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a state monopoly and its production should be left to the competitive private sector. The linkage is misguided. Bitcoin is indeed free from government (so far) but has turned out unlike anything Hayek imagined. It is not issued by a private enterprise operating in a com- petitive environment, disciplined by the market to maintain the stable value of its currency. The bitcoin network is an automaton, issuing currency at a pre- dictable rate, perfectly incapable of pro- viding “good money” in Hayek’s sense, i.e., a currency of stable value. It has, moreover, a status of quasi-monopoly in the realm of digital currencies by virtue 1 Author’s calculations based data from the Board of Governors of the Federal Reserve System, H.4.1 statistical release; Visa fact sheet (http://corporate.visa.com/_media/ visa-fact-sheet.pdf); and Bitcoincharts (www.bitcoincharts.com). 2 To factorize a number means to express it as a product of prime numbers. of its first-mover advantage, and Hayek did not address whether currency is a natural monopoly. Conclusion So far, the uses of bitcoin as a medium of exchange appear limited, particularly if one excludes illegal activities. It has been used as a means to transfer funds outside of traditional and regulated channels and, presumably, as a specu- lative investment opportunity. People bet on bitcoin because it may develop into a full-fledged currency. Some of bitcoin’s features make it less convenient than existing currencies and payment 3 Note the difference with the concept of “money is memory” of Minneapolis Fed President Narayana Kocherlakota; in his model, money embodies information about the content of past transactions—not only the identity of the parties, but also what was exchanged. See www.minneapolisfed.org/ research/sr/sr218.pdf. systems, particularly for those who have no strong desire to avoid them in the first place. Nor does it truly embody what Hayek and others in the “Austrian School of Economics” proposed. Should bitcoin become widely accepted, it is un- likely that it will remain free of govern- ment intervention, if only because the governance of the bitcoin code and net- work is opaque and vulnerable. That said, it represents a remarkable conceptual and technical achievement, which may well be used by existing financial institutions (which could issue their own bitcoins) or even by governments themselves. 4 For details, see http://bitcoin.org/en/ alert/2013-03-11-chain-fork. 5 Nakamoto’s original paper providing bitcoin’s specifications is available at http://bitcoin.org/bitcoin.pdf. 6 SeeF.Hayek,1976,DenationalisationofMoney, London: Institute of Economic Affairs.PDF Image | Chicago Fed Letter Bitcoin: A primer
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