Monday, December 11, 2017

Connecting the recent developments of Patreon and bitcoins

These last few days have been intense, online-wise. Patreon did what they did, and the price of bitcoins soared way above the limits of reason and sanity.

It is tempting to see these two things as connected. It is even more tempting to connect them. Because it is a very easy thing to do.

The thing about what Patreon did is that it underscores the need for what bitcoin supporters claim bitcoins do. Patreon gave - gives - everyone the opportunity to donate money at people without too much fuss, and it provided a social vehicle for accepting these donations. At the heart of Patreon's raison d'etre we find the sending and receiving of money.

In short, online transfers of money is kind of a big deal. For Patreon and bitcoin both.

If we go back to the olden days of bitcoin evangelism, we find that the emphasis was much more on the crypto than on the currency part of cryptocurrency. It would be possible to perform transactions in secret, without the prying eyes of government surveilling every transaction. You didn't have to justify why you used your digital moneys the way you did - you could do what you want with them. Including donating them to others for no particular reason whatsoever. No borders, no taxes, no limits, no donation fees.

There is no reason bitcoins could not have evolved to fill a similar role Patreon fills: donations freely given to those who are deemed worthy of them. There could have been an active crowdfunding culture within the bitcoin community.

But there isn't. And there can't be.

The reasons are manifold, but they all revolve around the fact that bitcoins fundamentally do not work as money. The recent dramatic rise in value of bitcoins, with values eclipsing $16 000, only serves to underscore this fact: if you bought something with bitcoins a week or two ago, you would have lost out on this increase. The deflationary nature of bitcoins mean that any use of them that is not getting more bitcoins is an irrational use. Buying things with bitcoins is always a losing proposition; the only winning move is to sit on them until their value inevitably rises.

The most extreme example is the bitcoin pizza, bought for 10 000 bitcoins; the estimated value of that pizza is now $137,408,583.

Moreover, the wildly fluctuating value of bitcoins make it hard to price things. You might try to sell a pair of socks for what currently seems a reasonable price, only to discover mere hours later that it now amounts to thousands of dollars. Sellers cannot set prices, buyers cannot gauge if the prices that are set actually make sense, and the usual market mechanisms determining prices are in effect nullified. Prices carry no information, and in conjunction with the deflationary process mentioned above, it makes using bitcoins as currency a wager at best and a guaranteed loss at worst.

Adding to all this is the cost of conducting bitcoin transactions. Turns out there is in fact a transaction cost to bitcoins, aptly named a fee. Sending money without paying the fee will either take a long time, or simply fail. The minimum fee is 0.00001 bitcoins, or a $1.52; more if you want the transaction to complete with any degree of certainty and/or quickness. It is not unheard of for fees to reach the twenty dollar mark.

Needless to say, buying a ten dollar pizza for thirty dollars is the opposite of a good deal.

The list goes on. The bottom line is that bitcoins do not work as money, and by extension that they cannot work as a replacement for Patreon.

At this point, I suspect that there might be a non-zero amount of readers going: why does any of this even matter? What is the connection between bitcoins and Patreon?

The trivial answer is that there is no connection. The more interesting answer is that by juxtaposing these two things with each other, we find out something useful. On the side of Patreon, we have an actually existing real usecase in the world, which might very soon be in need of a replacement; on the side of bitcoins, we find an utter fucking failure to be even theoretically relevant to this usecase.

This has implications for the "currency" part of cryptocurrency. Given that I am not part of the bitcoin community, I leave it to those readers who are to grapple with these implications best they can.

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