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.

Epilogue

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

 

 

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

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

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

  3. 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.

  4. 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.

  5. Pingback: Γ. Βαρουφάκης: Το Bitcoin και η επικίνδυνη φαντασίωση… | ΑΝΑΔΡΑΣΗ

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

  7. 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.

  8. Pingback: TRANSCEND MEDIA SERVICE » Bitcoin is a Flawed Currency but a Potentially Useful Application for the Eurozone

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

  10. Pingback: Bitcoin is a Flawed Currency but a Potentially Useful Application for the Eurozone

  11. Pingback: Bitcoins for the Eurozone? | Invest in Bitcoins

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

  13. Pingback: Bitcoin is a Flawed Currency but with a Potentially Useful Application for the Eurozone

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

  15. Pingback: O que é bitcoin? Sha 256 Blog

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

  17. 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.

    http://www.eba.europa.eu/-/eba-warns-consumers-on-virtual-currencies

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

    http://cryptome.org/2013/12/boa-bitcoin.pdf

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

  18. 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.

    http://bitcoinity.org/markets/mtgox/EUR#

    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.

    http://english.mofcom.gov.cn/aarticle/newsrelease/commonnews/200906/20090606364208.html

    and the price of virtual currency at 6 Dec

    http://www.cnbc.com/id/101249450#

    But today 7 December is up again $739 as well as in past time it reached t at $1.000.

    http://www.coindesk.com/price/#

    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.

  19. Pingback: Bitcoin, Litecoin, Tulips and Deflation – on RT-TV

  20. Pingback: Bitcoin | kalkinmaokumalari

  21. 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.

  22. Pingback: The ghost of Bitcoin – Polygon

  23. Pingback: Virtual Mining Bitcoin » The ghost of Bitcoin – Polygon

  24. 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:

    https://bitcointalk.org/index.php?topic=280292.0

    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.

  25. 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.

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

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

  28. Pingback: Η (α)πολιτικη οικονομία του Bitcoin ← P2P Lab

  29. 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: http://freico.in/
    Discussion: http://www.freicoin.org/
    Code: https://github.com/freicoin

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

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

  32. 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 bitcointalk.org 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..

  33. 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 :)

  34. Pingback: Bitcoin and the dangerous fantasy of ‘apolitical’ money « Economics Info

  35. Pingback: Bitcoin Deflation Is Good – Yanis Varoufakis Misses The Point Again « independence4wales.com

  36. Pingback: Is Bitcoin a dangerous fantasy? | Raphaels Blog

  37. Pingback: P2P Foundation's blog » Blog Archive » Bitcoin and the fallacy of a non-political currency

  38. Are these European Comission guys copying from your ideas/book?

    http://www.voxeu.org/article/should-eurozone-current-account-surpluses-be-reduced

    “Current-account deficits have caused problems in several Eurozone countries, but surpluses are also an issue. This column argues that surpluses are detrimental to the welfare of the population to the extent they are driven by structural weaknesses affecting demand. Addressing these issues through structural reforms, while letting wages and prices respond flexibly to market signals, would be welfare-enhancing for the surplus countries.”

  39. Pingback: Is the UK Broke? – the recent report by Reed & Clark | Reflections on Science & Political Economy

  40. Can I be clear on an evident fact: money is not a free lunch. For money to function successfully, a public domain must be well defined with respect to money; the public domain must be adequately monetized for money to be a good coordinator at the private domain.

    Actually, this public domain is defined itself by the attitudes with respect to the monetized public domain taken by the vast majority of citizens. As of now it is clearly impossible to well define a public domain with respect to money at the planetary level, so money as a valuation tool must necessarily appear concretely as plural currencies.

    How must currencies be matched to populations?

    After the last painful years of the euro experiment, one is in a position to answer – with lots of European experience, one can clarify a crucial point for every unit of account wanting to become a currency..

    Currencies should be matched to polities. What is meant by a polity? A set of citizens founding the power of a politically independent public organization, as independent nation-states of today.

    How to test if a set of citizens constitutes a polity? By the willingness of the vast majority of citizens in the set considered:
    – to support the polity’s public domain through taxes
    – share public debt / private savings value maintenance and
    – to agree on time unlimited fiscal transfers on the currency adopted by the polity inside sub-populations of the polty.

    In the EMU, this willingness exists inside nation-states, but it does not exist at the EMU level, nor its appearance can be reasonably expected in the necessary time-frame to limit the damage. Therefore the euro cannot practically exist with a well defined public domain. The euro is not a proper currency. Itts definiton – like an outstanding European innovation – should be a multicurrency peg with a virtual single unit of account.

    The formation of the euro can be seen this way: the countries fixed the exchange rate and then revalue so that the revalued national currencies became 1:1 for all, in the process adopting a common new name for all currencies.

    The problem now is to make the inverse operation: to let national re-identify themselves, self-govern in net public spending and float the exchange rate. The output of this process will be the desired matching between European polities and European currencies inside the EMU. The question is how to make it in an ordered manner so that we get a better result than if we let such process happen in a chaotic manner as the result of trying to enforce as a currency what is really a peg on a virtual unit.

    Actually, this a prospect that must be faced with a cold mind and a brave heart. It is not the kind of matter people too much anxious about their assets, incomes and corresponding lifestyles feel easy to reason about. People tend to see the breaking of the euro peg as a catastrophic event, but the truth is that an increasing catastrophe is already happening inside the EMU and the derivative of this catastrophe is positive and increasing. Nobody will be saved by going on with the peg.
    Actually, the de-peg scenario when considered with a cold mind is much less fearful than it is mythically purported awfulness. Going beyond the euro does not mean to go back to 1996, to simply wipe all of the experience gained from then as it will happen in case of a catastrophic collapse.

    Reforming the actual euro does not mean that the euro as a designation of a currency unit, neither the Eurosystem as the monetary authority of the EMU must be terminated, which of course includes the ECB.

    In terms of European experience the Eurosystem is a concept that is worth to retain. The sustainability of the Eurosystem, the ECB and other institutions of the European Union presents no significant threat if the Eurosystem concept is redesigned to mean the monetary authority of a system of multiple currencies, including national currencies to match the diverse national polities of the EMU.

