Bitcoin and the dangerous fantasy of ‘apolitical’ money

The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.


1. What are bitcoins and what makes them a very special form of digital currency

Bitcoins are digital units of currency that one can use, on the Internet, to purchase (a limited number of) goods and services. The digital nature of bitcoin is not what makes it novel and unique. There are, indeed, a large array of digital currencies, including dollars, euros, frequent flyer points, Amazon points etc. Starting with standard (fiat) money, more than 90% of dollars, euros, yen etc. are, indeed, digital. When your bank gives you a loan, for instance, it appears as digital money in your bank account. And when you use debit/credit cards or Internet Banking in order to transfer it to someone else’s account, from whom you are buying a good or service, your dollars, euros and yen come and go as mere digital currency units. Only a tiny portion of standard money takes a paper or metallic form.

Similarly, when an airline grants you frequent flyer points, that you can add to by using a particular credit card or redeem on some flight, upgrade or duty free item, it is creating a digital currency that you are accumulating for the purposes of using it in the future in order to purchase goods or services. Similarly, when the European Union created its carbon trading scheme, to be used by corporations and traders, it concocted a digital stock of carbon dioxide, divided it up in small bundles, distributed them to corporations (attaching to each such bundle or unit a quantity of carbon dioxide that the bundle’s owner could emit) and then set them free to trade these bundles (or pollution rights) amongst themselves in the hope that this digital market would generate a price for carbon dioxide such that corporations would have an incentive to produce less of it and sell (to less efficient firms) the balance of their bundles. Had this scheme worked, these bundles of carbon dioxide would emerge as a digital-only currency.

So, bitcoin is not novel because it is a digital currency or because it is a ‘made up’ currency. Digital, ‘made up’ currencies are everywhere. What is, however, genuinely novel and unique about bitcoin is that no ‘one’ institution or company is safeguarding the so-called Ledger: the record of transactions that ensures that, when you have spent one unit of currency, there is one less unit of currency in your (digital) wallet.

Put differently, take gold sovereigns as an example: By their (metallic) nature they constitute private and excludable media of exchange, in the sense that if I use one to pay Mary for a car that she is selling, I shall end up with one less such unit in my wallet. The great challenge of creating a non-physical, wholly digital, currency is the pressing question: If a currency unit is a string of zeros and ones on my hard disk, who can stop me from taking that string, copying and pasting it as often as I want and become infinitely ‘moneyed’? For if I can do that, then it is as if all of us have a printing press in their living room, in which case we would have the makings of instant hyperinflation.

Until bitcoin’s emergence, the conventional wisdom was that to make a non-hyper-inflationary digital currency possible, a Ledger of Transactions, keeping track of each unit that you and I spent, must be kept by some Central Bank or some corporation. E.g. the Fed or the ECB or indeed Visa keeping track of our digital dollars, or euros. Or British Airways or Lufthansa or Amazon maintaining a Ledger of the ‘frequent flyer’-like points that they administer. Bitcoin, quite audaciously, broke the back of this assumption.

Bitcoin was born the day in 2008 some anonymous computer geek, using an unlikely Japanese pseudonym (aka Nakamoto), posted an algorithm (on some obscure listserve website) that made something remarkable possible: It could generate a string of zeros and ones that was unique, ensuring that, before it could be transferred from one computer or device to another, a minimum number of other users had to trace its transfer and verify that it left the device of the seller (of some good or service) before moving to the device of the buyer. Moreover, the algorithm was written in such a way as to guarantee a steady ‘production’ of these strings, or bitcoins, over time and in response to the computing power devoted by users in order to help track transfers and, thus, in order collectively to maintain The Ledger. Lastly, to cap the supply of bitcoins, and thus safeguard their value, the algorithm guaranteed that the maximum number of these strings, or bitcoins, could only grow (given the algorithm’s structure) to 21 million units by the year 2040. Once it reached that quantity, its ‘production’ would cease and the users of bitcoins would have to do with these 21 million units. Meanwhile, before that date, and before the maximum bitcoin supply is reached, the ease with which users could ‘mint’ or ‘dig up’ fresh bitcoins (by making computer power available to the bitcoin community) would be inversely related to the total quantity of bitcoins already ‘created’ or ‘extracted’ from the algorithm.

