I Was Wrong About Bitcoin

October 2nd, 2011   Submitted by Seth King

Since its inception I have always been in opposition to Bitcoin as money. To me the idea of trading one unbacked currency for another was foolhardy. That it could compete against Federal Reserve Notes long-term was wishful thinking. And that it had values in ways silver could not was absurd. I thought Bitcoin was nothing more than an unsound currency and short-term fad destined for failure. I now believe I was wrong.

In the past, every time I had publicly criticized Bitcoin I would get a nagging feeling that perhaps my opinion was one of ignorance. In response to this I set out a few weeks ago to better understand how Bitcoin works. What I came away with was more than I had expected. I had learned not just the internal machinations of Bitcoin, but where the currency derives its backing.

It is interesting how divided the austro-libertarian community is concerning Bitcoin. Mises has been quoted heavily by opponents and proponents alike as legitimacy for their position. Ultimately, the argument that had the most sway in my mind was that value is not inherent but imputed. The subjective theory of value placed all of the decision making on my shoulders whether or not to accept Bitcoin as desirable. And for a long time I simply did not. What I needed in a currency in order to consider it valuable was backing. My ignorance of how Bitcoin works prevented me from understanding how the currency is backed. But no longer is this the case.

Without getting too technical I learned that the Bitcoin miners are not just crunching worthless mathematical equations in order to mine new Bitcoins, but are actually processing the transactions between Bitcoin users to maintain security. This requires computing power and electricity. Without them there could be no transactions and no currency. Now, being backed by electricity, or the consumption thereof, may not be enough for you to convert to the pro-Bitcoin camp. It wasn’t for me, either. I had to do some comparing and contrasting.

I decided to go through the same process I did when I was first contemplating anarchism. Before I became an anarcho-capitalist a couple of years ago I made a list of all of my fears of a stateless society. They included mass murder, theft, rape, trespassing, kidnapping, etc. In making the list it dawned on me that every one of my fears were happening every day, all over the world, en masse by governments. I simply could not imagine things being any worse without the institutionalization of crime by the state. So, I converted to anarchism.

The same rang true with my worries about Bitcoin. Ultimately, my one and only fear in Bitcoin was in losing the purchasing power of the currency. I believed that one day the value of Bitcoin would drop to zero and I would be left holding the bag. However, comparing that to what I know about Federal Reserve Notes I soon realized that my fears were unwarranted. While Bitcoin may not be around forever, neither will government money.

Truth be told I need not hold any large amounts of Bitcoin. If one day it does cease to exist, for any reason, I stand to lose a few hundred dollars worth. I can still put my excess Bitcoins or savings into gold and silver before then. Furthermore, any potential losses incurred by Bitcoin will likely be dwarfed by the amount I save over the course of its life by not paying Paypal fees or taxes.

Taking the time to better understand how Bitcoin works helped to ease my fears in the same way a person frightened of firearms is likely to relax their position towards gun ownership after having been taken to the shooting range. If you, too, are on the fence or currently dislike Bitcoin I invite you to install the Bitcoin software and play around with it. Spend some time learning how the software works and test it out. I think you’ll be pleasantly surprised.

34 Responses to “I Was Wrong About Bitcoin”

  1. MarkNo Gravatar says:

    What bitcoin allows anyone to do, even if they have doubts about the long term viability of bitcoin, is move their stored values into position, so that they can react to any future changes.
    Bitcoin works very effectively as a mechanism for moving stored value between 2 places. It’s a protocol of transfer primarily, not a mechanism of value store (like the email protocol – you can store messages if you want, but you use it primarily to transfer messages).
    I am currently slowly moving my money out of the banking system and into the Bitcoin system. Only a small percentage of this is stored as bitcoins – the rest I immediately covert to different currencies. If the dollar start to look like a bad bet, I can buy bitcoins and sell them in RMB or Pounds or whatever. When I need more bitcoins I can just buy them immediately. If an new digital currency comes along I can exchange them for bitcoins. As new exchanges appear I can move some stored value onto them and spread my money throughout the world anonymously.
    The key for me is to be prepared within the system, even if you don’t want to risk a big investment in bitcoin. Just use it to move the stored value anonymously to the other side of the world

  2. alexbasasaNo Gravatar says:

    The other thing that anarchists should like about bitcoin is decentralization. For a currency to be backed by something there must be a central authority claiming to have a reserve of that something, and that’s where the problems start.

