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posted: April 25, 2025
tl;dr: A somewhat more level-headed view of Bitcoin than you get from the Bitcoin maxis...
I like Lyn Alden. I subscribe to her newsletter and follow some of her recommendations, although one was a Russian ETF that went to zero after the U.S. imposed sanctions in response to the War with Russia. She believes in diversification, which disqualifies her from being a Bitcoin maxi. I am aligned with her macroeconomic views which come more from the Austrian school than Keynesianism. The first two thirds of Broken Money are a good primer on the monetary system before the focus shifts to whether Bitcoin can be the cure for the ills that Alden documents.
For the time being Bitcoin does have utility as a way to transfer value across borders. It’s basically a next-generation Western Union, with more retailers and which operates worldwide, including in countries with repressive governments, as well as ways to do private person-to-person transactions. But why pre-buy and hold these nextgen Western Union tokens, if one doesn’t expect to ever need to do major international transfers? Why not wait until it is time to transfer money? Why not use stablecoins or a gold-backed token? Why is it better to have a token that is ultimately backed by nothing, just like a fiat currency? Clearly the main use case in countries like the United States is speculation.
Alden’s primary argument in favor of Bitcoin, an unbacked cryptocurrency, is decentralization and no reliance upon a counterparty. The most widely-used stablecoin, Tether, had a shady beginning, and there are still questions about whether all Tether is backed by dollars, although less so now that interest rates are well above 0% and Tether is extremely profitable by just parking the money in U.S. T-bills. She cites one example of a gold-backed stablecoin that was shut down by the government, although there are other ones out there and they could become more popular in the future, especially if run by reputable, audited firms with a global presence. But she dismisses gold-backed stablecoins with this comment: “To move around quickly, gold needs to be abstracted by a centralized custodial entity, and that entity can be corrupted or shut down.”
Alden does have some, but not enough, recognition of the problem caused by the ever-growing financialization and abstraction of Bitcoin, or what I call “paper Bitcoin”. It’s the same problem that gold-back currencies experienced: are they really backed 1-for-1 by the underlying asset? Microstrategy buys some Bitcoin, but perhaps uses Coinbase - does Coinbase really have all the Bitcoin they claim to hold for their customers? Maybe they are fractionally reserved? How secure is Coinbase’s Bitcoin? Exchange hacks have happened before and will happen again. Microstrategy creates Bitcoin derivatives by issuing bonds which have claims on Bitcoin under certain conditions. An ETF or investment fund buys the bonds, and sells shares to retail holders. Does the end holder really have the Bitcoin they think they have? All it takes is one bad actor or security breach in the chain of claims and everything falls apart.
The most important chapter in Broken Money is chapter 26, Cryptocurrency Risk Analysis, which functions as an S-3 filing that should be read by Bitcoin investors. She does list some of the main risks including other coins and software bugs in the Bitcoin source code: “It can never be proven to be bug-free”. No non-trivial software is bug free: OpenSSL had a bug that went undetected for many years. She states that governments can and have cut off exchanges from the banking system. Being an engineer, Alden does enumerate some technical risks, including superior ASIC technology being used to gain control of the Bitcoin network and the threat posed by quantum computing. She fails to mention The key problem. Several times she talks about how easy it is to generate a private key by flipping a coin 256 times, but doesn’t emphasize how hard it is to secure a key, nor the loss-of-confidence and price plunge in Bitcoin that would be caused by a major holder mishandling their key(s) and someone else gaining control of their Bitcoin. China has already hacked computers in the U.S. Treasury Department.
Importantly, Alden does state that a nation-state (she mentions China by name) could launch a 51% attack: “such an attack is not outside the realm of possibility”. Broken Money was written in mid-2023 before Bitcoiners began pleading for a U.S. Strategic Bitcoin Reserve, which would dramatically increase the incentive for enemy nation-states to launch such an attack. I would be curious to hear what Alden’s reaction would be to my Attention China: How to Destroy the U.S.A.’s Strategic Bitcoin Reserve post.
But all in all Alden produces a decent summary of what could potentially go wrong: “Governments could ban or severely restrict usage of the Bitcoin network, force various financial institutions to sell their holdings to crash the price, and drive the technology into the black market. From there, they could go after the supply chain and do their best to prevent the construction and distribution of new SHA-256 ASICs. If bitcoin’s price remains low for a long time, many miners would become unprofitable and disconnect from the network until the difficulty adjustment reduced enough to find a new steady state. This would sharply reduce the cost of attempting a 51% censorship attack, and at that point perhaps some large government entity would spend the resources to do it, for the sake of eliminating the threat of stateless money entirely.”
I’ll close my review with a quibble that definitely weakens the book. Alden chooses to include one quote from Bitcoin cult leader Michael Saylor, which does nothing except demonstrate how irrational Bitcoin maxis are: “Most people don’t realize this, but Satoshi opened a portal from the physical realm into the digital realm. And energy began to flow into cyberspace, bringing life to a formally dead realm consisting only of shadows and ghosts. Bringing conservation of energy and matter, objectivity, truth, time, and consequence into the digital realm, delivering property rights, freedom, and sovereignty that is separate from the physical and the political realm, to humanity.”
The digital realm was formally dead before Bitcoin appeared in 2008? It seemed pretty active to me, with many users, companies, activities, and fortunes made. That probably is news to the founders of Google and Facebook. The digital realm didn’t have conservation of energy and matter before Bitcoin? Somehow pre-Bitcoin computers violated the laws of physics, and Bitcoin fixed this? I could go on, but Saylor is just spewing Bitcoin maxi nonsense. I’d advise Alden to edit this quote out of future editions, it weakens her other arguments.
All in all Broken Money is a decent overview of the monetary system. Even with the recognition of Bitcoin’s flaws, it’s too optimistic about Bitcoin’s ability to solve the system’s ills. I know, I know, I am resigned to “have fun staying poor”, but there are other assets to invest in, including at least one which functions as hard, stateless money.