In a sense, the designer of the bitcoin algorithm (the delectable Mr ‘Nakamoto’, who has, by the way, dropped off the radar some time ago) seems to have designed the new currency on the basis of faith in the crudest version of the ‘monetarist’ Quantity Theory of Money (i.e. the idea that the value of money depended solely on the quantity of money supplied to the public) and, thus, aimed at creating the digital equivalent to… gold. Come to think of it, bitcoin was, indeed, modelled on gold.

2. Bitcoin as a digital simulation of some precious metal (e.g. gold)

What is the great merit of gold? Its scarcity! The fact that, once humans, for some strange reason (most possibly related to gold’s perpetual glitter and scarcity) started using it as (a) a means of exchange and (b) a store of value, gold became a currency and its smallest possible, meaningful, quantity became a currency unit. The designer of bitcoin’s algorithm tried his damnest to emulate gold. Just like gold, which one presumes to be in fixed supply under the Earth’s surface, bitcoin is also limited, artificially (through the design of its algorithm) to a plateau of 21 million units. And just like gold, there are two ways in which bitcoins can be acquired: One is to buy them using dollars, chickens, silk, honey, whatever… The other is to ‘dig’ for them like 19th century gold diggers dug for gold. To that intent, Mr ‘Nakamoto’ designed his brilliant algorithm in a manner that allowed for ‘bitcoin digging’. This is how he did it:

The uniqueness of bitcoin, as alluded to earlier, is that no centralised institution (private or public) is the custodian of the bitcoin transactions’ Ledger. So, who is? The answer is a spectacularly liberal-cum-communitarian: “We all are!” By that, what I mean is that the bitcoin algorithm is written in a manner that makes it possible (indeed demands) that the whole community of bitcoin users has access to, and polices, the Ledger of Transactions (which ensures that I cannot cut and paste my one bitcoin a large, or indeed infinite, number of times).

In this sense, bitcoin users must make available computing power to the bitcoin users’ community so that everyone can ‘see’ the Ledger, in order to ensure perfect community ownership of the transactions’ record, as opposed to trusting some government agency (e.g. the Fed) or some private corporation that may have its own agenda. Naturally, as the bitcoin economy, and the number of transactions grows exponentially, the amount of computing power that is necessary for one individual to devote to the ‘bitcoin community’ in order to ‘mint’, or ‘unearth’ a new bitcoin rise exponentially with time. This increasing complexity also acts as a legitimiser of the notion that new bitcoins are delivered to the accounts of the users that put increasing computing power at the bitcoin community’s disposal.

3. Bitcoin’s two fundamental flaws

As with all things digital, there are a number of concerns to do with security; with the fear of hackers and e’spivs. Imagine a world that has shifted entirely to bitcoin. Would we not live in fear that some ingenious hacker will get the better of Nakamoto’s algorithm and manipulate it to his benefit? Would it be wise for humanity simply to assume that the bitcoin algorithm is un-hackable (especially so in the absence of some authority that can intervene and save the day if something horrible happens to the algorithm)? Besides, even if the algorithm is safe, there is always the danger of waking up to the realisation that one’s bitcoin stash was e’looted during the night. And if one entrusts one’s stash to some company with better firewalls and computer security, what happens (in the absence of a bitcoin Central Bank) if that company goes broke or simply disappears into the Internet’s darker crevices (with its customers’ bitcoins)?

These concerns would probably suffice to put a dent in bitcoin’s prospects. But they are not the main drawbacks of the currency. No, there are two insurmountable flaws that make bitcoin a highly problematic currency: First, the bitcoin social economy is bound to be typified by chronic deflation. Secondly, we have already seen the rise of a bitcoin aristocracy (a term ‘coined’ by Greek blogger @techiechan) which, besides the issues of distributive justice which it raises, evokes serious fears about the capacity of very few entities or persons to manipulate the currency in a manner that enriches them at the expense of financial instability. Let us look at these two problems in some detail.

