Why Bitcoin is the Future, Whether it Survives or Not

Writing in The Wall Street Journal, Bob Gelfond of MQS Management (and a donor to Reason Foundation, the nonprofit that publishes this website) talks up how Bitcoin ("an electronic version of gold") represents the future:

The attraction of the Bitcoin is not just the anonymity it provides to users (an anonymity that the U.S. government has alleged some users have employed for money laundering). Bitcoin is also secure against traditional forms of counterfeiting. More important, the Bitcoin is designed to be scarce and thus immune to inflation. There is a limit to the number of Bitcoins—21 million—that is determined by a transparent rule and not by the whim of a central banker….

It is likely that other digital alternatives to currency will emerge, each one competing in the market to satisfy the needs of users. The possibilities are limited only by the imagination. Here is one:

Cloud-computing companies could issue certificates convertible into an hour of premium computing. Prices for other services could be quoted in terms of these certificates. The analogy is to traditional gold-backed currency, which was redeemable into physical gold at the option of the owner….

It is impossible to predict what kinds of money a truly free market will create in an increasingly digitized world. But we can be confident in predicting that just as markets improve the quality of all products, they will do the same for money.

Read the whole thing here.

Mercatus Center scholar Jerry Brito talks about Bitcoin, including the recent speculative bubble that jacked up its price despite the steady, pre-determined increase in its supply mentioned above:

Comments

[Mr Whipple]

Anyone who chooses not to use bitcoin or an alternate currency actively "votes" for the current system to continue.

[CharlesWT]

ripple

[Mr Whipple]

Mercatus Center scholar Jerry Brito talks about Bitcoin, including the recent speculative bubble that jacked up its price despite the steady, pre-determined increase in its supply mentioned above:

It wasn't a "speculative bubble". It was people trying to get their money out of Cyprus before the government could seize it.

"Can bitcoin replace the dollar?"

Outright, no. But it has the potential to put an awful lot of pressure on an already distressed world currency system.

[Floridian]

Maybe someone who is more economically literate can answer this for me. I hear that economies are not zero sum games, which I take to mean there is no limit to the size of an economy. As population expands there are more customers and people providing services. So if that is true why is it good to have a currency like gold that can't expand with population growth? Please don't take that question to mean I think there is no down side to printing money all willy nilly.

[Agammamon]

Gold puts limits on *how* much money you can put out in the economy - the more dollars you have in circulation, the less each individual dollar is worth. Gold puts a hard cap on how many dollars you have in circulation.

In a gold economy, assuming that you can't produce gold fast enough to keep up, each gold dollar is more valuable - prices drop relative to the dollar (instead of paying 8 bucks for a meal at a fast food restaurant now you're paying, say, 5).

Taken to an extreme, if you couldn't expand the supply of gold and the economy grew many orders of magnitude what you'd see is that stuff would be selling for fractions of a dollar (you could re-denominate your currency to fix this but the effect is still the same, just the decimal place moved).

Of course it would also mean that salaries would be in fractions of a dollar - that's where the ability to do a small amount of inflation comes in handy. Keeps down the social unrest of people seeing their paychecks shrink even if their purchasing power is increasing.

[Agammamon]

'Course you do have the worry of technological solutions destroying your economy in one fell swoop - if it can be cheap to filter gold out of seawater then the value of gold drops precipitously without the institutional controls on the amount of money that fiat currency has.

But that is less likely to happen than your central bank inflating the nation out of debt, destroying the value of your savings in the process.

[Floridian]

So the culture of people would need to change. People have no problem watching their pay check grow even while it buys you less, but they won't stand for a shrinking pay check while it buys you the same amount of stuff. If currency value fluctuates with the price of gold once production of new gold is limited, how is that superior to the current system. I mean if I turn in my gold certificate and get 2 ounces at one point in time and get 1 ounce at another point in time, what is the value of a gold based system?

[Agammamon]

Your *always going to get 2 oz of gold - the difference is how much you can buy with that 2 oz.

The advantage is that (IRL) the gold supply increases due to market demand. As the economy increases, gold becomes more valuable, therefore more gold is extracted, making gold less valuable - the gold supply fluctuates around a natural equilibrium set by price signals.

Fiat currency sets the money supply based on the best intuition of top men, who are often wrong and even when right can't respond fast enough to changes in the economy or to political pressure.

The problem of "running out of money" is an extreme end case "hundreds of years in the future" scenario. If we ran out of gold then some other rare, but not too rare, commodity can be substituted.

[CE]

People worry about this, but the supply of gold has typically grown slowly over time, at about the rate that Chicago school monetarists say they would inflate the paper money supply if only they were in charge.

[Virginian]

The supply of gold does expand. It just expands at a rate which is set by the market, not by the whims of bureaucrats.

[Floridian]

I had read that most of the easy gold had been mined and it is becoming much more difficult to extract the remaining gold. Is this a fallacy like peak oil?

[Agammamon]

Yes, for much the same reasons as peak oil.

Sure the easy gold has been mined - and the price of gold has gone up, making some of the remaining gold profitable to dig out now. As *that* gold is used up, the next harder bit gets profitable enough to dig up.

[CE]

And as the price goes up, a lot of gold owned as jewelry becomes very easy to "mine", keeping the price from rising too quickly.

[Virginian]

Peak anything is a fallacy, IMO. If the price of a good is rising, then new sources of the good will become economically viable, and this will drive the price down.

[Floridian]

So as gold gets harder to extract the value will increase giving more incentive to extract more gold raising the value and supply of gold simultaneously. I guess that was my misunderstanding thinking gold was zero sum. You could add multiple currencies based on platinum or whatever expanding currency but at a slower rate than fiat currency. Thanks.

[Heroic Mulatto]

There is currently 20 million tons of gold diluted in the world's oceans.

[Floridian]

I get the value of that being about 890 million. Seems like that is not worth the effort to get it.

[Floridian]

Oops. I did the math wrong. Multiple that by a million. It now is worth the effort.

[Floridian]

890 trillion dollars is like 4 times the total debt of the US.

[Agammamon]

Its not worth the effort - as evidenced by the fact that no one can get the gold out without having to spend more money than the gold is worth.

[Floridian]

Can you recommend a good book for introduction into economics. Not a text book but something fun and informative. Thanks again for the response.

[Agammamon]

Not so much an intro, but "The Clash of Economic Ideas" by Lawrence H White (available in e-book format from Amazon) is a good exploration of both capitalist and socialist economic ideas and why the former works and the latter fails consistently.

[Floridian]

Awesome. Thanks

[hamilton]

Re the alt-text: don't be hatin' on Dippin' Dots Nick. The Cookies and Cream variation was great as the dot texture really complemented the flavor. I said it.

[LTC(ret) John]

Thanks for that picture an alt-text... the minor league (single A0 ballpark I go to has Dippin' Dots, the Ice Cream of the Future, and the signs for it are now old and faded. The Dippin' Dot Future - always approaching, but never here.

[LTC(ret) John]

), not 0

[CE]

Sorry, I prefer real money. Private fiat money isn't much better than government fiat money. Neither has any intrinsic value.

[bit cromwell]

the biggest risk to bitcoin is lack of understanding - what they are, how to buy them, and how to use them. i'd recommend this or a similar bitcoin starter kit to anyone interested in btc.
http://littlebiggy.org/4755888