    The key is to see the Eurosystem as a system, first. Then one asks: which are the main parameters defining this system? One can answer: one, the euro. But why not eighteen or what number people find appropriate?

    To be true to reason, the implementation of such a redesign would require a change of the Treaties. To be responsive to facts, a liberal interpretation of the existing texts will work. Having swallowed a frog, who cares about flies?

    The main clause in question is the one that binds the states to tax in euros. How to reconcile this with the necessary change of states going into taxing into euro derived national currencies? The possibility exists that the euro be kept as a virtual currency unit of constant value having its exchange rate to the national currencies calculated by an agreed upon rule to be enforced after the date of depeg. With this proviso any taxing in the euro derived currencies could be re-expressed into euros.

    Going back to bitcoin. To be a proper money, any currency must have a well defined political public domain associated; and people inside the political public domain willing to maintain such domain This may be practically accomplished through being chosen by a state or a set of states with taxing power as the currency in which the taxes must be paid.

    • Whats the point in maintaining the Eurosystem if we are to return to national currencies? I don’t get it.

  41. If the public sector in a Country like Spain is roughly the same same size as the private sector and Spain runs a public deficit of 10% GDP (it did!!!), they spent 20% more money than their revenues were. This is bad enough, but they must have had too much Sangria to call that austerity!!!

    Great article from Austria:

    http://diepresse.com/home/wirtschaft/economist/diebilanz/1393747/Krise_Die-Schulden-und-der-Hausverstand?_vl_backlink=/home/wirtschaft/index.do

    • Looks like the collateral in Terms of Soccer Players the ECB accpeted is not worth much anymore!

  42. Pingback: The Bitcoin aristocracy and chronic deflation | Digital Currency News

  43. “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.”

    The Bitcoin system can evolve and change over time, so long as the changes are accepted by a majority of the Bitcoin network’s miners (weighted by hashing power). In the future, if deflation becomes a big problem in Bitcoin, I can see people proposing that the Bitcoin protocol be changed to again give miners a bonus for each block they create. Since this has a secondary benefit to the miners (in that they’ll earn more money for a while until transaction fees reduce in reaction to mining becoming more profitable) it shouldn’t become too big a problem to gain consensus.

    Why don’t the miners agree now to just increase the block creation bonus to huge amounts? That would negatively impact users’ confidence in bitcoin and so while they get a larger bonus, they will also be worth less (and perhaps much less).

    So in summary, you don’t need a Bitcoin Central bank to adjust the long-term supply of Bitcoins. The Bitcoin protocol has changes a few times in the past, and will continue to evolve in the future.

    • What is the difference between a central bank lowering interest rates and a programmer changing the protocol of bitcoin in order to allow its supply to grow at a faster rate in order to avoid deflation?

  44. “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.”

    The Bitcoin system can evolve and change over time, so long as the changes are accepted by a majority of the Bitcoin network’s miners (weighted by hashing power). In the future, if deflation becomes a big problem in Bitcoin, I can see people proposing that the Bitcoin protocol be changed to again give miners a bonus for each block they create. Since this has a secondary benefit to the miners (in that they’ll earn more money for a while until transaction fees reduce in reaction to mining becoming more profitable) it shouldn’t become too big a problem to gain consensus.

    Why don’t the miners agree now to just increase the block creation bonus to huge amounts? That would negatively impact users’ confidence in bitcoin and so while they get a larger bonus, they will also be worth less (and perhaps much less).

    So in summary, you don’t need a Bitcoin Central bank to adjust the long-term supply of Bitcoins. The Bitcoin protocol has changes a few times in the past, and will continue to evolve in the future.

  45. Pingback: Τι δεν είναι το Bitcoin - Το ελληνικό στέκι του Bitcoin

  46. I dont see how would anyone in his right mind, prefer a bitcoin world over a free floating fiat currency one.Bitcoin, by its nature, is bound to create the very same problems the gold standard (and the euro) have created, apart from the obvious deflationary trap due to its fixed supply.

    External deficits would cause a real reduction of base money for the deficit economy,causing the very same problems we are seeing today.Furthermore, busts would be more severe since the public sector would not be able to persue a counter cyclical fiscal policy due to real financial constrains that would be non-existent in the case of a free floating fiat currency.

  47. I am kind of surprised that nobody hasn’t suggested to just implement a real alternative to this bitcoins showed in “Money as Dept 3″ documentary.
    And yes the author of this article is correct in his judgements.

    • There’s no implementation or proof of concept of Paul Grignon’s proposal of a “Digital Coin”, not even a paper or just a draft how this could work in a functioning and secure manner.

      However, it can largely be done within Ripple – http://en.wikipedia.org/wiki/Ripple_monetary_system – as far as I can see, because essentially everybody can create their own currencies there.

      In this context, Bitcoin may be one of many coins, with “Bitcoin Corp.” being a global open payment system with certain properties (enabling more privacy that Ripple’s XRPs or probably any other corporate coin), where its units of value (also kind of “promises”) would be “privately” (but transparently in public) issued by the Bitcoin miners, and development happens open and transparently in the existing online communities (forums, Q&A, github).

  48. “Do you *really* believe merchants and customers prefer to trade with a currency that loses value over time?”

    Yannis:

    As an economist do you see the problem here… as I see it, I repeat, “one of the biggest dramas of human history”?

    People are worried about an irrelevant ratio, real products / monetised effective demand, when the ratio that universally counts for people is real income per person.

    The irrelevant ratio comes from conceiving money as a substance. The quantity of issued units of account increases faster than real products, therefore, the value of currency dilutes… Savings evaporate…

    The ratio that universally counts for people, real income per person, gives another view of money: it is the scalar variable used in a given social production and distribution system to allocate goods, services and incomes to people. It is a numeric information endowed with social power.

    Money is an outstanding simple invention to coordinate human action. It has a social power of coordination akin to nuclear power in energy production. With money one can engineer financial bombs able to blast world economy as well as monetised productive economies nuclear reactors that go on making available to people the monetised goods and services that people all around the globe have available today.

