The Antitrust Attorney Blog
Author: Jarod Bona
I believe that Bitcoin is the enemy of tyranny and the greatest invention of the 21st century. Its detractors tend to either not understand Bitcoin or believe that the people are best when they are controlled and manipulated.
Maybe that was a little hyperbolic? I don’t care.
The truth is that I am still learning. I am still crawling through the rabbit hole (a cliché, but one often used in this area) and I recommend that you do the same. The more I learn, the more excited I get about Bitcoin and what it means for our future.
As someone who has made the study of and interaction with competition his career, it is fun to watch a superior competitor to government fiat currency develop.
We had (and still have) gold, but that has its limitations: Mostly, dividing and carrying it.
Blockchain v. Bitcoin
First, an important clarification: The incredible blockchain technology developed from Bitcoin, but many cryptocurrencies now utilize this technology for themselves. And NFTs (non-fungible tokens) are becoming a big deal in certain circles; they utilize blockchains like Ethereum. Bitcoin is on a blockchain, but there are other blockchains out there and other currencies and applications that utilize these blockchains.
To really get it, you must understand the distinction between Bitcoin and everything else that might appear on a blockchain. The blockchain technology is exciting and there are use cases that people are testing all over the world. And others that we can’t even contemplate yet. But there is only one Bitcoin and it is different in kind from everything else. You should read the original Bitcoin white paper by Satashi Nakamoto here to learn more.
The Limited Supply of Bitcoin
Among other more complex reasons, Bitcoin is different because it is programmed such that the number of Bitcoin will never exceed 21 million (and it won’t even reach 21 million for a long time). As far as money is concerned, it is harder than gold (even though it isn’t physical). And there isn’t a central authority (i.e. a Central Bank or any other entity) that can add inflation or otherwise screw around with it.
Go ahead, read that last paragraph again. And try to comprehend how big of a deal this is.
Currencies (even government fiat) work by supply and demand and you would be shocked if you discovered how many new dollars are introduced into the world each year, especially the last couple years. Go ahead and look it up. And it is much more than just the actual cash-money printer. It is Congress and the President adding more debt and the Federal Reserve “stimulating” the economy. Even simple bank loans increase the money supply. Anyway, poke around the internet about this to add a new anxiety to your life.
You don’t have to have a Ph.D. in Economics to understand that dramatically increasing the supply of something can negatively affect its value. And that’s just as true with dollars and other fiat currencies.
Did you know that “Mo Money Mo Problems” by The Notorious B.I.G. is really a ballad about the ravages of increases in the money supply?
Well, I made that up. But it would be a great title for what’s happened with fiat currency.
Network Effects
If you follow antitrust issues, you are now undoubtedly familiar with network effects. There are certain products, services, or platforms (even currencies) that become more valuable to each user, the more users participate. So, for example, if you are building a platform business, the more sellers on your platform, the more useful your platform will be to buyers, and vice-versa. This is one reason why you see so many new platform tech companies burning through money, charging customers as little as possible, sometimes nothing. The game is to win the market, at whatever cost. Then you can start to really monetize. Social media, of course, works the same way. People want to be where others are.
Anyway, Bitcoin also benefits from network effects. As more people use it as a store of value, the more valuable it becomes as a store of value. And while Bitcoin is also a medium of exchange, I think that its current role is much more of a store of value because it is still quite volatile and, frankly, those that understand it don’t really want to spend it as the value has consistently increased—sometimes dramatically—during this current adoption phase (which may continue for years).
Bitcoin as a Censorship-Resistant Medium of Exchange
As a medium of exchange, however, there is a second layer on top of the Bitcoin blockchain called the Lightening Network that makes it even easier for users to exchange bitcoin. And if you go to El Salvador (which has adopted Bitcoin as legal tender), you can utilize the lightening network, through an app, to purchase a McDonald’s Cheeseburger with bitcoin.
In addition, we are beginning to see people take all or parts of their salaries in bitcoin including the mayors of New York City and Miami. A company called Strike allows you to set up a direct deposit of your paycheck in part or in full in bitcoin. And as the government money printing starts to show up even in the official government inflation numbers, more and more people are looking for protection from the currency devaluation, which seems to have no end in sight. Bitcoin offers one possible solution, with its inherently limited supply that no person or entity can change.
Bitcoin (and Ethereum) have also literally saved lives by providing money for people in Ukraine when banks and ATMs weren’t available. And the government of Ukraine has taken in millions of dollars of donations in these cryptocurrencies. This isn’t a surprise as The Human Rights Foundation has long utilized Bitcoin to help those facing tyranny throughout the world.
The reason that Bitcoin is the solution to those under oppression is that it is decentralized such that no government, entity, or person can cancel it or remove people from its network. In that sense, it is censorship resistant. For the antitrust fans out there, not even a group boycott can keep you from using it. This censorship-resistant feature will likely become increasingly important, including in developed countries as banishment, oddly, seems to be in fashion as a method of punishment.
