There are three obvious defects to Bitcoin. As a means of payment, it is slow. The Bitcoin blockchain can process only around 3,000 transactions every 10 minutes. Transaction costs are not trivial: Coinbase will charge a 1.49% commission if you want to buy one bitcoin.
There is also a significant negative externality: Bitcoin’s “proof-of-work” consensus algorithm requires specialized computer chips that consume a great deal of energy — 60 terawatt-hours of electricity a year, just under half the annual electricity consumption of Argentina. Aside from the environmental costs, one unforeseen consequence has been the increasing concentration of Bitcoin mining in a relatively few hands — many of them Chinese — wherever there is cheap energy.
But these disadvantages are outweighed by two unique features. First, as we have seen, Bitcoin offers built-in scarcity in a virtual world characterized by boundless abundance. Second, Bitcoin is sovereign. In the words of Casares, “No one can change a transaction in the Bitcoin blockchain and no one can keep the Bitcoin blockchain from accepting new transactions.” Bitcoin users can pay without going through intermediaries such as banks. They can transact without needing governments to enforce settlement.
The advantages of scarcity are obvious at a time when the supply of fiat money is exploding. Take M2, a measure of money that includes cash, bank accounts (including savings deposits) and money market mutual funds. Since May, U.S. M2 has been growing at a year-on-year rate above 20%, compared with an average of 5.9% since 1982. The future weakness of the dollar has been a favorite 2020 talking point for Wall Street economists such as Steve Roach. You can see why. There really are a lot of dollars around, even if their velocity of circulation has slumped because of the pandemic.
The advantages of sovereignty are less obvious but may be more important. Bitcoin is not the only form of digital money that has flourished in 2020. China has been advancing rapidly in two different ways.
Nowhere in the world are mobile payments happening on as large a scale as in China, thanks to the spectacular growth of Alipay and WeChat Pay. Those electronic payment platforms now handle close to $40 trillion of transactions a year, more than double the volume of Visa and Mastercard combined, according to calculations by Ribbit Capital. The Chinese platforms are expanding rapidly abroad, partly through investments in local fintech companies by Ant Group and Tencent.
At the same time, the People’s Bank of China has accelerated the rollout of its digital currency. The potential for a digital yuan to be adopted for remittance payments or cross-border trade settlements is substantial, especially if — as seems likely — countries participating in the One Belt One Road program are encouraged to use it. Even governments that are resisting Chinese financial penetration, such as India, are essentially building their own versions of China’s electronic payments systems.
Some economists, such as my friend Ken Rogoff, welcome the demise of cash because it will make the management of monetary policy easier and organized crime harder. But it will be a fundamentally different world when all our payments are recorded, centrally stored, and scrutinized by artificial intelligence — regardless of whether it is Amazon’s Jeff Bezos or China’s Xi Jinping who can access our data.
In its early years, Bitcoin suffered reputational damage because it was adopted by criminals and used for illicit transactions. Such nefarious activity has not gone away, as a recent Justice Department report makes clear. Increasingly, however, Bitcoin has an appeal to respectable individuals and institutions who would like at least some part of their economic lives to be sheltered from the gaze of Big Brother.