Pros and Cons Of A Country Doing "Bitcoinization"

[Bungeebones]

I ran across this article http://www.investopedia.com/articles/04/082504.asp about the idea that a country abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). They call it "dollarization" so why don't we add "bitcoinization" to the discussion?

It also talks about the idea of "pegging" their local currency to a major international currency (this differs from dollarization as it is non-exclusive use).

So, what if countries start using Bitcoin in either of these ways? There are many (hundreds) of countries, some too small to really develop "counterfeit" proof fiat paper currencies. And with the proliferation of cell phones, digital money is just more efficient so they would be able to leap frog over the whole fiat fiasco by going right to digital.

So what might countries experience if they did allow Bitcoin an equal playing field to compete with other currencies that their populations are already using? Especially the type/size country the article is talking about (smaller ones).


Read more: Dollarization Explained | Investopedia http://www.investopedia.com/articles/04/082504.asp#ixzz4YzsnBALH
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[d5000]

I live in a country (Argentina) which has done a very similar thing to dollarization (the so called "Convertibilidad", a 1:1 peg, in the 90s). At a first glance, it went well with a short-lived boom until ~1994 that after a short recession in 1995 continued later until ~1998, but the outcome was a severe distorsion of the economy in disfavour of the industry (and in favour of agriculture and services) which lead to a severe crisis in 2001/2 and then an abandonment of the 1:1 peg. So, in our case, "dollarization" failed.

With a "Bitcoinization", I think we can discuss two variants of it:

1) a Bitcoinization of a small country without mature economy.

Probably, it would lead first to a "boom" because if the State had to buy the necessary Bitcoins to be able back the national currency (to change legal tender amounts to BTC). Although I have my doubts that the nationals of the "Bitcoinized" country could profit from that because speculators will price in this bullish event very early. But then, even if the country could profit in the first phase, volatility would be probably still too high for the country to benefit from it. Because, as the economy of a small state probably couldn't supply most goods and services on its own it will depend on the Bitcoin price measured in external currencies. Probably it will lead to severely distorted and unstable prices and most of the people will use other barter mechanisms.

2) a Bitcoinization of a large country with mature economy.

The difference to the first scenario would be liquidity. There would be a steady high level of trading of goods and services to Bitcoin and vice versa. This way, a large country could "back" Bitcoin's price on its own with its economy (let's say, a >20 million inhabitants country), so that would minimize volatility a lot. In this scenario, Bitcoin could evolve into a currency practically controlled by that country, but it could profit from the auto-discipline the controlled supply imposes on the government. But on the other hand, I see in this scenario the same risks as with dollarization: inability to perform monetary policies, and that only would work with nearly-perfect governance. So it could lead, in the long run, to a "second Argentina".  

[Xester]

I ran across this article http://www.investopedia.com/articles/04/082504.asp about the idea that a country abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). They call it "dollarization" so why don't we add "bitcoinization" to the discussion?

It also talks about the idea of "pegging" their local currency to a major international currency (this differs from dollarization as it is non-exclusive use).

So, what if countries start using Bitcoin in either of these ways? There are many (hundreds) of countries, some too small to really develop "counterfeit" proof fiat paper currencies. And with the proliferation of cell phones, digital money is just more efficient so they would be able to leap frog over the whole fiat fiasco by going right to digital.

So what might countries experience if they did allow Bitcoin an equal playing field to compete with other currencies that their populations are already using? Especially the type/size country the article is talking about (smaller ones).


Read more: Dollarization Explained | Investopedia http://www.investopedia.com/articles/04/082504.asp#ixzz4YzsnBALH
Follow us: Investopedia on Facebook

Bitcoinization is not a bad idea since it can be done just like dollarization. But there are conditions that we need to do so bitcoin can be qualified to be used to all country as a replacement of local currencies. The condition of monetary circulation is the first thing and that means that the number of bitcoins in circulation is not enough to  cater the number of citizens all around the globe. Hence to make it possible we need to increase the number of bitcoin in the circulation.

[n0ne]

I ran across this article http://www.investopedia.com/articles/04/082504.asp about the idea that a country abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). They call it "dollarization" so why don't we add "bitcoinization" to the discussion?

It also talks about the idea of "pegging" their local currency to a major international currency (this differs from dollarization as it is non-exclusive use).

