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Bitcoin: A Hedge Against Bad Government

Bitcoin began as algorithm that created a token of no intrinsic value. But in a few short years it has become a hot commodity, trading now for about 250 dollars for each coin.  Nevertheless it does not yet constitute an effective currency.  It is still too volatile to be a reliable store of value.  Moreover, while 13 million people have used Bitcoins, far fewer use it on a consistent basis.  And the total value of Bitcoin is about 3 billion dollars—a fraction of the worth of many companies.

But Bitcoin has room to grow and become a currency. Of greatest aid to Bitcoin is the failure of governments. Already, Bitcoin is a household word in Argentina, where the government maintains an official exchange rate at substantial variance with real exchange rates. Bitcoin allows people to evade these controls by making their purchases via Bitcoin. If economic crisis leads other nations, like Brazil and Russia, to take such illiberal action, which is all too possible, Bitcoin will ride higher and begin to look more like a currency. And even after the crises subside, Bitcoin may well remain in use in such nations because of a distributed trust that does not depend on government and its relatively low transaction costs.

More generally, the less stable are national currencies, the more currency controls are imposed by government, the more inefficient are regulations of payment systems, the more attractive Bitcoin becomes. In short, Bitcoin  thrives as a  hedge against bad governance of one kind or another. And given the amount of bad governance in the world, I think Bitcoin is likely to succeed at least to a modest extent. Enough people will use it for real transactions that its value will stabilize and that stability in turn will propel even more frequent use. The process may take longer than its greatest enthusiasts imagine. But such delay is not atypical of technological innovation. The internet was around a long time before it took off. We tend to overestimate the short-term impact of technology and underestimate its long term-impact.

And if takes off, it will probably endure. While other crypto-currencies may rise to challenge it, it has a first mover advantage. And its open source software is  always being improved. Satoshi Nakamoto already recognized that Bitcoin could make transactions like escrow easier by building special features into its software, like multi-signatures.

And such inbuilt and continuing  innovation may be the greatest lesson of Bitcoin. It is part of a more general trend of what Marc Andreessen has identified as “software eating the world.” It should not ultimately surprise us if software designed and refined by human ingenuity can provide a more effective currency than gold or government fiat.

Reader Discussion

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on August 16, 2015 at 20:03:50 pm

So you are offering me a chance to partake of "software FIAT" - thanks a lot, John.

Still sounds like a stock gamble to me; why not just swap Ford Common stock for MacDonalds, or pay for a hamburger with a portion of Ford Common. Satoshi can develop an algorithm to process and record the transaction, can't he?

BTW: How long will the Argentine government stand by and allow folks to bypass their disastrous policies - this is not the way of governments, is it?

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gabe
on August 17, 2015 at 16:05:23 pm

Bitcoin exists in the wild. It is neither secured nor abused by government. Because it is not secured, I'm not interested in using it. It is very easy to abuse. In my comments to the preceding post in this series I briefly discussed one fairly simple way of doing that; by setting up a parallel and identical bitcoin system to devalue the original bitcoins.

I expect that government will assimilate the most useful parts of the technology. Once under the controls of a stable government, the technology used in cryptocurrency will be stable enough to trade with. Most of our currency today is just bits in a computer, so a gradual and controlled shift further in that direction will not be overly traumatic to the general public.

The biggest problem as the blog post suggests is the stability of the government securing the currency and legitimizing the bits.

Government needs to be able to manipulate currency to reduce harms to the economy (hopefully) by managing inflation and deflation. Which means that every government securing the currency must secure a line of currency for itself and no other state, otherwise it can be accused of manipulating the currency to harm other states. (And we don't need to reinvent the euro.) Which means that bad government will have an ability to screw up its own currency and its own economy. Which pretty much takes us back to where we started.

Cryptocurrency is only the latest iteration in the idea of printing paper money with nothing to back it, but it is worse because it lacks any government securing the paper money. It just replaces the old new and advanced technology of the printing press with the new new and advanced technology of the computer and encryption. A valueless "note" of ones and zeroes replaces a valueless note of paper and ink.

Cryptocurrency in the wild will only be useful until it becomes politically relevant on the international stage. Then it will become an instrument of manipulation.

Like the author of this series I too am optimistic about the potential advantages found in the technology, but the idea of cryptocurrency in the wild is not appealing to me at all.

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Scott Amorian
on August 17, 2015 at 21:10:09 pm

You hit it on the head re: security and "damage to other economies"

Can you imagine the opportunities for mischief with this kind of currency? We can not even protect Defense / Intelligence information - and we think we will be immune from this for our s/w fiat currency?

What's more, if you think that China has been manipulating its currency to stave off a severe depression, what till you see what these folks could come up with.

Hey my money is fiat - but I will settle for government secured fiat!

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gabe
on August 18, 2015 at 20:19:21 pm

Speak of the devil ...

This came up on Slashdot today:


A bitcoin civil war is threatening to tear the digital currency in two

High points ...

Because bitcoin is open source (meaning the full code is available for anyone to alter) and decentralised, no one can unilaterally push an update on other users without widespread consensus — consensus that has so far been lacking.

Samson Mow is the COO of BTCChina, one of the largest mining pools. A mining pool is a group of users who pool their resources to improve their chances of successfully "mining" bitcoin — authenticating transactions on the network in return for a bitcoin reward. He told Business Insider that BTCChina and the broader Chinese mining community "has decided not to adopt Bitcoin XT. The foundation of bitcoin is consensus and what we need is for core devs to reach consensus on changes to bitcoin core. Without that consensus from the core devs, it falls upon the mining community to maintain the stability of bitcoin, and that is what we will continue to do."

Collectively, the biggest Chinese pools make up more than half the network.

In other words, the Chinese run half the system. And anyone can push out software changes and those changes will affect everyone using bitcoin.

Some of the ideas of bitcoin technology are interesting. The legal principles of it are certainly worth examining. But the security and stability of bitcoin are not even close to being solid enough for anyone to use.

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Scott Amorian
on August 18, 2015 at 20:39:30 pm

Scott:

Thanks for the info - hope that Prof. McGinnis considers this info / threat.

goodness, I have gotten to be a distrustful sort in my dotage, haven't I?

seeya
gabe

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gabe
on August 19, 2015 at 14:46:04 pm

This comment shows you have no idea how technology works, Gabe.

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Kyle

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.