such a contentious political project would be adopted and invested in, precisely by those who it wished to curtail the dominance of in a modern society.

But a pressing question remains central to the story of Bitcoin: why was there so much caution and cynicism from some, when there was an abundance of hope and excitement from others? Perhaps because Bitcoin was such a new technology, people didn’t understand it, or simply know how to use it. Or perhaps it was because of Bitcoins highly volatile nature, people were understandably anxious of losing large amounts of their investment, in a matter of days. Or maybe, because as decentralised tech with no central actor, there was no one person or organisation solely accountable for Bitcoin. Or perhaps the cynicism was borne from Bitcoin suffering from a lack of regulation, where there were no active dispute resolution or legal recourse options in place for consumer issues or challenges.

I would posit all of these reasons played into the fears of the public when it came to Bitcoin, particularly in bitcoins infancy, and much of this was amplified by the media to cause concern. These were quite legitimate arguments of course, as cryptocurrency became synonymous with the Wild West for its shortcomings. Bitcoins relationship to the dark web as a common payment option for drug dealers, terrorist financiers, weapon traders and other illegal organised crime was also a difficult reputation for Bitcoin to distance itself from. Commentators were quick to draw parallels with the host of Initial Coin Offerings (ICO’s) following Bitcoin and the dubious penny stocks sales of the 1980’s, which further brought its fragile reputation in to disrepute. With the exception of heterodox economists such as Max Keiser with Stacy Herbert, cryptographers, developers other techy proponents who appreciated the mathematics and code underlying technology, Bitcoin was the proverbial whipping horse for the mainstream financial press.

However, in the chaos of the crypto market and the media frenzy of the meteoric rise and falls of Bitcoin, an important element was consistently missed by most onlookers who were dismissive of Bitcoins potential. And that was the factor of potential value. When I speak of value here, I mean not just in monetary or quantitative terms but from a social and political point of view. For example, those that bought into the idea of Bitcoin and of what it stood for, gave it the ‘people power’ support, providing it with social and political value. Ultimately this support provided an intrinsic value, as Bitcoin now had an army of followers which would be required for any successful project.

The original Bitcoin whitepaper does not explicitly state the intended purpose of Bitcoin, it makes no political statement, except to exist with the goal of “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party”. Yet this statement alone was enough to encourage those with political sentiments on the left and right, who were keen to limit state interference and surveillance in their financial lives, as well as those on the extremes who adhered to ideologies of anarchy. In particular, a good analysis from David Golumbia purports Bitcoin as a right-wing software, due to the software features it exhibits, and how these fit certain political ideologies on the right. Attracting a host of people with varying political stand points has been very useful in Bitcoins success and is rarely highlighted in its success as a political software.

But back to Bitcoins economic value. Where does this come from? Bitcoin price reached a peak of just under $24,000 in December 2020, giving it a year-to-date increase of 224%. That’s an astonishing increase for any investment but according to financial tycoon Warren Buffett, Bitcoin is in fact “worthless”. How can such different valuations co-occur? This is what most people including Buffett misunderstood about Bitcoin. And it is not his fault or those others who suffered from such misunderstanding. They did not need to understand the ins and outs of Blockchain technology to see the benefits of Bitcoin (though it would undoubtedly have helped in their estimations!). What they just needed to be reminded of, was that within the human nature of exchange, whether it be goods or services whether back in the palaeolithic times, or in the modern technological revolution, trade can be beneficial to both parties, regardless of the negotiation of value. Referring back to Szabo ‘s book, he argued that:

“Because individuals, clans, and tribes all vary in their preferences, vary in their ability to satisfy these preferences, and vary in the beliefs they have about these skills and preferences and the objects that are consequent of them, there are always gains to be made from trade” (Szabo, 2002).

The subjectivity of economic value is most explicitly witnessed in Bitcoins volatility; it can be and has been, a driver for Bitcoin in its success and not an obstacle as most initially asserted. People want to trade it. For some their purpose is to make profit, for others it is to be part of a social and political project that fits their ideologies on privacy, surveillance, the state and more broadly the curtailment of western capitalism. In this way, these subjectivities have been undervalued by many onlookers, particularly in the mainstream financial press against the tide of Bitcoins roaring success.

Bitcoin will stand in history as the underdog that many people overlooked and misunderstood. This has flown in the face of years of debate over Bitcoins supposed underlying ‘lack of value’. It seems that Bitcoin is no longer in the dog house as the underdog, but stands now proudly as an investment top dog, considered now even by those who initially doubted it.