If all the Bitcoin and crypto exchanges keep going bust -- like FTX and its associated hedge fund, Alameda, has just done -- does that then mean that Bitcoin itself is going bust soon? I have to admit that, for myself, I don't really see a use for Bitcoin but then perhaps that is just me – I first wrote a column proudly announcing that Bitcoin is dead some 11 years ago. I might even be right about that at some point but I was definitely too early.
The real point here though is that the exchanges and the hedge funds going bust doesn't mean the end of Bitcoin or crypto, no. It means that exchanges and hedge funds are going bust, which is a very different thing. Just as a bank going bust doesn't mean the end of money, a hedge fund either.
Both banks and hedge funds deal with money, play with it, but are separate from it. Further, we have uses for money that don't require either a bank or a hedge fund. So too we might have a use for Bitcoin other than to speculate with it and about it. I've no idea what that use is but I do know that if there is one then the market will find it.
So, that's dealt with.
This does leave though that question of why the investors, hedge funds, exchanges and so on dealing with Bitcoin and crypto keep going bust. The answer is that we've got this new form of money. One where the infrastructure handling it is entirely outside the usual regulatory structure.
Now free marketeers like myself are normally thought of as being against all regulation -- that's not really true, that's actually wrong in fact. We want regulation where there must be and not where there just could be. Banking, money, that's one place where regulation is a just great idea.
Crypto shows why.
Because what we've seen in this past decade is this new form of money. Great, new things, try them out, see if they're good for anything or not. That's the great power of the “free” in markets, that new things can be tried. But what we've also seen is every mistake, scam, crooked scheme, and error that we humans have thought up about money over the past few thousand years being repeated. We've seen all of them repeated, several times, in just this past 10 years.
In fact, I've been playing something of a game with myself -- which of those scams, errors, or just plain crooks is this particular new crypto idea going to fall prey to? Not all of them have so far but I've had an interestingly high hit rate on my guesses.
This particular one, FTX and Alameda, is just the bank (for that's what FTX really was, it borrowed short and lent long, so it's a bank, whatever the regulations say) lending all the client deposits to a speculator who then lost it all. That the speculator was owned by the same person as the bank doesn't hugely change that, nor does that it lost it all in crypto. This is a mistake -- we can call it anything we like but should probably wait for the court cases -- that has been made many-a-times before.
There's another way around to say much the same thing. Banking, money, speculation, they all have a number of interestingly useful ways to go wrong. For all the money to be lost. That we're now talking about a new form of money, crypto, doesn't change that. Which is why we're seeing this vast repeat of every monetary, banking, and speculative mistake humanity has ever made at this warp speed in just the past decade. Thousands of years of instructions on what not to do were for naught, as the mistakes were repeated by those who didn't know that history and weren't supervised by those who do.
Which leaves us with two remaining questions: Why do we allow people to do all of this? Because this is the way that we find out. This really is what the “free” part of free markets is. Anyone gets to try anything. Maybe it will be of use, maybe it won't and we'd like to find out. So, let people do it and find out. It's not looking all that good so far but maybe there will be a use for crypto at the end of all of this.
Which leads to that second question: What is that use for crypto? I've already indicated that I don't know what it is. It's entirely possible that there isn't one. Or maybe there is, but I am adamant in my insistence that we're using the right system to find out. That is the “free” in free markets, after all. People try it out and find out. Most things do fail but we'll never find out which ones do unless we do try them, will we?
Tim Worstall is a senior fellow at the Adam Smith Institute in London