First, deflation is unavoidable in the bitcoin community because the maximum supply of bitcoins is fixed to 21 million bitcoins and approximately half of them have already been ‘minted’ at a time when very, very few goods and services transactions are denominated in bitcoins. To put simply, if bitcoin succeeds in penetrating the marketplace, an increasing quantity of new goods and services will be traded in bitcoin. By definition, the rate of increase in that quantity will outpace the rate of increase in the supply of bitcoins (a rate which, as explain, is severely constricted by the Nakamoto algorithm). In short, a restricted supply of bitcoins will be chasing after an increasing number of goods and services. Thus, the available quantity of bitcoins per each unit of goods and services will be falling causing deflation. And why is this a problem? For two reasons: First, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?). Secondly, because to the extent that bitcoins are used to buy factors of production that are used to produce goods and services, and assuming that there is some time lag between the purchase of these factors and the delivery of the final product to the bitcoin market, a steady fall in average prices will translate into a constantly shrinking price-cost margin for firms dealing in bitcoins.

Secondly, two major faultlines are developing, quite inevitably, within the bitcoin economy. The first faultline has already been mentioned. It is the one that divides the ‘bitcoin aristocracy’ from the ‘bitcoin poor’, i.e. from the latecomers who must buy into bitcoin at increasing dollar and euro prices. The second faultline separates the speculators from the users; i.e. those who see bitcoin as a means of exchange from those who see in it as a stock of value. The combination of these two faultlines, whose width and depth is increasing, is to inject a massive instability potential into the bitcoin universe. While it is true for all currencies that there is always some speculative demand for them, as opposed to transactions demand, in the case of bitcoin speculative demand outstrips transactions demand by a mile. And as long as this is so, volatility will remain huge and will deter those who might have wanted to enter the bitcoin economy as users (as opposed to speculators). Thus, just like bad money drives out good money (Gresham’s famous ‘law’), speculative demand for bitcoins drives our transactions demand for it.

Can these two flaws be corrected? Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins? To do so we would need a Bitcoin Central Bank, which will of course defeat the very purpose of having a fully decentralised digital currency like bitcoin.

4. Conclusion: The fantasy of ‘de-politicised’, ‘honest’ money

The Crash of 2008 has infused our societies with enormous scepticism on the role of the authorities, both government and Central Banks. It is quite natural that many dream of a currency that politicians, bankers and central bankers cannot manipulate; a currency of the people by the people for the people. Bitcoin has emerged as the great white hope of something of the sort. Alas, the hope it brings to many people’s hearts and minds is false. And the reason is simple: While it is true that local communities have, in the past, generated successful communitarian currencies (that enabled them to improve welfare in their midst, especially at a time of acute economic crises), there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society.

Since the second industrial revolution made possible the emergence of large, networked oligopolistic companies (the Edisons and Fords of the 1900s, and the Googles or Apples of today), capitalism became dependent on large credit spurts for the purposes of financing these capital corporations’ needs. Such credit spurts required large boosts in the money supply, both in order to finance the creation of new capital goods and also to support the new consumption patterns that were necessary to maintain the economy’s new productive capacity. Even when capitalist economies operated under the Gold Standard, banks found ways of creating money by lending increasing quantities against the existing, stable, stock of gold.

The 1920s thus demonstrates the impossibility of an apolitical money supply. Even though the monetary authorities were insisting on a stable correspondence between the quantity of paper money and gold, the financial sector was boosting the money supply inexorably. Should the authorities stop them from so doing? If they had, the Edisons and the Fords would have never flourished, and capitalism would have failed to produce all the goodies that it did; indeed, it would have stagnated and spawned social tensions that would put its institutions under a cloud well before 1929. So, the authorities stood by, allowing the bubbles of the 1920s to inflate, leading to 1929 and to the disaster of the Great Depression.