    It is up to humans to understand how money system can be used and to choose to use it as a means for increased prosperity creation coordination, rather than as a means for a succession of financial blasts that disturb, depress and destroy production.

    There should be a teaching program at the span of K-12 grades available for the general public to learn and research of their own on
    “What is money and what is its purpose?
    How its wealth creation effect operates?
    How its wealth destruction operates?”

  49. “Though I guess I should point out E-GovLink does a conversion to dollars for you, and E-GoveLink isn’t the government but a front end for paying fees and tickets. So technically the government isn’t accepting payments in Bitcoin. But the user does in fact feel as if they are paying in Bitcoin to the government.

    From the user perspective, they feel they can pay fees and tickets with Bitcoin, as long as their local government happens to use E-GovLink for collection services.”

    By that logic you can pay your parking ticket in heroin, after all what is an extra step in your process (SR->bitcoin->E-GovLink).

    To put it differently, what you are suggesting isn’t any different from any other three party payment arrangement. You could just as easily cover that ticket in Beanie Babies or Pogs via eBay.

  50. Even tough BTC has inelastic supply, latching onto existing currencies makes it very elastic trough float. This makes it sustainable and proves Yannis economic reasoning incorrect but if BTC could become single currency in a country, everything Yannis wrote would destroy it in short order.
    Latching onto existing currencies through float it defines its usage; is it store of value or exchange value. But those two uses are opposing forces onto BTC reflected in the float.
    As a store of value it destroys its exchange value and as exchange value makes it more attractive to speculate as store of value which in turn destroys its exchange value.

    Fiat currency is useful as exchange value which is important for economic activity.
    The best storage of value is government securities. And even better are those securities that are insured against PCI.
    Mixing those two in a currency is sure way to reduce economic activity as i explained above.

    This is how gold, which has both of those forces atacking each other from the inside, led to abandoning it as exchange usage and switched to using Treasuries for two purposes.

    I find that using currencies as a store of value is described in the Bible and presented with the story of Golden Calf as treating money as a store of value. Moses destroyed Golden Calf and ordered forgivness of debt every 7 years. If the money has store of value then forgivness of debt becomes impossible. But forgivness of debt crystalizes the value of money solely as exchange value. I find that Bible writers found that story crucial to the developement of humanity and ordered to be included in the main everyday prayer in Our Father by Mathew when talking about forgivness of debts.
    Yes, i found Bible as a very practical recomendation.
    The real values are goods and services, currency should be only nominal value used for exchange for easing economic activity.

    BTC also has a use in exchange value for across the border activity which is also reflected in float against those currencies, but it would never be able to manage peged currencies barricade on a large scale since as a store of value is opposing such activity making it less useful then the present systems.

    BTC can be used as long as it latches onto existing currencies with float.
    If it forces politicians to abandon pegging currencies one to another, it would be of a huge benefit to society at large. Maybe it could force EU politicians to abandon their tribal associations and make them cooperate in problem solving.

  51. As far as i can gather, it seems that computing power needed for mining and transactions in BC is going to take a huge bite out of available world computing power much before the system reach the limit in total of 21 M BCs which some are predicting will be in next 50-100 years.
    Progressive growth of computing power needed for mining will kill it long before some other meassure by governments or economic deficiencies. I think that major growth in the system comes from investing in mining but the problems with computing power will be insurmountable.

    Would that not be a huge waste of electricity and computing power? Both things we need more and more for productive purposes.

  52. Well the very political Euro fiat ( the modern elite have built political structures which they do not call political) will cause the total collapse of the European entrepot economy.
    Indeed the wider European entrepot economy has already died……the German operation was all about turning the European hinterland into a energy surplus area for its global mercantile operations.
    We are no longer a Imperial market for cars and other good stuff , we are a imperial salt mine.

    Of course it is not a fiat currency in its truest sense but a bankers & corporatist plaything with some fiat characteristics.

    You see because of the Euro very little primary production now occurs.
    It is all added value crap.
    But you can only add so much value / extract labour value until the system breaks down.

    It will not be without its good moments.

    I hope to see the end of Ryanair in my lifetime.
    Its dark existence started at the beginning of the end of the credit hyperinflation around 1986 ~
    It will die at its very end.
    Much like its Irish sea (Dublin to London) operations – it will simply run out of customers with money to spend……..
    I am keeping a good Malt for this moment in time – if I live long enough it will be a very special occasion.

    Two neo liberals walk into a Irish bar……

    http://www.irisheconomy.ie/index.php/2013/04/23/financieel-dagblad-on-ireland/

    What a fucking pox.

  53. Great article; in the past, I’ve been very interested in the gold standard and understanding the faults in it, and in extending that knowledge to bitcoins, and this article does a great job putter together much of what I’ve learned in a much more succinct way, and providing additional very interesting insights.

    I find particularly interesting, the Greshams dynamic between speculative vs transactional use of a currency; interesting the variety of ways Gresham’s law can be applied.

    I like too, the emphasis on the inherently political nature of the money supply; that itself is a useful and strong argument, that the only right way to manage the money supply, is through government control (with money creation being put to use for public purposes).

    Most argument on that topic merely revolves around whether it is possible, and then only as an optional alternative; not that it is the only right/democratic way to have it.

    Makes me wonder how some of Bernard Lietaer’s ideas on multiple competing currencies might work out (which I’ve not yet looked at in detail mind), without either being partially undemocratic or unstable.

  54. > Unfortunately, proponents like your self do it major injustice when basing their defence (of bitcoin) on economic arguments that are laughably flawed (e.g. that bitcoin is not deflationary because it is not a monopoly currency!).

    Well, I guess then we’ll see who’ll have the last laugh, Mr Varoufakis ;)

  55. Bitcoin is not a monopolistic currency. Expansion of monetary supply, if necessary, can also come from competing (crypto-) currencies which in fact already exist.

    Bitcoin is not “deflationary”, because it is not an enforced monopoly money. It is just an asset. It follows supply and demand. So you could ask even today, why should I lend someone my dollars, if I can buy bitcoins instead? Because they’re so much gonna rise in value? Simply because bitcoins exist, you would therefore want to charge high interest even on dollar loans. Or would you? No, because, as we see, the value of Bitcoin fluctuates; it’s just another risky asset, just like a stock. It is therefore not deflationary. And even in an economy that is dominated by the Bitcoin currency, it will have to compete with other assets that may promise even higher return. So the average interest rate in an economy that is not dominated by a central bank would have nothing to do with the mainly used currency. It will rather be the median of any assets out there.

