A Philosopher, a Computer Scientist and an Economist Tackle Bitcoin

Bitcoin has been making headlines during the past year. A digital, person-to-person currency with no central bank, Bitcoin was established in 2009 by Satoshi Nakamoto. At the beginning of 2017, one bitcoin had an exchange rate of $1,000. At press time (Jan. 2018), one bitcoin is worth about $10,800. That’s an increase of 980 percent. Graham Lemke, the Donald T. Butler endowed chair and professor of finance, points out this phenomenal increase of value. The financial community continues to keep its eye on Bitcoin.

What exactly is Bitcoin? “It’s a cryptocurrency, a digital currency, but that’s not what’s really distinctive about it. What’s distinctive is there’s no central control,” explains Mark Thomas, assistant professor of philosophy. Bitcoin has no central bank, so when someone makes a transaction, they do not have to go through a third party. Lemke adds, “It’s really difficult to explain. To me, it’s a pseudo-currency. You could use this currency to buy things and you could also use it as a speculative asset.”

The complexity and technological aspects of Bitcoin are what initially interested Lemke, Thomas and Mark Johnson, the Ruth & Marvin Denekas endowed chair in science and humanities and professor of mathematics/computer science, to take on research into the idea and technology behind Bitcoin.

Lemke, Johnson and Thomas thought it would be interesting to explore this concept on several dimensions. From a philosophical perspective, they wanted to look at the political philosophy of how it got started and what sort of people were initially involved in it. On the computer science side, they wanted to look at what was actually going on technically: How did Bitcoin work, what was the blockchain doing? (Blockchain is a digital ledger in which transactions made in bitcoin are recorded.) As for the financial and economic side, they looked at the characteristics of bitcoin as a currency. Lemke was interested in looking at the volatility of bitcoin.

DIFFERENT VIEWPOINTS

The three professors enjoyed many good conversations. Coming from three different disciplines, they were able to share their insights and piece together what they thought Bitcoin was and what it meant for the financial community as well consumers. Thomas points out that people who are interested in libertarianism, in particular, were drawn to the idea of Bitcoin, as it would be a way to push back on government control since it’s not controlled by a central bank.

Lemke mentions the area of economics called Austrian economics, which overlaps with libertarian political philosophy. Johnson explains some of the differences in how Bitcoin is perceived, making the distinction between anonymity and pseudo-anonymity. “Some of the initial interest in Bitcoin has to do with the fact you are perceived as transacting without anybody knowing what trade is taking place, so there is some degree of anonymity. I think through the discussions we had, we learned this is not necessarily a completely anonymous transaction,” Lemke says.

For Thomas, an interesting part of Bitcoin was how altruistic the developers were. A lot of them had a libertarian philosophy people often think of as self-centered. Thomas saw that actually, those people were willing to spend hours and hours of their time developing Bitcoin and the institutions that support it without compensation.

“In a world that is very dark today, and we think of all these things going wrong with the world, it gives me a little bit of hope that there are people out there who are just interested in doing things they think will make the world a better place.”

— Mark Thomas

The most fun part for Lemke was spending time with his colleagues and listening to what they had to share. “It was interesting hearing Mark [Thomas] talk about philosophical issues and Mark [Johnson] talking about the details of the blockchain. They challenged me to think more carefully about some of the economics.” He also enjoyed looking at the data and analyzing Bitcoin as an economist. He says, “What, in general, makes finance and economics interesting is dealing with uncertainty even if we sometimes fail miserably. When trying to value something, you’re asking questions about events in the future and those are interesting but difficult.”

CURRENCY OF THE FUTURE?

So, will Bitcoin be used widely in the future? Thomas says, “I think things like Bitcoin will continue to have an appeal based on the fact that many people do desire autonomy and to limit government control.” However, Thomas points out that it’s not very easy to use. “One thing I discovered about Bitcoin, because I actually set up a Bitcoin account and purchased something, it’s very cumbersome.”

Lemke adds, “The other thing I would say about it, and this is significant, is that two of the major derivatives exchanges, the CBOE in Chicago and Chicago Mercantile Exchange, started trading Bitcoin contracts in December 2017, and that is important since it may lend a measure of credibility to the notion of Bitcoin as currency.” Lemke noted the price of Bitcoin has been extremely volatile in the past and has remained so, flirting with the $20,000 mark in late December before dramatically falling back. Lemke and a student doing an independent study spring semester are looking at the data and keeping an eye on this process.

Thomas, Lemke and Johnson presented their research at the Annual Chair’s Conference during the fall.

BITCOIN BY THE NUMBERS

 

• 252K daily transactions
•  Money supply: 16.8M BTC
• Market cap: $181.7B
• Bitcoin price: $10,800

Source: charts.bitcoin.com as of Jan. 26, 2018.