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Bitcoin (virtual currency) coins are seen in an illustration picture taken at La Maison du Bitcoin in Paris
Bitcoin (virtual currency) coins are seen in an illustration picture taken at La Maison du Bitcoin in Paris July 11, 2014.  Photograph by Benoit Tessier — Reuters

Bitcoin’s Argentina ‘revolution’: No reason to be bullish on bitcoin

May 04, 2015

The New York Times Magazine published a meaty feature this weekend asking the question, "Can Bitcoin take over Argentina?"

The article follows a long tradition of bitcoin reportage, filled with detailed accounts of swashbuckling early adopters and traders of the virtual currency, many of whom made a pretty penny as the dollar value of bitcoin rose to great heights in the fall of 2013 before crashing shortly thereafter. Still, at roughly $230 per bitcoin, the virtual currency is valued at roughly twice of what it was two years ago.

In the introduction to the Times Magazine's money issue, Adam Davidson describes the emergence of bitcoin as a truly revolutionary development that is confounding central bankers, writing, "the Federal Reserve has no idea how much money is out there, at least in all its digital forms, or how fast the overall supply is growing. This is alarming, because the whole concept behind the Fed is to monitor and control the money supply."

Bitcoin, Davidson argues, is a central force in the decentralization of money. He continues:

The authority to create, move and define money — once confined to central banks and treasury departments — is being dispersed to an odd mix of entrepreneurs, libertarian hackers and old-line banking institutions. Even for the most technologically skeptical, this monetary chaos isn’t something we can choose to avoid. It’s a new and pivotal force in our economy, and it will change the way we work and live.

Bitcoin sure is changing the way some people work and live in Argentina. The nation has a long history of macroeconomic policy mismanagement, going back to at least the 1930s. And Argentina is once again under the grip of inflation. Officially, the Argentine government allows its citizens to trade $11 for 100 Argentine pesos. But on the black market, the dollar is even more expensive. Such a market thrives because of the onerous capital controls the Argentine government imposed in 2011, all in an effort to combat the latest bout of inflation in South America's third largest country.

And so Argentines, at least the most technologically savvy of them, are turning to bitcoin as a way to exchange their pesos for what they're actually worth, rather than what the government says they should be worth. Bitcoin, in other words, is simply a way for Argentines to make an end-run around the banking system, which works with the Argentine government to force its citizens to use the ever-devaluing peso. This is illegal behavior by any other name, but Argentines, like bitcoin broker Dante Castiglione, aren't worried. "He takes comfort from the fact that, at least for now, the Argentine government has bigger problems to deal with," according to the Times.

But the Times presents the issue of bitcoin use in Argentina entirely backward. It is probably a good thing that enterprising folks in underdeveloped economies, like Argentina and Kenya, have a way of avoiding some of the most onerous effects of their government's policies. But if bitcoin were to really "take over Argentina," that would be the very sad result of the Argentine government's inability to put in place broadly beneficial economic policies and to reform its institutions so that the Argentine economy actually works.

Meanwhile, Davidson overstates the case that bitcoin is really revolutionizing the creation of money. Central banks have always had a much more collaborative role in managing the money system than many believe. Most money in America today, for instance, is created by banks when they extend credit to their customers. The Federal Reserve can encourage that behavior by setting interest rates, but it was never intended to have an iron-clad grip on the process.

And while bank credit and bitcoins are forms of money, their worth is inextricably tied to fiat money for the simple reason that tax obligations can only be satisfied with currencies endorsed by governments. That's why when a business says it accepts bitcoin as a payment, they're usually fudging the truth. In reality, these businesses partner with one of a few bitcoin exchanges, which immediately convert that revenue to dollars.

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