Hi there, new to Bitcoin but interested in.
Now, the main function of currency is medium of exchange which requires the following characteristics:
(1) value common assets
(2) constant utility
(3) low cost of preservation
(4) transportability
(5) divisibility
(6) high market value in relation to volume and weight
(7) recognition
(
resistance to counterfeiting
Bitcoin does well in (3)(4)(5)(6)(7): Bitcoin wallet only occupies a small amount on the hard disk. When compared with safes, the cost of preservation can be omitted. Bitcoin has no transportation cost and thanks to the Internet, transportation is very easy. Bitcoin can be divided into 2.1*10^15 monetary units. As far as we can see, this is enough. You cannot split a 10 dollar into 10 pieces of 1 dollar, but with Bitcoin, you can do that. Bitcoin has no volume or weight. It is almost mission impossible to fake Bitcoin as Nakamoto has proved that in order to do that you have to take control of more than half of the hash power worldwide. As for (7), the rapidly rising exchange rate of Bitcoin and more and more papers talking about it are strong evidence that more and more people are taking part in the Bitcoin.
For(1)(2), it depends on people. Does the commodity have absolute value? No, the commodity’s value is relative, and it will change depending the time and the place. For example, the antique’s value now compared with in the time it was produced; the water value in seashore compared with in desert. Commodity’s value is determined by the price offered by the buyer. Why the medium of exchange must be commodity and cannot transcend commodity? If you give me A and I pay with medium of exchange X and I use medium of exchange X to pay for B, the economy will also work. Let’s take another example---the equipment and gold in online games. The exchange rate of the gold is often determined by the company running the game, like a central bank. However, black market is always existed. The equipment is commodity. But the price of the equipment is determined spontaneously --- I think no one will sell equipment at the system price in the right bottom corner in WOW. Bitcoin has no traditional value in use; it is only 01 code in disks and has no outstanding physical or chemical properties. However, when more and more people involve in and recognize it, Bitcoin will become a true currency.
After the collapse of The Bretton Woods System, the commodity property in currency is gone. Now, the currency supply is determined by the central banks and becomes a way to “adjust” economy which results inflation. Although there are many theories talking about reasonable quantity of currency to inject into real economy, none of them is good enough. Even if there is a good theory, when coming to practice, it will be hard --- the statistics data may be flawed due to manipulating or the inherent inaccuracy of statistic methods, and a tremendous pressure from the government or interest groups.
Look at what happened in Cyprus. The deposit more than 100k will be seriously damaged. Fiat currency depends on a nation’s power, which will rise and fall, but Bitcoin depends on mathematics, which will always be the same until the end of the world.
In Hayek’s Denationalisation of Money, he imaged several different currencies issued by private banks, no central banks exist. But, I cannot image there is a government willing to give away currency privilege. If the government cannot CREATE money, then the deficit will be a deadly trouble although today, it is already a very big trouble. It will also be hard for the government to expand its power by doing some big projects. Even if the government does allow different currencies exist, it is hard to prevent the different currencies’ issue banks to form alliance and to act as a central bank because we all know, people are greedy. People can also be influenced and cannot be 100% rational. As a result, the organization running by people will have to deal with pressure and cannot follow methodology strickly. But a currency with decentralized structure and is created under certain arithmetic can solve this problem.
BTW, I am always wondering whether a top-to- bottom economy system will be good. There are too many factors affecting the economy, and being a top-to- bottom economy you will have to deal with all that. One factor may rely on another and the dependence may enhance the factor. I read Out of Control and I find out some things can be solved much more easily by a bottom-to-top method: a robot can walk by its 6 legs without a central control system. Each leg has its own “brain” and its action only depends on the other two legs. Researchers find out that even if one leg is broken, the robot can still work with the remaining 5 legs.
A top-to-bottom system is not flexible and it can only study when the whole system is shut down, and a simple modification in top level will have strong impact in the bottom level, whereas a bottom-to-top system is flexible, self-assembling and after certain points, a new order will emerge in it. Why we do not put our economy in it and take a try? Maybe a new economic order will emerge from the decentralized P2P network of Bitcoin.
