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Bitcoin, impressive but flawed

by on May 18, 2012

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.

By Anthony Migchels
This article was updated for Henry Makow and originally posted at Activist Post.

Bitcoin was developed by Satoshi Nakamoto and launched in January 2009. There are currently more than 8 million Bitcoins in circulation and after predictable major price swings after its launch, they have traded at a fairly stable rate of about 5 dollar for more than six months now.

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.

Why it matters
Its key strength is 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.

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 is the first free market unit in the world that creates convertibility to other units through a currency exchange. This is an innovation that is underrated by most commentators.

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. Apparently 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.

….and why it doesn’t
Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a full reserve banking system as required by bitcoin (and Gold too, by the way) would allow the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They prefer to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade.

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. It’s deflationary by nature, which is very problematic.

Its decentralized peer to peer nature and its convertibility mechanism are its main strengths. If these can be harnessed in interest free credit based units, the Money Power would be really hard pressed.

Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow.

Why Gold is so strongly deflationary
Mutual Credit, the Astonishingly Simple Truth about Money Creation
Mutual Credit for the 21st century: Convertibility
The Swiss WIR, or: How to Defeat the Money Power
Regional Currencies in Germany: the Chiemgauer
The Problem with Gold

  1. FeedThemCake permalink

    Hi Anthony,

    I think a lot of people, especially coming from an Austrian background, struggle with the idea that money should not be a good store of value. Sure it encourages money hoarding, which leads to deflation and liquidity shortages, but the counter argument is that without the ability to effectively save one’s money, the middle class can’t develop. I suppose the answer is to save in the form of other commodities and have a money that retains its original function as simply a medium of exchange.

    But if that is the case, why can’t something like Bitcoin be included as one of those commodities? It’s a bit like owning land, except the government can’t seize it or tax it as easily. I would include Gold, but as you’ve pointed out, its supply is definitely not what the media and the wealthy pretend… As long as BTC doesn’t try to pass itself off as a currency I see no big problem with it. It appears to me as a legitimate store of value to the extent that it is genuinely immutable and permissionless.

    Also, I don’t know if you’re aware but there are DeFi protocols now arising in parallel with the BTC ecosystem that allow for interest-free loans using BTC as collateral. So basically you become your own bank, loaning yourself your own interest-free coins and re-financing the loan as the price goes up, or adding collateral if it goes down.
    This is especially appealing since debt isn’t subject to tax.

  2. Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow.
    Jct: If an online currency based on nothing can make news, just wait until an online time-based currency takes off with the same network tools.

    • herzmeister permalink

      a time-based currency would be something like Ripple:

      a crypto-currency can by definition not be time-based, as the latter necessarily is identity-, trust- and reputation-based, and that’s an entirely different category to a potentially anonymous crypto-currency like Bitcoin. Both concepts have their scenarios and applications, and both can complement each other really well.

  3. ron permalink

    maybe you know this video ; Thanks again Anthony for your great work

  4. Robert P permalink

    Fractional reserve banking was invented during gold standard era. It is definitely possible to have fractional reserves with bitcoin or gold

  5. Anthony,

    Thanks for the article, good job.

  6. Jorge permalink

    why is it problematic that an exchange good is deflacionary? It is only dangerous if you’re running on a fractional reserve system, if you deeply think about it. If not, it would leed you first to savings and then to investment.
    Of course you may think that consume is the source of economic growth but that’s SOOOO wrong….

    • Deflation means the means of exchange is becoming more scarce in comparison to total economic activity.

      It’s a major fallacy of both Austrian Economics and Mainstream Economics that savings are required for investment.

      Quite the opposite is true: hoarding the means of exchange just makes it even more scarce than it is already, adding to deflationary pressures.

      In a normal (interest free) credit based monetary environment, there is always all the liquidity necessary for all investment. People (and particularly businesses) can just go into debt, backed by the assets in the community. These assets are the real wealth, not the amount of money that circulates.

      Please read the inflation vs deflation dialectic to read about the problems of deflation and how Austrian Economics just is the other side of that dialectic.

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  8. I first became wary of Bitcoin when they announced that the CIA venture capital firm, In-Q-tel would become involved with its development. I’m glad they won’t be sabotaging a viable debt free currency.

    • huh?
      Give me a source, this is rather………..relevant…

      Thanks pm

    • Unbelievable. The whole nakamoto/bitcoin story was too good to be true in many ways, but this just painfully reminds me of what a naive drone I actually am. Always looking at the simple math and economics, instead of the people hoaxing the crap out of us all. that’s why I started out refuting Austrian economics on content, instead of going at the money behind it in the first place.

