Why Bitcoin Cannot Win

Why Bitcoin Cannot Win

The future of cryptocurrencies

j. maanmieli


The primary requirement for anything to function as money is that of being accepted by people. Bitcoin is designed to avoid relying on central authorities, which increases its function as a store of value. However, the acceptance of money (adoption) is ultimately determined by central authorities in any foreseeable socio-economic context, as has always been the case throughout history. All the desirable features of cryptocurrencies can be easily implemented by governments in their competition with Bitcoin to the extent that will preserve their monetary dominance.  The belief in Bitcoin becoming the main world currency in an increasingly interconnected world is therefore based on a mistaken view of society.


The members or users of social networks, such as those defined by languages, face a certain dichotomy we are all very familiar with: reason vs. norm. A language is itself a mixture of those two ingredients; it combines logical rules with arbitrary, consensual elements. It may be more rational to use a certain language or expression in a particular context, but the norm to make more compelling the use of another. The same is true for money, because, just as language, it functions as an instrument for social cohesion. This is something a lot of Bitcoin enthusiasts (“bitcoiners”) resent when looking at the dominion of state currency and the violent workings of statist societies. It is this resentment precisely, so typical of political minorities, that warrants they bring fundamentally no change to the way society organizes itself, of which money is only a reflection. In other words, money (Bitcoin) is not going to change society because money, like the state, is a product of society – not society a product of money, or money a product of individuals.


Reason vs. norm

There are two main arguments these bitcoiners use to support their conviction that Bitcoin will take over the world. The first one is that the supply of bitcoins cannot be manipulated because it is a decentralised, self-sustaining system, and therefore their precious-metal-like scarcity and future value is guaranteed; this will bring about an increasing incentive to hold bitcoins over rapidly depreciating fiat currencies. The second one is that Bitcoin is by far the biggest cryptocurrency network, and so there is a diminishing incentive for people to hold any alternatives (altcoins) of electronic money with the same fundamental monetary qualities. The problem with these arguments, while true, is in how they oppose each other from the perspective of monetary theory.

When comparing Bitcoin to fiat money bitcoiners argue for its superiority via the first argument (Bitcoin is better money); while comparing Bitcoin to other competitors they use the second argument (Bitcoin is the biggest cryptocurrency network). When an advocate of fiat money uses this second argument, he is told that Bitcoin has a lot of valuable features that will defeat the fiat network; when an altcoin enthusiast argues that X-coin comes with valuable extra features, he is told that Bitcoin is superior for having the biggest network and human commitment… This is how bitcoiners are essentially the same as the average adult citizen, with their own contradictions, culture and morals.

The growth of a network for a commodity used as money is caused either by its good monetary properties or by its own preponderance, the latter not being just the result of its monetary properties, but also accident. The theory is very clear: money is valuable because it is liquid. Given two competing commodities whose properties are exactly the same, the one whose network size (number of users) is larger by even a single unit or by a tiny amount of preference (this being the result of accident, decree, convention, etc.) will expand until it has completely replaced the other [1].


(..) “why would men risk life and limb to travel across huge expanses of dangerous ocean to give away what appear to be worthless trinkets?”. Malinowski carefully traced the network of exchanges of bracelets and necklaces across the Trobriand Islands, and established that they were part of a system of exchange (the Kula ring), and that this exchange system was clearly linked to political authority. (https://en.wikipedia.org/wiki/Kula_ring)

In practice things are more complicated than that, because commodities are never exactly the same, and society and its politics change. What happens is that people either want to hold one commodity because it is an objectively better medium of exchange, store of value and unit of account, and expect others to behave equally rationally (say, gold) or they want to hold it simply because they expect others to want it, who in turn expect others to want it and so on (as it happens now with dollars). The former is a quality of the commodity itself, while the latter is a quality of the network. The former is a rational quality, while the latter is normative. Both gold and dollars have a certain amount of both qualities, as do bitcoins, in variable degrees. While the former is a necessary and sufficient condition for any exchange network to develop (the money has to be good enough at what it does) the latter is a necessary condition for the network’s strength and dominance (the money has to be preferred by a majority, independently of its being good or bad money), and there is certain independence between the two. A commodity that has good monetary properties, such as gold, can achieve a network on its own merits, as people have a rational incentive to hold it for future exchanges. On the other hand, a commodity that has arbitrarily become legal tender, for example, can maintain its dominance over the former on the sole basis that everyone expects everybody else to accept it (for a start, because the state forces them to accept it as payment) and thus want to hold it as long as it has similar good monetary properties. There is nothing in this commodity that makes it better – any other brand would do – simply the fact that it has automatically achieved a big network makes it preferable even over better or more advanced forms of money, to a degree that depends on the whole of society and its prospects.


