Thursday, June 6, 2013

Bitcoin Debate 1

Is it really true that Bitcoin is a way to preserve private wealth or is it a new bubble that destroys wealth? Who are we going to believe, those who say that Bitcoin is the “solution” to fiat currency or those who argue that this new digital currency is basically flawed? Which camp has an accurate Austrian concept of money, the pros or the cons? Allow me to share my reading focusing on both the positive and the negative sides of this new electronic cash.
Let me start with Rick Falkvince’s “Why Bitcoin is Poised to Change Society Much More than the Internet Did”. He claims that as Bitcoin “matures, it will change society’s fundamental operations much more than the Internet did.” He then identifies Bitcoin as a new form of money operating without the need to trust any institution. In fact, it is outside the control of government and any financial institution; its chief goal is to make central banking obsolete. Falkvince further describes Bitcoin as “the Skynet of banking” due to its resiliency even if the government would attempt to shut it down. Though Falkvince accepts that Bitcoin has many weaknesses, he still considers “shortsighted and ignorant” to describe it as a “bubble”. He admits that “liquidity to state-issued money” is one of its problems, but sees the value of Bitcoin as “an economic agreement”.
Let’s proceed next to Jeffrey A. Tucker’s “Bitcoin for Beginners”. At the outset, Tucker argues that understanding Bitcoin is not easy and it requires humility to accept the limitation of our imagination about the future potential of the free market. He compared Bitcoin to emails and ebooks, which both replaced familiar and known utilities. By this word, Tucker implies that Bitcoin will eventually replace the present monetary system.
Tucker’s observation is accurate. He perceives that despite the fact that the entire world has been leaving the actual into the cyberspace, existing monetary system is still clinging to material paper under the control of the government. And that is why Bitcoin as a digital currency is necessary to take this control out of the hands of the government.
A certain anonymous “Satoshi Nakamoto” introduced this needed currency in 2008 that according to Tucker possessed the features required to address the present financial crisis. These features include anonymity, speed, preservation of property rights and scarcity. Among them, scarcity is the precise quality that is now violated both by governments and central banks through the printing of indefinite quantity of paper money. In the case of Bitcoin, its scarcity is proven by its present 11 M in quantity and fixed at 21 M by 2140.
Jeffrey A. Tucker introduced three other points in understanding this new monetary system. Bitcoin is decentralized, has value, and offers a promising field for investment. The system is designed free from the monopoly of any single institution. It is a monetary system where everyone is in charge. And because of this, we are told that any attempt on the part of the government to destroy or control the system would be an impossible task.
Note: Originally posted in Studies in Economics and mirrored in Acts of the New Commonwealth last April 10, 2013.