    Also because Bitcoin is not monopolistic, everyone can set up a competing currency if they’d like to have different parameters or more “fairness”. The concept of crypto-currency was very new back then. Satoshi (or the early adopters) had no other choice than to mine the first coins themselves in order to bootstrap it. If they had not done it, or if they had publicized the concept widely first and waited, they would not only have met skepticism (bitcoins were practically worthless back then, the concept would not have been understood), but also someone else would have started mining instead, so it wouldn’t have made any difference. It was an experiment, a proof of concept. Turns out it was successful.

    Now if there is a significant envy of early adopters, some people will have to get together by their own initiative (i.e. not expect a government to do it for them) and start a competitor with the goal of more equal initial distribution. The concept of crypto-currency is more widely understood by now, so maybe they will be successful.

    Anyway, so why does Bitcoin (or a similar crypto-currency) act like gold? Because only by essentially simulating a commodity type of money is what can enable a form privacy adequate enough for organizations like Wikileaks.

    Credit-/promises types of online currency exist as well: see http://en.wikipedia.org/wiki/Ripple_monetary_system – such a form of money is very empowering, creates adhoc-liquidity on the spot where it’s needed from the bottom-up (instead of FED printing it and pouring it into wall street hoping it would trickle down). But this “soft” kind of money carries more risk (a chain of debt may collapse), and enables less privacy as it’s ultimately backed by a web of trust, and all balances of your profile would necessarily have to be public. A treasure chamber for data mining.

    So both approaches to a money have advantages and disadvantages. But they can exist alongside each other in parallel very well. In fact this yin-yang relationship (also see http://www.scribd.com/doc/34641415/The-Monetary-Blind-Spot – and yes, Bitcoin would be “yang coherence”) may be the ultimate monetary theory.

    • Bitcoin is an interesting experiment that will teach us much that we do not know. Unfortunately, proponents like your self do it major injustice when basing their defence (of bitcoin) on economic arguments that are laughably flawed (e.g. that bitcoin is not deflationary because it is not a monopoly currency!).

    • @hartzmeister
      So, following your logic, since I can buy from the US company amazon.com goods with my Euros, the US dollar is not a ‘monopolistic’ currency in the US and the supply of Euros by the ECB expands the monetary supply in the US. Some logic…

  56. Another technical limitation that seems to be overlooked are the “miners” ability to process transactions in a timely manner if Bitcoin gains widespread acceptance. The term “mining” is a bit of a misnomer since you are really doing is processing the transactions in a way that is intentionally slow and energy-intensive, and the more you process the better odds you have of being allocated new Bitcoins in a lottery-type arrangement.

    The currency started out being processed on CPUs, which were slow and not well suited for the task. That quickly transitioned to processing on GPUs which are much better suited for that work from both a power and performance standpoint. The final technical jump are ASIC systems which are highly specialized chips that only process the Bitcoin algorithm at a speed and efficiency that dwarfs the GPUs. At the moment, GPU mining is the standard with only a scattering of the ASIC systems (but steadily increasing in the goldrush for the next great tool). After that point, there are no more clear jumps to be had; just incremental improvements with small gains.

    Which gets us to the problem of network capacity and transaction latency. Back when Bitcoin was still relatively new, you had a few brick and mortar places that decided to accept it. Even during the initial rush of interest before there was a large volume of exchange, it was common to see 3-5 minute delays before a transaction was verified (sometimes shooting up to 15 minutes). Imagine trying to handle that delay in a in-person transaction for a fast food restaurant; either you make the person stand there with their food getting cold waiting for the funds to transfer, or you roll the dice and hope you aren’t getting ripped off. At least with credit/debit cards you get immediate notification if the transaction is delayed.

    There has been steady growth and advancement in “mining” performance and capacity, but that growth is not sustainable. Like I mentioned earlier, those ASIC systems are the last big jump to make. There has been a consistent string of miners going bust because the payout doesn’t even begin to match the energy costs. That process will continue and naturally consolidate that processing power in to the hands of people who can afford the expensive ASIC systems and live in an area with low electric rates. If that consolidation goes to its natural conclusion, you will have one person or a small group of people essentially able to hold the whole system ransom.

    The losers in the mining game will also be taking out big chunks of processing capacity as their systems go dark, incurring more transaction delays. Assuming there is increased growth in the volume of transactions, this spells big trouble for the systems ability to process transfers in a timely manner. Sure, there are band aids like attaching fees to the transaction to give it a high priority, but that can only go so far. The only real solution would be to process those transactions through an intermediary exchange (Bitcoin Visa, essentially) which abstracts you from the slow block chain processing. But this is creating a central bank which opens the door for Scary Regulations, not to mention the risk of the exchange being hacked or being crooked. Magic: The Gathering Online Exchange (Mt.Gox) already processes ~70% of the Bitcoin transactions and is in a position to manipulate the market for their gain if they are so inclined.

    It is amusing that the Bitcoin community seems doomed to relive hundreds of years of failed monetary policy, when taking a semester or two of Econ classes is illumination enough to see the deep, crippling flaws in the thing. I am convinced that by the end of it, the community will be screaming for centralized banks, injections to the money supply, and insured personal accounts once they grow tired of beating their heads against the wall. Or it will just be abandoned, because why go through all that work when Dirty Fiat Currency already addressed those problems years ago.

  57. I think you pinpointed some excellent points on what are the possible weaknesses of using bitcoins in large scale. #1 concern is always security. The bitcoin platform has some impressive security characteristics. So far, there hasn’t been a case of a forged bitcoin (double-spend), although that comes at a cost (transactions take more than 10 minutes to be verified). That’s an advantage over paper money. #2 concern is that bitcoin wallets can easily be stolen (it’s just a file). Many bitcoins have already been irrevocably lost by accidentally deleted files. However, if bitcoin takes off as an online currency , one can envision secure digital flash drives that provide a layer of physical security. In any case though, it’s not less secure than cash paper money in that sense.