What we use drives out what we don’t use

The analysis above is the reality underlying the old debate about the meaning of Gresham’s Law and whether “good money drives out bad” or the other way around. The law being empirical, a lot of confusion is cleared when we define exactly what we mean by “drive out”, and what time span and political area we are referring to. Indeed, today’s empirical reality – that cheap, fiat money rules the world – shows us that the law “good money drives out bad” has not a lot of predictive value when it comes to the large scale of things. We don’t know what money will drive what in the long run precisely because human choice is affected by these two competing, dynamic factors of reason vs. norm. In the end, all that can be said is simply that the money we use drives out the money we don’t use.

So which is more important in the end, the commodity or the network, reason or norm? Again, in theory we see that, given two commodities of exactly the same properties, the network is the determining factor for the success of only one of them. In practice, we see that, if the long-term survival of a currency depends on its function as a store of value, but this function is completely dependent upon others accepting the currency in the future (that is its future liquidity or utility as a medium of exchange, which can be absolutely determined by accident or government whim) then clearly the network is more important. Since the network is a product of irrational, selfless, cultural or moral values, one cannot speak of a “homo economicus” without considering the rationality and self-interest inherent in choosing to be a part of the network.

This has repeatedly been shown in history, where the tendency is for the quality of money to worsen over time – along with increasingly centralised power – only after it has achieved the greatest network effect through the blessing of the local authority. In other words, the state has taken the good money, made it official, and then progressively devalued it – to feed its own growth – by taking advantage of the fact that the network is of primary importance for anything to function as money [2]. Milton Friedman speaks about this in what he calls the “fiction” of money:

“The numerous inflations throughout history—whether the recent moderate inflations in the United States, Britain, and other advanced countries, or the very large recent inflations in South and Central American countries, or the hyperinflations after World Wars I and II, or the more ancient inflations going back to Roman times—have demonstrated the strength of the fiction and, indirectly, its usefulness. It takes very high rates of inflation—rates well up in double digits that persist for years—before people will stop using the money that is so obviously inflating.”

Money Mischief: Episodes in Monetary History.

Yap stone money

Yap stone money

The same book opens with the very illustrative (social) fiction called “The Island of Stone Money”. A place where money takes the form of a common property-record of heavy stones, too impractical to carry, but rare and valuable for the local society much in the way precious metals are for us. When the Germans purchased this Micronesian island from Spain, in 1898, the German government confiscated the stones, by simply placing a mark on them, in order to make the inhabitants work to repair the highways. What this means in reality, of course, is that the society has reached a new consensus over the property of the stones because of their inability to counter the overwhelming superiority of the Germans [3]. Firstly, the government understood the value of the monetary network (the good money). Secondly, with a simple display of political power, the Germans manipulated the network for their own advantage. Other forms of manipulation could have been adulterating the stones, counterfeiting them, issuing a competing currency that would have sufficiently pleased the natives, etc. This shows very clearly how money is primarily dependent on the political functioning of the society that it serves. The stones had no “intrinsic value”. They were good enough, rational enough money that had achieved the greatest network, become the norm, and maintained it when the German government took over and decided to respect this peculiar, rock-backed credit system. The system was more vulnerable than, say, a gold-backed system because of the nature of the stones and the natives’ inability to hide them from the government; but this does not change the reality of its complete vulnerability to the local, current regime and the occasional whims of a powerful few.

What would have happened if the German government had “issued” another set of equivalent stones? Clearly, its capacity to arbitrarily cancel the ownership of the original ones, as it did through their mere marking, would have translated into this new money automatically achieving the status of the old one. Should the original stones had been better, tamper-resistant money in the way gold or bitcoins are, they might have been able to become the island’s refuge or substitute currency. Similarly, as human networks have become more cohesive throughout history – along with the centralisation of the means of production, the migration to cities, communications, etc. – their more efficient organisation has relegated precious metals to this subordinate role, only “driving out” devalued state money in times of political turmoil. Conversely, during the times precious metals were mainstream, it was the decentralisation of the economy itself that enabled this, for example when goldsmith bankers operated in 17th century England, under the King’s blessing. Even in this favourable climate, political interference led to the expansion of credit and the origins of modern banking: the old network effect based on the social reputation of goldsmiths was eventually replaced by the greater political network of the Bank of England. Either way we encounter the primacy of the “fiction”, as society moves towards increasing levels of trust according to the predominant values of the time, and departs from the “less fictitious” forms of money. This is true even when the state is absent:

“A fiat-money currency generally loses value once the issuing government or central bank either loses the ability to or refuses to further guarantee its value. But this need not necessarily occur; for example, the so-called Swiss dinar continued to retain value in Kurdish Iraq even after its legal tender status was withdrawn by the Iraqi central government which issued the notes.”


