Bitcoins have been one of the currencies of choice for those looking to ‘buck the system’, providing a way for libertarians, anarchists, and others to circumvent the global Central Banking cartel while simultaneously utilizing the free-market aspects of the internet to engage in trade.

However, on April 10^th, 2013, Bitcoin holders saw the value of the virtual currency drop $100+ in dollar terms after climbing steadily for months from its $15 dollar value in January. (Boesler, “Bitcoin is Crashing”)

What caused this ‘crash’? How could a currency that is fixed in number terms gain and fall so dramatically? How can a near-‘Free Market (in reference to the internet) currency be subject to these things?

There are many aspects to the Bitcoin phenomena that can teach valuable lessons to libertarians.

Firstly, a firm/currency/good/service that is made available in the Free-Market or similar institutions such as the internet is not necessarily a perfect thing just because it is arrived at voluntarily or through the market. Many libertarians and anarchists tend to assume that any association or good that comes about through voluntary exchange in the Free-Market must automatically be good because of the efficiency of markets and lack of coercion. However, this is simply not the case: as for most things, there are always exceptions.

A man can work for the state and be a good man, and believe that he is doing good work. For example, many libertarians/anarchists might tend to think that all police officers are bad simply because they work for the state. This may be true with some officers but oftentimes it is not. If these same people worked in private security agencies under Free-Market conditions, the same libertarians would most likely approve of, and even look up to, these same men. It is important to separate the good from the bad in every market structure, mixed economy or not. Although the state does subsidize and allow for enhanced tyranny and corruption, it is simply dishonest and intellectually lazy to claim that it means that this is the case all of the time.

How does that relate to Bitcoins? Well, many libertarians and anarchists viewed Bitcoins favorably due to the fact that the state was not running the operation. This false assumption that Bitcoins were impervious to the same types of currency cycles that all other currencies go through (regardless of being centrally run or through the market) led many libertarians and anarchists to see their Bitcoin stocks implode within a day. (It is important to note that they still trade at a relatively high value, but a 50% fall in one day is obviously bad.)

Secondly, Bitcoins operate on a fixed amount, which is obviously quite different from the Federal Reserve’s elastic money supply. Elastic money supplies, contrary to what most libertarians believe, are not always a bad thing. Under free market circumstances, elastic money supplies would allow banks and currency holders to shift the amount of money in circulation to fit the demand for the medium of exchange in question as necessary. Banks that devalued their money too much would face currency holders abandoning ship; contrarily, banks that kept their money counts too low would not be meeting the demand of potential currency users, and therefore would need to adjust accordingly. Changes in population sizes or other structural changes in the economy would most certainly require different currencies and different currency amounts to suit the market.

That being said, currencies that are fixed in amount can serve as ‘safe’ currencies that check against and hold value for other currencies redeemable in it. For example, gold is relatively fixed in amount (fluctuations in gold supply are minor compared to most currencies that it used to be redeemable in.) For centuries, gold has served as a currency or commodity in which other currencies would measure against. Many markets accepted both gold and paper notes that could be redeemed for gold despite that one of the currencies was fixed and other, for the most part, was not.

Fixed currencies under freer markets can be god-sends and even hold whole economies together. However, markets dominated by central banking often move away from fixed currencies and commodities due to monopolized elastic currency heavily relying upon credit and debt expansion. Fixed amounts of gold do not serve monopolized currencies well due to the fact that there are no market checks on credit and the true demand for money.

The state, with a monopolized currency, is able to absorb power and property through money devaluation and debt enslavement. Under free market pretenses, elastic currencies would most likely not be able to lend out nearly as much money or devalue the currency to such a high degree as a monopolized institution could. Where a fixed currency in the free market may be able to give currency holders a way of keeping elastic currencies in check, it fails to keep up with the expansion of monopolized currency such as Federal Reserve notes.

Lastly, the Bitcoin boom and bust is clearly a market bubble. Some libertarians and anarchists forget that free markets are still subject to boom-and-bust cycles and that there would be tough times under the free market. So many of us have become accustomed to the state and its many failures and lack of success, almost to the point of blaming the state for everything wrong and praising the market for everything right. This is a dangerous way of thinking. Assuming that the market is always right can lead to downright apologism for free markets producing bad outcomes. Evidence does indicate that freer markets generally lead to higher standards of living; however, this does not mean that free markets (or free market entities) are always perfect.

References:

Boesler, Matthew. “Bitcoin Is Crashing.” Business Insider. N.p., 10 Apr. 2013. Web. 10 Apr. 2013.