To the extent that bitcoin attempts to emulate the Gold Standard, if a large portion of economic activity is denominated in bitcoin, the dilemmas of the 1920s will return to plague the bitcoin economy. Finance will either have to find ways of introducing bitcoin denominated securities, 1920s-style, that will cause asset bubbles to form or the bitcoin political economy will nosedive into a deflationary spiral that either causes untold hardship amongst its users or leads them, as is more likely, to abandon bitcoin altogether.

The reason that money is and can only be political is that the only way of steering a course between the Scylla and Charybdis of dangerous ponzi growth and stagnation is to exercise a degree of rational, collective control over the supply of money. And since this control is bound to be political, in the sense that different monetary policies will affect different groups of people differently, the only decent manner in which such control can be exercised is through a democratic, collective agency. In brief, while apolitical money is a dangerous illusion, a Central Bank that is democratically controlled (as opposed to the indefensible notion of an ‘independent’ Central Bank) remains our best hope for a form of money that is for the people and by the people. Bitcoin, despite its many interesting features, can never be that.


Bitcoin enthusiasts, just like believers in the Gold Standard, understand money as if it were some commodity which has spontaneously emerged as a unit of exchange – a little like cigarettes did in the POW camp ‘economy’ that R.A. Radford (1945) described so brilliantly. This is a gross misconception based on the unexamined (and dangerously false) faith that there is no substantial difference between Radford’s POW camp and a modern capitalist economy; that, like in that POW camp, output is independent of expectations and demand is always abundant enough to absorb the produced output. As for investment, it is assumed to be uni-directionally determined by savings which are, in turn, determined by the rate at which present consumption is deferred to the future. None of that holds in an economy involving not only exchange but also production and investment. It is these two activities, production and investment, that preclude the possibility of apolitical money.  

Further reading

Radford, R.A. (1945). ‘The Economic Organisation of a POW Camp’, Economica, Vol. 12, No. 48., pp. 189-201

Varoufakis, Y., J. Halevi and N. Theocarakis (2011). Modern Political Economics: Making sense of the post-2008 world, London and New York: Routledge, Chapter 6&7



147 thoughts on “Bitcoin and the dangerous fantasy of ‘apolitical’ money

  1. Pingback: O νέος υπουργός Οικονομικών Γιάννης Βαρουφάκης έχει αρνητική άποψη για το Bitcoin | - H Ελληνική κοινότητα του Bitcoin

  2. The first sentence of point 1 is so far off base (“Bitcoins are digital units of currency that one can use, on the Internet, to purchase (a limited number of) goods and services”) that I did not bother to read further. It is obvious the author is not in touch with reality. The use of Bitcoin is not confined to the internet and I can and do use the currency to buy a vast local and international array of goods and services. As a Doge would say “Wow! Such ignorance. Such good indoctrination into socialist method.Such arrogance to publish viewpoint uninformed. Much sympathy for man with little brain. Grrrr.”

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  4. I love when someone in the blogosphere, again and again, discovers Bitcoin deflationary nature and immediately writes that’s a fundamental flaw. Watching someone’s cognitive dissonance is so entertaining.

  5. Pingback: Der neue griechische Finanzminister Yanis Varoufakis findet Bitcoin eher kacke | Bitcoin EU

  6. Pingback: Der neue griechische Finanzminister Yanis Varoufakis findet Bitcoin eher kacke | - das Blog für Bitcoin und andere virtuelle Währungen

  7. I like this part: “First, because an expected fall in bitcoin prices motivates people with bitcoins to delay, as much as they can, their bitcoin expenditure (why buy something today if it will be cheaper tomorrow?).”

    Why buy cell phones when you can wait six months and buy a better cell phone for the same amount of money, more bang for your buck?

    Or wait a few months and buy the cell phone you wanted used for a 50-60% discount?

    Why buy a new car when you can buy that same car in a year for 30-40% less money? Gee, by his logic, nobody should ever be buying new cell phones or new cars! They experience HYPER-DEFLATION!

    Oh, I know why.

    Because people want shit now and don’t want to wait six months or a year. Ah ha.