    I also bought some bitcoins, I spend only as much money as I was prepared to loose. And I think it has been a fair gamble (until now, at least).

  3. GraetNo Gravatar says:

    I run a Bitcoin mining pool.
    It’s great to see when someone takes the time to investigate, better when they can write an article like this 😀
    Daily I watch as new businesses are established and the Bitcoin economy grows 🙂

    Just as sovereign nations have their currencies there is now an internet currency.

  4. LittNo Gravatar says:

    It there was anything worth looking into today in the times of such economic turmoil and change, it is bitcoin. It’s very easy to brush off bitcoin if much of your opinion about bitcoin is from the limited media coverage it received. I encourage everyone to do your own diligence and find out what truly makes bitcoin special like the author has.

  5. DavidNo Gravatar says:

    We have gold silver and bitcoins at coinabul.com so think of us as your monetary umbrella 🙂

    I enjoyed reading your article and it makes me happy to see another person i respect understand bitcoin.

  6. pip010No Gravatar says:

    first thing I realized about BC is that it still works on a good old economic principle : scarcity and demand !
    scarcity because it takes significant computing power to generate any viable quantity and demand because of the many benefits it gives online shops and shoppers alike!

  7. I have a little bit (a very little bit) of Bitcoin, purchased for some of the same reasons you list.

    My biggest reason is simply the desire to be in personal support of experimentation in alternative and competing currencies. I’m not “sold” on Bitcoin per se, but figure that if nothing else it will produce valuable lessons learned for other currencies that come later.

    • LittNo Gravatar says:

      I completely agree. It’s an underdog in the currency world that is controlled by the central banks. If there are people are there that value their economic freedom and wealth preservation, it’s at the very least, a worthwhile social experiment that one can show support and promote. This is why I’m trying to do my share and increase the awareness of this new currency.

  8. DDNo Gravatar says:

    Bitcoins are awesome!

  9. RyanNo Gravatar says:

    Heartening to see someone do their research and join the Bitcoin community because of it! Thanks for the article and for looking further into things. 🙂

  10. ThunderboltNo Gravatar says:

    Since bitcoins are not considered a legitimate currency by governments, then transactions are not taxable or traceable. Herein lies the greatest strength of bitcoins to destroy all governments: the inability to control from a central nexus.

  11. TopherNo Gravatar says:

    This is the first time I saw your website. The fact that you can change your opinion and aren’t stuck in pre-held beliefs encourages me to read more here. I believe it’s good to adapt to the world around us and Bitcoin is something that is worth integrating into our daily lives. It may not replace the currencies foisted upon us by government but it is another tool on our belt. I don’t see how anyone opposed to government control can fail to be excited at it’s potential.

  12. bcNo Gravatar says:

    Kudos for having the strength to reevaluate your decisions, and make it public. I think it’s a mark of intelligence, and it’s heartening to see.

    I’m a recovering Republican, so I’m glad I found your site. Nice.

  13. DimetrodonNo Gravatar says:

    I personally don’t like BitCoin’s non tangibility but I do like the idea of privately issued competitive “fiat” currencies like Ithica HOURS and BerkSHARES replacing both State and FARO RESERVE BANK Central Bank currencies that also seems inherant in the BitCoin idea.

    The idea I have in mind is to make the PRODUCERS of goods and services
    the issuers of paper and token currencies backed by the goods and services the produce on a privatized “Social Credit” basis with “Social Credit” dividends replacing wages for the labor side of production. Charity organizations should also be allowed to issue competitive private currencies to replace Social Security and similar programs based on the “Social Credit”
    dividend and produce goods and services at a profit instead of running on a phony State mandated “non profit” basis.

