“Why Bitcoin will fail”

There is a saying: The more slander you can withstand, the more praise you deserve. There is no point or value in paying attention to brainless trolls. What we care about are those rational objections.

Today we bring you “Why Bitcoin Will Fail”[1], written by software engineer Avery Pennarun on May 8, 2011. At that time, the price of Bitcoin was about $3.84. Today, the price is about $41,000.

In Avery's opinion, Bitcoin is not good, just like the sky is not red, which can be called common sense. Of course, this kind of emotional appeal is meaningless, and he wrote a long article to explain his reasons. The summary is as follows:

First: If you like Bitcoin, then you must think the gold standard is a good idea.

The gold standard is the issuance of paper money backed by a full reserve of gold. At this time, the paper money is gold certificates - just like the US dollar before 1971.

The Gold Standard is a Bad Idea:

First, in order to create money you need to waste a lot of work, like mining gold.

Second, gold is a stupid and inconvenient currency compared to paper money.

Third, believing in the gold standard means not believing in capitalism.

This one may not be easy to understand, so we need to explain it a little more. Avery said that the whole magic of capitalism is two words: Making Money, which literally means making money. Turning people into machines that "eat food and make money" is capitalism.

He said: "Incentives (for people to create value)" are important, gold (currency) is not important.

Avery emphasized: If the gold standard had worked, we would not have had the Great Depression of the 1930s (referring to the Great Depression in the United States in 1933), and we would not have emerged from the recent banking crisis (referring to the financial crisis caused by subprime mortgages in 2008).

In his opinion, the root cause of the Great Depression in the United States in 1933 was that the US dollar was on the gold standard at the time, which caused a spiral deflation during the economic contraction period: companies suddenly had no money to pay wages, and people would not work without wages. If they did not work, companies would have no income. If companies had no income, they could not pay wages. If they did not pay wages, people would have no money. If they had no money, people would not consume. If they did not consume, companies would have no income.

How was it finally resolved? War (World War II).

We can see that the most ironic scene has occurred, although this has often occurred in human history: wars that can only bring about a net reduction in wealth can boost the capitalist economy. Production for the purpose of destroying wealth is also a strange feature of capitalist production.

How did the 2008 subprime mortgage crisis get through? In Avery's opinion, it was of course because the dollar had been decoupled from gold, and the government could print a large amount of dollars "free of charge" to save the market.

According to Avery's logic, whether it is war or flooding the market with money, they can effectively "motivate" people to work, thereby resolving the economic crisis.

Finally, a government’s ability to print money (and to recycle and destroy it) is a critical tool for economic management.

Avery explained that if the Federal Reserve, the central bank of the United States, can't print money, then it can't control the money supply. If it can't control the money supply, it can't set the federal interest rate. If it can't set the interest rate, it can't control the economy. If it can't control the economy, the economy becomes a complex system that gets out of control: it goes crazy.

At the end of the first point, Avery summarized the comparison between Bitcoin and paper money:

Bitcoin is a lot like the gold standard, only digital:

- Bitcoin mining is a meaningless job that creates no value.

- Bitcoin is not as convenient to use as paper money.

- Bitcoin limits the total amount of issuance, thereby rejecting the expansion of the amount of money as the economy develops, which rejects capitalism, which cares about value, not money.

- Bitcoin will cause the Great Depression of the 1930s.

- Bitcoin removes government controls from the economy, which means the economy will become control-free.

Paper money has many advantages:

- Printing money is almost free (in many cases it’s just a matter of typing a few numbers into a computer).

- Today's currency is very convenient to use and comes in many convenient forms.

- When more value is created, more currency can be printed to match it without having to do useless work like mining.

- Today's currency allows us to spend money to save the market during financial crises.

- The current system allows the government to reduce economic fluctuations.

Second: Even if Bitcoin were a good idea, governments would crack down on it.

Avery said: "Government is a power structure. Money is power. Digital currency is not like pirated software or pirated music. Pirated movies are not going to cause any harm to the government, but losing control of money is going to cause a lot of harm."

