Why should we trust bitcoin?

Illustration: Juan Pablo Bravo. Source: The Noun Project. CC-BY-3.0.

When I was in the Boy Scouts growing up, we ran a “trust exercise.” One of the boys in our patrol would face forward, cross his arms, and fall back. His partner would catch him as he tipped backward. It was a lesson for both the “faller” and and the “catcher.” The faller – or “trustor” – needed to keep their eyes forward and not panic, stepping back to catch themselves. The catcher – or trustee – needed to be both faithful and strong enough do the job. The leaders used their common-sense and made a point of pairing up similar-sized partners.

Being young boys, there were some hijinks involved. Let’s just say that no one was seriously injured, and the lessons were clear: we needed to trust each other, but we also needed to be *worthy* of being trusted. Being trustworthy is the first precept of the Scout Law. But trust is a two-way street. We had to trust our patrol-mates to do their jobs, even as we focused on our own. The Scouts who learned that lesson did well. Trusting and being trusted is central to Scouting.

It’s also central to the functioning of society.

We need to trust that when we buy a product, it won’t be defective. We need to trust that when we put our money in the bank, they won’t close their doors (or turn off their web portal) and keep us from our money. We need to trust that the money we use won’t become worthless. In a larger context, we need to trust that our doctors aren’t prescribing medicine to make themselves rich. We need to trust that our schools don’t have a hidden agenda when they educate our children. We need to trust that our news sources aren’t feathering their own beds.

For almost 50 years the Gallup organization has been asking people how much they trusted the institutions of their daily lives – business, news, the justice system, and politics. Different institutions have done well or poorly over the years. Below is a chart of institutions, ranking them from most trusted to least. This poll measures how many people said they have “a great deal” or “quite a lot” of trust in these institutions. Currently, small business gets the best ratings and Congress gets the worst. Banks and the monetary system are in the middle of the pack.

Souce: Gallup.

But that’s not the way to read polls, the experts tell us. The real value in a poll comes from its trends. After all, the Gallup folks have been doing this for a long time. And the trends can tell us a lot.

Percent of respondents with “a great deal” or “quite a lot” of trust in Banks:

Souce: Gallup.

Note when banks fell out of favor: during the S&L Crisis in the early ‘90s and during the Global Financial Crisis of 2008-9. It was out of this crisis of confidence that bitcoin was born. Embedded into bitcoin’s “Genesis Block” is a Times of London headline from January 3, 2009: “Chancellor on brink of second bailout for banks.” Satoshi Nakamoto codified his lack of confidence in the financial system as indelible stamp in the first bitcoin block. But if that’s not enough evidence, read the first sentence of his whitepaper, “Bitcoin: a Peer-to-Peer Electronic Cash System.”

A purely peer-to-peer version of electronic cash would allow online
payments to be sent directly from one party to another without going through a
financial institution.

Bitcoin exists because people don’t trust their banks. They don’t trust the money to hold its value, they don’t trust banks to be there when they need them, they don’t trust the institutions established to support banks when they get into trouble. A banker, it’s been said for over a century, is someone who lends you an umbrella when the weather is good and takes it back when it starts to rain. And during the Financial Crisis, when everyone was getting soaked, it seemed that the bankers insisted the Government manufacture boxcars full of new umbrellas exclusively for their own use.

But why should people trust bitcoin?

Bitcoin is different. The source code is open. Nakamoto released the license so that anyone can use, study, alter, and distribute the software and its source code to anyone and for any purpose. That’s why some many different cryptocurrencies and tokens have multiplied since 2009. All people had to do was copy the code and alter a few lines. Presto, a new currency is created! That’s how Bitcoin was modified to become Litecoin and later Junkcoin and then Luckycoin and then Dogecoin. There is no central authority that determines the protocol. Bitcoin is trusted because anyone can examine how it works. It’s trusted specifically *because* we have less trust in our institutions. It dominates the other cryptocurrencies in part because no one has found a reason to displace it, and it has enjoyed a first-mover advantage.

Market Cap of Cryptocurrencies. Source: Coin360.

In 2014 I posted a blog article entitled, “Bitcoin is Impossible.” When I wrote that piece, I failed to appreciate how technological innovation makes even the clunkiest codes work better, as computer speeds improve, and open-source software evolves. And Bitcoin’s code isn’t clunky, my coder friends tell me it’s actually quite elegant. And bitcoin’s price has grown 200x since then!

We live in a time where people only trust what they can see and examine. As long as we need to verify our institutions, we’ll put the most value on those that are open and transparent. In an age of increasing skepticism, bitcoin – or something like it – isn’t impossible. It’s inevitable.