    I’m not sure however why “there can be no de-politicised currency capable of ‘powering’ an advanced, industrial society”. People trust bitcoins as a store of value because many other people do. Sure, there is no organized state with military etc backing the currency, but people bet on its decentralized democratic nature and so far it works out. One can even assume that this kind of trust is less volatile than the will of central bankers. In theory, bitcoin value would also be hard to manipulate and to speculate on it , however as you point out there is an “aristocracy” that can currently maliciously manipulate the currency. This is a clear artifact of them being the early adopters of the currency, and it is a real problem for bitcoin.

    Finally, don’t forget that bitcoin is just one of the many possible peer2peer currencies. In the future we will probably have many of them, with fluctuating exchange rates. New currencies are already addressing the flaws that you mention, providing an even field for all newcomers.

    I just don’t see why it’s not possible to have bitcoin as the most popular currency, and your article doesn’t really explain why. Just because it hasn’t happened historically (because of lack of relevant technology and sociopolitical issues) doesn’t mean it can’t.

    • Currency is not the same as money. You seem to use the term currency both for currency and for money. You’ll find some excellent discussions of the distinction if you care to google it.

  58. Just out of curiosity: Does anyone here have or has used bitcoins?

    I bought 30 and then later another 70 bitcoins, just to have some skin in the game and to have everything set up in case the capital controls also on other countries. I did not want to learn how to use and where to buy at a point in time that would be too late.

    No, I have not made any money and did not lose any (yet).

    • Looks like noone actually tried it out. Everyone is just talking about it…

  59. It should be noted that bitcoin denominated goods are not the same thing as goods available for purchase with bitcoin. The former is virtually non-existent for obvious reasons. The latter is growing rapidly.

    The medium of exchange comes first. The unit of account will come much much later.

    Think about the consumer for once. Bitcoins save you money, they save the merchants money too. They dis-intermediate the credit card and wire transfer houses; they do this regardless of the exchange rate at any given moment.

  60. To helsworth: Wars are being funded by inflation. It is the socialist approach to money (fiat) in combination with channeling of what populations perceive as truth (propaganda) that makes it possible to engange in large scale warfare.

    In other words, without central banking, all the wars of the 20th century (and the ongoing ones) would not take place.

  61. Your article exposes a certain “denial”, most probably caused by your predetermination of “how the world should work”. As my understanding grew, I came to realise that it is exactly this notion that causes all the deranged phenomena of modern economics. Too many people believe they know what is best for everyone else.

    Bitcoin is meant to be out of control, and can serve as a means to bring mankind into a natural state of affairs, eliminating all the points of potential failure integrated in the current systems. Eliminating the need for “trust”. Did you check bitcoin’s capabilities regarding contracts, smart property, inheritances etc?

    It is a fact that the “nation state” model is collapsing. Bitcoin is a way out of the turmoil for those individuals that seek to live their lives creatively without the miasma of politics in their lives. As long as such people exist, central planners will be facing unexpected consequences to every action they take “for the common good”. This is no fiction. It is how things have been working out throughout the 20th century – up to now.

  62. Pingback: Yanis Varoufakis: Bitcoin and the Dangerous Fantasy of ‘Apolitical’ Money – The Doctor News

  63. Pingback: Yanis Varoufakis: Bitcoin and the Dangerous Fantasy of ‘Apolitical’ Money « naked capitalism

  64. I’m unsure why Bitcoin is considered deflationary – the current rate of inflation is 12.5% and will remain at 12.5% until 2016 at which time it will halve for the following 4 years.
    The price of bitcoin is increasing becasue the number of new users is increasing faster than Bitcoins are being mined – but this can’t continue forever due to the limited number of people on the planet.
    Once the number of users stops growing, bitcoin will be inflationary until 2140. For the next 30 years or so the rate of inflation will be equivalent to the inflation rated of most national currencies.
    It’s only the growing user base that creates the impression of deflation – presumably this is by design as a mechanism to bootstrap the currency and rapidly increase user base.

    • Another basic misunderstanding of what deflation means… A request: Before using economic terms (like deflation), please look them up.

    • @yanisv
      “The term “inflation” originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term “inflation” to refer to a rise in the price level.” Wikipedia

      I think my meaning was clear – bitcoin isn’t deflationary in the long term once the user base stops growing (whichever definition of inflation you prefer to use).

  65. More businesses are accepting Bitcoin. Because Bitcoin increases in value, it encourages saving (often referred to has “hoarding”). Of course, if your savings are not being inflated away artificially, then you can in a few years buy say a car. Or a house. Or pay for college.

    Or invest. Invest money. Money you saved.

    But in the Keynesian take on the world, we don’t want people to save, i.e. have resources that they might use as they see fit. We want them to borrow. From the bankers. And return what they borrow along with interest from what they earn.

    The technology sector has been in “crippling” deflation for 40 years. If falling prices prevent people from buying iPhones and computers, it isn’t any effect I have ever seen in the real world.

    At the end of the day, do you want your savings to be worth more at the end of the year? Or quite a bit less? The value does exist somewhere in the economy. So another way to view this is whether you want the value of your money? Or should the bankers get it?

    And a final note applies. Gresham’s law only applies when currencies have mandated exchange rates. Then of course, foreign countries will demand the better currency for pay, while providing the poor currency in exchange (as its value is set by law). Thus Bad Money drives out (to other countries) good money.

    Where exchange rates are allowed to float, Thier’s law applies. Good money drives out bad. That is because the value of the poor money falls as the good money is desired. The inevitable “Hot Potato” game, where everyone converts to the good money as fast as possible to maintain as much value as possible leads to the quick demise of the bad money.

    It really is that simple. Who in their own self interest is going to want to hold currency that loses value? And at 2 percent inflation each year (the target of the Federal Reserve) amounts to burning nearly a trillion dollars of value from anyone holding dollars. Every year.

