Friday, December 06, 2013

Update on my Simple critique of Bitcoin

Two and a half years ago I wrote Simple critique of Bitcoin, and my first prediction is coming true.  I wrote:

Bitcoin MIGHT work if only it was able to be unique. But there is nothing to stop a proliferation of identical networked coinage systems. Even if it were patented, the patent would expire. With no intellectual property protection, we would see an unlimited set of identical citcoin, ditcoin, etceteracoin. 

[Added 12/6/13] So this is how fiat currency dies, with thunderous CPUs?
As predicted, Litecoin has arisen.  And it can make 4 times as many coins!  It is open source, and thus can be reimplemented over and over by anybody who wants to open yet another bubble.  But worse, "In fact, Cryptocoincharts shows something in the region of 164 different virtual currency-based cross rates in the market..."  which means a minimum of 13 competing currencies.

1 comment:

Mordanicus said...

It's clear that such "electronic" currencies suffer from a classical free rider problem. For each currency it would be advantageous if they would agree to restrict the total amount of such currencies in circulation. However, simultaneously it is beneficial for each separate currency to increase it's market share. Consequently each issuer of bitcoin-like currencies will produce more and more of it, so inflating the total supply.

A more important critique of bitcoins is that it's based on a discredited theory of money. Classical economics argues that money is just a means of exchange, which is more efficient that pure barter. However, anthropologists and historians have pointed out that there's no evidence to support this hypothesis about the origin of money. Instead they argue that money originates from the government imposed compulsion to contribute to sacrifices. This obligation creates demand for the goods to be sacrificed, and hence these commodities get value.

In modern world taxation fulfills the role of sacrifice.