So, what if countries start using Bitcoin in either of these ways? There are many (hundreds) of countries, some too small to really develop "counterfeit" proof fiat paper currencies. And with the proliferation of cell phones, digital money is just more efficient so they would be able to leap frog over the whole fiat fiasco by going right to digital.

So what might countries experience if they did allow Bitcoin an equal playing field to compete with other currencies that their populations are already using? Especially the type/size country the article is talking about (smaller ones).


Read more: Dollarization Explained | Investopedia http://www.investopedia.com/articles/04/082504.asp#ixzz4YzsnBALH
Follow us: Investopedia on Facebook

Bitcoinization is not a bad idea since it can be done just like dollarization. But there are conditions that we need to do so bitcoin can be qualified to be used to all country as a replacement of local currencies. The condition of monetary circulation is the first thing and that means that the number of bitcoins in circulation is not enough to  cater the number of citizens all around the globe. Hence to make it possible we need to increase the number of bitcoin in the circulation.

That's a must to have a increased number of bitcoin to regulate the needs of the citizen. This is not a possible solution with bitcoin, because mining is taking place with limitations in the generation of coins along with halving occurring every four years. Now based on requirement if the number is increased the value it has got as well the system collapses.

[pooya87]

there is going to be one big problem with this when comparing "dollarization" with "bitcoinization"! and that is the price volatility.
if a country choose US dollar for their currency, it is going to stay stable and the chances of value of dollar dropping hard are so little.
but on the other hand the same chances for bitcoin are pretty high. and not to mention all the other limitations bitcoin has such as limited block size which leads to limited transaction per second handling.

[neochiny]

--
So, what if countries start using Bitcoin in either of these ways? There are many (hundreds) of countries, some too small to really develop "counterfeit" proof fiat paper currencies. And with the proliferation of cell phones, digital money is just more efficient so they would be able to leap frog over the whole fiat fiasco by going right to digital.

If the so-called 'bitcoinization' were due to a small country's inability to develop counterfeit-proof fiat currency then, how would they have the ability to support the whole country's change to bitcoin.
Not only would they have to ensure that Internet connectivity is available and affordable throughout the whole country, how would they go about solving the transaction times? And what happens to those citizens who are truly unable to afford a computer/laptop/or even a smart phone?

As for 'pegging' a whole country's local currency to bitcoin? It's not so bad if it was a sudden huge pull upward, but what happens when the 'usual' $800-$1000 value plunges to $50-$200?

We could handle it even if it stays there for a few months as we have majority of our assets/funds in our own local currency and thus are not truly affected and could still afford to wait, but what if ALL of it were in bitcoins?

Those citizens could still pay for their needs however 'pricey' it may be but, if they do spend, then what happens to holding and waiting for the recovery? The only citizens who won't accrue any loss are those truly rich who can afford to have stashed funds in other currencies.
It's a great dream to think of bitcoin as the main currency of the world but, that's decades yet to come, if ever.

[avikz]

I don't see any pros for a country doing bitcoinization, instead there are lots of cons. Firstly bitcoin is an international currency and miners are the god of bitcoin. Why a country would want to risk their economy to the handful of miners?

Secondly, bitcoin is available only till 2023. So a country can't develop with such a small future outlook. Instead they will have think for long term. So after 2023, they will have to adopt another coin to survive. So it is not at all a good idea for a country to adopt bitcoin as a national currency. Its economy will be in shambles. 

[davis196]

I don`t think that any country will adopt bitcoin because it will loose the independence of the central bank  of that country.Every goverment needs a central bank to print money and create inflation,which sometimes might help the economy.
In my country the national currency is fixed to the  euro and sooner or later we will adopt the euro.
The idea of bitcoinization is too exotic.

[mrkevio]

I don`t think that any country will adopt bitcoin because it will loose the independence of the central bank  of that country.Every goverment needs a central bank to print money and create inflation,which sometimes might help the economy.
In my country the national currency is fixed to the  euro and sooner or later we will adopt the euro.
The idea of bitcoinization is too exotic.

It would mean that we would be our own banks. Since when does any politician agree that? Nah, Bitcoin should remain as it is at this moment, it shouldn't become a currency replacement. It's a commodity, an anonymous one, and that's nice. Just the fact that it is worth more than 1g of Gold and almost as much as 1oz of Gold is great, so Bitcoin has a big value too..

[Hydrogen]

Dollarization and similar practices are methods of pinning an economy to a specific currency for valuation or stability purposes.