  8. Pingback: Greece Taps Anti-Bitcoin Video Game Economist as Finance Minister |

  9. Interesting. You mentioned that “Would it be possible to calibrate the long-term supply of bitcoins in such a way as to ameliorate for the deflationary effects described above while tilting the balance from speculative to transactions demand for bitcoins?” – His answer is that only a Central Bank can calibrate through political decisions. If am often wrong, but couldn’t we automate this and so produce more money as transactions increase? This way we have a built in way of keeping the economy geared for transactions rather than speculation. It is likely that I am missing something here, but maybe this is what Bitcoin misses.

  10. Pingback: Financial Crisis Or Monetary Crisis? | Guerrilla Translation!

  11. Pingback: Financial Crisis Or Monetary Crisis? | Guerrilla Translation!

  12. Nice write up by the way. We all know that bitcoin is a digital currency, meaning it’s money controlled and stored entirely by computers spread across the internet, and this money is finding its way to more and more people and businesses around the world.

  13. Varis, With all due respect. There is a number of very large holes in your analysis. First your assumption of deflation being in and of itself a bad thing. In a free market where you have competition, one of its salient features is deflation (i.e. prices are dropping while the quality of the product or service improves). Why? Let’s consider one of the few markets where there is a high level of competition, telecommunications market. Prices have been dropping in a manner which I imagine that you would consider horrendous, but have organisations stopped making profits? No. Has employment gone done in the telecommunications sector? No. Has rates gone down for employment in the sector? No. The reason for this is because the sector continues to expand and reach greater sections of the population. That’s a good thing!!! The type of deflation that you speak of is the type that comes from government meddling in the economy which cause malinvestment due to interest rates being manipulated and other interventions such as government guarantees or subsidies. The deflation that comes from that type of malinvestment is the correction. Also a good thing!!!
    Next, you go on to attack bitcoin because it is free from governmental (i.e. political manipulation – meaning the printing of money) and second because your misunderstanding of programming is such that you actually think that it is possible for someone to steal bitcoins (e’ looted)!?! This is rather curious because if you understood a bit more about bitcoin you would realise that the transfer of bitcoins is dependent on the solving a certain mathematical puzzles (equations) which are impossible unless you actually have the right digital signature. Even with quantum computers on the horizon, changes that are in the works will ensure that even these won’t be able to determine a digital signature using brute force methods.
    You then assume that people are going to entrust their bitcoins to a bank!?! My question to you is why when I can use a highly secure cold storage to keep my bitcoins safe. With bitcoins I don’t need a bank to warehouse my funds nor do I need them to make purchases. In fact I don’t need them for anything! As is already evident, the unbundling of banking services that is taking place on a massive scale demonstrates that even for mediation between those who are looking to save or earn interest on their funds and those who are looking for funds for investment, DON’T NEED TO USE A BANK OR INVESTMENT HOUSE!
    As the banks and governments can no longer, print money ad infinitum, what this means is that: 1. The purchasing power of people’s money is being retained and not stolen from them either directly by banks and governments; 2. Government will be forced to live within their means. These are good things!!!
    The last pieces in the puzzle in order to stop the madness of the Keynesian world that we live in is for people to take back control of their governments by having the right to call binding referendums on any area and the second and equally important is for there to be a constitution in all countries (starting in Greece?) change so that any taxes, direct or indirect (i.e. subsidies, guarantees or god forbid increases in the money supply) must require a referendum (similar to what exists in Switzerland). Only then will things improve. It will not happen by allowing for politicians and banisters to continue to manipulate the money supply. Best Regards.

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  15. Pingback: BITCOIN: A flawed currency blueprint with a potentially useful application for the Eurozone | Yanis Varoufakis | Bitcoin in Europe

  16. At the ATM, the user will select how much money to spend, insert cash, then scan a QR code with a smartphone to transfer the Bitcoins to his digital wallet app.
    Users can also convert their Bitcoins into cash at the ATM.

