Published on May 26th, 2013 | by Ori Manor0
Bitcoins: Systemic Game Changers?
Bitcoin appears to be the face of the latest financial controversy. Adherents enthusiastically evangelize it as the key to a utopian financial/monetary system and critics deride it as a potentially dangerous fad.
I’ll tell you one thing: it’s got the revolutionary in me all hot and bothered. But the realist is skeptical.
As an idealistic middle finger-in-the-face to the financial and political elites that, with greedy meddling, have all but crashed the global economy, it’s an empowering idea—brilliant even.
But is it a viable currency in the long term? Could Bitcoin really change the financial landscape?
In defense of Bitcoin, let’s start with the basics. Consider some fundamental economics principles:
Underlying economic axiom #1! Something’s value is determined primarily by what someone is willing to trade (pay) for it. This goes for any currency, product or service.
For example, my house is appraised by the local government at a value of $100,000 for property tax reasons. But I found a buyer that will pay $150,000. That means my house is really worth $150,000.
Using this principle, Bitcoin is an extremely valuable currency and though unstable, is generally valued at a hundred or more times the U.S. dollar.
However, one problem is that, unlike the dollar, Bitcoins are significantly more difficult to turn into something else. It’s unlikely that anyone could go grocery shopping with Bitcoins, for example. Rather, it’s become a popular currency on the “deep web,” particularly on a website called the Silk Road where consumers can buy anything from illicit drugs to prostitutes to the services of a hit man.
Slightly disturbing? Perhaps, but these products and services have always been, and will always be in demand, therefore giving value and credibility to Bitcoin as per our axiom discussed above.
The suits and talking heads are pretty down on Bitcoin—as are many status quo social scientists, listing numerous reasons why it will never work. I watched a video where a smug, British pundit on CNBC laughingly disregarded Bitcoin because it’s not “backed” by any “hard currency.”
Well, first of all, that’s the whole point—to operate outside of the conventional financial system. And second of all, the currencies our smug pundit was undoubtedly referring to—the Dollar or the Euro or the Pound—aren’t backed by anything either!
They used to be. Before Nixon and the 60s, every dollar was backed by a set amount of gold sitting in a locked room and anyone with paper money could theoretically trade their money for the equivalent amount of gold if they wanted to. Now, the value of a dollar is determined by how it stands next to other currencies and how many dollars other countries hold in their reserves. Oh, and how much money the Federal Reserve prints.
This brings us to underlying economic axiom #2! The more there is of something, the less valuable it is.
Bitcoin critics often point out the fact that Bitcoins can be “mined” by anyone willing to dedicate the time and computing power, thus creating wealth out of nothing. “That’s just not right,” they proclaim. “That’s not how economies operate!” And yet, the Federal Reserve printed trillions of dollars in 2012. Some call it counterfeiting, but one thing is for certain: when all this money starts circulating through the global economy, the value of the dollar decreases.
Satoshi Nakamoto, the pseudonymous creator of Bitcoin, seems to have addressed this problem with his algorithm. By the year 2140, all available Bitcoins will have been mined, hitting a ceiling of 21 million. However, this leads to the opposite problem posed by central banks printing money and devaluing currencies—deflation.
Theoretically, the limited supply of Bitcoins will result in a steady increase in their value. So logically, if you have a Bitcoin that’s worth $100 today, but you know it’ll be worth $150 tomorrow, you won’t spend it and the whole point of a currency is negated. Plus, like all bubbles—gold, housing, tech industry, etc—when the value gets too high, no one can sell and the market crashes.
This is perhaps the most legitimate criticism of Bitcoin, but it’s an issue that other cryto-currencies (P2Pcoin, Feathercoin, Novacoin, etc) hope to answer with variations on Bitcoin’s algorithm and theory. I hope they do.
The powers-that-be, mainstream economists, media personalities and government officials tend to look down their nose at Bitcoin. They look for reasons (even blatantly ridiculous ones as mentioned above) to write it off as some silly experiment. And yet they feel threatened enough to attempt to regulate it, such as in March of 2013 when the U.S. Department of Treasury released a rule requiring anyone dealing in large Bitcoin transactions to report their gains/losses.
In that moment, a mainstream economic entity essentially legitimized crypto-currencies.
Still, the future of Bitcoin is uncertain. It’s success or failure will depend on how many people or organizations adopt it and spend it. And it could most certainly fail dramatically or fade into obscurity.
But the idea, the theory of crypto-currencies is quite exciting. Rather than rely on shady financial institutions like central banks as they desperately cling to economic stability by endlessly manipulating currency values and interest rates from their ivory towers, the regular people of the world are offered an opportunity they’ve never had before—to step outside of the “system.”
Furthermore, critics of Bitcoin’s underpinnings can only critique it using current models and theories. They seem to forget that paradigms always change and have a hard time seeing past what exists in front of them. We used to buy women with cows. We used to deal in precious metals in open-air markets. The current fiat money system cannot be the only measuring stick we hold up to any new idea. This is an era where things are dramatically changing at record speeds. The global communication network has all but toppled the film, music, and newspaper industries, among others. Whether or not its Bitcoin specifically or some other crypto-currency, why can’t our monetary system be next. This is an era for thinking outside of the box.