CATO Monetary Conference: Economist Tells World to Sell Their Bitcoins

By Kyle Torpey Nov 21, 2014 11:53 AM EST

sell bitcoin

NEW YORK (InsideBitcoins) — Kevin Dowd is a professor of finance and economics at Durham University, and one of his main areas of research over the years has been the topic of private money. For this reason, it seems clear that Dowd would have a fascination with bitcoin.

“In spite of its success today, bitcoin is not sustainainable. It will collapse.”

In a recent presentation at the Cato Institute’s 32nd Annual Monetary Conference, Dowd confessed that he wished bitcoin were a solution for private money. On the other hand, he also pointed out what he perceived to be many flaws with the digital scarce resource. It is due to these proposed flaws that Dowd has a bearish outlook on bitcoin as a currency.

A system of distributed trust

To his credit, Dowd seems to understand bitcoin’s main value proposition, which is its system of distributed trust. As long as decentralization can be maintained in the bitcoin system, it seems that Dowd would find it to be a valuable alternative to other forms of money. He even pointed out that the tamper-proof mechanism for the creation of new bitcoins should be viewed as an attractive benefit of such a system.

Having said that, Dowd does not believe that bitcoin can maintain this system of distributed trust over the long term.

Distributed trust is lost if mining is centralized

Dowd sees bitcoin’s current incentive structure leading to an inevitable collapse, mostly due to the centralization of mining. He sees this centralization eventually leading to a natural monopoly. Dowd noted the economies of scale in bitcoin where it makes sense for multiple miners to join together instead of working against each other.

When you take this concept to its eventual conclusion, Dowd believes that it makes sense for all miners to come together to form one, centralized bitcoin mining institution This would effectively destroy the decentralization of bitcoin, which also removes its value proposition.

[Read Also: Bitcoin Mining Centralization: Bitcoin’s Achilles Heel?]

Is Kevin Dowd right?

The criticism of mining centralization in bitcoin is not a new one, but it is one of the few criticisms that actually has some merit to it. While there is no doubt that more work could be done to improve the decentralization of bitcoin mining over the long term, the incentive structure seems good enough for now.

The main flaw in Dowd’s presentation is that he ignores the fact that miners who decide to centralize the mining process are also hurting the value proposition of the very resource they are mining. Although it may make sense to combine forces at first glance, the fact that doing so would hurt the value proposition of bitcoin must be taken into account. We’ve already seen various powerful mining pools, such as Ghash.io and BTC Guild, voluntary limit their share of the network hashrate to help maintain bitcoin’s value proposition.

Note: There were some other statements made by Dowd that seem absurd to any bitcoin supporter at first. For example, he claims bitcoin is inefficient because this sort of transaction system could exist on a single server, and he says PayPal is a more reputable option than Ghash. These statements become less absurd when remembering that he doesn’t believe bitcoin will be able to maintain its system of decentralized trust.

For what it’s worth, this is one of the most legitimate criticisms of bitcoin that I’ve seen from an economist.

You can follow @kyletorpey on Twitter.

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  • Doug Depker

    I am a 31 open source decentralized crypto/blockchain proponent, how could anyone who thoroughly understands it not be. I helped get my father (age 66) interested in Bitcoin in the last few months. He was blown away once he understood the mathematics and mechanics that govern the system. He thought it was amazing that this tech sprung up at a time when U.S. citizens were shedding tons of trust in the dollar, in those who manage the dollar supply, and in the financial industry’s major players who thoroughly decimated what little trust they had before the financial meltdown.

    Reforming Wall Street, the banks, and the regulatory agencies is an impossible task since the only option for redress is via the the current political channels. These are the same political channels that have been corrupted & exploited by the financial industry due to a monetary system that allows the gov to print print print and the banks to create money by putting the citizens in debt. The system began forming cracks over the passing decades, so the banks sent their “repair men” to effectively widen those cracks and ensure they would never be sealed up. The only viable option at this point is the forced migration of our settlement systems to crypto/blockchain tech through mass adoption.
    Voting politicians in to office and hoping they kick their nasty financial industry addiction while reforming that same industry is a joke of a plan some people offer as. Bitcoin really did come along at an ideal time and will lessen the blow of a total fiat failure scenario.

  • Duncan Black

    Well said Croblet! And, by the way, I am 65 – so age is no barrier to being a fervent believer in Bitcoin! I say the sooner the present – murderously corrupt – system is booted aside, to be replaced by Bitcoin, the better. Keep at it young ‘uns – proud of you!

  • CryptoReporter

    He does have a point, but there are SEVERAL massive mining nodes built and being built around the world as I type this. As more come online it will help to distribute trust. I see bitcoin as an ongoing project. There will be mining catastrophes, new miners, new hardware, etc all the time and everyone gets to be a part of it in some way.

  • It’s hilarious to watch academia and proponents of this existing non-transparent obviously corrupt financial system sling arrows at the new competitor which acts like a mirror exposing every flaw in the existing financial system. May the best idea win, and in the crisis what will folks flock to? Not every transaction is done over the Internet, but for those transactions that are, visa, MasterCard, PayPal even Square are all exposed to risk of fraud of epic billions per year which is why their fees are so high…. The blockchain eliminates this risk, so the fees do not meet to be as high. We haven’t seen the first chapter of this technology yet, and it is just like 1993 when white haired conservative men didn’t get the www, or the Internet… It’s this simple, bitcoin protocols, Altcoin protocols all share one vision… We don’t need to ask permission from self-described or invented officials what to do with our own value, if we choose to play with bitcoin that is our free choice, our perogative, our risk…and regardless of what pompass folks think we don’t need your permission to think or act in the virtual world. One could argue, you need permission to enter our virtual world and if you choose to enter leave your old ideas from your world at the door, they don’t apply in here.

    may the best idea win.

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