Friday, January 31, 2014

Bitcoin predictions.

At some point in the not-so-distant future, a nation will issue its own crypto-currency that is exchangeable one-to-one with its ordinary currency.  If Bitcoin really does have transaction advantages beyond ordinary banking and credit cards, this more stable currency will share those advantages but also have a MUCH simpler exchange process into a real-world currency.

Why would a national crypto-currency be more stable?  In the old days, gold was considered most stable in value and its exchangeability with fiat currency made the fiat currency more stable.  Fiat money is considered more stable in value than crypto-currencies and can stabilize their values.

Once some smaller nation has established the first national crypto-currency, it will be obvious to the nations with dominant currencies (and the banks and the credit card companies and the rest of the financial industry) that they need to do the same thing to protect the demand for their currencies.

As national crypto-currencies develop, the value of Bitcoin will plummet.  Even the rumor of these currencies will make Bitcoin plummet.  National crypto-currencies will keep transactions traceable to prevent money laundering and other evasion of laws, leaving Bitcoin with primarily black market transactions.  At that point, Bitcoin will be regulated out of existence if not simply made illegal.

How could Bitcoin be eradicated by governments?  Very simple: use market mechanisms!  Set up a privateering system whereby Bitcoin usage that is caught results in confiscation, with the booty split between the government and the privateers.  Libertarians often like to talk about pirates as anarchist entrepreneurs that created complicated organizations without government, but they conveniently forget that government licensed pirates (privateers) were also very common.

[Update 2/4/2014]  The Paperless Economy: How governments can and should beat Bitcoin at its own game.   at Slate presents another good reason why governments such as the US might want to switch from paper to digital: to allow better control of interest rates and thus better control of the economy.

5 comments:

Mordanicus said...

Given that the anonymity of bitcoin is a joke (see The Silkroad), I wonder whether bitcoin isn't actually created by the NSA or a similar agency. BTW a few weeks ago it was announced that the Dutch government has confiscated some bitcoins from a convicted felon, which they subsequently exchanged for cash.

Mike Huben said...

While that sort of conspiracy theory might explain Bitcoin, it strikes me as unlikely that the NSA would develop a new open source technology and release it to the public.

Actual NSA/CIA conspiracies exposed to date have generally relied on compiled code (STUXNET and RSA tools) or hardware. That way it is more difficult for others to reuse the technique, I presume.

I look forward to learning from counterexamples, if we can find them. But in the mean time, I don't see much reason to think the NSA is behind Bitcoin.

Mordanicus said...

I see your point, however the release of the code could be part of the strategy. STUXNET and RSA tools have a different function than bitcoins, which means that in former cases the publication of the source code is not in the advantage of the NSA.

However, I am not claiming that the NSA or a similar organization is actually behind bitcoin, but I see it as an interesting hypothesis.

Troy Kocher said...

The assumption that miners will abandoned unregulated coins to mine government controlled currency is questionable.

Mike Huben said...

Miners do not determine the usage of a coinage. If usage switched to government controlled currency, the miners would follow to process the transactions. I suspect that the government coinage would not need miners for its production.