If bitcoin succeeds....so what?

[BTC Economist]

I have been getting excited about bitcoin, but now I'm not so sure about it.  Think about if bitcoin is successful.  If many merchants decide to accept bitcoin.  What will happen?  Well....the big banks will still be the big banks and hold the most bitcoin.  Sure, a few early adopters will get rich much like the founders of Google and other companies got rich, but the rest of us?  Not so much.  We'll just be paying more with bitcoins and less with dollars.  Our lives might be a bit easier since payments are easier, but as we've seen lately we still need banks and we'll still get gouged with fees.  We'll just be getting taken advantage in terms of bitcoins rather than dollars. 

Now, onto the Fed situation.  Yes, bitcoin is deregulated.  I know many think this is a chief benefit of bitcoin, but nobody really knows.  Opponents of bitcoin would argue that deregulation is going to make the currency very volatile and as most people are risk-averse, this means most people would rather not live in terms of bitcoins.  Maybe bitcoins will be stable.  Who knows? 

My point is the main change that would result from wide adoption of bitcoin is the unknown.  Our lives won't get much better.  We'll just be in for a surprise.  Now I like reading a good thriller as much as anyone else so this isn't the worst thing in the world, but it certainly isn't the utopia some people make it out to be.

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[Gabi]

Well, then no country will be able to inflationate the currency by printing loads of money like they do now...

[BTC Economist]

Well, then no country will be able to inflationate the currency by printing loads of money like they do now...

That is true.  However, the USA sets a target of a little inflation for the reason that they want to encourage spending and keep the economy moving.  With a deflationary currency, as you know, people are more inclined to save since their savings are growing in value. 

I am tempering my enthusiasm for bitcoin because I don't know how it will deal with recessions.  There is a role for the government in those economic times and bitcoin doesn't provide for that.  We shall see, though.

[Richard Andreassen]

I am tempering my enthusiasm for bitcoin because I don't know how it will deal with recessions.  There is a role for the government in those economic times and bitcoin doesn't provide for that.  We shall see, though.

That is a good thing. Governments only makes recessions worse!

[philipp]

Hyperinflation.
Everyone will want to get rid of their remaining fiat currency as quickly as possible. Many people will end up with bags of dollar bills and nothing to eat.
Maybe the governments will step in and offer to buy fiat currency at a fixed rate (and subsequently destroy the bills and coins) using tax Bitcoins, so fiat currency holders won't end up starving.
The transition period will feel like after a world war. After a few years the wounds will have healed, power and welth will have shifted to new owners, just like a few years after the world wars.

Philipp

[vector76]

I'm tempering my enthusiasm for bitcoin because scarcity is not enough to create value.  Yes bitcoin has scarcity built-in by design but that is the only thing it seems to have.

[drknark]

Disclaimer: I am not an economist

If there was widespread adoption of BTC, as in more than 50%, wouldn't the frame of reference change? IE, goods and other currencies would be priced relative to BTC, making BTC the standard and therefore stable? And fluctuations would in practice mean that other currencies are unstable vs BTC.

[BTC Economist]

I'm tempering my enthusiasm for bitcoin because scarcity is not enough to create value.  Yes bitcoin has scarcity built-in by design but that is the only thing it seems to have.

The main thing here is developing a market for bitcoins.  I am actually optimistic about this happening.  I saw an article about a small restaurant in NYC now accepting bitcoins.  This is crucial.  It needs to go beyond small techie products to really gain traction.  Given network effects, I think bitcoin can succeed in this area.  I am actually quite confident bitcoin will be around in 5 years, but whether or not it will change things much I'm not so sure.

[BTC Economist]

Disclaimer: I am not an economist

If there was widespread adoption of BTC, as in more than 50%, wouldn't the frame of reference change? IE, goods and other currencies would be priced relative to BTC, making BTC the standard and therefore stable? And fluctuations would in practice mean that other currencies are unstable vs BTC.

Certainly it will become more stable than it has been lately and we won't see 50% swings, but I worry about how it will fare in bad economic times.  When the economy is bad, how can a bitcoin economy encourage spending?  Hoarding seems to be the end result which would destroy the bitcoin economy.

[BradZimdack]

I see a lot of ways that if bitcoin became a standard form of payment, we could quite easily end up right back where we started with unreasonable banking fees and terms.  (The banks would be built on top of the bitcoin framework.  They'd issue credit cards, home loans, etc.)  The only difference would be that your fees would be charged in bit instead of dollars.  At least the emergence of this thing would give us some chance at breaking up the current banks' monopoly powers, at least for a while.  All human developments tend to end up the same.  Empires are built, they get out of hand, they collapse, then they're rebuilt.

Another comparison might be the Web itself.  In 1995, it looked like the WWW would give the little guy a level playing field to compete against the giants.  Here we are, not even 20 years later, and basically two companies own it all.

[vector76]

A market will give it liquidity but it won't give it value.  At least not a stable value.

When commodities are used as money, they have usefulness in industry, and also usefulness as a medium of exchange, and both things contribute to their value.  The commodity value will at least act as a floor for the value of the money, although the total value might rise quite a bit above that depending how much usefulness it has as a medium of exchange.  Liquidity and broad adoption affect how much medium-of-exchange value is added on top of the commodity value.

