Is the network effect enough, i.e., is it irreversible?
No, the relationship between network value and size is not a one-way ratchet. As noted in Part 2 when discussing instability, the network effect and the potential for momentum-driven price changes is bi-directional. It holds on the way up and on the way down. Put another way: large network size is insufficient on its own to guarantee stability (Exhibit 1: Myspace).
Is BTC a Ponzi scheme?
A Ponzi scheme is an accounting fraud where capital infusions are miscast as revenues or capital appreciation in order to give the false impression of profits. There is nothing produced and no real assets purchased. A network good is not a Ponzi scheme. Furthermore, Ponzi schemes are never sustainable whereas many networks are.
It is true that stable networks depend on emergence and thus “authenticity”. A major source of instability in networks is what can be thought of as a lack of authenticity. The process is far subtler, however, than simply fraud.
It is also the case that networks, bubbles and Ponzi schemes all relate to collective action. The tendency to confuse them is due to economists having paid insufficient attention (until now) to the process of collective action and coordination.
A continuing theme in BTC commentary is the potential for state action to undermine the network in some manner.
I would make two points here. First, fiat central banking is unquestionably critical to the financing of the modern centralized, all-encompassing, administrative state. The potential for a competing base money, particularly of the non-fiat variety, to be widely adopted is therefore an existential threat to the modern state and to its objectives.
Second, the long run is not the short run. Fiat central banking in its purest form (see Part 1) is an engine of discoordination and disequilibrium. Disequilibrium systems are, by definition, unstable. Their internal logic and path dependence drive them towards increasing amounts of instability (some of which they hope to reverse of course, but never can). If something is unstable, it is also unlikely to be sustainable.
A final point: We cannot know
One encounters a surprising amount of certainty in BTC discussions.
Stable network formation is unavoidably a discovery process. Although we can form more or less reasonable expectations regarding the outcome of such a process, we cannot be certain. As Hayek and Mises taught, the market produces and processes information in a manner that neither individuals acting alone nor the state can hope to duplicate. That is precisely why we value the market process – it creates something that can only be reliably created by the decentralized collective and that therefore we cannot envision in advance.
We cannot know, for example, whether crypto-currencies will replace other forms of base money, whether there will be an extended period of base money competition or whether BTC will retain its position as the dominant crypto-currency. It’s best not to be hubristic about something the very purpose of which is to overcome hubris. “Certainty” about the outcome of market processes is an error best left to interventionist governments.
20 December 2017