Bitcoin is ludicrous, but it tells us something important about the nature of money

[Javaman]

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/04/12/bitcoin-is-ludicrous-but-it-tells-us-something-important-about-the-nature-of-money/?tid=pm_business_pop

>snip<

So why would somebody want to go and invent bitcoins? There is a certain theoretical elegance to the idea of a borderless currency, with its supply limited by the difficulty of working out very tough mathematical problems. But going back to where we started, money is useful inasmuch as it can be used to buy things. And two massive things stand in the way of bitcoin ever being anything more than a monetary curio. Ironically, both are byproducts of the things that bitcoin enthusiasts most like about it.

First, because it has the endorsement of no government, it will never be usable for official transactions. If you are an American, you will eventually have to pay your taxes, which means getting hold of some dollars, and as long as everyone needs to use dollars, that will be the way the currency in which an overwhelming majority of U.S. transactions occur.

Second, the cap on the supply of bitcoins may reassure people that there will be no inflation, but in fact it ensures that it can never go into widespread use. A currency needs to be elastic — that is, its supply has to rise and fall in order to keep prices stable even as people’s demand for money varies. Part of the reason the Federal Reserve was created a century ago is that the dollar was at that time an inelastic currency, its supply was basically fixed based on how much gold banks had in their vaults. That meant that when harvest season came around in what was then a heavily agricultural nation, there was always a shortage of cash and a spike in interest rates, and in some years a banking panic.

Bitcoin exacerbates that problem. Its supply is capped in the long run. That means that if it ever came under widespread use, demand for bitcoins would rise faster than supply (which is what happened between February and earlier this week), and the price rise rapidly. That may sound good — your money is more valuable! — but in fact it means that prices of goods and services are plummeting. That’s deflation, which as the Great Depression showed us, is not much fun. It is a situation in which everyone has every incentive to hoard money rather than spend it, leading the gears of commerce to grind to a halt.


more at link...

[onehandle]

1. In science fiction, they call them 'credits.' nt

[tridim]

5. Or "Space Bucks" in bad science fiction.

[phantom power]

9. on the Flintstones, it was clams

[Dawson Leery]

2. McVeigh Currency.

[siligut]

3. Bitcoin resembles a Ponzi scheme

Bitcoin is a fantasy. The Internet’s currency—a secure, private, decentralized type of money that makes possible anonymous and virtually costless transactions across borders—contains the seeds of its own destruction. More than anything else, it resembles a Ponzi scheme—and the wild claims made on its behalf reveal a great deal about a libertarian strain of thinking with deep roots in the American psyche.

**snip**

Unless a bitcoin has value as a currency, it has no value at all, and its price in dollars will fall to zero. A regular Ponzi scheme collapses when people realize that earlier investors are being paid out of the investments of later investors rather than from the returns on an underlying asset. Bitcoin will collapse when people realize that it can’t survive as a currency because of its built-in deflationary features, or because of the emergence of bytecoins, or both. A real Ponzi scheme takes fraud; bitcoin, by contrast, seems more like a collective delusion.
http://www.slate.com/articles/news_and_politics/view_from_chicago/2013/04/bitcoin_is_a_ponzi_scheme_the_internet_currency_will_collapse.html

If only we could devalue money as easily, we could negate the Koch brothers.

[phantom power]

4. It kind of mystifies me why people consider bitcoin "ludicrous"

Sure, bitcoins have no current govt endorsement, but... well, people can decide to use them amongst themselves. And *if* enough people eventually did that, there's no special reason a govt couldn't decide to officially recognize it. It would be no different than a govt officially recognizing any foreign currency.

I agree completely that the current encoded policy of gradually decreasing inflation with a hard cap won't work in the big picture, but that's just a policy, and it can be altered just as easily as governments alter their currency policies.

The interesting thing (imo) that the bitcoin concept brings to the table is decentralized and transparent accounting, and cryptography-based tagging and verification. Which seem like pretty appealing properties to me, considering the gigantic lack of transparency in United States monetary policies.

Everything else is just issues about supply policies, and whether or not enough people eventually agree use it. But those two things are also issues that apply to all currencies. So invoking them to poke fun at bitcoin doesn't hold much water to my way of thinking.

I'm interested in the idea of individual nations, and possibly states, or regions, maintaining their own currencies based on bitcoin technology:
http://www.democraticunderground.com/?com=view_post&forum=1116&pid=33764

[Javaman]

6. The question is: which government would support it?

certainly not the US since right now the dollar rules over everything.

and frankly, credit cards are basically just bitcoins tied to the US dollar.

I really don't see a viable future for it other than as a "novetly" currency.

[phantom power]

7. I have a couple thoughts on that...

Firstly, my proposal for a nation such as ourselves, would be: (re)implement dollars, just using the bitcoin accounting technology.

Now, that clearly won't happen because the banksters who run the Fed rule our world, and there's no motivation for them to voluntarily change that situation. The same logic may very well apply to all other govts.

So, back to bitcoin-as-we-currently-know-it. I really have no idea how much traction it will ever get. It's gotten more traction already than I would have predicted a few years ago. I'm rooting for it. Why am I rooting for it? Well, I kind of like the idea of the world's existing currencies having some competition, and specifically some competition that isn't inherently tied to any one country's politics and/or corruption. And one that is built for cryptographically-strong transparency from the ground up.

If a sufficient number of people started to use bitcoins, it might induce governments to recognize it out of convenience, or political pressure from constituents using it. After the cyprus bitcoin bubble, I've decided that scenario isn't completely nuts. Consider: some non-trivial number of people actually decided to park some of their assets in bitcoin, because of policy problems involving euros.

I'm not really interested in the idea of nations *not* having currencies. Again, it's more about the accounting technology for me. And also the spectator sport of an experiment in currency adoption playing out for us all to witness.

One mistake I see a lot of commentary making is implicitly assuming that There Can Be Only One. Notice that anybody can start their own bitcoin-based currency system. And they can implement any monetary supply policy they want. If I ever did it, I'd go with some kind of modest inflation rate, and alterable, maybe based on some kind of majority-based voting system. But that's just me.

So, nations could adopt the technology. There could be multiple a-national currencies, as the current bitcoin system is. I think that might be a healthier scenario for a world economy.

[phantom power]

8. Oh, one other thing...

Even if no government *ever* officially recognizes it, it isn't really a show stopper. All you need is a facility for exchanging "official" currencies to and from bitcoins. Those facilities already exist.

The exchange rates are currently extremely volatile. So that's an obvious barrier to widespread adoption, but it's a function of new-ness, and the relatively small supply of both bitcoins and the number of people using them. Those are all things that can change over time. Currency instability isn't exactly some new thing that only happens to cryptographic currencies