Money is the product of society, just as Bitcoin is the product of a society of computers. Money needs the greatest human network to succeed, just as the Bitcoin blockchain needs the greatest computer consensus. This network and consensus, however imperfect, is ultimately provided by the state in modern societies, just as it was the case in the many cases of recoinage and remonetization throughout history. For as long as we have states that strong and accepted by people, for better or worse, Bitcoin will remain a substitute currency – at best.


Defeating Bitcoin: a guide for governments

Thus, all that world governments need to do in order to defeat Bitcoin is to convert their fiat money into a good enough cryptocurrency on a big enough scale. A cryptocurrency good enough to compete with Bitcoin in rational value, and with a network big enough to achieve a sustainable normative value in a country or combination of countries. In a new type of monetary reform, a sort of cryptographic recoinage, central banks could simply convert their fiat money into cryptocoins with properties equal, or close, to those of bitcoins; or they could issue their own legal-tender cryptocurrencies to be exchanged for the old money. This would restore official money’s function as a store of value in the same way people’s confidence has always been restored after wars, revolutions, reforms, or the imposition of a new national or international currency. The scarcity and unforgeability of bitcoins is nothing unique to them, but a property that can be implemented into any monetary system by using the same techniques, and to varying degrees depending on the political motivation. If cryptography and distributed systems provide what’s needed to earn people’s trust in cryptocurrencies as sound money, then they can do likewise for any other network. As it happens, the largest monetary network today, by far, is not Bitcoin, or gold… but fiat. This would give the new cryptocurrency the greatest advantage, ipso facto, and there is nothing the struggling community of other cryptocurrency users could do to overcome the resulting effect on its value.


Bitcoiners can turn politicians.

Cryptocurrencies are very easy to make by mainly setting parameters in the same way central banks make their own policy. Banks could assign a number of coins proportional to the amount of dollars in each account. A proof-of-stake protocol could be used to ensure the fortunes of the world will remain tied to the new financial system, fostering it, and maintaining the status quo with its current distribution of wealth. A backdoor for centralised manipulation could be built into the protocol, or changes to it could be implemented politically as they are now implemented in the fiat system. If it’s not the banks themselves that engage in mining, mining incentive (the main hurdle any Bitcoin-based cryptocurrency has to overcome in order to succeed) will be guaranteed by the reward being issued in the de facto currency of the respective country or monetary union; the currency needed to pay taxes, bread, oil and basic commodities that will remain tied to state money, like it or not. No need for exchange sites, speculative headaches, or downward pressure on the price. Any windows computer or device equipped with a microprocessor can and will mine for “cryptobucks”. Trust in the system will be reinforced by its (cryptographic) lack of anonymity and identification systems being another speciality of the state. How can there be any worries about a 50+ attack when you can go to jail for attempting a fork of the official blockchain? An energy costly proof-of-work protocol would therefore not be necessary, which would fulfill the green agendas of the modern world…

Punk-rock is for misfits

The fact that central banks are the centres of the current financial system is not due to any economic accident, but that they are set up and regulated by the centralised violent monopolies of states in their corresponding geographic areas. States are very bad at everything practical they do, especially in IT, and some say this gives Bitcoin a great advantage. But in order to orchestrate the entire financial system you don’t need to make complex software solutions; again, you only need to set little quantifiers.

Dreaming about their libertarian revenge, bitcoiners try to deny the evidence that states successfully coerce the immense majority of people, financiers and capital into their system; that those involved on either side will refuse to see it as coercion; and that it’s not precisely those who deserve it who get the crowd working on their side. Bitcoiners try to escape the fact that capital and investment is what drives the value of money, not the other way around, and turn a blind eye on where the immense majority of the capital and investment lies. They somehow manage to believe that the state’s ability to create an electronic monetary system is that bad that they cannot use coincreator.net. They flee to that fantastic place where they become just like the mortals they criticise, who believe that the nature of those in government (“irrevocably bad and useless” in this case) is different from theirs, and that natural laws do not apply to them from their ruling position. Governments are not that bad or stupid.

