Topic: Bitcoins will die – an economics standpoint and possible solutions - page 2. (Read 3775 times)

Bitcoins had quite a frenzy about them recently, being mentioned in mass media and their value increasing. However, they will die out even without governments etc. Intervening or clamping them down. Let me explain:

Bitcoins are not money. They are a (perfect) medium of exchange. Their properties are similar to gold: scarce (finite amount), divisible, stable, low volume / easy transport, secure. So they only fulfil two properties of money: exchange and storage of value. But they lack CREDIT.

Fiat however, is born out of credit (each dollar/euro/... cash or deposit is mirrored by an equal amount of debt). The next is zero. Money is debt. The debt money (fiat) arises from property rights: somebody needs cash so he will pledge his property against a loan. The bank demands interest for giving up her property right on the money (a compensation for not being able to use the money, NOT because of the credit risk). Fiat systems thus have inherent interest in debt contracts. This interest has not yet been created, in order to have the interest paid back, new money must be perpetually created. Obviously, over the course of many years, the fiat system leads to an unequal distribution of net worth, as people owning property earn interest and people needing money pay interest.
The advantage, however, of the fiat system is Credit: only Credit enables economic trade, investment etc. Everybody who started their own business or wanted to buy a house knows that.

But credit comes into place with property rights – the only conundrum is the interest which is inherent to it. If we could remove the interest, we could go towards more equilibrium and a more stable and sustainable economy.

Without credit, we would live in a mere barter society. That’s what the bitcoin world is at the moment – a bartering club.

Unless bit coins allow CREDIT, they will just be a scarce barter medium and will end in an awful way:
Due to their scarcity (and the relatively huge amount of fiat in circulation), a bubble is already building: many people buy bitcoins without the intention of even use them for barter. Easy to see, as mtgox a “exchange” is the biggest bitcoin accepting site. They are now valued at ten dollar, with about 8 million in circulation. I would not be surprised if they go to 100 dollars due to their scarcity and similar properties to gold. They are a highly deflationary medium.

Eventually, the bubble will burst however, as people suddenly find themselves on the selling side and convert their bitcoins into physical goods or fiat. (the velocity of money rises, everybody wants to get rid of them, prices of goods relatively rise, the currency plummets). This would lead to a sad end to a nice experiment. Just like with Tulipmania, Dot Com Bubble etc. People would lose a lot of fiat and staying away from alternative currencies for a long time.

So what can be done to avoid it?

1)   Bitcoins should not be completely scarce. A finite amount of bitcoins makes them highly deflationary. Similar to gold, a controlled mining should be allowed even after the intended stop, so their availability grows with usage

2)   Credit needs to be allowed and facilitated: As we don’t want to have another fiat experiment, bitcoins would be ideal to try true interest free credit:  please take a look at the following interest free credit/banking model which could be easily setup for Bitcoins
http://jak.aventus.nu/download/Uppsatser/MARK_BURTON_DISSERTATION_2.pdf
http://www.feasta.org/documents/review2/carrie2.htm

Thoughts / critique / discussion welcome!
Guy