Bitcoin Competes with Government-Backed Currencies like the Dollar
Like any market, there is a market for currency. And the dollar, particularly in the United States, has market power. It is, at least for now, the world’s reserve currency. The dollar still competes well against currencies from other nation-states, despite its dramatic increase in supply, in part because other countries are doing the same thing, often to a much greater extent.
But now that there is an emerging non-government-backed currency, it will be interesting to see what happens. Bitcoin is vastly superior to government currency in many ways, but it has been around for a relatively short time, so many are still skeptical (I personally am not skeptical).
Besides Bitcoin, there are other currencies that will compete with the dollar, including China’s digital currency (which comes—at no extra charge—with high-tech surveillance tools). Bitcoin may not displace the dollar, but it wouldn’t surprise me if it has a major role alongside it, as it is better than the dollar in certain ways. This includes the programmed fixed supply, alongside the fact that people can move Bitcoin across time and space more quickly and cheaply than government-backed currencies. And, of course, its censorship-resistant qualities are becoming more apparent and important on the world stage.
You might begin to see countries, including the United States, adopt their own digital currencies. But don’t be fooled: These currencies will not be censorship resistant and will always be subject to increases in their supply. They are not worthy competitors to Bitcoin and their dystopian qualities could be frightening for those that cherish freedom.
The Environmental Benefits of Bitcoin
The Bitcoin network runs on a proof-of-work system that changes energy to value that can be stored and transferred across time and space. So—like just about everything else human-created in this world—it requires energy. Those that don’t fully understand Bitcoin sometimes target the proof-of-work energy use as a reason to criticize this positive world-changing technology. You can tell what I think by the way I framed that sentence.
But what you don’t hear in these shallow articles by those that don’t truly understand Bitcoin (see, I did it again) is that Bitcoin utilizes energy in such a unique way that the environmental impact is likely to end up as a net positive. Of course, even that is unfair to Bitcoin as we don’t routinely criticize other technologies that use energy. But if you don’t understand something, you tend to fear it and look for flaws. So, I’m not surprised that the Bitcoin luddites get stuck on the energy usage.
Bitcoin mining can be done anywhere and anytime and allows those that mine to convert energy to value in the most flexible of circumstances. These features create positive consequences for energy markets and the environment.
First, Bitcoin expands the relevant geographic market for energy competition to the entire world. Typically, energy markets have all kinds of barriers, nooks, crannies, and regulations that ultimately limit competition, including to limited distances. Transferring energy results in significant leakage, as you lose the energy (the value) with distance and time. But Bitcoin allows you to create energy and obtain and store the value for that created energy immediately and even at the source of the energy creation. What that does is provide energy creators with the incentive to innovate, anywhere and everywhere, as they can immediately capture the value of that innovation. The efficiency from this additional innovation, which can then be applied to uses beyond Bitcoin, is likely to more than overcome the costs of any energy usage.
Second, energy producers are often monopolists or those with substantial market power in their region or jurisdiction. For example, think about your local electric or gas company. They don’t have the same incentives to innovate as entities in more competitive markets. Bitcoin energy production adds a new type of energy producer and a new type of energy customer. That diversity itself is likely to create greater innovation and competition within energy markets. While the benefits are hard to quantify, over such large markets, even small improvements create substantial aggregate gains.
Third, many alternative-energy producers like wind and solar, for example, have trouble making a legitimately strong business case for their development because energy use doesn’t always coincide with energy creation across time and space; that is, the demand by customers doesn’t always line up with when it is most windy and sunny. And transferring energy across time and space, as I already explained, has substantial costs (leakage). So, absent subsidies, wind and solar energy just doesn’t work that well in most places. But when the alternative-energy producer can mine bitcoin or has customers that mine bitcoin, their economics substantially improve because bitcoin mining is available 24 hours a day from anywhere. Thus, these producers are much less likely to need government subsidies to survive. The Bitcoin network creates an opportunity to obtain value from otherwise wasted alternative energy production. This makes alternative energy more profitable, which will make it more plentiful.
Fourth, there is a lot of other wasted energy in the world. Over time, I expect that people and companies will find these opportunities to turn them into bitcoin mining. For example, many are already taking the energy from gas flares to mine bitcoin. And El Salvador is mining bitcoin from volcanic energy.
Fifth, to the extent that over time Bitcoin replaces other financial services that are not nearly as effective or efficient, we should credit these energy savings. To transfer bitcoin, you don’t need a bunch of banks approving the transaction, in limited hours on business days, each taking their tribute out of the funds transferred. Instead, you can easily move bitcoin, anytime, anywhere, for virtually nothing in transaction fees. The efficiencies so dwarf our current archaic financial structure that the energy savings would be phenomenal.
While it is unlikely that you will read about these environmental benefits in your favorite mainstream press article about Bitcoin, as an antitrust attorney, these benefits to competition and innovation stand out as obvious and significant.
Learn More
There is a lot more that I can say about Bitcoin, but this is enough for now. Rather than taking my word for it, I highly recommend that you dig in and start to discover Bitcoin for yourself. If you are willing to tackle a book, you might start with The Bitcoin Standard by Saifedean Ammous.
Once you do, you might find yourself part of the HODL crowd.
Photo: Pixabay