Bitcoin Would Be a Calamity, Not an Economy

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A piece appearing in MIT Technology Review suggests that the anonymous digital currency bitcoin has had trouble growing beyond a niche community.

From MIT Technology Review:

The number of bitcoin transactions (as opposed to trades) has not risen much in the last few years, and one recent academic study suggested that half of those transactions are associated with illicit activity. As a medium of exchange, bitcoin remains today pretty much what it was in 2010: an interesting complement to the existing monetary system, primarily useful for people interested in avoiding legal authorities or living in societies racked by inflation (like, say, in Venezuela or Zimbabwe).

James Surowiecki's journal piece goes onto claim that a future economy would cease functioning should a decentralized monetary instrument such as bitcoin replace the Government controlled US dollar or euro.

Our economies and financial systems are built around fiat money, and they rely on the central bank’s control of the currency (and the government’s ability to issue debt in that currency) to help manage the business cycle, fight unemployment, and deal with financial crises. An economy in which Bitcoin was the dominant currency would be a more volatile and harsher economy, in which the government would have limited tools to fight recessions and where financial panics, once started, would be hard to stop.

He added:

Bitcoin would also make it hard for governments to fight recessions, which they typically do by using what economists call countercyclical monetary and fiscal policy. Central banks slash interest rates, and—as the Federal Reserve did after the 2008 financial crisis—pump money into the system by buying assets (what’s known as quantitative easing). And governments try to get the economy moving again by cutting taxes and increasing spending, typically paying for that by borrowing money, as with the Obama-era stimulus package.

Here again, a Bitcoin economy would limit the government’s options. Since the central bank would have no control over the currency, it would also have no control over interest rates, and only a limited ability (depending on the size of its Bitcoin stash) to pour money into the economy.

Surowiecki also notes that, when demand for bitcoin is high, transaction fees soar as miners raise the price of processing those transactions.  Also, with a remarkably small number of people owning bitcoin, market manipulation will be much easier.

Bitcoin and the countless number of other cryptocurrencies on the market today will also help to make money laundering more prevelant, Surowiecki surmises.

This isn’t speculative. we actually have a historical example of how this works. In the United States in the decades before the Civil War, there was no national currency. Instead, it was an era of what was called “free banking.” Individual banks issued bank notes, theoretically backed by gold, that people used as money. The problem was that the farther away from a bank you got, the less recognizable (and therefore the less trustworthy) a bank’s note was to people. And every time you did a deal, you had to vet the note to make sure it was worth what your trading partner said it was worth. So-called wildcat banks sprang up, took people’s money, issued a host of notes, and then shut down, making their notes worthless. To be sure, people came up with workarounds—there were volumes that were a kind of Yelp for banking, displaying the panoply of bank notes and rating them for reliability and value. But the broader consequence was that doing business was simply more complicated and slower than it otherwise would have been. The same will be true in a world where some people use Ethereum, others use Litecoin, and others use Ripple.

- Aaron Goldstein, Gambling911.com

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