    • It is clear that we are inhabiting different universes. Yours is one in which Keynes was inimical to… saving. One in which savings happens when one holds an appreciating currency. One in which iPhones cost less with every year that passes. One in which you cannot distinguish deflation from prices reductions due to increasing returns and falling average costs of production. Etc. etc. In this weird universe of yours, bitcoins may seem a splendid alternative currency. Alas, permit me to say, yours is a fictitious universe utterly disconnected from the one we (including your good self) live in.

    • “Alas, permit me to say, yours is a fictitious universe utterly disconnected from the one we (including your good self) live in.”

      Actually, I would say that the world where individuals desire a currency that loses value over time over a currency that holds value or increases in value over time … that is the fictitious universe utterly disconnected from the one we (including your good self) live in.

      Just answer the question right there at the end. Who would pick dollars over the last four years for holding their savings over Bitcoin? And what if Bitcoin continues to rise in value?

      Even if Bitcoin slows to only a 2 to 5 percent increase in value per year, where can I get interests rates like that for dollars that doesn’t also come with all kinds of risk and limits on access? That’s 4 to 7 percent for dollars (just to make up for CPI).

      And I can hold my Bitcoin in a ridiculously secure, 256 encrypted account, beyond the reach of anyone at all. All I have to do is maintain a private key. If I had 1 million in a bank account, I could lose all but 250K of that. Or get a Cyprus hair cut.

      There is 30 Trillion dollars out there in off shore accounts for lots of rich people. If even a few of them realize that Bitcoin can hold that value more securely, I don’t think your arguments about the need for central banks is going to mean squat.

      As I have said before, I don’t really know how the economy would actually react to a powerful and successful Bitcoin. But I don’t see how anyone is going to stop it from coming to be.

    • A successful takeover of fiat currency by bitcoin or any such currency will be impeded by the lack of transactions demand for it. If its value versus the dollar continues to rise, it will attract much speculative demand. But if prices of goods and services face a deflationary dynamic, as they will (during a period of an expanding bitcoin economy), the ratio of speculative to transactions demand for bitocins will skyrocket (as happened recently), thus giving rise to a bubble whose bursting will be the end of bitcoin. Don’t say you weren’t warned!

    • Hi Paul,

      Can you please explain your take on Keynesian economics as what you have written in your comment conflicts with my understanding re Saving & Hoarding…

    • Alax68: “Can you please explain your take on Keynesian economics as what you have written in your comment conflicts with my understanding re Saving & Hoarding…”

      I don’t think that Keynesian economics is entirely wrong about how economies can get into a pattern where saving impacts some economic sectors. The biggest reason to save is to be able to buy later. Saving is worthless if you never intend to use your savings, ever. Why you might as well just burn your money in that case.

      If the inflation of money exactly matched the increasing number of transactions, then the cost of all goods (including the basket of goods from which we compute the CPI) would fall. Why? Because just like in the Long Depression of 1873-1879, productivity increases are lowering the real cost of producing goods.

      This points to the fact that the real inflation rate ignores productivity gains. The common statement that medical costs are rising faster than inflation, and education costs are rising faster yet is a lie. This was actually predicted in the 1960’s by William J. Baumol and William G. Bowen in the 1960s. It is called Baumol’s cost disease. They predicted large drops in costs of goods, but medicine would have labor costs that resist drops in cost. Education has fixed costs nearly resistent to productivity gains. But if you forget productivity, then goods are flat, and medicine costs are rising, and education is out of hand.

      And it is all a lie.

      The problem we have in our economy is that we have impoverished most of the population through a systematic and understated policy of inflated money. It didn’t have to be that way, but it is.

      Expecting Bankers to “do the right thing” is like expecting me not to eat that donut at work.

    • Paul
      You have a very good understanding of microeconomics, but it is wrong to aplly it to macro. All what you say is true on the level of a company’s and individual concerns but all it is conncted only with turnever cycle. There is no issue of sloww inflation and slow deflation in one turnover cycle which is few months on average.
      The conclusions are copletely different for macro which is one level up, from the view of national accounts.
      That is why you did not understand Keynes and position of saving. It is about change in saving that matters not savings per se.
      Have you heard about Paradox of Thrift? Spending = income. When i or you save it is good for us, but when the whole nation decides to save more all at once it is destructive. because they force total income down and debt stays the same making it impossible to pay the debt.

      You are just confusing micro and macro.
      Real effect of actionsof all is not equal to the sum of all actions.

    • A success does not necesarily require lots of transactions! Greham# s law anyone? It is the bad money that will be transacted like crazy, because people want to get rid of it, while they keep the good money for storing value!

    • Jordan from Croatia: Saving

      Let’s assume I am wrong about the evil nature of saving. All my points about the dynamics about the Dollar vs Bitcoin still apply. I don’t know how the economy will react (and frankly, I don’t think economists that can’t predict the major economic shifts over the last 20 years do either.

      What I do know is that it is hard to listen to people say Bitcoin can’t succeed because its price is rising too much. (i.e. nobody wants it because too many people want it.)

      But thanks for actually listening to what I am saying, and not ignoring the central points I have tried to make.

  66. Most of the fiat money I have seen in my lifetime has extracted net capital.
    I.e. its not really pure fiat in its true sense – its a variation of double entry money which has captured the fiat system.

    I am not against fiat money – far from it.
    I am also not against holding gold as a store of value against lets say a corrupt military fiat system but not loaning it out at interest.

    But whoever has the money power in Europe is probably the darkest force that has ever walked this planet.
    How could a group of humans conspire so hard to control for so long………………

    My mind sometimes has difficulty grasping the ancient evil of it all.

  67. Maybe the use of this digital payment system can be partially traced to the child-like wonder at having new (untested) forms of payment (like candy coins, marbles, rocks, sticks, etc.) and the resulting adventure that you take when you go to use it.

    • Being divisible to such small amounts means that Bitcoin can inflate as needed to denominate transactions within the economy simply by increasing in value. It isn’t a perfect system, and at times prices might be higher, and at others might be lower than the money supply can support. But the adjustment is done not by some “all knowing” central bank, but by the simple process of setting prices by merchants.

      And the “new value” would fall on everyone! According to their wages and savings (think dropped from helicopters). All done buy simply raising in value. And people that can afford things will, as they feel comfortable with their savings, buy things. Bitcoin is in the middle of a “land rush”. But a “land rush” doesn’t last forever, and it will stabilize.