He continued: The government has lethal weapons, a propaganda machine, secret agents, and the support of a large number of citizens who think that keeping the economy under control is a good idea. If you threaten the currency, you threaten the entire civilized world. You become an "enemy" of the state - literally. In their eyes, this is as dangerous as if you were building nuclear weapons in your bedroom.

He said: The only reason you can get away with it is because you are too young to matter. And that is the current situation.

Today, the price of Bitcoin is more than 10,000 times higher than when Avery wrote the article, and its market value is close to $800 billion. Indeed, various external shocks and pressures have come one after another, but wasn’t all of this already expected by Satoshi Nakamoto?

"We could win the arms race (of digital currencies) and conquer a new frontier of freedom in a few years. Governments are good at decapitating centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be invincible." - Satoshi Nakamoto, posted on the cryptography mailing list group on November 6, 2008.

Article 3: The entire technological foundation of Bitcoin is flawed.

Avery said that although he did not quite understand the principle of SHA-256, he knew that the strength of an encryption system depends on its weakest link. A failure in the encryption system would cause the collapse of the entire financial network.

He believes that the traditional financial system we use today is slow, old, and has many flaws and problems, but it is resilient and can be remedied and repaired if errors occur. In comparison, Bitcoin is not like this. Once a problem occurs, it will be an irreversible and fatal collapse.

There are too many things to extend this topic, such as quantum computers, cracking ECDSA, cracking SHA-256, etc. Liu Jiaolian has written about this many times in previous articles, so I will not repeat it here.

Article 4: Bitcoin does not work offline.

Paper money is OK.

This is "both..." Of course, using Bitcoin as a reserve asset and having a trusted commercial bank issue specific banknotes, is that possible? I think it is completely possible. Of course, the future trend is electronic and digital. I am afraid that it is more likely that everyone will have a smartphone and use the Lightning Network to make small payments directly, right?

Since the collapse of the Bretton Woods system in 1971, we have only been able to decouple from fiat currencies for more than 50 years. Compared to the 5,000-year history of human civilization, 50 years is just a blink of an eye.

What kind of economic history we have determines what kind of solution we will accept. The 50-year road of currency devaluation and savings shrinkage is nothing more than the result of capitalism whitewashing its faults.

Why is the economy in recession? Can we blame gold?

Marx has long made it clear that the capitalist mode of production, that is, production aimed at pursuing surplus value, will inevitably lead to cyclical depressions.

Because the money earned by a company after paying upstream companies is equal to the surplus value taken by the capitalists and the wages taken by the workers, the total income of all companies connected together is = total profit of capitalists + total wages of workers.

It is known that workers (proletarians) spend their entire lifetime wages to support their families, while capitalists (property owners) only need to spend a small portion of their total income. In this way, all expenses, that is, total consumption, are always less than all total income.

The cycle of the entire economic system will result in the continuous collection of money by capitalists. This is the real reason for the so-called deflation.

Some people say that the surplus that capitalists take away will be used for investment. But when they act as investors, they must be pursuing a higher profit return rate. Total investment + total profit = total return.

Investment activity allows capitalists to take more money out of the economic system, not less.

If a gold standard monetary system like Bitcoin supports this cycle, then as capitalists take away money, the amount of money will decrease, and the price will rise. Then the part of the wages temporarily saved by workers will also benefit from the appreciation.

However, the unlimited over-issuance of legal tender has deprived workers of even this last chance. In order to "motivate" capitalists to engage in production and investment, monetary expansion has made unprofitable business models profitable and investment projects that would otherwise lose money profitable. However, this servility to capital has ultimately resulted in capital taking an increasingly larger slice of the pie, while workers have not only enjoyed the first distribution of exploitation, but also the second exploitation of reduced savings.

To see the effect, just look at the extent of wealth polarization in the U.S. economy over recent decades.

The reason why gold has the so-called deflation problem is that it is not infinitely divisible. When its price rises to a certain level, the gold for daily use will be cut into too small pieces and inconvenient to use. Bitcoin does not have this problem at all, because numbers are infinitely divisible in theory.

To fundamentally solve the deflation problem of capitalist production, the whole world must abandon Keynes’ explanation, take Marx’s theory seriously, take practical actions, and strive for “common prosperity”.