News like ‘Deloitte Outlines Concept for Central Bank-Backed Cryptocurrency’ or ‘French Megabank Société Générale Seeks Bitcoin Expert’ are not “hopeless efforts” for an Andreas Antonopoulos speech; they are the same millennia-old organic process whereby the body politic adapts to a new monetary phenomenon, happening right now. A paper called ‘Centrally Backed Cryptocurrencies’ has already been published with a solution enabling the international financial system to adopt the technology flexibly [4]. Almost three quarters of financial pros think the blockchain can thrive without Bitcoin, because they are just applying their empirical knowledge and common sense in agreement with this essay; while the rest cling to their nerdy illusions of economic revenge. As anyone would expect from his own very accurate analogy, Andreas and his friends will continue to play their punk-rock in the garage, while executives continue to fill stadiums with their pop.

Not that “promoting rationality” or saying “choose freedom”, as Andreas says, is any sort of rational behaviour, but for what is rational about Bitcoin: dominant social networks are not, and never have been, grounded on rational values, just as their respective rebellious networks aren’t. This is why there are languages, cultures, subcultures, religions, atheists, nations… and why you say “Merry Christmas” and “Happy Birthday”. This is why there are sports teams, country-coins, pet-coins, and Bitcoin entrepreneurs who try to scare you into buying like any old politician or priest [5].




Just as we know that the network effect is the reason Bitcoin will defeat current altcoins, we know that Bitcoin can be defeated by a greater network effect. Never before in history has this effect been more pronounced than in current times, with the mass media and the Internet providing a capacity for political influence without precedent. Bitcoin enthusiasts constantly argue from this perspective of technological liberation – as I have done myself – and there is nothing wrong with it if you so want to be free. It’s when you imagine that “the world” shares this yearning for freedom that you go completely wrong. The Internet may be decentralised in its functioning, but it is largely used by people for very isolated purposes: the things they love. Bitcoin is not disruptive for the dollar anymore than BitTorrent is disruptive for Hollywood. Peer-to-peer networks are not disruptive for the Internet any more than precious metals or cash-in-hand are disruptive for your local economy.

Bitcoin teaches us that decentralisation is the best solution in a world without trust, but the world teaches us that it doesn’t trust mistrust.

The future

The good news is, as you might have guessed, that the money of the future will be a cryptocurrency anyway; and that, victorious or not, Bitcoin has come to teach all of us a very important lesson. Certainly, governments and banks know how to use the Internet too, but the new paradigm and the competition with Bitcoin – and a population much wiser than before – will impose greater limitations on their mischief, just as the Internet already does today. On the other hand, where statists are delusional about the “goodness” of their job, libertarians are delusional about the “goodness” of their coin, which they promote to inordinate levels of moral absurdity. Where it takes great pains to acquire state money, Bitcoin still gets sold cheap by numerous entrepreneurs… Therefore, it remains to be seen who out of the governors or the governed will be the first to overcome their own absurdity. For now, the fundamental rules of social interaction remain unchallenged. People remain loyal to values that are very old, including the Bitcoin family.  They remain loyal to the same values that inform the primary networks of human interaction and which, from their origin in childhood, shape the economy just as language shapes who you favour in you relationships.



[1]  “A more liquid currency has an advantage over a less liquid one because it can support more trade. Furthermore, liquidity in a currency is self-reinforcing. The more that people buy a currency, the more liquid it becomes. This naturally tends to promote the success of a single currency over all the rest.” – Daniel Krawisz

[2]  This is what rulers have done throughout history by extracting the wealth society produces, and money was not going to be an exception. It is a particularly conspicuous phenomenon in the history of the USA, that went from being the freest country with the freest, most productive economy, to the monstrous empire it is today in just over 200 years.