      Imagine a world where computer goods REALLY drop in price. Consumer good! Even Medicine!

      Imagine Educational institutions whose foundations can actually support services like colleges, Endowments that do not evaporate! Where year after year expenses fall!

      People will be able to take wages in dollars, at least for many years. But eventually, Bitcoin might be preferred. And wage adjustments may have to be something people live with. But wages are always sticky, and the value of wages will rise, reversing the income gap.

      Currency wars will end. You can’t debase your currency (cutting wages of your people) to attempt to increase exports (to increase profits to investors and banks). Everyone world wide can take Bitcoin payments. And they are the same world wide.

      The federal reserve also inflates the money supply. Using figures on the economy that are admittedly inaccurate (they frequently adjust figures 3 months and even 6 months after the fact), they manipulate interest rates, provide low-to-no cost loans to various large actors (financial sector companies) at various rates to maintain the “money supply”. By that, we mean the value of money held by many people, and their wages, are reduced in value by some amount that approaches the target value for inflation. For the next many years, that target is 2 percent.

      Managed Inflation by the central banks has produced a gradient that has concentrated wealth for 40 years (as we see with the income gap) into the hands of a very, very few. Even most of the 1% and near 1% now find it difficult to afford college for their kids.

      Bitcoin at the very least offers someplace to put money where it cannot be inflated away. Value diluted by giving for nothing money to favored economic actors. The result may very well turn out badly. I really don’t know. But at the individual level, it is very hard to understand why anyone would hold to the current system of devalued money year after year and reject money that gains in value.

    • Your first sentence of your last paragraph is the only one that has a sound basis in economics. As long as people use it for speculative reasons, it value will hold. Everything else you write is predicated on a fundamental misunderstanding of basic economic concepts, I am sorry to say.

    • “Everything else you write is predicated on a fundamental misunderstanding of basic economic concepts, I am sorry to say.”

      That is quite a “drop back and punt”. I can’t support my argument, or even understand what your opposition is, if you just say I am wrong and run off the field.

      Do you *really* believe merchants and customers prefer to trade with a currency that loses value over time? I think trying to tell a rich person that they should hold their wealth in dollars rather than a currency that appreciates in value is a loosing proposition.

      Like Luke trying is Jedi Mind tricks on Jabba the Hutt. Any sane person would just laugh wickedly at you and say, “Your Jedi Mind Tricks won’t work on us!”

    • I take your point and I apologise. But, having said that, time is too short and I just do not have the time to correct basic errors.

    • “I take your point and I apologise. But, having said that, time is too short and I just do not have the time to correct basic errors.”

      Well just address one: Why would anyone want a currency that loses value over time, if they can have a currency that gains value over time?

      Even if they choose badly for the economy by going for growth in value, I hardly see how you can keep insisting that people won’t make that choice.

    • Two reasons: First, because they can pay their taxes in it as well as a great variety of ‘stuff’ that is unavailable in bitcoins. Secondly, because if you are a producer and you need to buy raw materials (in bitcoins) at one price but then, by the time you manufacture the final product and take it to market all prices (in bitcoin) have fallen, your margin has shrunk and you wish that, instead of this deflationary currency, you bought and sold at an inflationary one. Economics 101…

    • “Two reasons: First, because they can pay their taxes in it as well as a great variety of ‘stuff’ that is unavailable in bitcoins. Secondly, because if you are a producer and you need to buy raw materials (in bitcoins) at one price but then, by the time you manufacture the final product and take it to market all prices (in bitcoin) have fallen, your margin has shrunk and you wish that, instead of this deflationary currency, you bought and sold at an inflationary one. Economics 101…”

      Taxes: You hold your money in the appreciating currency, and convert to pay taxes. (That is what my link to E-GovLink does for you in one step! You pay in Bitcoin, it is exchanged into dollars, and those dollars are handed to government.

      Producers: Yes, if Bitcoin is rapidly increasing in price, they could very well make more money holding Bitcoin than producing a product. If too many people quit producing products, the price of products go up (less supply, more demand; Economics 101). There is a point where deflation is a factor reducing the numeric number of Bitcoins a company can make. But the numeric number of currency is meaningless. It is the value of the profit that matters in the end (despite the psychological pump a person gets from bigger numbers).

      But most likely everything in the near future will be priced in dollars. Holding Bitcoin becomes another place to increase value, because (converted to dollars) your scenario increases the number of “dollars” at the end if any value held in currency by the company is held in Bitcoin.

      So again, very simply: Why do you believe people do not want to have hold a currency that increases in value?

      And just another observation: Bitcoin “accounts” amount to free “checking accounts” that support direct deposit from employers, customers, suppliers, and support payments to the same. No hold times, no overdraft fees, no chargebacks. Full International support.

      Why would one prefer credit cards and bank accounts? Particularly for funds being kept for some period of time (say like a CD, or an Emergency Fund)? The only issue today is liquidity, but let’s assume demand eventually (this year) solves that issue please. Why wouldn’t people at least convert to Bitcoin and pruchase? Then the Merchant can quickly (or not quickly [arguments above]) covert to dollars?

      Basically, you haven’t explained why people WANT to spend more money for banking services, for less reliable services, for delays in processing, for added risks (charge backs, bad checks, fraud), when a very inexpensive alternative provides solid services, is free, requires no contracts, and utilizes a currency that pretty much insures your “holding cash” gains in value as others figure out the advantages and switch over?

      Why do you believe people want to pay more? And have savings depreciate by design and policy?

    • @Paul Snow

      You said; “Being divisible to such small amounts means that Bitcoin can inflate as needed to denominate transactions within the economy simply by increasing in value.”

      Unless I’m misunderstanding your comment, using the term “inflate” is a bit inaccurate. As you know, when the money supply is inflated the money already in circulation loses purchasing power. This would not be the case if bitcoins were made more divisible.

      I’m sure this is an oversight given the quality of your comments. Keep up the good work!

  68. Yanis, you don’t need to go to an account of concentration camp practices to illustrate your point, you only need to go to a contemporary prison in the West in order to see one or more versions of Radford’s practices in operation.