If a country thought Donald Trump being elected President would increase the value of the dollar over the next 4 years, they could adopt dollarization in the hope of leveraging those gains if their economic policies called for increasing currency valuation.

Historically the united states economy has shown good stability, it has the most powerful military, is located in a relatively stable area geographically & has the largest gold reserves backing its currency.

These are other reasons dollarization could make sense over the long term.

Iceland and aurora coin could be something like pegging a local alt coin currency to an existing currency.

Sad to say aurora coin's day was too long ago fro me to remember details.

[Senor.Bla]

I think this is theoretically possible and if a country would want that i would be technical doable. Fiat or cash works offline. So first you would have to make sure that everybody everywhere has access to the internet or find a way to do transaction offline. The bigger problem would be to find a government that is willing to take this step. They are giving up the possibility to make new money on their own, but they also give this up with "Dollarization", so this seems not to be impossible.

[BitcoinGirl.Club]

I do not know how this Bitcoinization would benefit an individual country when they abandon their local currencies or peg the local currencies to bitcoin, this could result in a negative effect on the economy and loss of control and revenue for the central bank bank and could be a major con!

[Victorycoin]

I don't see any pros for a country doing bitcoinization, instead there are lots of cons. Firstly bitcoin is an international currency and miners are the god of bitcoin. Why a country would want to risk their economy to the handful of miners?

Nevertheless, there are pros for a country to take to bitcoinization. First is that it stands to diminish risk on a country's local currency. Secondly, it is going to protect against inflation and devaluation. Both merits would culminate in a stable, secure economic and investment climate as pressure is off the local currency. However the fear of losing its ability to directly influence its economy is a strong reason, no country would want to go bitcoinization.

Secondly, bitcoin is available only till 2023. So a country can't develop with such a small future outlook. Instead they will have think for long term. So after 2023, they will have to adopt another coin to survive. So it is not at all a good idea for a country to adopt bitcoin as a national currency. Its economy will be in shambles.  

Where exactly did you get that from?

[jubalix]

I feel "Bitcoinization" will happen by economy segment rather than jurisdictional/geographic area

eg remittance, capital control easement, store of value etc

[jak3]

well i thought we are already on the Bitcoinization step becuase logically we are not using bitcoin in a single country and its getting mass adoptiong throughtout the world and in additon it already beats the U.S.Dollars and gold in recent time. i expect that around 2020 the U.S Dollars will get beaten many time more

[thend1949]

Nice Idea but government will not accept bitcoin because it's not like dollar. And of course government can't control bitcoin not like dollar that the price of it is connected to their government. If the price of dollar increase the U,S government is effective to their management. And if they accept bitcoin the price of bitcoin is not too stable, so it means their management is based on Global market?

[alyssa85]

The biggest risk is that Bitcoin isn't liquid enough. It moves like crazy on rumours from the PBOC for example - if your real economy was attached to it, it would create havoc with trade etc.

Here is an example: say your tiny nation imports oil. Some rumour comes out about the PBOC inspecting some exchange in China. Bitcoin then crashes 30% against the dollar. Suddenly the oil you buy is 30% more expensive because you use bitcoin. So you end up with massive inflation.

No economy can cope with fluctuations this wild based on complete nonsense rumours and speculation.

[Kprawn]

How much help was that to a country like Zimbabwe for instance? You have the same corrupt government behind the new currency and they still

act in the same manner as they did with their previous reserve currency. Bitcoin cannot currently scale without consensus, so we do not have the

capacity to handle that volume of transactions.  ... Bitcoin will be better than other currency as a replacement, but it will not change human

behaviour. 

[Zadicar]

Nice Idea but government will not accept bitcoin because it's not like dollar. And of course government can't control bitcoin not like dollar that the price of it is connected to their government. If the price of dollar increase the U,S government is effective to their management. And if they accept bitcoin the price of bitcoin is not too stable, so it means their management is based on Global market?

Bitcoinization seems to impossible for me and as you said government wont really like to adopt bitcoin on their area since it cant be controlled or make out of money on it.Bitcoin would remain on its place no matter what and it cant be considered as a main currency because government wont really allow it.

[BillyBobZorton]

A country directly accepting bitcoin is going to make the government lose power and control over the money, so you tell me what country in the world is going to have his government willingly sacrifice control over the monetary supply in order to accept bitcoin... i dont see it happening.

What I see happening is countries accepting bitcoin pegged sidechains that are used for their own currency.