Bitcoin Is Inferior to Skymiles

Bitcoin is a privately issued currency. So, to some extent, are Skymiles or Kroger points or whatever loyalty program to which you belong. In the case of Skymiles, Delta is rebating some of your original cost to you in the hopes of earning a near monopoly on your future business. Skymiles has value to Delta (the repeat business brings additional profits) and value to you (reduced cost of future business you conduct).

There is no similar economic basis to Bitcoin. Bitcoin is based on solving math problems no one actually needs to be solved. The math problems are simply a constructed substitute for work. Let’s be clear that those math problems are not work. They are an artificial substitute for work. There is certainly no business of the type Delta runs standing behind the currency in the same way Delta stands behind Skymiles.

Let’s be generous and assume Bitcoin is not a scam where the original players have long ago cashed out with mega millions or billions. Let’s assume they were really trying to do something for the good. I think they fell for a kind of tech fallacy that has entrapped the minds of many other people today.

What is this fallacy? The whole logic of Silicon Valley is technological disruption of the existing market for goods and services. In other words, if you can create some new technical good or service that is a vast improvement or even transformational, then there is massive profit to be earned as customers leave the previous product and opt for the new one in giant numbers. These disruptions may even render the older goods and services obsolete. Industry by industry, market by market, tech has disrupted and shifted the way things worked. But in every one of those cases, there is an underlying business and real value-producing activity (mostly in the private sector). The fallacy is that this process of tech disruption can apply to everything. In the case of Bitcoin and cryptocurrency, the tech disruption is aimed at money.

Now, there are lots of things tech can do with money. At one point, it gave us credit cards and debit cards. Now, we have Paypal, Square, Venmo, and more. Tech can change the contours of the whole money process and is doing so. But with Bitcoin, you are attempting to assume a traditional function of sovereign governments with nothing more than artificial work and artificial scarcity. In order for a privately issued currency to have value, there must be somewhere that value takes root. With Skymiles, the value is in profits and cost. Delta gets more certain profits. You get reduced costs. The same is true of Kroger’s rewards. Where is the value in Bitcoin other than that it proposes to solve inflation with its artificial scarcity? And even then, any private currency of any type could be built with the very same feature.

The improvement of financial transactions will continue. Venmo will be a household word every bit as much as Jello or Xerox were for other generations. But those improvements will relate to sovereign currency and not the cast of thousands of imitators (Bitcoin and its many, many competitors) developing in the crypto world, which is ultimately vapor. Tech cannot necessarily disrupt sovereign government functions.