There’s a meme on r/Bitcoin used to describe excessive Bitcoin optimism; “all news is good news.” But despite the title, this isn’t an “all good news” story. It’s a story about what makes a successful economy.
Surprisingly, the key to economic success is failure. I don’t mean this in a cheesy, “there are no failures, only learning experiences” motivational poster way. I mean that for an economy to function efficiently, bad businesses need to falter and die, sometimes messily. Then those failed businesses need to be hacked apart, their accumulated resources scavenged and recycled back into the economy.
This process sounds harsh, reminiscent of the goriest scenes of a horror movie. Yet it’s the core of capitalism; a fiercely competitive system in which your best outcome is to enjoy fleeting success before decaying usefully. Of course, the same could be said of life itself…
To understand why failure is necessary, consider Mt. Gox’s supply of blue space hoppers. Formerly chairs for asses, with those asses now unemployed the blue space hoppers are gathering dust. But! when the bankruptcy lawyers rake through Gox with their sharp talons, the space hoppers will get sold off to some yoga studio. Firming the flesh of Tokyo housewives, the blue space hoppers will again provide a useful service to the world!
This same process of “creative destruction” will disperse Gox’s other assets: office premises, PCs and programming expertise… OK, maybe not that last one unless a Russian syndicate is headhunting malware developers. I kid!
Beyond liberated resources, the indirect benefits of Gox’s failure are extremely valuable. Tales of loss and woe will ripple through the Bitcoin economy, instilling caution in participants. Surviving exchanges will need to satisfy this caution by meeting higher standards, chiefly for competence, security, communication and transparency. Further, core developers are working to implement balance verification, specifically so exchanges can prove their holdings. And coders, entrepreneurs and investors are now highly incentivized to innovate exchange software which solve related trust and centralization issues.
This is how the demise of an organism plays out in nature; its energy transferred to the wider ecosystem. It’s how any efficient and sustainable system must function, notwithstanding the infantile human impulse to cry out to some higher power for relief during crisis. The danger of this childish response to adversity is that, to further misquote a misquoted Chinese ideogram,
Clearly not one to let a “serious crisis” go to waste, Superintendent Lawsky has been quick to push his BitLicence trojan horse, proclaiming that increased regulation will save the day. And he’s not alone.
Sure, Messieurs Lawsky and Carper, why not centralize Bitcoin and make it taxable if that’ll save us from the drudgery of performing due diligence? The only problem is an old one; who will regulate the regulators? I might add, who will regulate the regulators who notoriously fail to regulate the criminal actions of that other branch of government, big banking cartels?
Still, I’m assured that calls for increased regulation accompany all market bottoms. Bitcoin remains a solution to many of the problems of the fiat system. Fixing what ain’t broke by implementing the flawed strategies of the old system (compliance with self-appointed, centralized authorities in particular), will hopefully be rejected in favour of new technical solutions.
Returning to the matter at hand, even in the dog-eat-dog world of hardcore capitalism, there are economic cases whereby it’s worth rescuing a failing business. Yet there always comes a “tough titty” tipping point, beyond which there… just isn’t.
As “goxxed” is now Bitcoin slang for getting screwed out of money, I doubt the Gox brand is worth salvaging. By (inter alia) blaming all their problems on the Bitcoin protocol, the company burnt through all the community goodwill they built up in their better times.
As we now have proof that Karpeles is seeking a bailout, prospective investors would be well-advised to steer clear. Simply put, Gox was badly-run and deserved to fail, don’t resurrect it to plague us further.
Business failures can be tragedies, especially for customers who lose money. But business failures are also inevitable. Outside of a world of Charlie Sheen clones with infinite cocaine, everyone can’t win all the time. This evolutionary view of economics – classical capitalism, really – is tough. But it’s necessary, because it’s the only way things can work long-term. To illustrate why, let’s approach the failure of Mt. Gox in the same way the Federal Reserve approached the collapse of Lehman Brothers in 2008…
Here to show us why capitalism Bitcoin-style is far too risky and in dire need of benevolent guidance by wise central planners, please welcome to the blog pages of CCN… Our glorious financial overlords, those splendid central banking superheroes who saved the world with their various bail-ins and outs!
“Economic theory aside, right now there’s a lot of pain in the Bitcoin economy! Money’s been lost, reputations shattered and large amounts of FUD are being detected across the Bitcoin sector. Pandemonium! We can’t let Gox fail! That’d drop the Bitcoin price and then we’d lose market share to competing currencies. Unacceptable. Why, the more audacious peons may even question our impeccable stewardship of the Bitcoin economy!
I know, let’s tweak the protocol so we can insta-mine a few hundred thousand Bitcoin, mostly to inject into Gox… Perhaps a few thousand to pass out as tips in fancy restaurants in an impressive manner befitting our magnanimity. Then a few million more to start a rally… And hey presto, everything’s fixed. Easy as quiche!
Oh, what’s that, lackey? Some holders are complaining that creating extra millions has diluted their savings and distorted the economy? That’s OK, just tell ’em it’ll be tanks in the street if we don’t print a bunch of fresh money. Only don’t call it “printing money,” call it “a program” and give it a catchy acronym. That always works.
Hmm, you say querying the blockchain reveals other Bitcoin exchanges are insolvent? Well then. Gentlemen, I propose we rewrite the protocol to eliminate such undesirable accounting leaks! Truth can be very detrimental to confidence, which as you all know is the very animal spirit which enlivens a vibrant economy!
And as we know for a truth that confidence is what matters, there’s no harm in altering a few silly stats, Bitcoin adoption rate perhaps, to better reflect the truth the market should believe. If those fools just believe everything is fine, why, then everything will be!
Ah, so now BitStamp are using their customers’ funds to gamble on SatoshiDice? Damn it, I guess they realised we have no choice but to bail them out too if they go down. Well, no biggie, we can always insta-mine more Bitcoin…”
And I doubt Satoshi’s reason was to encourage the bail-out of failed Bitcoin institutions.
Satoshi’s choice to include this particular article is generally interpreted as drawing a key distinction between Bitcoin’s decentralised, apolitical potential and the moral hazard rife in the traditional system. The very fact that major financial players like Gox can fail, indeed will fail if they act irresponsibly, is part of what makes Bitcoin superior to the dysfunctional, heavily-manipulated and politicized fiat financial system. As the Gox fallout roils the markets and media, let’s not forget this crucial difference.
The more good businesses thrive and bad businesses fail within the Bitcoin economy, the healthier system will evolve. And ultimately, only an efficient and robust system will be able to replace the old one.
Last modified (UTC): April 20, 2014 18:34