    • herzmeisterderw permalink

      it’s been communicated transparently beforehand back then, and of course with being well aware of the conspiracy theories it may yield

      also completely other projects in digital finance were presented on that day, and of course an intelligence agency must be aware of these things and the implications they might bring, so let’s give bitcoin some benefit of doubt until proven otherwise.

      • thanks.


        I’ve seen the CIA is investing after the fact, so it’s coopting, not initiating.

        Nonetheless: it would be interesting to know who Nakamoto is.
        And considering what we have been discussing on this site about the forces behind Austrian Economics and Bitcoin’s clear prejudice towards AE, there seems little reason to hold one’s breath.

        • herzmeisterderw permalink

          Don’t forget Bitcoin is open source. It can be forked if the official incarnation becomes too, umm, impure. In fact there already are several modifications and alternative blockchains, but of course so far there was no real reason for them to catch on. Either way, the cat is out of the bag.

          Satoshi Nakamoto simply wants/wanted to keep a low profile. He said he did not want to become another Assange before he left. His posts are all still in the open of course.;u=3 . Last sign of life before “moving on to other projects”, via Gavin:

          There are some indications that Bitcoin was conceived at the University of Dublin, but of course this is just rumours and speculation:

          Happy investigating I guess. 😉

          I don’t believe AE is necessarily about a gold standard for its own sake only. They *do* suggest a free market of currencies, and simply used to say that a commodity-based, inherently valuable and debt-free money will naturally make it in that market.

          But now we are living in the internet age, the prerequisites have changed.

          Personally, I largely agree with Bernard Lietaer’s work who proposes dual currency systems.

          Bitcoin would be a patriarchical currency here, but one of the best we’ve ever had at that, because it’s open and transparent in how it works. It’s controlled by an authority, but that authority is incorruptible computer code that everyone can review.

          A patriarchical currency *has* to be scarce in order to be universally accepted. Where- and whenever such a currency proves to be insufficient to back a community’s economy, people can resort to local currencies, time trading, the Ripple system etc to provide ad-hoc liquidity. These are naturally credit- and thus trust-based concepts and abundant, but therefore cannot be used for anonymous, long-distance trading.

          It’s indeed like yin and yang.

          • I don’t agree with Lietaer’s notion at all. Despite his, in many respects, impressive work on interest, he ignores the fact that it is a simple wealth transfer by definition.

            The idea that scarcity and interest are necessary to create acceptibility is insane and actually places him in a bad light. It’s by far the worst part of his ‘Future of Currency’ book too.

            A unit providing everybody who accepts it with interest free credit, will be accepted by all.

            • herzmeister permalink

              Such a unit naturally cannot exist. Sometimes in some circumstances it’s more valuable for me to have money *now* than to have it *tomorrow*. So unfortunately you cannot forbid people to charge interest, unless you want a strong one-world government watching our every move. And even then there’ll be a black market. It’s not Lietaer’s, mine or your fault. It’s not a flaw of Bitcoin (or Ripple or any other system) that there is no boxing glove springing out of the screen knocking you over when you charge interest and find someone willing to pay. It’s technologically impossible to prevent that, for all that we know today.

              However, we can mitigate the devastating effects of interest and compound interest, or even their creation in the first place:

              * no more debt-based monetary system (for sure the largest cause either way)
              * local currencies and trust-based systems seem to encourage interest-free trading (but they don’t scale up globally, they’re not ubiquitous, hence the need for the mentioned dual systems)
              * crowdfunding platforms like kickstarter and similar concepts will hopefully largely replace traditional financing in the future

              no authoritarianism required for all of these 🙂

              • Why do you think ‘such a unit naturally cannot exist’ Herzmeister?

                Mutual Credit provides a monetary system based on Interest Free credit. It’s the way forward.

                • herzmeister permalink

                  I mean it naturally cannot exist in that you can’t prevent lenders from charging interests just because you hope so or because you say so.

                  But as I said myself, local trading and time banking systems etc seem to encourage interest-free trading, probably because the trading units are perceived as abundant, and because it seems they imply a community agreement to an interest-free credit floor.

                  Your Mutual Credit system is indeed a step up, but it’s either local or global. If it’s global, I don’t wanna have it, as it would be an authoritarian one-world government issued money. 😉 If it’s local, it doesn’t scale up. For large investments that are not feasible for crowd-funding, a non-local (i.e. scarce) currency will be used, and it will go with interest. But as said I don’t consider this harmful anymore because it will stay within the involved parties and not manifest (money-fest) macro-economically as compound interest.