[3]  This goes unmentioned by Milton in the book, as he contributes to the fiction of ignoring the violent roots of society and governments. Then he wonders why people seem fond of these monetary fictions to such an “illogical” degree, as he writes…

[4]  “Our design decisions were largely motivated by the desire to create a more scalable cryptocurrency, but were also inspired by the research agenda of the Bank of England [3], and the question of “whether central banks should themselves make use of such technology to issue digital currencies.” Indeed, as Bitcoin becomes increasingly widespread, we expect that this is a question of interest to many central banks around the world. (…)

RSCoin’s radical shift from traditional cryptocurrencies is to centralize the monetary supply. Every unit of a particular currency is created by a particular central bank, making cryptocurrencies based on RSCoin significantly more palatable to governments. Despite this centralization, RSCoin still provides the benefit over existing (non-crypto) currencies of a transparent transaction ledger, a distributed system for maintaining it, and a globally visible monetary supply”

[5]  “While the future of currency is undoubtedly digital, it can take two radically different forms. We can live in a financial panopticon, a straitjacket of surveillance and tyranny. Or we can live in an open society where our privacy is protected by cryptography, not subject to the whim of every petty bureaucrat — where our digital money is global, borderless, anonymous, and controlled by the individual. The choice between financial freedom and financial tyranny is a choice between fundamental freedom and tyranny. Choose financial freedom: choose freedom.” – Andreas Antonopoulos

  • Tony

    What the author don’t even understand is that money creation is managed exclusively by central and commercial banks. They create money out of governments debt (AKA bonds) and fractional reserve system (AKA any other form of debts). Governments have nothing to do with that. The only power they have is taxing money that banks have created out of debts. Central banks around the world tried to collude for centuries but never fully succeeded because they all want to be on the driver’s seat. Secondly, money is all a manner of trust and banks are obviously losing this trust with each and every crisis they creates.

    • Jose Perez

      You might as well say that governments have nothing to do with the police or the military. It is laws that set up the whole system in the first place. And it is quite cleverly set, since they manage to convince people like you that the problem is with the (unarmed) banks.

      • Tony

        Laws around monetary policies aren’t created by governments neither. This is a completely independent body.

        • Jose Perez

          You seem to have a problem with the concept of government (a monopoly on the initiation of force in a geographical area), and see it as if it were some guys with guns and a credit card that just popped up yesterday (as if people with credit cards didn’t like to get into debt). It does take considerable delusion to say that laws “aren’t created by governments…”

          • Tony

            Laws that involve monetary policies are the only exception where governments aren’t invited to the table. Every bills come from private too big to fail banks. Politicians come and go unlike the oligarchs in control of monetary policies. This is no delusion, you should go get a clue.

  • “Thus, all that world governments need to do in order to defeat Bitcoin is to convert their fiat money into a good enough cryptocurrency on a big enough scale.”

    It would be impossible for a government to replicate the features of Bitcoin without losing control over their own currency. The thing that makes bitcoin qualitatively different from fiat is not that it’s a big computer network but that there is no party that has the ability to change the supply or censor transactions. If a government created a cryptocurrency with an “official” fork, then that government would be able to increase the supply and decide which transactions go through. Therefore, they would not have built something equivalent to Bitcoin but with a bigger network.

    If the new government cryptocurrency had no official fork and was distributed in the same way Bitcoin is, and somehow managed to produce an original distribution of this currency which corresponded to the existing distribution of fiat, then they will have made an improved currency that has a bigger network than Bitcoin. In that case, however, they will have lost control of their own currency. Would a government do something like that? Maybe, but it doesn’t seem very likely. But if it did, that would be great because then we’d have free market money again.

    • Jose Perez

      “The thing that makes bitcoin qualitatively different from fiat is not that it’s a big computer network but that there is no party that has the ability to change the supply or censor transactions. ” (…) “In that case, however, they will have lost control of their own currency.”

      This is not entirely true. The existence of forks and consensual changes to the protocol makes this manipulation a possibility for Bitcoin too, and governments have the capacity to do this more efficiently and reliably than the Bitcoin community ( http://www.coindesk.com/block-size-debate-whos-picking-sides/ ). Granted, it won’t be Bitcoin from then on, but it can just as easily be reverted. Either way they have the greatest network and the greatest capacity for consensus.

      All they need is that increases in the money supply or other manipulations do not antagonize the populace, not “having the perfect money”. People at large do not care, understand or even want to have perfect money. They mistrust it, just as they mistrust anarchy.

  • Loz Blanko

    If a government converts its own currency to a cryptocurrency, I’d see that as a massive boost for Bitcoin. Why would I want a regional digital dollar or pound if I can use a digital global currency? You can force me to use digital dollars in the USA, but you can’t stop me using a global digital currency everywhere else. Seems like that ship has sailed. Even if Bitcoin doesn’t become the final solution, it has paved the way for it.

    • Jose Maanmieli

      Bitcoin is surely a blessing. But what will make society suddenly organize itself around cryptomoney in the opposite way as it has always done before? What will suddenly replace the state and the violence as the means to establish monetary network effects?