fbpx

Government Failure Makes Bitcoin Succeed

Bitcoin, the premier cybercurrency, is at an all-time high in price and an all-time low in volatility. In a new article, Bitcoin: Order without Law in the Digital Age, Kyle Roche and I compare Bitcoin to fiat money and show why and how it may succeed in the long run in becoming a currency relied on by millions. In this post, we focus on the flaws in fiat currency that may enable Bitcoin’s success. In the next we will describe how Bitcoin is succeeding.

In 1924, Georg Friedrich Knapp, the father of monetary theory, wrote that “[t]he soul of currency is not in the material of the pieces, but in the legal ordinances which regulate their use.” The state must instill confidence through law that its currency will retain value. And it is the uneasy relation between a state and its currency that gives Bitcoin the opportunity to grow. Citizens in some nations rightly distrust their currencies, precisely because they have little confidence in the legal ordinances and institutions, like central banks, that regulate their use.  For instance, in the recent past nations, like Argentina and China, have undermined the value of their currencies and yet also tried to prevent citizens from using other more stable and reliable currencies to maintain the value of their assets.

Bitcoin provides many people in monetarily oppressive regimes with a better alternative.Bitcoin is encrypted, making seizure by government, difficult, if not impossible. It is minted by algorithm, not by any physical process that can be easily captured by agents of the state. Those responsible for keeping the ledger of Bitcoin’s transactions can do so from any jurisdiction, making it hard for individual nations to shut it down.  The algorithm also limits the minting of new Bitcoins, thus making it impossible for the state to artificially inflate the currency.

If Bitcoin succeeds as currency, it will do so by climbing rungs left open by frailties of fiat money in the nations of the world. It is already gaining strength and stability by competing successfully against monetarily oppressive regimes and performing payment functions for the poor that bank regulations have made difficult. But as it gains in price and stability, it becomes more attractive as a store of value, and can climb other currency rungs, because good currencies too are subject to inbuilt political and legal risks.

For instance, even the dollar,  probably the world’s best currency,  cannot avoid the  danger that that the Federal Reserve or indeed the United States government more generally will pursue objectives other than maintaining its value.  In the paper, we show in fact that Federal Reserve has legal objectives other than maintaining the value of the currency. Moreover, Congress can always change those objectives. Thus, if Bitcoin gains market share and stability by competing against weak currencies, it may at some point become sufficiently stable and widely used to compete against a reserve currency like the dollar.

In the next post, we will discuss the mechanisms that permit Bitcoin to be trustworthy and even more importantly present evidence that it is gaining in price and stability when compared to other stores of value.

Related