Hello, I'm really Kazu, however that account was hacked so I'm posting on this one instead. I hope my utter security fail on these forums doesn't affect my credibility in any way
Anyways, I have been thinking about how a 'switch' from USD to BTC might occur. To begin with, I considered the difference, practically, between USD and Bitcoin. The primary value of BTC over 'cash' USD is (1) cheaper/easier transferability and (2) better store of value. There are other benefits, such as the potential for anonymous transfers, however this potential has not yet been fully tapped, and is unlikely to motivate the masses to make a switch.
Second, I examined the advantages of USD over Bitcoin. First, there is the acceptance problem: Many merchants won't accept it, and there is little motivation to do so since few users use it. Then there is the liquidity problem. Small Bitcoin trades can cause massive price fluctuation, making Bitcoin a less-than-ideal store of value, especially in the short term, for larger amounts of money. Now forgive me if this introduction bit was obvious, I just wish to define my terms so we can examine the issue with greater clarity.
We must also account for the fact that, typically, a Bitcoin investor is willing to take on significant risk, more risk than a 'normal' investor, especially if the reward for such risk is dissasociation with traditional banking. This risk appetite is often offset with a willingness to 'buy and hold' to compensate for Bitcoin's liquidity problem.
In my opinion, due to this buy and hold mentality, I believe that Bitcoin debt and leaseback schemes are what will ultimately have the power to trigger a chain reaction that can eventually cause a more wide-spread 'switch' to Bitcoin. Since many of those holding Bitcoin have no expectation to spend it in the short term, it makes financial sense to allow borrowers some access to this capital in return for interest. Should this interest be on average higher than that of the USD, the chain reaction can begin.
The first way in which the chain reaction will promote Bitcoin is with increased Bitcoin spending. When credit is available, even at higher interest rates, spending goes through the roof. Such credit, dissacociated with traditional banking, would introduce users completely uninterested with Bitcoin before, including individuals with a low credit score, or individuals that need to borrow money for odd purposes. The spending of such individuals would in turn motivate more businesses to accept Bitcoin. This process would likely reduce the value of Bitcoin in the short-term, and this effect combined with increased acceptance would trigger increased Bitcoin-denominated spending from Bitcoin speculators. In short, Bitcoin commerce would benefit from the availability of Bitcoin credit.
Next, debt creates something that might be called 'guaranteed future demand.' Especially in the case of secured debt, future demand is ensured by the requirements of Bitcoin borrowers to return their principal with interest. As more borrowers realize that they can pay back their debt more cheaply when they are paid directly in Bitcoins - rather than USD to be exchanged into BTC - the Bitcoin economy will be complete.
Bitcoin denominated debt also makes much sense for the lender. Rather than let your Bitcoins sit in a wallet somewhere, doing nothing, why not let them grow? Additionally, lenders will be more tempted to lend Bitcoins than US Dollars. There is less inflationary risk, and, to put it bluntly, the potential to trap borrowers should the price of Bitcoin 'bubble' during the course of the loan.
Of course, the obvious flaw within this plan is the potential for widespread default. In such a situation confidence in Bitcoin could be erroded and the currency actually hurt. However, with security, this is much less of an issue. Another way of thinking about it would be to consider Bitcoin to be 'backed' by the collateral provided by all Bitcoin borrowers.
Now, you may be thinking that it is completely outside of the realm of possibility for such loans to be made. However, I actually think it makes logical sense. Perhaps the most obvious form such debt may come in is that of "Bitcoin Futures." Naturally, such an instrument would almost constantly be in a state of backwardation, and functions effectively as futures. Such contracts could potentially be issued by miners, or really any business expecting regular inflows of Bitcoin, with their equipment serving as security. I admit that such security is less than ideal, however it does make the option to default less attractive.
Other forms of Bitcoin debt are likely to be created in the future as well. There are a wide variety of online shops selling Gold for Bitcoin. The creation of a Bitcoin-lending pawn shop seems like a logical next step. Many Bitcoin exchanges already offer leverage. Services like Bitpay could even offer financing options. And, of course, users like yourselves can easily lend or borrow Bitcoins on a smaller scale.
In short I encourage Bitcoin users to responsibly lend and borrow Bitcoin, not only for the reasons stated above, but also because the nature of the currency rewards it.
