Topic: Pros and Cons Of A Country Doing "Bitcoinization" - page 2. (Read 1436 times)

Bitcoinization is not a bad idea since it can be done just like dollarization. But there are conditions that we need to do so bitcoin can be qualified to be used to all country as a replacement of local currencies. The condition of monetary circulation is the first thing and that means that the number of bitcoins in circulation is not enough to  cater the number of citizens all around the globe. Hence to make it possible we need to increase the number of bitcoin in the circulation.

I live in a country (Argentina) which has done a very similar thing to dollarization (the so called "Convertibilidad", a 1:1 peg, in the 90s). At a first glance, it went well with a short-lived boom until ~1994 that after a short recession in 1995 continued later until ~1998, but the outcome was a severe distorsion of the economy in disfavour of the industry (and in favour of agriculture and services) which lead to a severe crisis in 2001/2 and then an abandonment of the 1:1 peg. So, in our case, "dollarization" failed.

With a "Bitcoinization", I think we can discuss two variants of it:

1) a Bitcoinization of a small country without mature economy.

Probably, it would lead first to a "boom" because if the State had to buy the necessary Bitcoins to be able back the national currency (to change legal tender amounts to BTC). Although I have my doubts that the nationals of the "Bitcoinized" country could profit from that because speculators will price in this bullish event very early. But then, even if the country could profit in the first phase, volatility would be probably still too high for the country to benefit from it. Because, as the economy of a small state probably couldn't supply most goods and services on its own it will depend on the Bitcoin price measured in external currencies. Probably it will lead to severely distorted and unstable prices and most of the people will use other barter mechanisms.

2) a Bitcoinization of a large country with mature economy.

The difference to the first scenario would be liquidity. There would be a steady high level of trading of goods and services to Bitcoin and vice versa. This way, a large country could "back" Bitcoin's price on its own with its economy (let's say, a >20 million inhabitants country), so that would minimize volatility a lot. In this scenario, Bitcoin could evolve into a currency practically controlled by that country, but it could profit from the auto-discipline the controlled supply imposes on the government. But on the other hand, I see in this scenario the same risks as with dollarization: inability to perform monetary policies, and that only would work with nearly-perfect governance. So it could lead, in the long run, to a "second Argentina".  

I ran across this article http://www.investopedia.com/articles/04/082504.asp about the idea that a country abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). They call it "dollarization" so why don't we add "bitcoinization" to the discussion?

It also talks about the idea of "pegging" their local currency to a major international currency (this differs from dollarization as it is non-exclusive use).

So, what if countries start using Bitcoin in either of these ways? There are many (hundreds) of countries, some too small to really develop "counterfeit" proof fiat paper currencies. And with the proliferation of cell phones, digital money is just more efficient so they would be able to leap frog over the whole fiat fiasco by going right to digital.

So what might countries experience if they did allow Bitcoin an equal playing field to compete with other currencies that their populations are already using? Especially the type/size country the article is talking about (smaller ones).


Read more: Dollarization Explained | Investopedia http://www.investopedia.com/articles/04/082504.asp#ixzz4YzsnBALH
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