Inline image 1

Ryan Cooper says this about Bitcoin:

…there is no human judgment whatsoever on the size of the bitcoin money supply, because it is all determined by prearranged mathematical formulas. This solves the problem of the currency being destroyed by the government, but at the cost of an inherent vulnerability to deflation and boom-and-bust panics, as we’re seeing today. (I strongly suspect some Wall Street types are making out like bandits at this very moment.) The only way to solve the panic problem is with a trusted central bank that credibly promises to intervene to prevent excessive inflation or deflation, thereby short-circuiting the self-fulfilling cycle. Again, this is impossible with Bitcoin.

Which is correct! But asks the question – what is the point of Bitcoin?

Money is three things – a medium of account, a medium of exchange, and a store of value. Let’s say USD:BTC is a random walk with unknown parameters. Is Bitcoin money?

The fact that, at any given moment, the USD:BTC has deviated stochastically from its prior value should not impact Bitcoin’s usefulness as a medium of exchange. Much has been written about the cleverness of Bitcoin’s code and structure; this makes it a very useful way to make secure exchanges.

But what about a medium of account? If Bitcoin’s value is random (and, presumably, fluctuating quite wildly), that doesn’t mean it can’t be a medium of account; it just won’t be a very useful one. Something that was 3BTC today will be 30BTC tomorrow and 0.000003 BTC next week. You could certainly keep track of USD:BTC and "translate" a Bitcoin ledger into dollars, but that only goes to prove that usefulness as a long-term medium of account has something to do with…

"Store of value." The thing about Bitcoin is that it is not solely a platform for secure exchange; once an exchange is made, one party or another is holding some number of Bitcoins. In fact, since there is no Bitcoin finance, at any given point individuals are holding all the Bitcoins in the world. And, if the price can fluctuate wildly between exchanges, it is a terrible store of value. Something you sold for 5 BTC yesterday could be worth 50 or 0.5 BTC today, and you haven’t had a chance to change your BTC for something more stable – or, if you have, the next guy got screwed.

So, to be money-er, Bitcoin really could use some sort of exchange rage regulation. The problem is…who? Even in the Cryptonomicon scenario, you’d have to trust the authority regulating the currency. And why would you? They may not have any power to buy back the currency if inflation is overheating, and no power to inject new money unless there is demand for it. The central bank of a country, back by laws and institutions and police and armies, have the power to compel money demand chartally; they have regulated banks that must maintain reserves at the central bank; they have deposit insurance; they have foreign reserves; they have gold; they have all kinds of things that allow them to back currency with trust, because they back trust with the state.

Point being, that in this modern age non-state currencies without intrinsic value are destined to either fail or be severly limited in their broader utility, especially to folks who want to engage in legal transcations.

Advertisements