Bitcoin Creates Trust Where It Previously Couldn’t Exist

Friday, January 12, 2018

Earlier this week, The Washington Post’s Wonkblog featured a piece by Matt O’Brien entitled “Bitcoin Is Teaching Libertarians Everything They Don’t Know About Economics.” I’m not going to take the bait and comment on the title, nor will I respond to most of the piece, which is a capable summary of the articles one might find in a Google search of “problems with Bitcoin.” There are indeed problems with this technology, still in its relative infancy, which entrepreneurs and enthusiasts are working to solve.

But Mr. O’Brien has one misconception to which a response is of the utmost importance. He writes that Bitcoin advocates “don’t get … that trust makes economies more and not less efficient.” Of course trust is efficiency-enhancing, all things equal. Nobody wants to remove it from our economy. What Bitcoin and other blockchain-based cryptocurrencies do is allow transactions to happen in places where trust previously would not have been possible. Mr. O’Brien’s misunderstanding is partially the fault of Bitcoin advocates who like to use the term “trustless” to describe this phenomenon. I think that term has the wrong connotation; I think of cryptocurrencies as creating trust where it was otherwise impossible.

Imagine your child is traveling in Southeast Asia. She’s in a remote village when an emergency strikes and she needs to be wired money. Someone in town volunteers to facilitate the transfer. All they need is your bank account number. Trust is obviously an issue. With Bitcoin, you could trust that the money would be transferred in its entirety without putting your sensitive information in a stranger’s hands.

Mr. O’Brien also neglects the costs to society of trusting government or banking intermediaries. I’ve written about this in greater detail, but suffice it to say that the cost of trusting a bank isn’t just the chance your money will be mishandled or stolen — it’s all the money that bank has spent to assure you that it won’t. Bitcoin currently has scaling issues that Mr. O’Brien correctly identifies, but the billions currently spent on data security alone need to be part of that cost-benefit calculus.

In a sense, I agree with Mr. O’Brien’s headline. Bitcoin is teaching libertarians — but also everyone else — many things about economics. Blockchain is an extremely novel technology that forces economists to think about bottom-up networks in new ways. Watching Bitcoin’s uncertain future unfold will indeed educate us all.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.