But if a currency has no usefulness other than as a medium of exchange, no exchange ratio is any better or worse than any other exchange ratio.  It has no stability and this in turns makes it a bad store of value, which kills it as a medium of exchange also.  When it loses its usefulness as a medium of exchange, there is nothing left and it has no value at all.

It is not much different from the stock of a dot-com company that will never realize earnings.  Yes, people might trade it and exchange things of value for the stock, in hopes that there will be a greater fool, but with no value other than the greater-fool value, in the long run it is going to be worth nothing.


I am curious what economic theories you subscribe to, if you think encouraging spending is the solution to a bad economy..

[blogospheroid]

You're basically mentioning coase's theorem right? Doesn't matter how the initial resources are split up, in the end the wealth distribution turns  up the same?

Well, my guess is that bitcoin on its own may not create a new world. But however it will enable a few things that were not possible before.  Cross border trade on basis of trust without keeping big banks in the loop. There will be new institutions and escrow in their place, but they may not be the same guys. Plus, guvs and bank will not have the ability to print money. They gotta earn it or beg, borrow or steal.

The prevention of future inflation gotta be worth something, right? When you cannot print money and give it to your crony, when you actually gotta take money from someone else and give it to your crony, it's a lot more difficult to say you're doing it for the public good.

Hyper inflation may boost financial literacy forcing more people to drill into the idea of what money is, what a company is, what a loan is, what a share is, etc.

[BTC Economist]

I am curious what economic theories you subscribe to, if you think encouraging spending is the solution to a bad economy..

Clearly that's a Keynesian idea, but it's just an example.  I'd rather not get into politics.  The key point is the bitcoin economy is decentralized and we don't know what that will do in the long run.

[BTC Economist]

You're basically mentioning coase's theorem right? Doesn't matter how the initial resources are split up, in the end the wealth distribution turns  up the same?

I tend to think of Coase's Theorem in terms of property rights in a micro framework, but, yes my suspicions are that bitcoin will not alter the wealth distribution aside from creating a few rich people.  Another response earlier provided a good example of how the same result has occurred with the internet.  I don't see evidence yet that bitcoin represents a fundamental shift aside from an adventurous monetary policy change.

[BenRayfield]

Governments and others with power use normal money to control the majority of people. It would be much harder for them to do that with Bitcoin, so it would at least happen a lot less often. Banks are an anti-democratic force and Bitcoin is a democratic force, spreading power to everyone. Bitcoin allows the funding of free speech like Wikileaks which allows people to organize on large scales to change the world.

Why would I keep my Bitcoins in a bank when the peer to peer network already functions as a bank?

[EhVedadoOAnonimato]

I'm tempering my enthusiasm for bitcoin because scarcity is not enough to create value.  Yes bitcoin has scarcity built-in by design but that is the only thing it seems to have.

I don't get it... you're doubting bitcoin has value? Isn't that crystal-clear already? Even thieves are after them!

Scarcity alone is not enough, but being scarce + being desired by some people is enough to attribute value to any resource.

[CamelToeBob]

Hyperinflation.
Everyone will want to get rid of their remaining fiat currency as quickly as possible. Many people will end up with bags of dollar bills and nothing to eat.
Maybe the governments will step in and offer to buy fiat currency at a fixed rate (and subsequently destroy the bills and coins) using tax Bitcoins, so fiat currency holders won't end up starving.
The transition period will feel like after a world war. After a few years the wounds will have healed, power and welth will have shifted to new owners, just like a few years after the world wars.

Philipp

Can you explain how you came to the hyperinflation conclusion?

[EhVedadoOAnonimato]

To the OP: if bitcoin really succeeds, like, becoming the main currency of a nation, such nation would be able to prosper considerably as a result of it.
The damage caused by central banks is tremendous. Lots of capital is destroyed on economic cycles they cause, and besides that, money printing is an endless source of financing to governments. All this at the expense of hard working people.
Much less wealth would be destroyed by governments if they could not inflate the monetary base as they can today.

[vector76]

I don't get it... you're doubting bitcoin has value? Isn't that crystal-clear already? Even thieves are after them!

Scarcity alone is not enough, but being scarce + being desired by some people is enough to attribute value to any resource.

Yes they have value because they are desired.  Tulip bulbs were valuable because they were desired, and desired because they were valuable.  My problem is that if a thing is ONLY desired because other people want them, then no rational price exists.  Tulip bulbs could be $100 or $1000 or $10,000 and none of these prices is any more rational than any other price.

Actually, there is a rational price, which is the commodity value.  If it has no commodity value then it is zero.

Even if the rational price is zero, it can still have numismatic value.  Old stamps have value because people want them, and people want them partly because they have value to others but also because they derive joy from owning old stamps.  I'd say this is not rational value but it is value nonetheless.

In the case of bitcoins I think people derive a similar kind of non-rational value from believing that they are escaping the system.

"I spent $1000 on this rare T-shirt as an investment and all I got was this lousy T-shirt"

[Litt]

Graduate degree in econ and the OP is what you have to show for it? The education system have failed you miserably or the troll university you attended have done you much good.