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On Confidently Misunderstanding Bitcoin: A Response to Steve Hanke

Hanke's arguments against cryptocurrencies did not accurately reflect current data or common understanding of terms.

Economist Steve Hanke of Johns Hopkins University is known for posting innumerable variations of the same tweet — “Bitcoin is too volatile and has a fundamental value of 0.”

But in a recent opinion piece, “How Innovative Is Crypto?,” Hanke tried his hand at some new arguments. The essay is subtitled, “The case for crypto as a driver of innovation is thin.” In it, Hanke purports to show that cryptocurrencies aren’t that innovative. This essay shows how he fails.

There are three main problems with his essay. The first is that he considers only two features of cryptocurrencies: they’re digital and they’re private. The second is that he relies on an exceptionally narrow and unstated definition of the word “private” and pretends that then invalidates Bitcoiners’ focus on what true financial privacy entails. The third is that his statistics are outdated; more recent data paints a very different picture.

We’ll tackle the problems in turn.

First, he purports to show that cryptocurrencies aren’t innovative. He attempts to do this by showing that digital, private money already exists. But even if he’s right that it does (which is the focus of the second problem), he ignores all the other interesting features of cryptocurrencies that proponents point to. With respect to Bitcoin, those features are that it’s cryptographically secured, censorship-resistant, inclusive, borderless, unseizable, supply-capped, decentralized and permissionless. Even if Hanke is right about his claims, he has failed to make the case that Bitcoin isn’t innovative in these other ways.

Second, he invokes the word “private” but fails to define exactly what he means and which guarantees his usage implies. He begins by saying, “readers with bank accounts may be tickled to learn that they have been using private, digital money for a long time.” He goes on to point out that bank accounts are increasingly digital. This is true. A lot of money these days only exists digitally.

The sense of “private” that Bitcoiners care about is that financial information is “not to be shared with or revealed to others.” People with bank accounts have not been using private money in this sense; their bank account information is regularly shared with or revealed to authorities. Another sense of “private” is that an asset is “provided or owned by an individual or an independent, commercial company rather than by the government.” Private in this sense exists as a contrast to “public;” your house is your private property while the park across the street is public property. In this case, people have been using private money; the money in their bank accounts is often created by private banks and is owned by the individual, not the government.

There’s another sense of private money which is: money that isn’t, in general, controlled by a government (thanks to Aaron Segal for pointing this out). Some Bitcoin proponents care about this sense of private money very much. The U.S. government controls the U.S. dollar in the relevant sense, so U.S. dollars in any bank account — or any pocket! or under any floorboards! — are not private.

Hanke uses the word “private” six times in the next two paragraphs! Every single time it means “provided or owned by an individual or an independent, commercial company rather than by the government” (i.e. the public vs. private property distinction), which is decidedly not the kind of privacy cryptocurrency advocates are talking about. Here are the phrases:

1) “...convertibility of private deposit money.”

2) “The Federal Reserve stands ready to convert every private, digital dollar…”

3) “[the Fed] converts private dollars into reserve money…”

4) “...settle private money transactions.”

5) “Using the clearinghouse apparatus provided by the Federal Reserve and various private consortia.”

6) “Private, digital money is nothing new.”

Clearly none of these have either of the two meanings of “private money” that Bitcoin proponents care about (transaction privacy; free of government control). So, Hanke hasn’t shown that private, digital money existed before Bitcoin in the form of U.S. dollars in bank accounts.

Third, Hanke’s statistics are outdated. He says, “Academic research has found that roughly half of bitcoin transactions involve illegal activity.” The paper he cites says it uses data “from January 3, 2009, to the end of April 2017.” That was four and half years ago! A third of Bitcoin’s existence! Things have changed. Looking more recently, Chainalysis finds that illicit cryptocurrency transactions are just 0.34% of all cryptocurrency transactions, and CipherTrace similarly found they’re less than 0.5%.

So Hanke’s assertion that “cryptocurrency’s value proposition rests overwhelmingly on its ability to provide end-runs around the law” is false. More than 99.5% of transactions are legal.