The Finance Prof. Who Says Bitcoin’s Going to ‘Bite The Dust’ Is Wrong



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Kevind Dowd. Image from Independent Institute.

By CCN.com: Kevin Dowd is a Professor of Finance and Economics in the Business School at Durham University, Northeast England, and the co-author of the 2015 paper “Bitcoin Will Bite the Dust,” along with market analyst and author, Martin Hutchinson, for the libertarian Cato Institute in Washington DC.

CoinDesk published an op-ed by Dowd Monday, with the title, “Bitcoin Will Still Bite The Dust,” in which the libertarian finance and economics professor avers that Bitcoin is doomed to failure.

Well what he says exactly is that Bitcoin will “bite the dust,” and what he means by that is:

Bitcoin can “not survive in the long run,” and “I still think that the long-run equilibrium price of bitcoin is zero. It just hasn’t bitten the dust yet.”

And technically he might be right, the same way John Maynard Keynes was right when he said:

“In the long run we are all dead.”
-John Maynard Keynes, Dead British Economist

John Maynard Keynes. Image from Wikipedia.

But before we take a look at the two reasons Professor Dowd gives for why Bitcoin will “bite the dust,” here’s an excerpt about him from Wikipedia to give you an idea where he’s coming from:

“Dowd’s main subject of research is private money and free banking—monetary and financial systems that operate without any government intervention and in the absence of any central bank. A related focus of his work is on central banking and other forms of state intervention into economies, most particularly, on deposit insurance, the lender of last resort and bank capital adequacy regulation. He has repeatedly called for the abolition of central banks and an end to state intervention in the financial system.”

So here is an economist who would want Bitcoin to succeed, but doesn’t think it will. That’s interesting. It makes me think he must have a pretty good argument that Bitcoin will fail.

Again, “in the long run,” whatever that’s supposed to mean.

Does Dowd have any claim more specific than Bitcoin will bite the dust “in the long run?”

If thousands of years from now when humanity is a space-faring, interstellar civilization in the year 40,750, if they’re not still using the very blockchain which began with the first Genesis block mined by Satoshi Nakamoto in 2009, then the ghost of Kevin Dowd can gloat his prediction was true. What use is a prediction like this? If he’s so certain as to Bitcoin’s demise, will Professor Dowd be so bold as to make a forecast of roughly when Bitcoin will bite the dust?

Prof. Kevin Dowd lecturing. Image from Wikipedia.

The Two Reasons Why Prof. Kevin Dowd Says Bitcoin “Will Bite The Dust”

FIRST he claims Bitcoin is ‘a natural monopoly’:

‘To work as intended, the bitcoin system requires atomistic competition on the part of the miners who validate transactions blocks in their search for newly minted bitcoins. However, the mining industry is characterized by large economies of scale.

Indeed, these economies of scale are so large that the industry is a natural monopoly. The problem is that atomistic competition and a natural monopoly are inconsistent: the built-in centralization tendencies of the natural monopoly mean that mining firms will become bigger and bigger – and eventually produce an actual monopoly unless the system collapses before then.’

But this simply isn’t true.

There are economies of scale involved in bitcoin mining, sure, but a lot of industries that aren’t monopolies have economies of scale. Bitcoin mining happens to be one of them.

Below is a pie chart of the market share of bitcoin miners in terms of hash rate distribution.

Hash rate is how many operations a bitcoin miner’s computer is doing in a period of time. The higher the hash rate, the greater the opportunity of solving a hash function (by generating random guesses until your computer finds the correct one), which qualifies you to certify the next block of transactions in the chain and receive a reward in bitcoin.

From Blockchain.com:

An estimation of hashrate distribution amongst the largest mining pools. The graph shows the market share of the most popular bitcoin mining pools. It should only be used as a rough estimate and for various reasons will not be 100% accurate. -Blockchain.com

Does that look like a monopoly to you?

Looks like some pretty healthy competition to me.

And miners themselves are just one major stakeholder in Bitcoin.

There’s also the individuals and businesses who hold bitcoin as savings or speculative investment, and who transact business with it.

  • There are the exchanges.
  • There are the wallet companies.
  • And there are the developers for all of these areas.

It’s completely inaccurate to portray Bitcoin as a monopoly under someone’s central control when it is, in fact, a brilliantly envisioned, highly robust digital economic architecture with a manifold system of checks and balances built into it like the U.S. Constitution.

The Bitcoin blockchain architecture and the vast public digital ledger it has produced on its blockchain constitute the founding digital document of a new economic order based on old principles and new possibilities, and the network of people and computers that maintain it are the founding fathers of a promising establishment.

Which is part of my rebuttal to Prof. Dowd’s next contention:

SECOND he claims Bitcoin is ‘an inferior product’:

‘There is also the argument that the price of bitcoin must go to zero because an inferior product cannot survive long-term in the absence of regulatory barriers to entry.

Imagine you have a market with no entry barriers. The first firm to enter the market has 100 percent of the market share, as bitcoin once did. Competitors then come along and make inroads into the market.

Some of these offer products that are superior to the product produced by the first firm, not least because their producers have learned from some of the design flaws in the first firm’s product. And eventually superior rivals displace it completely and the market share of the first product goes to zero.’

But it’s not.

Dowd contradicts himself here. First, he says Bitcoin will bite the dust because nobody can survive in the market without getting swallowed up by a bigger beast. Then he literally says Bitcoin will bite the dust because it’s too easy for people to get into the market and compete.

And both claims are false. The first claim is false because that’s not what’s actually happening. The market for bitcoin mining is an oligopoly, not a monopoly.

The second claim is false because Bitcoin is not an inferior product. Dowd is positing that competitors will find a second mover advantage that will prove fatal to Bitcoin, but the second mover doesn’t always have the advantage.

And what we’ve found with Bitcoin, which has a market capitalization in excess of the rest of the planet’s cryptocurrencies combined, is a lot of first-mover advantages.

The fact that it came first makes it a very stable boat in the waters. It has the longest, strongest blockchain, and the most battle-hardened network with the most experience weathering bugs and attacks. The fact that it came first has been a major advantage to Bitcoin.

The mere fact of its sheer size gives Bitcoin the benefits of the network effect and makes it the most difficult target for a 51% attack. The old tropes about Bitcoin being outdated because it uses a lot of energy either miss the point of Bitcoin entirely, or are deliberately misrepresenting a difference of design philosophy as Bitcoin being outdated.

This is a network that uses energy and computation on purpose to create a qualified node. That’s part of what makes Bitcoin so solid. Characterizations of Bitcoin as outdated because of transaction volume also either miss the point of Bitcoin or are deliberately misrepresenting a difference of design philosophy as Bitcoin being outdated.

Perhaps Bitcoin isn’t meant for that, but as equity for a store of value as savings, something for which fewer transactions are necessary, and which is highly valued and sought after by markets.

Or maybe second layer technologies will facilitate the use of Bitcoin for daily commerce in small amounts because an army of developers makes Bitcoin a superior product every day.

Video: CATO’S 32ND ANNUAL MONETARY CONFERENCE (NOV 2014) —brings leading scholars together and advocates for fundamental monetary reform to discuss:

– The bitcoin revolution and future of crypto-currencies
– How technology will drive further innovations so that private currencies become a reality
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– The steps necessary to return to constitutional money based on the convertibility principle and free banking


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