Bitcoin in Academia: Where do Economic Circles
Stand on the Digital Currency?
Before we go into academia’s position on Bitcoin, it will be productive to point out just how little the academic world has actually written on the digital currency. Let us look at a few, major economic research institutions to see how little mind they have given to Bitcoin. We will start with the largest institutions, operating on a global scale, and will then move down the ladder to the more obscure, libertarian-leaning organizations.
Our brief research is only cursory, however; it is far from exhaustive. We have simply searched for the term “Bitcoin” on the official websites of these organizations, using the search bars on their homepages. It could be the case that some of the organizations have published articles or formal studies on Bitcoin that have not yet made their way into the institutes’ public databases. However, even this cursory research uncovers a definite, although probably unsurprising, trend among our various economic organizations.
The International Monetary Fund(IMF) on Bitcoin
The IMF institute is a global organization, and is part of the World Bank, that receives money from the various world governments and distributes it to countries that the IMF has deemed in need of financial assistance. They also conduct economic research and recommend monetary and fiscal policies for the world’s governments. When we searched for “Bitcoin” on their official website, the databased returned a total of 1 match for our term. The document was not even about Bitcoin, though, it was an IMF country report on China—the word “Bitcoin” only appeared in this report 1 time.
The Federal Reserve and Bitcoin
Next, we left the global community and went into the United States of America, which will be the country of origin for the rest of our organizations. The first of these US organizations we searched was the notorious Federal Reserve System. When entering our search term into the website’s database, we got two matches. Both of these matches were minutes from Federal Advisory Council (FAC) meetings. The first document outlined a basic overview of Bitcoin, laid out in the FAC meeting. The Council concluded that Bitcoin posed no serious threat to traditional monetary institutions. The second document was a record of the minutes from a FAC meeting that was held a few months before the one that produced the first document we examined. This record only had 2 sentences on Bitcoin.
Austrian Economic Institutes’ Bitcoin ResearchNow, moving on to more Austrian-leaning institutes, we did a search at the official website for the CATO Institute. This search returned 23 matches in total, ranging from official publications to multimedia platforms and blog posts. Going even deeper into the Austrian community, we went to the Foundation for Economic Education’s (FEE) website. Our search did not give us a specific number of matches, but there were at least 10 pages of results. Lastly, we visited the official website of the Ludwig von Mises Institute, an Austrian-minded, economic research organization that is almost exclusively anarcho-capitalist. When searching the Mises Institute database for “Bitcoin,” we received approximately 23.6 million matches.
As we can see, the discussion on Bitcoin is almost non existent on the global level, and becomes more and more vibrant as the institutes we searched became more and more obscure and free market-oriented. Furthermore, many of the search results on FEE and the Mises Institute likely were not exclusively about Bitcoin, since the search mechanisms provide documents that have as little as one mention of the search term.
Even though the Austrian community has undergone lengthy conversation on the cryptocoin, the theoretical discussions on Bitcoin have been disappointing thus far. Many of the Austrian economists who have been active in academia for some time, and are new to Bitcoin, pay it little attention; their thoughts on the digital currency have not extended beyond the conclusion that Bitcoin value either adheres to the regression theorem or proves it wrong. Thinkers like Detlev Schlichter, Konrad S. Graf, and Peter Surda have given Bitcoin value some more sophisticated thought, but their conclusions still leave something to be desired in regards to Bitcoin value theory. Furthermore, most of the Austrian-minded academics have not even considered practical implementations of Bitcoin or commented on flaws in the protocol—such as the potential for Bitcoin mining centralization. And the people who are working on these problems do not really give much mind to theoretical discussions; besides, they dwell within the depths of the Bitcoin world, meaning that they are outside the more mainstream circles that we are examining.
The mainstream economic circles, even the more obscure, Austrian circles, have not yet advanced even a satisfactory Bitcoin value theory, much less any ideas on real-time, practical implementations or solutions to flaws. We must keep in mind that these are mainstream economic communities, living in academia. These people are far from the general, societal mainstream, the laymen. The average person knows even less about Bitcoin. Really, most of the general population does not yet understand cryptocurrency, and in many cases have never even heard of Bitcoin.
Bitcoin and the Laymen
We can hardly expect society at large to accept Bitcoin as their chosen currency and means of wealth preservation when they know nothing about it. The members of the Bitcoin community are sometimes subject to “tunnel vision” when it comes to cryptocurrency. Those of us who are so absorbed in the digital currency world make Bitcoin the main focus of our free time; our number one hobby. Some people have even devoted their careers to Bitcoin—people like Gavin Andresen. So it sometimes seems like a surprise to us when we run into someone who has never even heard of Bitcoin. In reality, we are a small minority of the world’s population. Mainstream society is a long way from learning the intricacies of Bitcoin, and accepting it as a daily currency.
According to this Bloomberg poll, only 42% of Americans who responded to the poll have heard of Bitcoin. The article reporting on the poll quoted one person who has heard of Bitcoin as being skeptical of its utility:
I’m not sure what the value of it is, and what I’d be able to exchange it for. . . What use would it be for me?