However, I do not think today’s bitcoin is prefect. I think there may be some areas to improve:
(1) The time to generate a block. Now, it takes 10min to generate a block. As a reasonable confirmation needs 6 blocks, it usually takes 1 hour to finish the confirmation. Time is precious; maybe the time to generate a block should be shortened.
(2) The quantity of currency created. Now, 50 new bitcoin will be created for every block, and it will become half in 4 years. I think the simple linear decline method is not good enough. As we know, for new products, according to product life cycle theory, it will normally go through 5 stages: 1. Introduction; 2.Growth; 3.Maturity; 4.Saturation; 5.Decline. For bitcoin, we assume it will last forever so stage 5 can be omitted. So the supply of bitcoin should start with a low level in Stage1 and be more in Stage2 and then decline in Stage 3/4. This can help to force bitcoin into circulation and gain liquidity---a critical KPI of currency. When more people notice bitcoin and come to join, the Stage should be 2 and in this stage, the bitcoin supply is increasing. As a result, the increasing supply will satisfy their needs and help to stable bitcoin currency --- remember, if bitcoin exchange rate is much too high, speculation and low liquidity will ruin the currency. The first mover advantage will be reduced to an acceptable level. To satisfy long term requirement, a long-tailed distribution may be a good choice. Maybe someone will say a long-tail will result in inflation, but please notice that expected inflation is not devil, unexpected inflation is. By calculating the arithmetic you can know the quantity of currency to be injected and you will have a solution for that.
Also, I think the supply of bitcoin should not be fixed but float. The next created currency should have some connection with the transactions/notes’ change before as the currency value should be stable and response to the demands. Maybe a formula
S(currency created per block) = L(long-tail distribution) +- modification value.
As a decentralized currency, we do not want to see a central adjusting system. So the adjusting can only be done by the P2P network. Bitcoin created will not vanish. So how to handle the situation when supply exceeds demand? We cannot simply issue bonds to get money back. Image everyone’s requirement is met and the system is still creating money and this will result in the inflation and unjustified wealth redistribution (wealth will be distributed to miners as they have more bitcoin). So the modification value should be able to be the same with L.
(3) The intensive distribution. Now the armament race in bitcoin becomes more and more fierce. More and more ASIC machines are built and connected to the network. This is good and this is also bad. It may hurt the newbies when they find their best video cards cannot be used as the hash is much too low. The armament race may also be wasteful. What’s worse, if one genius build a super machine having 1millionT hash rate, then all the new bitcoin will belong to him. So I suggest introduce range distribution into bitcoin: just like in school, when you get 90 above, you get an A, when 80-90, B, something like that. And the bitcoin will first allocate to ranges via normal distribution by the hashing powers: say, the top 5% will enjoy 68.4%, 5%-20% enjoy 27%, 20%-45% 4.4%, and the rest. In every range, bitcoin will be allocated equally to wallets in the range. (Actually I cannot find the distribution formula, maybe my understanding is wrong).
In conclusion, I think bitcoin has bright future. Tax? It is not a problem. Money-laundering? The government should care about the upstream not the currency itself. More anonymity, more safety, harder to trace, easy for money-laundering---determined by natural laws. But I have to say, sometimes, “bad thing” is the driven force for the development of civilizations. High-tech often comes from military. Internet itself is also from America military (APACHE). So anti-money-laundering should not be the barrier but a factor to consider with. What’s I am worrying about is that people are hoarding Bitcoin as the price is a rocket, and more and more speculation in Bitcoin. This is really bad. If people stop to exchange real commodities with Bitcoin but hoarding it to gain exchange income, as the supply is short, the price will continue to rise. The merchants who accept Bitcoin as medium of exchange will find out hoarding is more valuable and stop to spend Bitcoin. The market will LOOK LIKE bull, but in fact, when a big guy wants to cash out, the price will collapse.
IF U THINK SOMETHING IS WRONG PLEASE POINT IT OUT. THANKS!
