Bitcoin, from utopia to dystopia :

Bitcoin, the best-known crypto-currency, was born from a libertarian project opposing innovation - blockchain technology - to international finance, that of banks and states, considered as an instrument of oppression responsible for crises. Nineteen years after its creation, the value of a bitcoin has passed the twenty thousand dollar mark last November before falling dramatically below ten thousand this January 17th.

Cryptocurrency has also been banned from what had become its chosen land, China. Indonesia has followed, and Korea is thinking about it. Warnings are on the rise, from left-wing Nobel economists such as Joseph Stiglitz or Paul Krugman, to more moderate ones like Jean Tirole and Robert Shiller, and conservative businessmen like Jamie Dimon, JP's leader. Morgan.

However, new crypto-currencies are being created every month to finance various start-ups or non-profit initiatives and the enthusiasm that surrounds them is not mitigated despite the very speculative nature of their value. Even austere central banks are thinking about their possible use. How will it end?

The story came to light in January 2009, when Satoshi Nakamoto, a pseudonym still unresolved, produced the first bitcoin. The associated string was quoted in The Times of London on January 3, "Chancellor on Brink of Second Bailout of Banks". Alastair Darling, then chancellor of the chessboard, was thinking of a new intervention to bail out the banks. Precision is important because it highlights the climate of crisis of confidence in the "system" at the origin of cryptocurrency.

At the heart of crypto-currencies, a technical innovation: the blockchain
The principle of bitcoin and its avatars is to create a virtual medium for expensive exchanges between individuals (their computers, in fact) secured by the blockchain technique: a chain of blocks of characters, each including in an encrypted way information from the previous block , and being added to the previous one by a minor, clearly a computer operator having solved a problem of hashing.

In cryptographic programming jargon, a hash mathematical function has the virtue of transforming any string into a fixed-length string, but so that it is very difficult to return to the original message if one knows only the result (also called hash), and it is very unlikely that two different messages have the same hash. "Very difficult" and "very unlikely" have precise mathematical definitions. The hashing problem that a bitcoin miner must solve is to find, by trial and error, a sequence of characters whose encryption or hash by an internationally recognized public program will give a predetermined result, but changing with each attempt.

In the end, a transaction is sanctioned and secured by a new block of characters, mathematically related to the previous ones, and thus forming a chain of public information, dated, unfalsifiable and inviolable, guaranteed by a network, open to all. operators, without any authority whatsoever. Thanks to the blockchain, the dream of complete privatization of onerous transactions seems to become a reality, which only the physical barter between two parties in direct contact allowed until then to approach. But as we will see, good intentions end up paving what looks like a money hell.

Unlike previous attempts at digital currencies, the use of blockchain by bitcoin contains a financial incentive to solve the problem of hashing: the first to achieve this is given a certain amount of bitcoins, today. the only way to proceed is to multiply the attempts - there is no elegant mathematical solution to the problem - a race for computing power has resulted, resulting in a concentration of minors where the price of electricity is weak: in China until the recent ban; but also in Russia, Ukraine, Canada, Iceland or in some Swiss cantons. This has led to server warehouses entirely dedicated to mining, an opaque concentration of miners' groups or pools, and an escalation of power that, at the current rate, bitcoin production could soon consume as much electricity as Denmark.

 From the libertarian dream to reality
The use of bitcoin is divided between exchanges of lawful goods or services (but invisible to the authorities), financial investments, speculative or, conversely, protection by diversification, but also transactions involving illicit activities, without the weight of each type of activity is known. We are already far from the original libertarian dream.

Speculation about the future value of bitcoin is a second snub for its founding fathers, who justified private cryptocurrencies, especially on the basis that the real value of official currencies, such as the dollar or the pound sterling, has varied over the past year. time due to recurring flushes of inflation. But if it is true that the real value of official currencies is volatile and tends to depreciate over time, the Swiss franc being an exception on this last point, the volatility of the price of bitcoin is several orders of magnitude higher!

Bitcoin advocates, who have developed a website for this purpose (bitcoinwiki), respond in detail to each of these critics. Here are three examples:

- minors consume an extravagant amount of energy? Answer: less than the central banks and their vast bureaucracies do, all things being equal;

- Bitcoin is prized by criminals and professionals of tax evasion? Answer: cash transactions have the same problem, but those in bitcoin have the advantage of being duly listed in a chain of blocks, making it possible to trace transactions, if necessary. Note that the argument is inconsistent with the guarantee of protection of private data that bitcoin is supposed to offer;

- The value of bitcoin is highly speculative? Answer: this is inevitable at first, but its long-term value is supported by the fact that the show will cease once 21 million units have been extracted - for nearly 17 million today. It should also slow down in the future as the remuneration of minors is scheduled to halve every four years.

