By: Lea Wang

In the wake of 2008’s subprime mortgage crisis, Satoshi Nakamoto, a presumed pseudonymous computer scientist, established Bitcoin as an online communication protocol that facilitated virtual currency and decentralized financial transactions. Offering a “real-world incarnation that will supplant the current central-bank-issued monies,” Bitcoin dissociates with any institutional intermediaries as it governs by distributed consensus in an open-source, peer-to-peer (P2P) network. In this light, Bitcoin is a transparent network that embraces libertarian ideals in finance. Its features include the innovative self-custody of funds, and its network sits outside a disrepute traditional banking industry prone to avarice and fraud. A robust criticism of Bitcoins’ flaws, however, can challenge these ‘fully automated, crypto-liberal’ beliefs. Its supporters willfully overestimate Bitcoin’s capability to offer itself as a workable substitute for monetary demand and completely disregard the fact that while financial intermediaries are imperfect, they are prerequisites for monetary sustainability and efficiency. Accordingly, this essay argues that Bitcoin is a curse. This is because it cannot fulfill its grand ambitions to challenge the centralized monetary systems that suffered a crisis of legitimacy following the crisis of 2008.  

The first section explores the ideals of Bitcoin and its political connotations. It argues that cryptocurrency communities have an inherent utopianism that looks to Bitcoin as a solution to human greed. The second section unveils why this crypto liberal utopianism is impractical, as a technocratic, ‘early buyer’ hierarchy grants ‘whale’ dominance (large Bitcoin holders) power over mining power, reserves, and price. This, in effect, centralizes the Bitcoin network via a form of oligarchical inequality in its ownership. The third section proposes that centralization could be a positive influence if handled competently and with sufficient accountability by the state, which is far preferable to powerful, private, and exorbitantly wealthy Bitcoin holders. However, how this may be achieved is a matter of practical discussion, as Bitcoin’s technology was deliberately designed to erect barriers to state intervention. Notwithstanding, the essay concludes that while Bitcoin’s founder(s), whoever they may be, intended it to be a blessing for the world, it is a curse, given that it has become a playground for manipulative power brokers to speculate and enrich themselves. Undoubtedly, this outcome is far from what Nakamoto, Bitcoin’s founder, originally envisioned.  

Bitcoin: a one-size-fits-all solution to human greed?  

  The subprime mortgage crisis shattered the trust and legitimacy of traditional banking. The New Deal’s Glass-Steagall Act was shortsightedly repealed in 1999, easing regulations on the banking industry, which enabled unethical speculations of “valueless,” high-risk securities for institutional benefit. Consequently, Nakamoto’s critique that banking institutions were responsible for creating unmanageable credit bubbles with “barely a fraction in reserve” invited public hostility and resentment towards the industry. This led to calls for a secure, decentralized currency wholly owned by the user and boasting deflationary tokenomics. Cryptocurrency communities, therefore, claim that Bitcoin protects investors from corrupt financial and even state institutions. In a way, it is a form of populism that encourages one to put their faith in a cryptographic system of rules rather than blind trust in the state. Therefore, the philosophical backbone of Bitcoin is an expediency proposed by people who have lost all trust in banking institutions and the associated authority they command.  

However, distrust in financial institutions is an age-old tradition in the United States. An early example of conflict over banking and its seemingly irresistible opportunities for corruption can be traced back to Thomas Jefferson’s opposition to Alexander Hamilton’s Assumption Plans. In 1792, the fledging nation was left with huge debt, both owed by the federal government and individual states. There was much debate in the Washington administration, as many states were defaulting on their loans accumulated either by Revolutionary War debt or through necessary local expenditures. To save the young nation from a prolonged economic downturn, the first U.S. Treasury Secretary, Alexander Hamilton, proposed a scheme of converting federal and state debt obligations into long-term bonds. This would establish a credible mechanism to service and amortize this debt. His plans, however, were met with robust opposition from Jefferson’s Democratic-Republican party. Ultimately, the conflict arose from starkly contrasting economic and philosophical perspectives on government intervention in financial markets. Hamilton took Thomas Hobbes’ approach, arguing that the states required a national bank for adequate regulation. This was a need most obvious during the panic of 1792, as the young nation proved incapable of resolving said debt crisis. On the other hand, Jefferson opposed Hamilton’s plan as it granted the federal government “a boundless field of power.” This debate, arguably, continues two centuries on, as the invention of Bitcoin was intended as an innovative form of resistance to central banking institutions. In this vein, Bitcoin jeopardizes the power of traditional finance, offering a self-governed network that Jefferson, speculatively, may have exalted with great adulation.  

Bitcoin’s inevitable, technocratic centralization  

Bitcoin, however, arguably falls into the same traps of idealism that Jefferson reputedly did during his presidency. Firstly, it is important to understand Bitcoin’s rewards mechanism, which is a process far from perfect. Bitcoin grants the first “miner” the authority to register a new block into the blockchain. A certain number of Bitcoins are then rewarded to the miner in exchange for their computational forces, and the marginal cost of mining, namely electricity, is converted into value. From an information-economics perspective, Bitcoin’s system was designed to optimize a fair distribution of rewards to personal endeavors in a collectively trusted chain of self-interested individuals. Yet, despite these noble intentions, Bitcoin’s reliance on technology doomed it to a process of centralization from its genesis. Rather than constituting an institutional governance corrupted by the impact of status and identity, the need for technical expertise to operate the Bitcoin network has led to the rise of a technocratic hierarchy of early adopters. Hence, whilst the system was originally designed to “mimic the anonymity and payment finality aspects of cash in digital domain,” its distribution is congruent with the seemingly consistent trend toward tech monopolization and platform capitalism. This is because giant mining operations generate an increasing possibility of reward, thus further concentrating wealth and power within the wallets of large holders known (at least within the cryptocurrency space) as ‘Whales’.  

