The Byzantine Premium
On the contradiction at the heart of Bitcoin advocacy
When you write critically about blockchain, Bitcoin, speculation, NFTs and DeFi, you get an earful back. Advocates for these things are…well, aggressive is a polite term for how many believers respond to critiques of their financial/philosophical/political/technological project.
But any discussion with even halfway reasonable coiners arrives at a point of common ground: The sector is full of froth, scams, speculators, and suckers who are in way, way over their heads.
Indeed, the outright scams are so dense and noisy that even crypto’s greatest advocates are going on record with a wish for a new “crypto winter” — that is, a crash that will clear away all the crap.
But would it?
In “Cryptocurrencies: The Power of Memes,” financial analyst Alex Pickard proposes that the value of Bitcoin, and other cryptocurrencies, comes from a mix of four factors:
One: The “fair value”
This is the actual, intrinsic value of having a medium of exchange and account. We’ve heard a lot about this from cryptocurrency advocates, who make claims about the permanence, privacy, speed, censorship resistance, and transborder utility of cryptocurrency. Again, no reasonable person would deny that, at least some of the time, all of these things are valuable — notwithstanding that they come at a cost (money-laundering, criminal financing) and that the claims may be overstated (especially about privacy and speed).
Two: The “avant-garde premium”
This is the value that comes from being visionary enough (or lucky enough) to buy into a cryptocurrency before its value is demonstrated. There’s lots of evidence for this: People who bought “good” coins early on saw them go way up in value.
Three: The “speculation premium”
This is the “lottery ticket” that brings in the majority of cryptocurrency investors. Indeed, if you’re buying crypto to hold, rather than to use, you are definitionally a speculator. You’re not buying cryptocurrency because you need currency — the way you might buy some Euros before getting on a plane to Paris, say — but because you think they will go up in value.
Four: The “Byzantine premium”
This is the value that comes from having a lot of suckers who’ll buy crypto “assets” that they don’t understand, on the ground that they’ve seen a lot of people get rich doing so. The speculation premium comes from at least halfway smart money, but the Byzantine premium comes from stupid money, the suckers at the table.
Again, I think that even the most ardent coiner wouldn’t argue with this analysis, though there’s room for disagreement about how much of the value of any given crypto is attributable to which factors.
But Pickard’s point isn’t just that the value of crypto decomposes into real value, vision, speculation, and suckers’ money — it’s that if the coiners are right and they succeed in replacing real money (“fiat currency”) with cryptocurrency, then three out of four of these will go away.
In other words, if the dollar is replaced by the eth, that will kill the avant-garde premium (because cryptos won’t be the new thing on the block); and the speculation premium (because the eth will have stabilized so it can be used as a medium of account and exchange); and the Byzantine premium (because the eth will just be money and it will be a lot harder to rope in suckers who think of it as a complex, magical asset).
This makes for a useful framework for understanding Kevin Roose’s New York Times article, Bitcoin Was Made for This Moment. So Why Isn’t It Booming? Roose starts by citing coiners’ rhetoric about the desirability of currencies that aren’t under democratic control via a public institution, but rather are controlled by market forces alone: the theory that cryptocurrency is a safe haven from instability, authoritarianism, censorship, and inflation.
Today, the world is experiencing significant inflation (due to a combination of war, supply chain shocks, and price-gouging monopolies), instability, and the leader of a democratic state invoking a doomsday law meant to address national calamities to break a local demonstration by seizing protesters’ bank accounts.
But far from spiking, cryptos are generally down. In his investigation of this phenomenon, Roose talks with experts who say that the volatility, complexity, and speculation in cryptos has made them unattractive, even to people who are truly alarmed by instability, authoritarianism, and inflation.
Even the people who are relying on crypto — donors to protesting truckers in Ottawa and even the finance minister of Ukraine — tell Roose that the role cryptocurrency plays in their causes is, at best, a minor one.
Which brings me back to Pickard’s framework for understanding the value of cryptocurrency: If the wealth of successful coiners depends on the maintenance of novelty, speculation, and confused gamblers, how many of them are truly hoping that their project actually becomes a currency?
It’s certainly true that the “fair value” of crypto will shoot up if it somehow comes to replace a major “fiat” currency, but nowhere near enough to cover the fall that will come from shedding all the value that comes from novelty, speculation, and suckers.
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Cory Doctorow (craphound.com) is a science fiction author, activist, and blogger. He has a podcast, a newsletter, a Twitter feed, a Mastodon feed, and a Tumblr feed. He was born in Canada, became a British citizen and now lives in Burbank, California. His latest nonfiction book is How to Destroy Surveillance Capitalism. His latest novel for adults is Attack Surface. His latest short story collection is Radicalized. His latest picture book is Poesy the Monster Slayer. His latest YA novel is Pirate Cinema. His latest graphic novel is In Real Life. His forthcoming books include Chokepoint Capitalism: How to Beat Big Tech, Tame Big Content, and Get Artists Paid (with Rebecca Giblin), a book about artistic labor market and excessive buyer power; Red Team Blues, a noir thriller about cryptocurrency, corruption and money-laundering (Tor, 2023); and The Lost Cause, a utopian post-GND novel about truth and reconciliation with white nationalist militias (Tor, 2023).