Incidentally, we have just touched the main contradiction of the bitcoin system: once the extraction limit is reached, around 2040 according to its inventors, the financial incentive to validate the creation of a new bloc will collapse (only the remuneration will remain transaction fees, such as for PayPal or Visa), and with it the security of future transactions. It is likely that at this stage the demand for bitcoins will drop sharply, reducing its value accordingly. We understand why financier Warren Buffett advises those who would like to speculate on bitcoin to invest in put options while there is still time. Moreover, we can not exclude that, by idealism, the creators of bitcoin have themselves programmed its disappearance!

Bitcoin and avatars, the beginning of a Darwinian selection?
Aware of the limitations and potential flaws of bitcoin, other programmers have developed alternative crypto-currencies. For the anecdote, sensitive to the criticism of the computing power stupidly wasted by minors bitcoins, mathematicians have introduced the primecoin, which works on a similar principle, except that the sanction of transaction validation calculations is the discovery of a new prime number, larger than the previous ones. More promising, ether, the cryptocurrency used by the Swiss foundation Ethereum, has the ambition to make blockchain technology accessible to all those - start-ups, established companies, NGOs or even private individuals - who wish to establish smart contracts, in other words digitally secure, with their counterparties. Where bitcoin only secures transactions, Ethereum makes it possible to secure the contracts themselves, whatever their nature. There is also tradecoin, a digital money project developed at MIT by Alex Pentland and Alexander Lipton. The goal of tradecoin is still to compete with international currencies like the dollar or the euro. To do this, the transactions would be secured by the blockchain, but with an approved network of "trusted validators", so as to limit the energy consumption of the hashing, and prevent the system from being dominated by actors of the shadow. Unlike other crypto-currencies, tradecoin should be based on real assets and therefore convertible, much like currencies in the Gold Standard era, but replacing gold with a basket of commodities. While other cryptocurrencies have no intrinsic value, their scarcity, low liquidity and sensitivity to the authorities' reactions make them excessively volatile. The tradecoin has the ambition to be a more stable currency, because of its convertibility.

 The "system" is not as flawed as monetary libertarians say
The common point of all the crypto-currencies, whether they are the object of an unrestrained speculation like bitcoin or belong to scientific projects with social vocation like the tradecoin, is the conviction that the official currencies, detached from the real assets since the end of the Bretton Woods system, are fundamentally flawed, controlled by potentially manipulative states, and offer fertile ground for speculation and indebtedness, since the principle of fractional banking systems allows de facto banks to create money.

This ultra-caricatural representation of the modern financial system, which ignores the role of interest rates such as the balance sheets of central banks, not to mention macro-prudential regulation, is, I think, the Achilles' heel of crypto-currencies. . In fact, the global financial system regulated by central banks works far better than the caricature of monetary libertarians suggests. The crisis of 2008-2009, whose origin must be sought in a global real estate bubble and not in the collapse of US subprime, paradoxically illustrated its resilience, since, thanks to the intervention of central banks and swap agreements between the Federal Reserve and other central banks, a 1929 global depression was avoided.

From utopia to monetary hell
Believe, or pretend to believe, that modern economies would be better managed if reliance on a fully decentralized monetary system, even if it was proved that the underlying technology is perfectly safe, which is not not the case, is a dangerous illusion. The economic history is littered with "real" bubbles, tulip onions imported from China in the 17th century, and the actions of internet companies at the end of the 20th century. It is also striking that many companies have recently seen their market value soar by the simple magic of having added the word blockchain to their description, and then falling as soon as the bitcoin price has started beating. wing. Property bubbles, most often the cause of major financial crises, did not wait until the end of Bretton Woods to ravage the economies. What would happen in a world where money creation would be as rigid as that of bitcoin or ether? No monetary instrument would be available to mitigate the deflationary shock. Libertarian utopia would then turn into a monetary hell whose doors would have been carefully locked.

Central banks are watching with interest
Ironically, it is perhaps these central banks, despised by the crypto-currency promoters, who will draw the chestnuts out of the heat of the current vogue: several of them, Bank of England, Royal Bank of Sweden, but also Banque Populaire de China, have in their boxes digital coins secured by blockchain techniques. Among their motives, there is one that should be sobering: the post-crisis period of 2008 showed that one of the obstacles to recovery was the impossibility of lowering interest rates sufficiently below freezing for demand credit restarts. This impossibility is due to the fact that if the liquidities were taxed by very negative interest rates, everyone would accumulate fiat money, ie banknotes, since these would escape the tax. But the obstacle would vanish if all transactions were digital! This is the paradox: in wanting to liberate humanity from oppressive states, the promoters of private cryptocurrencies could accelerate the total takeover of transactions and credit by these same states.

From the bitcoin bubble and its foreseeable burst - of which we probably see the first phase - will remain scars and a closer control of the currencies by the states. It is to be hoped that blockchain technology, which has the potential to revolutionize all human activities under contract, making them safer and more just, will survive.