Bitcoin, a Positive Step in Monetary Reform (Updated!)
Bitcoin has already shocked both the establishment and the blogosphere.
A privately controlled currency, completely independent from Government backing.
Bitcoin leads the way in many respects, but is ultimately flawed: it was built on false premises and does not address the key issue, interest.
Bitcoin was developed by Satoshi Nakamoto and launched in January 2009. There are currently more than 8 million Bitcoins in circulation and they trade at a rate of about 5 euro.
Bitcoin basically is a debt free unit: it comes into circulation through ‘mining’: the solving of complex algorithms by clients yields new Bitcoins. However, no more than 21 million can be mined so there will never be more than that in circulation.
Bitcoin is important and actually nothing short of revolutionary. It is the first notable independent internet currency. Already many cyber units are in existence, but they are related to certain communities. Like for instance the Linden Dollars, used in the virtual world of Second Life. World of Warcraft also has its own tokens, available to millions of gamers.
But Bitcoin is a fully fledged currency, designed to finance real trade.
Why it matters…
One of its key strengths are its peer to peer design. The issuing organization’s sole function is to provide the client software and on-line market place, where Bitcoins can be traded for other currencies. It plays no role in the creation of the money supply.
In this respect it is a real assault on the Money Power’s strangle hold on our money supplies.
It allows businesses and consumers to diversify their methods of payment, making them a little less dependent on the Government/Banking monopoly.
And of course it lessens Big Brother’s ever growing control over our daily lives. Transactions are not logged in centralized databases, available to the ‘authorities’ and transnational corporations.
It also shows that a free market for currencies already exists. Yes, of course regulators are inimical to them, but current legislation does allow for all sorts of units. In fact, there is very little to stop free market currencies, provided those looking for opportunities are dedicated enough.
Furthermore, Bitcoin shows the way for independent currencies on how to create convertibility. Nowadays convertibility of ‘complementary currencies’ is usually created by backing them with dollar or euro. These currencies are sold for national currencies and this cash is used to convert them back. But this leaves them exposed to other problems. Someone could run off with the treasury. And more importantly: it disables interest free credit as no more units can be brought into circulation then there are dollars or euros available for backing.
Mutual Credit based barters can use Bitcoin technology to create convertibility without dollar/euro backing.
Unsurprisingly, legislators bribed by banks have already voiced ‘concern’ about Bitcoin’s independence. Apperantly some naughty drugdealers are using bitcoin to finance their operation. Its peer to peer character makes it suitable for this kind of transaction. Just like cash. And cash too, as we know, is under attack from Big Brother who would like to know everything we buy and sell. Not to mention that he would like to make us completely dependent on his monopoly infrastructure for buying and selling.
So Bitcoin’s existence is very useful for all monetary reformers as it will allow us to gather information about the strategies that the adversary will use to disable it. That’s what we need: practice. The feedback will allow us all to grow and create even better solutions.
….and why it doesn’t
Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw: it is based on the premise that the problem with our money is a problem of volume. This is the basic assertion of ‘Austrian Economics‘: manipulation of the volume of the money supply leads to the boom/bust cycle and this is the problem with our money.
As a result Bitcoin does not address an even bigger problem: exorbitant cost for capital through interest.
This is what is behind their method of money creation, ‘mining’ as described in the introduction.
This does indeed solve structural inflation. But at a price worse than the problem: deflation. There will never be enough Bitcoin to finance all possible trade and it will suffer from high exchange rates. That is, if its deflationary tendencies will allow it to achieve maturity.
Bitcoin does not allow for interest free credit. But in a mature currency credit is unavoidable so it will have to be offered at interest. Most likely in what is known as a ‘full reserve banking system’. I.e., banks taking in deposits at interest and lending them out at even higher interest rates.
Unfortunately, a full reserve banking system can be subverted by the money power within one or two decades, as you can find out here. Through Compound Interest lending, not spending income through interest but using it to lend ever more, the money supply will quickly be controlled by the banks.
This problem is only aggravated by the limited numbers of Bitcoins that will circulate.
Bitcoin is a revolution and a badly needed bit of fresh air. Peer to peer and independent of banks and Government it is an example for all of us. Yes, we should press for reform at the Government level, but no, we should not await it. There is a free market for currencies and it is ours for the taking.
However, it is not credit based and it does not allow for interest free credit. Its deflationary by nature, which is very problematic.
It shows the way in assaulting monopolistic control of the money supply, but its methods are probably insufficient to make a real difference.
Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow.
Many commented that there will always be enough bitcoin, because it’s subdivisible by up to 8 decimal places, allowing 100 million times 21 million bitcoin.
I understand, but didn’t think it would be relevant to elaborate on it. Considering the number of comments it generated, I was wrong.
Let me explain what I mean with the statement ‘there will never be enough bitcoin to finance all trade’.
Here’s what I said:
“This does indeed solve structural inflation. But at a price worse than the problem: deflation. There will never be enough Bitcoin to finance all possible trade and it will suffer from high exchange rates”
This is a statement typical of the Gold debate and it is not for nothing that more than one feebacker wondered what my position on Gold as currency is.
It is well known that many gold critics claim there is not sufficient gold to finance all trade.
The Gold community counters and says: bollocks, simply divide all the gold through all the money in the world.
When we start a new Gold Standard, we just establish how much money we need, divide the gold we have through that number and voila. Bitcoin has the same answer: if the economy grows, Bitcoin will divide further.
The problem is this: after we do this, the economy will grow harder than the amount of Gold in the world through mining. As a result the money supply compared to the economy is dwindling.
This is deflation, and this is why the anti Gold crowd says there is not enough Gold.
It is exactly the same reason I said there will never be enough Bitcoin
The subdivisions leading to larger numbers will be a result of appreciating Bitcoin, which is the essence of deflation.
My original formulation was suboptimal and I hope this elucidates its original intent.