    • Bob BlackNo Gravatar says:

      I know this is an old thread. @Dimetrodon – that’s the best answer I’ve ever read, in any forum, on the entire Internet. Go on do it. Yeah man. I totally get your idea.

  14. David HollisNo Gravatar says:

    have you heard the free state project now accepts bitcoins? Also they are handing them out to everyone on their mailing list!

    Seth now you are in New Hampshire how about setting up a local trading group and helping businesses take them as payment? I am an unofficial bitcoin community organiser so I could put you in touch with the right people.

    • Seth KingNo Gravatar says:

      Maybe I’ll do something like that once I get a little more settled. Still trying to make ends meet for the utmost basics at the moment. But it’s a good idea, for sure.

  15. OllyAnCapNo Gravatar says:

    Yup, it’s been a strange concept for people to get their heads around. But I definitely feel positive towards bitcoin, or peer-to-peer currencies anyway. Just like a fiat currency but without the centralisation and inflation. Only drawbacks are security and I’m confident solutions will come forward.

  16. É vedado o anonimatoNo Gravatar says:

    There’s more to bitcoin than being “sound money”. Its decentralization makes possible what before was not.
    Something like Silk Road ( https://secure.wikimedia.org/wikipedia/en/wiki/Silk_Road_%28anony mous_marketplace%29 ), for example, couldn’t exist in the world of credit cards – and even a legal e-gold wouldn’t be good enough.

    In bitcoin’s forum, people talk today about creating a decentralized, anonymous stock exchange, based on bitcoin. That’s another thing that can’t exist without the concept of decentralized digital currency.

    All these things add “utility” to bitcoins. Plus its inherent scarcity, and there you go, value is imputed.

  17. Greg LilleyNo Gravatar says:

    Nice article and nice to see that you’re willing to change your opinion when circumstances warrant it.

  18. Rich BirkettNo Gravatar says:

    The value of something, including money, is what other people are willing to do to get it. Even money that’s not linked to the value of a commodity, is valued if someone else wants it. As long as transactions with any money are voluntary, why not use it? However, to link promissory debt-based money to a commodity, like Ron Paul and “gold-bugs” want to do, is problematic. It’s similar to legitimizing stolen property when the original owner is dead.

  19. Glad to hear someone finally correct themselves about bitcoin! 🙂

    Bitcoin is a game changer IMHO. I’m opening up a “kickstarterish” site for bitcoins sometime at the end the month at http://www.bitcoinstarter.com the future is here! the question I always ask is do you want to be left behind? 🙂

  20. NicholasNo Gravatar says:

    Foolish Austrian economics at work, markets need steering, people need stearing, the central-bank is necessary to boost aggregate demand, read Keynes General Theory.

  21. badgerNo Gravatar says:

    whats stopping big companies/banks mining bitcoins? is the number of people trading bitcoins limiting the number which can be mined?


    • Seth KingNo Gravatar says:

      There is nothing stopping anybody from mining Bitcoins. This is a free-market currency. That means everyone is free to join the network.

  22. TBCMNo Gravatar says:

    The more I know about this awesome cryptocurrency, the more I like it. For beginners, find here how to set up Bitcoin on your computer and a list of websites that give free bitcoins: http://thebitcoinmaster.blogspot.com
    Join the Bitcoin revolution!

  23. Michael HendricksNo Gravatar says:

    Very interesting. As a recovering Luddite my recent conversion to Bitcoin usage was done purely on a psychological and Austrian economic understanding of currency. As expressed by Rothbard and Mises in “Man Economy and State” and “Human Action”.

    I really have no understanding of the underlying encryption and mechanics of it, and I lament this fact.

    Luckily the Khan Academy just posted several videos on this subject.

    So much to learn, so little time!