Blog author: jcarter
Wednesday, December 17, 2014
By

bitcoin-deadEarlier this year I declared that Bitcoin was (nearly) dead. But as The Princess Bride’s Miracle Max once explained, “There’s a big difference between mostly dead and all dead. Mostly dead is slightly alive. With all dead, well, with all dead there’s usually only one thing you can do.”

Right now, Bitcoin is only mostly dead. As an investment, it was the worst of 2014. As a currency, it was destroyed by the IRS by a single sentence (“For federal tax purposes, virtual currency is treated as property.”). All that really remains is for it to become a financial network. But then it will be likely killed (i.e., all dead) with one word: regulation.

As Henry Farrell explains, Bitcoin has only survived this long because the U.S. government hasn’t really considered it to be a viable financial network:

Up to this point, regulators have largely tolerated Bitcoin as a curiosity and experiment. While Bitcoin allows consumers to buy illegal drugs on Tor Hidden Services sites like Agora and Evolution, they don’t do so on a sufficiently large scale to really cause enormous alarm. Regulators still don’t know quite what to do with Bitcoin. But if Bitcoin were ever to threaten to become a truly decentralized payments network, owned by no one, and with no one e.g. capable of implementing Know Your Customer rules, regulators would know very well what to do with it. They’d introduce regulatory guidances and pass laws to freeze it off from the regular financial system. Very possibly, Bitcoin could still survive at the margins (as the Hawala system has survived). However, it would be isolated, and in no position to threaten Visa or Mastercard, let alone the underlying payment and messaging services that really underpin the world financial system.

This seems beyond dispute. But Timothy B. Lee attempts to offer a rebuttal by making the argument that Bitcoin has become too powerful for regulators to shut it down:

Bitcoin already has more powerful allies than it did two years ago. In 2014 alone, dozens of Bitcoin startups have raised money. Their backers aren’t going to stand idly by while the government destroys their investments. For example, influential pro-Bitcoin venture capitalists, including Marc Andreessen and Fred Wilson, have pooled their resources to create a new Bitcoin advocacy organization called the Coin Center.

This is an extremely naïve view, for it completely ignores that fact that “influential pro-Bitcoin venture capitalists”, whether they admit it now or not, want Bitcoin to be more regulated. Even if you took out the crony capitalism aspect out of the equation, the venture capitalists are going to have a strong incentive to curry regulation: they want to get their money back. For Bitcoin ventures to make money they have to have lots and lots of users, which requires the masses to trust Bitcoin. And that trust will require . . . regulation.

In April, Lee made a more convincing argument that Bitcoin could be used for international money transfers. I still believe that’s a remote possibility (albeit one that will require a lot of regulation) and that it could be used to help the world’s poor.

The problem, though, is that Bitcoin will likely not survive to get to that level of innovation. Will Bitcoin enthusiasts support it after they realize it has ceased to be useful as a currency and is a terrible investment? Not likely. At some point they are going to realize that they are subsidizing Bitcoin for theoretical and emotional reasons so that it can be exploited by regulation-seeking venture capitalists. When that happens Bitcoin will shift from being mostly dead to being all dead.

And as Mad Max says, with all dead there’s usually only one thing you can do: “Go through his clothes and look for loose change.”

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  • Neal Palmquist

    Bitcoin is far from dead. There are still liars out there convincing innocent people to have their wealth destroyed by bitcon. Not everybody is broke, yet. And we are hundreds of dollars above the bottom

  • Jack

    I’m sure if the us govt wanted to shut down the internet they could do that too, but like bitcoin it’s much bigger than one country. If the us regulates this innovation to death than bitcoin business will seek more friendly countries and this tech will continue to innovate and thrive regardless of what the us gov decides.

  • Rassah

    If it does get regulated, it will likely be the first class of software that must follow regulations at the software level.

  • Neal Palmquist

    “Mostly dead is slightly alive. ”

    Is that the line they used to get Hal Finney to have his lifeless corpse frozen for the next four or five hundred years? Don’t forget to pay Finney’s refrigeration bill this Christmas. Use Bitcons to buy presents so the suicide cult prophet can have his messianic resurrection! Just like Little Bitcoin Baby Jesus

  • Bruce Lee Roy #911

    not going to lie this article has a point. The fact that it is taxed completely defeats the purpose of it,kind of counter productive don’t you think?