Hey, been seeing bitcoin come up on my radar all over the place recently, good to see an alternative online currency getting somewhere. I've been reading and thinking about currency since the financial crisis, particularly about what the fundamentals of a currency are and how the internet can revamp how we trade for stuff, and it strikes me that bitcoin doesn't go far enough in making use of these new possibilities. I'm writing up my thoughts on the economics here, thought you guys might be interested.
As I understand bitcoin, it's essentially a fiat online currency with computational controls so that it's distributed and has a stable growth rate. The latter is actually what Milton Friedman wanted the Fed to do with the dollar, just increase it by a set rate every year.
However, it strikes me that currency is now an outmoded concept, with all the stuff we can do online these days. What if we simply traded electronic options contracts for things like groceries or haircuts instead? So when I buy a candy bar, I wouldn't pay with a dollar bill or bitcoin, I'd pay with an electronic contract good for a tenth of a haircut or a bottle of orange juice, redeemable within the next year.
The fundamental insight here is that all currency is essentially a short-term option contract, ie a way to store value for the short-term in order to consume later, contracts which didn't exist when currency was invented millenia ago but which are commonly and easily created for some goods these days
. The good news for the commodity backing crowd is that all these options contracts are backed by some good or service, maybe they'll stop whining about gold then.
This is essentially online barter, taken to another level by the option aspect.
Of course, it has the same problem as barter: how do you know how much to trade of one chicken for one goose? Here I would imagine the solution is that option indices would be created. Some companies would figure out what the relative market values are and supply them to your smartphone to show you how much it would cost you to buy that sofa. One could even show the "price" in the number of hours of work instead: how much time would you have to spend at your data entry job to pay for this sofa? After all, that's the real price of something, how much time you had to spend at work to afford it. A computer programmer who currently gets paid $50/hour would be quoted a price of 15 hours for that $750 sofa while the data entry clerk making $10/hour now would be quoted 75 hours for the same sofa, ie everyone sees a price tailored to them.
In sum, there are many aspects of trading that can be reinvented online. I don't claim to have all the answers but I'm pointing out all the aspects of currency that can and should be rethought, now that software allows us to do so much more. I don't think that creating yet another fiat currency in bitcoin is going to be the long-term solution. However, I don't mean to be too critical of bitcoin, just trying to reason about the economic fundamentals and thought some of you might be interested in thinking about the possibilities too.