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  18. Pingback: Bitcoin is a Flawed Currency but a Potentially Useful Application for the Eurozone | Bitcoin News Room

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  21. Pingback: Yanis Varoufakis: BITCOIN: A Flawed Currency Blueprint with a Potentially Useful Application for the Eurozone | naked capitalism

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  23. Pingback: The Fantasy Of Apolitical Money | Design Interaction

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  25. Pingback: Bitcoin and the Dangerous Fantasy of ‘Apolitical’ Money « The Bitcoin Channel

  26. 1. The European Banking Authority (EBA) issued today (13-12-2013) a warning on a series of risks deriving from buying, holding or trading virtual currencies such as Bitcoins. The EBA said that consumers are not protected through regulation when using virtual currencies as a means of payment and may be at risk of losing their money.
    The EBA added that the ‘digital wallets’ containing consumers’ virtual currency stored on computers, laptops or smart phones, are not impervious to hackers. Cases have been reported of consumers losing significant amounts of virtual currency, with little prospect of having it returned. Also, when using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law.
    The EBA also reminded that as transactions in virtual currency provide a high degree of anonymity, they may be misused for criminal activities, including money laundering.

    In other hand Bank of America Merrill Lynch recently published a research report on Bitcoin, giving an estimated value of US$1300 per BTC.

    • Sorry for typos.. money needs a state BEHIND money (eg the violence of the state imposing the requirement for money on society).

  27. In the era of information and communication when “old” methods and techniques are met or are collided with “new” we have the “innovation” of virtualization machines both in technology and in social science like financial technology in order to both coexist and eliminate the debth and the focus between the “old” and the “new”.
    Bitcoin is a newly created virtual currency a form of digital e-money stored in a virtual wallet for electronic payments that does not rely on the economy of any country or the financial performance of institutions
    Nowadays it has been taken the form of ‘tulip mania’ all over again and again we witnessed the same “old” sad/sorrow story in “virtual happy and free world”.
    Currently majority of people are free to participate in the market until we see again victims on streets like in period of burst in locals Stock Exchange.
    In other hand we also have statements from Federal Reserve that they will tapper the monetary expansion and many investors are worried about of possible inflation / deflation in some regions.
    Furthermore after Baidu Inc., China’s biggest search engine announcement that they stopped accepting Bitcoins after the nation’s central bank barred financial institutions from handling transactions and triggers the drop in the virtual currency from $863 to $565 a 20% drop(6 Dec).
    Here is the official statement of Peoples Bank of China that they banned the exchange of virtual currencies for real world goods because the virtual currency was highly speculative.
    and the price of virtual currency at 6 Dec
    But today 7 December is up again $739 as well as in past time it reached t at $1.000.
    Personally as a neutral observer I believe that it ultimately “smells” transactions in illegal or illicit activities like drug trafficking and “famous” money laundering among “dealers” as well as financial sectors has a large influence on the entire economies and can affect many “multi-direction” investors or dealers.
    I am confident that because of favorable media reports and an expanding number of on line retailers we will be witnessed one more time sorrow stories among investors in future time because nowadays we may have “virtual machines” in financial technology but we haven’t “virtual” national debts among US-EU-UK –RUSSIA –ARAB –ASIA States.

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  30. How naive can you get? “Democratically controlled central banks”??? I am surprised that so much trust has been placed in you by people in positions of authority. It is remarkably undeserved and indeed this article does not effectively discredit Bitcoin as a dangerous fantasy, but rather makes you appear to be a shortsighted lackey (if not an outright shill!) of the Bilderberg group.

  31. Pingback: The ghost of Bitcoin – Polygon

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  33. Bitcoin and Freicoin are limited in supply?
    What about issuing the quantity you want of as many currencies you want using the the technically superior Bitcoin technology?
    We’re proposing a set of protocol changes to support this and many more things, and we call it Freimarkets:

    For the fans of orwellian money (the ones that don’t like anonymous currencies like paper euros or zerocoin, nor currencies that allow fully transparency but also a limited level of privacy like Bitcoin, they always have their money in bank accounts and always pay and are paid with credit card or bank transfer) and other use cases (like local currencies), assets can be “authorized”, meaning that an “authorizer” must validate all transactions and trades invloving that asset/currency.

