Bitcoin, impressive but flawed
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 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