This level of inequality within the network was not originally envisioned for Bitcoin. During Bitcoin’s early development, each participating individual could obtain a sizable reward due to the relatively small levels of participation and underdevelopment of crypto mining machines that did not require expensive hardware. Yet, with the increasing participation due to exuberant speculative enthusiasm over Bitcoin’s price, the difficulty of mining has escalated and now requires increasing computational resources to compete. In response to this stretched capacity, the mining of Bitcoin shifted from a relatively equal reward system to one that rewards miners proportional to their input computational forces. To adapt to this rapid increase in competition and maximize the efficiency of mining, participants’ hashing power is progressively concentrated into a few large mining pools. Described as ‘Whale accumulation,’ the rise of dominant mining firms and their activities are easily tracked on the blockchain. According to BTC.com, the hash rate obtained by individual miners labeled as “unknown” diminished from 18.01% to 4.97% during the course of December 2014 to December 2021. By December 2021, only four dominant mining pools, led by Foundry USA, constituted up to sixty-nine percent of Bitcoin’s hashing rate. Accordingly, these statistics can grant a small glimpse into how mining is now only available to very few firms by virtue of their wealth and technical expertise. The common majority, once again, has lost control over a once democratic exchange between labor and rewards. In contrast to Nakamoto’s objective of equal access to rewards, the decline of hash rate dispersion thus demonstrates Bitcoin’s loss of its principal decentralization feature. Further, this trend towards centralization will most probably continue due to Bitcoin’s fixed algorithmic framework. As such, the network in its current state imperils the idea of a healthy, competitive market, granting terminals with large computational facilities disproportionate authority and impact. This is especially egregious as Whales can determine the ‘flow of the ocean’ as they generate waves of inflation and deflation that unethically manipulate Bitcoin’s dollar valuation via leveraged trading on exchanges. The initial developer(s) of Bitcoin, therefore, clearly put too much trust in its algorithm. They failed to recognize that a decentralized currency cannot remain uncorrupted merely because it operates on a technological framework. In practice, Bitcoin has evolved into a highly centralized monstrous centralization – cryptocurrency exchanges. Although the network originally intended to promote decentralization by substituting human notions with an impartial algorithm, Bitcoin is cursed by the increasing influence of cryptocurrency exchanges such as Binance. These ‘gatekeepers’ are essential in the crypto space due to the fact that they are the only user-friendly platforms where one can sell their Bitcoin for fiat; cash out, so to speak. In this sense, a parallel, centralized banking system has ironically emerged within the cryptocurrency industry. This is a consequence of the necessity and role of these exchanges to mimic the role of banks in traditional finance, even offering savings accounts and pension plans. Once again, this is far from the ethos that Nakamoto sought to promote with Bitcoin.  

Bitcoin’s trend towards centralization, therefore, compromises its purpose. Currency is supposed to function as a medium of exchange, and its value should be based on public or market consensus. Hence, Bitcoin’s value was originally designed to reflect the consensus of its community. Yet, as argued, Nakamoto’s trust in algorithms to sustain Bitcoin’s decentralization feature was a false promise. The fact that 0.01% of Bitcoin holders control more than 27% of Bitcoins in circulation demonstrates that the majority of holders cast no impact on its value. Further, without institutional intermediaries, Whale trades in Bitcoin muster fear within investors and invite significant volatility for Bitcoin’s value. From September 2013 to September 2016, the annualized volatility of the exchange rate between Bitcoin and USD reached a striking 77%, six to seven times larger than the volatility of the G10 currencies. If a currency is supposed to hold value, Bitcoin categorically does not fulfill that role.  

Conclusion & Potential Solutions  

To conclude, Bitcoin is not only a curse due to its inability to fulfill its intended purpose but also because it is potentially very dangerous for world economic stability. Arguably, Bitcoin’s increasing centralization does not make it a functional blockchain but renders it more of a bubble. The seemingly democratic approach through distributed consensus is now used to merely lure incoming flows of participants in Bitcoin, all of whom are of utter importance for the appreciation of Bitcoin’s value. Due to the intensive media advocation for Bitcoin, which can often present it as a means to a rapid acquisition of wealth, Bitcoin itself is nurturing a giant bubble with some potentially very dangerous fallouts. Far from an innovative substitution to the traditional banking industry, Bitcoin has merely perfected the financial gamble of greater fool game theory, where there must always be another ‘fool’ to sell up to. As such, Bitcoin has shown that algorithmic rules cannot eradicate human greed or resist the desire of institutions to extract value. For Bitcoin, a more robust governance structure on top of its technical framework could be introduced to limit whale accumulation and price manipulation. This may diminish the risk of abusive Whale behavior and steer or perhaps just mediate a healthy and fair network. This framework should also be capable of understanding and accommodating “the politics inherent in each of its technical features.” Whether states can offer such solutions to the network is a matter community and the global community at large. 

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