  69. @EUdSSR I don’t think Yanis’ article is an attempt to ban bitcoin or warn people against it. Just his own analysis on why it isn’t the promise land many people hope it to be and moreover why it can’t replace existing currencies.

    People are free to use bitcoin as they are free to use gold.

  70. In an economist’s point of view… you are very correct.

    As far as all the other aspects are concerned… I couldn’t agree more!

    What is this frenzy with people needing to believe in some per-se value within each thing? As if one shouldn’t trust the human nature at all… then what should we trust, self-regulatory bit-coin?

    This is like joining the head of a “fascist” to the body of an “anarchist” only to create a little “monster” preaching stability while serving injustice. Then again, I suppose peoples’ cry for “justice” has often armed some other people’s hand to deliver the exact opposite thing. Isn’t that the case with the pre-War Germany?

    PS: I really look forward to that day where bit-coins, all of a sudden, stop reproducing themselves. Wow! What a great way to avoid inflation, let us all deflate instead!

    • Why don´t you allow others their freedom to choose to use a deflationary currency as they allow you to use whatever you like?

    • EUdSSR: When we look at how the US imposed a dollar standard on the world, we see that Central Banking doesn’t exist because the world chose it. It exists because it is imposed upon us.

      Choice in the end cannot be allowed, because nobody would *choose* to accept a currency losing value (even slowly) if another choice that doesn’t lose value is an option.

    • Alex
      I had a good laugh, you gave a great picture of the bitcoin.

      Paul
      Central banking exist because it is the best atempt at solving the problem from an earlier era. All solutions discover a new problem ussually smaller then previous ones, so does the FED as soluiton.

      You talking about currency loosing or gaining value, do you think that can be controlled? Do you think that nobody before you came with such idea?
      Do you think that nobody before BC tried to solve such nonexisting problem?

    • Jordan from Croatia: “You talking about currency loosing or gaining value, do you think that can be controlled? Do you think that nobody before you came with such idea?
      Do you think that nobody before BC tried to solve such nonexisting problem?”

      Central banks claimed they could maintain the value of money (i.e. value could be controlled). They failed, so no. I don’t think that was possible.’

      I do not think my ideas are unique.

      Now I don’t understand what “nonexisting problem” you are referring to. Bitcoin provides inexpensive ledgers of accounts, and transactions between those accounts, protected by military grade encryption. That is all it does. It eliminates most of the overhead from payment processing, banking, accounting, and removes most of the risk of counterfeiting, payment fraud, and greatly reduces the risk of identity theft.

      The currency is set up such that value cannot be sucked away but unwarranted inflation. What inflation exists actually pays for something, the running of the Bitcoin ecosystem.

  71. Not to mention the “0-th” flaw:

    The probability of any State coming to accept bitcoins to discharge tax liabilities is for practical purposes 0.

    As you say, money cannot be “apolitical” if it is to support a large, developed economy.

    I would say that one of the biggest dramas of human history is conceiving money as a “substance” rather than a special type of information inside a social system. Very much like the idea of “caloric” prevalent to the beginning of the XIX century in Physics: “heat being a substance rather than molecular vibration”.

    • Why not let the users (market) deide which king of Money they want to use for what. Maybe they would be more than happy to pay their taxes with their rapidly devaluating Euros!

    • @EUdSSR

      See, that’s the good thing with fiat money: if you think about it, there is no king.

      However, I suspect that you might disagree (and since there is absolutely no-point in giving an MMT lecture here) let me just point out that I’d prefer a real person as king rather than some kind of conception or material.

    • @paul

      The egovlink you provided only stipulates that the particular company which sells software solutions to local governments have integrated bitcoin payment methods to their applications thus allowing local goverments to accept bitcoins indirectly through a payment agency which will accept bitcoins and provide them with dollars. It does not stipulate that in fact any local government has already decided to do this. So, in my view, your statement is incorrect on two levels.

    • Though I guess I should point out E-GovLink does a conversion to dollars for you, and E-GoveLink isn’t the government but a front end for paying fees and tickets. So technically the government isn’t accepting payments in Bitcoin. But the user does in fact feel as if they are paying in Bitcoin to the government.

      From the user perspective, they feel they can pay fees and tickets with Bitcoin, as long as their local government happens to use E-GovLink for collection services.

    • NikosR: Yes, this is a company that is doing the transfer from Bitcoin to dollars, avoiding government from having to deal with Bitcoins. Bitpay can work the same way.

      But I work with state and local governments. I know that E-GovLink can’t provide this service unless the governments involved at least do not protest. If they prohibit the service it will go away.

      As long as the service exists, from the citizen’s point of view, they are paying their fees and tickets with Bitcoin. And remember, the point is that citizens can’t pay their taxes with Bitcoin. If companies jump up and provide the transition quickly and painlessly for people, than by any pragmatic measure, that is what they are doing. Holding Bitcoin, and paying taxes and fees and such with Bitcoin.

    • @paulsnow
      What you’re saying is no different than holding any real (e.g. pork bellys) or perceived asset (e.g. a .dot com stock in the 90s) and selling it in the market to obtain dollars to pay your taxes. Or holding a foreign currency for that matter. It is transactionally simpler but not different in nature. That is not the same as saying that bitcoin is acceptable by government to pay your taxes. Hope you can spot the difference. And it doesn’t change an iota in Yanis’ arguments.

  72. Are you afraid that the socialists favored tool of fooling the public is going to go up in dust? Why else be afraid of competition? Competition is good for the consumer, in all areas, also money!

    And as far as “the flaws” go, aren´t they very similar or identical to the flaws of paper/fiat money and other means of exchange?

    • If competition is really so good, why is the whole of mankind’s history littered with wars and massacres and hardships triggered by people competing against other people at the behest of their elites, who wanted to stay dominant and who wanted to compete other powers?

      “The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of the evil. We see before us a huge community of producers the members of which are unceasingly striving to deprive each other of the fruits of their collective labour…I am convinced there is only one way to eliminate these grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals.” Albert Einstein

    • Why do you want to force people to use a specific type of currency? Do you want to prohibit bartering too?

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