                  • Ah, ok, now I understand. No, outlawing is no good and unpractical. And unnecessary: nobody is going to get a loan at interest, if he can get it interest free. So all that is needed is providing interest free credit.

                    I don’t think local scale means too small. Even a 100k inhabitants town has multi billion economy. New York’s economy alone is probably close to a trillion.

                    Private cyberbased units on a global scale, as long as they are interest free, and competing in a free currency market, would not allow excessive power centralization.

                    So the future is probably a mixture of all sorts of units, scaled at all sorts of sizes.

                    hit reply to read squashed text

    • Tracks permalink

      Actually it sounds like the CIA might want to use it. And you can bet it won’t be just the CIA. NSA, Defense Intelligence and other intelligence agencies might use it. I would be surprised if the SVR (Russian Foreign Intelligence Service) wouldn’t use it or the Chinese MSS.

  9. The main flaw of bitcoin is that it is not currency it is a pseudo commodity. We have pointed out clearly at and provided the necessary proof that money loses its function of measure of value it is a commodity.

    Bitcoin is a red herring. What the world needs is a scientifically stable unit for the measure of economic value. We have proven that that can be done through a simple technical standard. In essence we have coined (excused the pun) the perfect monetary unit that only has two requirements for it to be stable:

    1) Units can only be generated through transactions
    2) All Transactions must be Passive BIBO stable-

    Meeting these requirements eliminates any need for centralised issuance and control of units to control credit. Thus any economic control is out of the scope of money system design and functionality, as it is in the scope of social governance that ostensibly is by the people for the people.

    • I agree. I think this is another way of saying it is designed to behave like gold, instead of being simply credit based.

      • Anthony (and other readers), you might like to read what FOFOA wrote about bitcoins a year ago – very relevant to today’s discussion:

        I should cite some paragraphs:

        “In comparing Bitcoins to gold, I think there is one characteristic in which Bitcoins outshine even gold, and I’ll bet that we can all agree on this one (except maybe Terry). Bitcoins truly have no value outside of being either a medium of exchange or a store of value. Hoarding them will never directly and physically infringe upon the natural rights of others nor impede the flow of physical inputs to industry.

        One of the reasons gold is money is that, of all the physical elements that meet other monetary requirements, gold is the one that comes closest to achieving the perfection of this monetary property that Bitcoin achieves, being completely worthless aside from its monetary uses. Bitcoin is truly an artificial, purely symbolic currency, which makes it, you guessed it, just like all the fiat currencies in the world today. Except there is one big difference: Bitcoin has a limited supply!

        What this means in practical terms is that Bitcoin is a hard currency. And remember, hard means difficult and inelastic. Today Bitcoin is trading as an asset backed only by the speculation that eventually it will be sufficiently accepted and adopted as a medium of exchange. Let’s be clear about this. Today Bitcoin is not widely (or sufficiently) accepted and adopted as a medium of exchange. Today it is a speculative asset backed by nothing more than being a neat idea mixed with a little misguided hope and speculation. As strictly a medium of exchange, today, Bitcoin is redundant and superfluous.”

        Also this (long) post by Mencius Moldbug:

        • Fofoa does have some points, but there is also a lot of illogical thinking. For instance:
          “In comparing Bitcoins to gold, I think there is one characteristic in which Bitcoins outshine even gold, and I’ll bet that we can all agree on this one (except maybe Terry). Bitcoins truly have no value outside of being either a medium of exchange or a store of value. Hoarding them will never directly and physically infringe upon the natural rights of others nor impede the flow of physical inputs to industry.”

          The bits and bytes and pieces of paper with ink slapped on it have absolutely no other purpose than the means of exchange they have been agreed upon to be.

          Further more: hoarding them WILL infringe on teh rights of others: they are no longer available to others to be used for their purpose: to be a means of exchange!

          This is the whole paradox!

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  11. Everyone’s Buzzing About This Cute Little Girl Who Slams Big Banks For Enslaving The People
    05-17-2012 •
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    • this girl is actually causing a bit of a stir, isnt’ she?

      • Facio Libre permalink

        I think there is another major weakness with Bitcoin.. It’s digital (virtual money).. That means it can be hacked.. Those people that question the “powers that be,” such as yourself for example, may one day wake up and discover that their Bitcoin accounts have been emptied.. Poof!! You’re broke.. (now toe the line or we won’t make it reappear)..

        BTW – Are you familiar with Nikki Raapana’s work regarding communitarianism?? If so, what are your thoughts about that?

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