  34. Problem with economic theory is it looks at economy of a country where individuals are just gears. I’m yet to find economic theories that look at individuals as creative vehicles to economic prosperity. Also, the deflationary characteristic seems bad for producing goods that nobody needs. If there is value in a good produced and if people have real demand for it, no amount of deflationary hype is gonna prevent people from paying a fair price.

    • I don’t find anything wrong with hoarding/saving your wealth and only spending it on things that are in need. Watch Fight Club, we work so hard to buy things we don’t need. Our current economic leaders want us to keep spending and taking out loans to spend more. To me, this sounds like an awful, vicious cycle, whatever the name of it is – the perpetual debt cycle? Eff that.

  35. Pingback: Η (α) πολιτική οικονομία του Bitcoin

  36. Pingback: The (a)political economy of Bitcoin ← P2P Lab

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  38. At Freicoin we’re trying to solve the deflationary problems of bitcoin as well as find a better way to distribute the coin to a wider audience and social projects.

    We believe in Silvio Gesell’s theory on money and interest and are also influenced by Bernard Lieater, E.C. Riegel and other authors.

    We sympathize with other complementary currencies like local mutual credit LETS and B2B network, and we plan to support those (and p2p exchanges between them) within the Freicoin protocol.

    More info:

  39. Pingback: Game over, Bitcoin. Long live human-based currencies!

  40. Pingback: In Money Politics Rule and Bitcoin Doesn’t | FrenchNewsOnline

  41. Of the Deflationary characteristic, one might imagine a time in the future where world population has started to fall as being a good time for a mainstream bitcoin currency. Economic activities that thrive in “fixed money supply” zones will surely spring up and thrive – we just don’t know what they’ll be.

    There is also a discussion on about bitcoin users becoming “their own central bankers”, adding and removing coins from the circulating supply. There are ideas about basing their actions on the blockchain (“Ledger”) itself. Perhaps it – or another currency – might have some sort of “self-regulating” mechanism built into it – though preventing that from dangerous booms and busts might be eternally elusive. It would be not a “polical-determined money supply” but a “mechanically-predetermined” one, ifnot a “fixed” one..

  42. This is an interesting and thought provoking article. I note the discussion between Yanis and Paul Snow regarding Bitcoin’s deflationary characteristics, but I don’t think this is a showstopper for Bitcoin. My thoughts on it are:

    [1] – the practically economy is very different from the theoretical one. The reducing price margin on factors of production due to a deflationary currency is just one of a myriad of commercial dynamics producers would have to deal with (and do today). The fact that it is a “known” one mitigates its adversity (which may even be negligible if the economy grows slowly). Few of these are directly related to the “theoretical” nature of the Fiat economy (not that economics is an exact science anyway). There are simply too many influences on a commercial market – supply & demand, the weather, currency fluctuations, technology changes, industrial factors.

    To pick out the “deflationary nature of the currency” as being the primary characteristic affecting producers incentives is kind of arbitrary. It might be significant or it’s effect might be tiny.

    [3] – we are hardly talking about BCT being the “only” currency around. So that makes economic theory even less relevant to it’s fortunes. What’s important is that it does what it’s designed to do well.

    [4] – Financial derivatives were invented to compensate for deficiencies in currency characteristics and, despite there being too many of them around at the moment, they will continue to have an important role in this regard. If the size of the Bitcoin economy grows, derivatives will be deployed to do the same job (e.g. protect against deflation /inflation / exchange value loss etc) as they currently do with Fiat currencies.

    [5] – Whatever disincentives are for producers in economic theory there are a barrel load of incentives in commercial reality for suppliers to at least accept Bitcoin for payment. For a start it’s one of the first serious electronic equivalents of paper money in that it passes directly from customer to supplier without going through a bank. Secondly – and the most glaringly obvious one – is sales. Most suppliers accept a variety of payments and none in their right mind is going to turn away sales if a payment type is in demand.

    So although this appraisal is interesting, its context is theoretical and of limited relevance (like a graph economics textbook with a supply line, a demand line and one external factor which happens to be the effect of deflationary currency on price margin). In actual fact there are hundreds of effects, the aggregate of which remains to be seen :)

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