Two Common (And Wrong) Arguments Made by Bitcoin Skeptics

In this new column, I’ll be wrapping up the week’s bitcoin headlines, and explaining what they mean to you, the New Finance investor. First, some background on me: I first used bitcoin in 2011 and have been writing about bitcoin on a full-time basis since early 2014. Currently, I contribute to Forbes and Bitcoin Magazine; my work has also been featured in Nasdaq, Business Insider, American Banker, Motherboard, and many other media outlets. I also do a daily bitcoin news show.

Paul KrugmanThe general theme of the bitcoin conversation from this week started with Nobel-prize winning economist Paul Krugman’s tweetstorm on Sunday and continued through The World Economic Forum in Davos, Switzerland.

Basically, there were a bunch of old white guys claiming bitcoin has no fundamental value, or it will eventually be worthless because governments will not allow it to exist. These sorts of stories pop up quite often, but they were especially prevalent this week. Let’s dissect these two arguments separately.

 

Bitcoin Has No Fundamental Value?

First, let’s start with the argument that bitcoin has no fundamental value. This seems to be the only point of view that brings together Nobel-prize winning economists like Joseph Stiglitz and gold bugs like Peter Schiff. These two camps are always spitting vitriol at each other, but they’ve somehow found common ground in the bitcoin debate.

The basic argument here is that the bitcoin price must eventually fall to zero (or very close to it) because there is no fundamental or “intrinsic” value to the cryptoasset. On the contrary, bitcoin skeptics point out that gold has utility via industrial use cases and even U.S. dollars are required for tax payments.

However, as I explained in an op-ed counterting Krugman’s tweets for Bitcoin Magazine, bitcoin also has this sort of underlying utility in the form of permissionless, digital payments. If you’re unable to gain access to a bank account or a highly-regulated online payment network, then you’re basically unable to participate in the global financial system — unless you use bitcoin.

In the same way that U.S. dollars are required for tax payments in the United States, bitcoin is required for making permissionless online payments.

But of course, this actually misses the point completely. After all, people who decide to hold some bitcoin have a much bigger impact on the price than those who are just transacting in the digital currency.

Bitcoin is the first digital form of an uncensorable, unseizable digital asset. This is why people “hodl” it as a store of value (in addition to the transparent monetary policy that comes with no counterparty risk).

In other words, the U.S. dollar and other fiat currencies are appcoins for making tax payments.

 

Bitcoin Will Be Banned?

Now, there are also those who admit there is some potential utility of bitcoin but still think the price will go to zero because governments will ban it. There are a few problems with this argument.

First of all, bitcoin is just computer code, so banning it would amount to banning a form of speech. This should be problematic from a legal standpoint, at least in western democracies. In the 1990s, the U.S. government came up against this issue in their fight against PGP encryption.

What regulators could do is get much more aggressive with their regulation of the centralized exchanges where a lot of people move in and out of bitcoin. They may even try to shut the exchanges down completely.

However, decentralized exchanges built on top of the Lightning Network are already in development, so this would be a speed bump for the technology rather than the end of it completely. Bitcoin can also be bought and sold for physical cash via platforms like LocalBitcoins.

Bitcoin was built to be resistant to government shutdowns. It is not the same as e-gold or Liberty Reserve. It’s the BitTorrent of digital money.

Of course, regulatory clampdowns can cause price panics over the short term. We’ve seen this over the past month with all of the regulatory news out of South Korea.

But over the long term, bitcoin will survive. The inability for governments to wrap their regulatory claws around the cryptoasset will only serve to further prove its core value proposition.

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