My favorite Uncommon Knowledge moment came in an interview with Thomas Sowell. The illustrious Mr. Robinson was grilling Tom on his assertion that the Federal Reserve should be abolished. Peter continually peppered him with the question "What do you replace it with?" Doctor Sowell answered “When you remove a cancerous growth, what do you replace it with?”
I am no more a fan of the Federal Reserve than Thomas Sowell is. The idea of a decentralized currency is extremely appealing to me. However, I fear BitCoin will kill any chance such a currency has at succeeding for decades to come. So what’s my beef with the crypto-currency?
BitCoin lacks several key features of a currency.
Money must be easily exchanged In order to be useful. The verification process of a BitCoin transaction takes several minutes, making it impossible for McDonald's or any other merchant who relies on speedy checkout to utilize it. This will not improve with increased processing power or bandwidth, as it is built this way by design.
BitCoin was also designed with an eye towards preventing inflation, as fears of government money printing was one of the primary reasons for its creation in the first place. As such, there are a fixed number of BitCoins that can be mined. After that, the supply will be completely static.
Reserve banks can surely create a mess of things by printing too much money; however, they can also trash an economy by printing too little. The goal of a currency is to create stable prices for ease of exchange. This may require adding, or removing currency based on the amount of trade taking place.
The fixed number of BitCoins guarantees that it will suffer massive deflation as its use increases. Deflation is at least as damaging as inflation (probably far more so), as it gives people reason to not invest their wealth in the economy, but to hold on to it in currency form as it is constantly increasing in value anyway.
BitCoin functions more like an asset than a currency. People who are buying it are either engaging in speculation, or are investing in it to avoid currency devaluation, as they would do with gold. However unlike gold, you possess no physical asset in a Bit Coin. Bit Coins have no industrial uses, and don’t make attractive jewelry.
They occupy a strange place; not quite a currency, not quite an asset, and yet managing to combine the worst features of both. One cannot help but notice the bubble shape of this phenomenon. Those who got in early were made rich. Those who got in late cannot. Financial bubbles are built on confidence. Once there are fewer people willing to buy into BitCoin, the pyramid shape cannot be maintained and the collapse will look very much like a Madoff Ponzi scheme, only with no one to throw in jail. The lack of accountability for the currency’s collapse will be particularly frustrating for those who lose money.
After a BitCoin collapse, there will be no appetite for another decentralized currency for a long time. It’s a waste of a promising concept.
Brace for Anarcho-Capitalist backlash in 3…2…1.