http://ftalphaville.ft.com/2013/04/04/1448072/of-bitcoins-and-rins/Part of the BITCOINMANIA SERIES
The problem with Bitcoin
Ceci n'est pas un Bitcoin
When memory becomes money; the story of Bitcoin so far
Bitcoin as fiat
Of Bitcoins and RINs
This is the latest Bitcoin price chart:
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Which made us think tangentially about another digital security. A government mandated one, which has also been suffering from some of the same issues as Bitcoin.
We give you US ethanol Renewable Identification Numbers (RINs):
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These credits can be purchased by refiners in place of having to meet requirements to blend a certain amount of biofuels in into petrol.
In some ways the two markets have a lot in common. Both are synthetic constructs. Both have a natural choke-point (a blend wall in the case of RINs and a mining incentive wall/24m limit in the case of Bitcoins). Both are stored in coded form. And both have relatively inelastic supply sources which are not immediately responsive.
The parallel makes even more sense when you consider Felix Salmon’s point about Bitcoin being a cross between a decentralised fiat currency and a commodity.
As the supply of both securities approaches a well publicised and well-documented “wall”, volatility shoots up because the creation of new units becomes more difficult.
While are obviously some major differences, the parallels with renewable and carbon credit markets are worth bearing in mind. After all, all are rule-based systems designed to give value to something which previously had no value.
The worrying thing for Bitcoin — based on the carbon precedent — is that even with their government-mandated authority, and a legal requirement to hold these securities, carbon markets have not escaped their share of volatile implosion or hacking scandals.
True, the failure of the initial the European carbon programmes was related mostly to static supply and badly estimated volumes of credits at the start of the programme. In some ways, Bitcoin overcomes that problem by having adjustable supply.
Yet, the problem with European carbon credits was never too little supply, but too much. And yet, apart from natural wastage (people losing wallets or experiencing server or computer crashes) there is no ability for Bitcoin supply to contract. From what we are told, it does not self-correct in that way.
That means if everyone was to suddenly pull out of the market, only the price (in a very volatile fashion) could reflect the drop in demand.