To be fair, this poll is over 6 months old, as it was published in December of 2013. At this point, more of the general population has likely heard of Bitcoin. However, it adequately shows the magnitude of mainstream ignorance about Bitcoin; the laymen still lag far behind academia, not to mention the core Bitcoin community. Whenever the digital currency gets any coverage on mainstream media, the talking heads on the television bring up the old, outdated arguments advanced by the Bitcoin skeptics: Where does it come from? How can it have value if I can’t touch it? What is stopping someone from printing a trillion bitcoins and ruining its value?
Clearly, the mainstream has a ways to go before they come to a reasonable understanding of Bitcoin
What Will it Take for the Mainstream to Catch up
With the Bitcoin Community?
Our emphasis on the ignorance of both mainstream economic communities and the layman population in regards to Bitcoin is not meant to insult or mock these people. A proper economic understanding of Bitcoin and a practical, layman knowledge of it are essential in spreading its global adoption and growth—something that every Bitcoin enthusiast desires to do. So, what kinds of developments will Bitcoin have to undergo before it is appealing to the masses?The first thing that needs to be done with Bitcoin, to prepare it for mainstream adoption, is to fix the Bitcoin mining centralization problem. This unforeseen flaw in the Bitcoin ecosystem poses a serious threat to the reliability of the entire Bitcoin network. Since transactions on the blockchain are confirmed by Bitcoin miners, any one person or group of people can essentially control the entire monetary system by attaining 51% hashing power. Once they have gained over half of the network’s hashing power, the possessors of this power will have the ability to successfully commit a double spend. This ability means that the owners of the majority mining power will be able to buy something with Bitcoin and cancel the transaction before the payment is confirmed.
This occurrence is known as a 51% attack, and is “hypothetical” when referring to Bitcoin specifically, but has been observed in smaller digital currencies. Many people in the community believe that this attack, if it were to actually happen, would destroy the confidence in the Bitcoin network, thereby ruining the value of bitcoins. While the realistic chances of a 51% attack are slim, the fact that a Bitcoin mining pool, or an individual miner, can gain 51% hashing power eliminates the trustless nature of Bitcoin. For many people, having to trust a mining pool to neutrally confirm the majority of the network’s transactions is just as bad as an actual 51% attack—it would make the mining pool closely resemble a central bank.
Therefore, this problem needs to be solved before Bitcoin permeates throughout the mainstream. If we think that Ghash.io is bad, just wait until multi-billion dollar companies start putting Wall Street-level capital into Bitcoin mining. Not only would a centralization of 51% hashing power be a real possibility, it would likely be laughably easy to attain. In actuality, we would probably see a Bitcoin mining firm control 70%, 80%, or even 90%+ of the network’s hashing power. Then, Bitcoin really would cease to be trustless.
There are multiple proposed solutions to the problem of mining centralization. Unfortunately, none are being seriously considered, as each would require a significant modification to the way Bitcoin’s transaction network functions. However, this is an important issue and must be addressed.Once Bitcoin mining centralization is fixed, the next step would be to make Bitcoin easy to use for literally anyone. The learning curve will have to be virtually nonexistent. Therefore, Bitcoin payment technologies must be developed that will allow people to spend bitcoins just as seamlessly as they can spend paper cash. The most popular goal in this line of Bitcoin development so far has been a Bitcoin debit card. If the already small, learning curve involved in adopting Bitcoin were to be significantly diminished, it is possible that we could see an increase in the demand for employers to pay their employees in bitcoin—which would be a great step in its evolution.
Finally, firms that are at higher levels in the production structure, the merchant suppliers and the capital goods producers, would have to accept bitcoin as payment for their goods. Merchant adoption is a positive development indeed, but unless those merchants are able to pay their expenses in bitcoin, increased adoption will increase selling pressure and thereby could cause a decrease the Bitcoin price.
The merchants that accept bitcoin currently have to convert their bitcoin revenue to fiat in order to really gain from accepting the digital currency. Therefore, the more merchants that accept bitcoin, and the bigger they are, the more downward pressure they will exert on the markets. We saw an example of this merchant-induced sell pressure a few weeks ago when Dell began accepting bitcoin. An initial conversion of bitcoin revenue into fiat triggered a multi-day sell off that significantly depressed the Bitcoin price. Therefore, it is very important that both merchants and suppliers accept bitcoin so that the currency can maintain, and stabilize, its value.
To conclude, Bitcoin is far from being widely accepted by the mainstream masses. Both economic circles and the layman population need to improve their understanding of Bitcoin. Also, he community needs to continue their development of Bitcoin technology that will diminish the learning curve. The only way to reach this goal is to adequately fund those people who are working on valuable development projects and economic research. We have one, major Bitcoin advocacy group—the Bitcoin Foundation—that has tasked itself with funding these types of endeavors. Unfortunately, the Foundation has decided to shirk its self-appointed responsibilities and use the community’s money to play politics. As a possible positive, however, Mike Hearn’s new project—Lighthouse—is on the horizon. Hearn’s project aims at creating a decentralized, Bitcoin powered crowdfunding platform that can be used to raise money for important development projects. If Lighthouse is successful, the community would finally be able to put their money to productive use, funding projects that will spread mainstream acceptance of Bitcoin. Of course, the ultimate success of this project, as well as Bitcoin itself, is still to be seen.