What kind of people use Bitcoins, the digital currency designed by cryptographers to be untraceable? Web entrepreneurs? Open-source evangelists? Anti-corporate hackers? Well, it turns out, perhaps unsurprisingly, that the average Bitcoin user is a libertarian. A 32-year-old libertarian male to be precise.
According to an online survey by Lui Smyth, a University College London researcher, 44.3 percent of Bitcoin users identify themselves as “libertarian / anarcho-capitalist.” That’s a remarkable figure considering that only 2 percent of Americans self-identify as libertarian. (Most surveys do not offer “anarcho-capitalist” as an option.)
Smyth also found that Bitcoins are most often used for gifts and donations. Small wonder the Libertarian Party of the United States accepts Bitcoin donations. Or that a recent Libertarian convention followed a gun rights panel with a panel discussion on Bitcoins.
At dailypaul.com, Texas congressman Ron Paul’s libertarian webforum, daily debates rage between Bitcoin zealots and skeptics. Mr. Paul hasn’t caught the bug himself. The 77-year-old congressman appreciates tangible objects that can be stored in a safe, but is keeping an open mind. “Evidently, they seem to be very free market oriented,” he says of Bitcoin enthusiasts, and suggests the technology might one day “compete with the Federal Reserve system.
And therein lies the source of libertarians’ ardor for the Bitcoin. They want to destroy the Fed, a view shared by Ron Paul, an irrepressible critic of centralized banking – he even wrote a book titled “End the Fed.” And some believe that Bitcoins could arm them with the weapon they need.
In many ways Bitcoins are viewed in a similar light to gold. Most economic libertarians don’t trust the federal government to manage the nation’s currency supply, and they certainly don’t trust the Fed, a quasi-governmental agency established in 1915. Unlike paper currencies, gold is immune to government meddling. The only way to create more gold is to mine it – same as with Bitcoins – and the Fed is not in the mining business. So if libertarians managed to reinstate the gold standard or even legalize gold tender as an alternative to the dollar, they could undermine the Fed’s authority.
Ron Paul has called gold “the ultimate money.” From a libertarian perspective it has only one drawback: It’s very heavy. At today’s exchange rate gold goes for about $1,374 an ounce. A pound would run $21,984. A $1 million home would require almost 50 pounds of gold. To avoid carrying around sacks of the stuff, 19th-century Americans exchanged gold certificates. The notes resembled cash and were denominated in dollars, but people could redeem them for equivalent quantities of gold whenever they wished.
Unfortunately for gold enthusiasts, the Treasury printed its last gold certificate 80 years ago. And since the government no longer recognizes gold as legal tender, gold transactions are now subject to sales and capital gains taxes, which makes it costly to set up a private certificate system, not to mention the security concerns.
Enter the Bitcoin. It weighs nothing. It’s not taxed. It’s (mostly, although not always) secure, and it can zip across the globe at the speed of light. Most importantly, it’s “stateless,” which means that governments can’t meddle with the currency supply. In fact, the Bitcoin “mining” scheme, which allows the currency supply to gradually expand as its popularity grows, is modeled on gold. Unlike libertarians’ fruitless attempts to legalize gold tender or reinstate the gold standard, no legislation is required to turn Bitcoins into currency. All its supporters have to do is to expand the market for Bitcoins. And best of all, they can make money doing it.
That is, if the US government doesn’t meddle. It takes a dim view of any attempts to create alternative currencies. Bernard von NotHaus, a self-professed “money architect” and founder of “National Organization for the Repeal of the Federal Reserve and Internal Revenue Code” or NORFED, introduced in 1998 the “Liberty Dollar,” which was backed by precious metals. In 2008 government prosecutors charged him with fraud and counterfeiting, and two years after a jury deliberated just 90 minutes before finding him guilty. Von NotHaus awaits sentencing, facing up to 20 years in prison.
“This is the United States government,” he told The New York Times. “It’s got all the guns, all the surveillance, all the tanks, it has nuclear weapons, and it’s worried about some ex-surfer guy making his own money?”
But at least so far, the government has not interfered with Bitcoin trading. The Financial Crimes Enforcement Network (FinCEN), which enforces money-laundering laws, has issued guidelines about what it calls “convertible virtual currency,” but no one has been prosecuted.
Media reports about bitcoins tend to miss the implications of a stateless currency, focusing instead on the gee-whiz factor of digital currency, the wildly varying exchange rate, or the potential for abuse. In a BBC Newsnight segment, one reporter marveled that you may one day be able to order a pizza online “and pay for it in Bitcoins!” To drive home the point, he took a big bite of a scary-looking slice.
After the pizza bit, the BBC turned to a Bitcoin expert from San Diego. Trace Mayer, a frequent guest on cable news shows, is the owner of RunToGold.com, which promotes gold and bitcoins to combat “Government abuse of currency.”
“What I like about Bitcoins,” he explained, is “there is no way for it to be seized or frozen or confiscated in any way. So we’re able to use a currency that can’t be hyperinflated and we don’t have to worry about bank seizures like what’s happening in Cyprus.”
“But what do you actually use them for?” the befuddled host asked.
The BBC also trotted in a journalist from the Economist, Daniel Knowles, who had a better grasp of the implications. “What it actually resembles,” he observed, “in fact what it’s designed to resemble is a sort of virtual gold, and that’s why we should be skeptical of the Bitcoin.”
Knowles is not alone in his skepticism. When you read economists’ take on the Bitcoin, you come to see the invention in an entirely different light. There is a very good reason why the United States and every other country in the world moved away from the gold standard. Sovereign currencies – also known as fiat currencies – enable governments to cope with currency shortages and recessions. Such shortages happen when the demand for money outpaces supply in economic booms or during deflationary spirals when people hoard cash. Before the Federal Reserve, back when the dollar was still pegged to gold, currency shortages periodically sent the United States and other industrialized countries tumbling into “panics” followed by severe contractions.
Today, European nations have mimicked the old gold standard by exchanging their sovereign currencies for the Euro. Southern Europeans desperately need to devalue their currencies in order to climb out of recession, but the Euro is as solid as gold (more solid, in fact), and their German partners refuse to led it slide.
So if we ever actually achieve the dream of a stateless digital currency, we will not have progressed towards a magical future of monetary freedom. We will have regressed to an era when the world’s money supply was chained to the arbitrary production of a finite resource and the cyclical currents of the market. And we will have lost one of greatest advances of the modern age: power over our own currencies.
Libertarians don’t see it that way, of course. They will happily proselytize the theories of Ludwig von Mises and the Austrian School of Economics. Just be careful when you buy their bits. You may be investing in more than you think.