I’ve just published my article on Substack. It’s an analysis of this article by Yanis Varoufakis. Let me know what you think. 🙏

One question I have had for a while now is why do socialists not like Bitcoin? You’d think they would right?

Bitcoin was envisaged as a money for the people that could not be debased or controlled in any way by a government or central bank. It represents a ‘separation of money and state’. And it is ‘decentralised’ meaning that the Bitcoin network is distributed across its user base - particularly the node runners who participate in running the network, relaying transactions and choosing the version of the code and parameters they wish to run.

In other words Bitcoin is in the hands of the people, not the central banks.

So why do socialists and others on the left not like Bitcoin? Shouldn’t they like something that aims to take power over money away from elites?

Varoufakis’s article is a mixed bag. He makes one or two fair points particularly around derivatives - however he also presents many mistaken assumptions. And I also suspect he hasn’t taken enough time to truly understand Bitcoin. In fact it struck me that the comments underneath his article make some better points and show a deeper understanding for the most part than anything he writes.

The two principle points he makes in his article are:

‘Two propositions support this view. In the hypothetical case where Bitcoin were, under presently-existing capitalism, to replace fiat money: (1) It would lack the mechanism necessary to stop capitalist crises from yielding depressions that benefit only the ultra-right; and, (2) Its community-based, democratic protocols would do little to democratise economic life.’

One principle issue I take with Varoufakis’s perspective is that he insists we currently have a capitalist system which is the basis for most of his subsequent points.

But in reality western economies cannot be simply put into a box and declared ‘capitalist’. It would be more accurate to say that we have ‘hybrid’ economies in the west - a complex mix of central planning and central banks who control the supply of money, credit and set interest rates (essentially Marxist principles) - with some degree of free markets (it’s debatable how much) that allow market forces such as supply, demand and price discovery to take place which are Capitalist principles.

From the Communist Manifesto, Chapter II - page 26, Marx states ten measures that he deems as necessary :

This fifth principle closely resembles the central banking system that we have today.

To further his first point Varoufakis states ‘Consider the Crash of 2008 or the more recent 2020 Covid-19-induced crisis. Suppose that Central Banks did not have the capacity instantly to create trillions of dollars, euros, pounds and yen – and instead had to rely on a spontaneous majority of Bitcoin’s users to agree to a massive increase in the supply of money. The result would be a 1929-like collapse of banks and corporations’.

It’s an odd statement full of assumptions of what would happen under a hypothetical Bitcoin standard. He seems to have little understanding of how Bitcoin works and is completely stuck in a Keynesian economic perspective where an elastic monetary supply is fundamental.

First of all the exact conditions of what happened in 2008 are unlikely in a future Bitcoin world because they were predicated on a fiat system and the ability that that gives to banks and mortgage companies to create money essentially from nothing. And the fraud that was incentivised by that system which we saw in 2008 as sub prime mortgages and the infamous CDO’s or ‘collateralised debt obligations’.

Secondly Bitcoin users would not ‘have to agree to a massive increase in the supply of money’ because Bitcoin is capped at 21 million which is a fundamental axiom written into the code. It cannot be increased whether we would wish to or not. Therefore debasement of the currency to deal with a crisis is not an option.

So the costs of any fraud that takes place under a Bitcoin standard is more likely to be born out by the institutions that participated in that fraud. And the fraud is disincentivised in the first place as bankers realise that bail outs are not an option under a monetary system where new money cannot be simply created out of nothing.

Varoufakis makes this mistake throughout his article assuming that Bitcoin could be simply printed like a fiat currency not understanding that Bitcoin adheres to a strict ‘proof of work’ protocol and a 21 million hard cap.

In a just world banks that make fraudulent loans as they did before 2008 should shoulder the costs, not the debtors or wider society. Of course the opposite happened in 2008 as the debtors and tax payers bore the costs. I argue this injustice was facilitated by central banking, fiat money and perverse incentives.

And ironically the ‘creating of trillions’ as he puts it and which he states is necessary - actually leads to the very inequality that he says he wants to fix under a socialist system. Because massively expanding the monetary supply creates inflation, debases the money and disproportionately affects the poor who cannot benefit from rising asset prices and only suffer from rising costs for food and energy. Has Varoufakis studied the Cantillon effect?

His second point I confess I don’t really understand. He characterises Bitcoin as a community based and ‘democratic protocol’ the latter which is not strictly correct as Bitcoin doesn’t utilise governance and is permissionless. It instead relies on immutable code enforced by the node runners. It is a system of rules.

Then he says that Bitcoin would do little to democratise economic life because monopolies such as tech would not really change and derivatives would be an issue.

I partially agree with this however he ignores here all the positive ways that Bitcoin has already benefited communities around the world including poorer ones in countries in Africa and Latin America. Where people now have an escape option from their rapidly inflating local currencies. And can gradually dig themselves out of poverty by using an appreciating currency. Two good sources for more information on Bitcoin in the developing world are Alex Gladstein and Joe Nakamoto.

In summary Varoufakis seems to consistently misunderstand and misrepresent what Bitcoin is and what it does. He repeatedly talks about the current capitalist system seemingly unaware that many analysts would characterise western economies as firmly under the control of a global central banking system and state monopoly that is perhaps more akin to Marxist doctrine than it is to Capitalism.

He talks about the democratising of money as desirable but that Bitcoin cannot work under the current capitalist system which ignores that Bitcoin has already demonstrated its use cases in different parts of the world and under different conditions. For over 16 years.

His conclusion is that he is unimpressed with Bitcoin and sees value only in the concept of ‘blockchain’ firmly utilised under a socialist system.

His perspective unquestionably assumes that the ability of the state to expand the money supply at any time is desirable rather than the problem that many others deem it to be. His is a Keynesian line of thinking and increasingly at odds with reality as we see increasing levels of debt and worsening inequality under the current Keynesian system. Bitcoin offers us the best chance that I’ve seen so far to begin to fix this.

So why then do socialists not like Bitcoin? I suspect that it’s because it is not under their control, the control of the state or the control of central banks which as I have shown is demanded in the Communist Manifesto.

Socialists want a monetary system that they preside over within a Keynesian system and can tweak as they see fit.

Interestingly the worlds global elite want the same thing but Bitcoin was designed to be separate from would be controllers, to be separate from the state, to be separate from banks, to be separate from elites. But also to be open and permissionless, to be immutable and to be decentralised. Therefore it cannot be easily liked by socialists or anyone else that fundamentally want power to be centralised in their hands.