Love it or hate it, bitcoin represents a market out of control: Don Pittis

In many ways, bitcoin is a microcosm of a pure free market.

Whether you think that's a good thing or not depends on yourown political values. Either way, the bitcoin phenomenon acts as a case study of what some celebrate as the benefits of markets without controls.

The longer the digital currencysurvives, the less free its market is likely to become. The fact iseven the most neo-liberal governments really don't like truly free markets.

As the new year dawned, South Korea a majornexus of the bitcoin trading frenzy announced it plans tocrack downandend anonymous trading, adding anotherzig in zig-zaggingprices.

The European Union and Britain have announced measures of their own to put controls on virtual currencies,including forcing online traders to know who is doing the trading and whether the money is from a traceable, legitimate source.Russia has said something similar.

Beijing has banned trading outright, which, as the South China Morning Post reported last month, may have saved bitcoin markets from even wilder gyrations thanwe have already seen.

"If things were still the way they were at the beginning of [2017], over 80 per cent of the world's bitcoin trading and [initial coin offering]financing would take place in China what would things look like today?" said Pan Gongsheng, head of China's State Administration of Foreign Exchange.

"It's really quite scary."

Scary is not how some free market advocates would describe it.

After all, bitcoin was founded on libertarian principles the dislike of government involvement in our daily lives, the so-called "nanny state."

Keeping the NSA out

The libertarian view, with a strong following in the tech community, is not single-minded, but it has often come down in favour of things like encrypted messaging, with the goal of stopping groups like the U.S. National Security Agency from reading your email.

In its harshest rendering, those strong free market principles oppose taxation as a form of theft and see the ideal world through a lens of social Darwinism where people should "eat what they kill" and devil take the hindmost.

Digital currenciesare a celebration of those principles.

By design, bitcoin keeps your wealth strictly between youand the global blockchainthat keeps an encrypted record of every valid currency unit.

A country's revenue agency has no way of knowing how much bitcoin a person earnsor spends. For countries with capital controls, money denominated in bitcoin flies through the electronic ether without reporting where it started or where it ends.

From a pure free market analysis, bitcoin may be the ideal currency. Rather than basing decisionson government tax laws and other rules that might seem like arbitrary red tape, a person using bitcoin could choose toconsider only what's most profitable.

But, of course, not everyone agrees that those kind ofpure free markets are an unmitigated blessing.

Free market crime

In the case of the EUand the U.K., authorities view anonymity asan opening for crime likemoney laundering and terrorism, the same kind of justification governments have used for demanding keys to encrypted documents.

As I reported last year, one academic study showed Google searches that combined bitcoinand libertarian terms were negligible while searches combining bitcoin and terms for criminal activity were widespread.

• Bitcoin implicated as accessory to cybercrime

According to Canadian tax law, people who earn money in bitcoin are required to report the value of that income. As bitcoins rise in value, Canadians are supposed to report those increases as capital gains in their taxes when they sell.

But if those currency units are anonymous, they are hard for the Canada Revenue Agency to track, meaning dishonest bitcoin owners and traders will be tempted to avoid taxes. Honest bitcointraders and the rest of us will have to pay more for the roads and streetlights that keep our economy functioning.

Another feature of truly free markets is their volatility. Even the world's freest securities markets are regulated. Among other provisions, most have what are called circuit breakers to limit sudden perilous changes in prices, allowing cooler heads to prevail before a damaging crash.

Even though currencies are for the most part freely traded, central banks have usedvarious techniquesto bring stability to those markets. Their interventions, intended to keep money stable enough to be a useful tool for domestic and international trade but also used to stimulate the economy by keeping money cheap have been a target of scorn from digital currencyadvocates who dismiss dollars, euros and yen as "fiat currency."

Trading irregularities

But, of course, without regulation, new issues of digital currencieshave been subject to hacks and frauds and trading irregularities. Trading in bitcoin has been so wild it'svirtually impossible to use for its intended purpose:buying and selling goods and services.

• Bitcoin is the currency you just can't spend

Instead, traded and mined as a speculation, mostly by men,bitcoinshave become a way of making money from nothing, profiting theirowners without providing social benefit. As CBCRadio's The Current reported yesterday, the currency, which requires massive amounts of computing power to mine,is sucking up the energyof a country the size of Ireland some of that energy fromcoal and in the manner of truly free markets, the social costs are ignored in favour of private benefit.

Even in the long term, it is hard to see howgovernments canever come to terms with a free market currency like bitcoin that robs them of so much power.

But for those who believe free markets really are the solution tocreating a sound and stable economy, there is a first test bitcoin and its ilkmust pass to show libertarians are right. To prove their superiority over government-sponsored money, the unregulated digital currencymarkets mustendtheir wild swings andbitcoin must reach a stableequilibrium price.

Follow Don Pittis on Twitter @don_pittis

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