My thoughts on Bitcoin, originally a comment here: http://rwer.wordpress.com/2014/03/22/bitcoins/
Bitcoins are virtual gold, or maybe palladium. The have low use value, high scarcity, can’t be forged, and aren’t controlled by any government. They’re clearly designed to facilitate payments and store value. People aren’t obliged to accept them, but they do so voluntarily. Very few real-world vendors accept Bitcoins, making their use value low and uncertain, but the speculation is that acceptance will grow making them valuable. Currently they’re like an obscure precious metal, say palladium. Proponents hope they’ll become mainstream like gold, silver, money.
So are they money? They’re clearly an attempt at commodity money, like gold. Let’s assume the proponents/speculators are correct and they achieve broader acceptance. What are the implications?
Like gold and houses, Bitcoins are in fixed supply and thus deflationary. If you hoard an amount of Bitcoins it’ll rise in value with GDP. Arguably this is unfair and promotes inequality. It also rewards idle saving instead of consumption, trade, or real-world investing and depresses the economy. Investments whose real risk-adjusted return is below GDP growth aren’t made, which of course lowers GDP. If Bitcoins became pervasive as money they’d bring the same deflationary problems as the gold standard. If they became pervasive as investment instruments they’d resemble housing bubbles.
The introduction of Bitcoins itself expands the money supply in the short term. Vendors of low marginal cost products such as information goods will increase supply in order to gain Bitcoins, and that is good. However this is a temporary and bounded effect. The total amount of Bitcoins is fixed, and eventually the much stronger deflationary effects will prevail.
To prevent these problems, modern states exercise monetary policy, which comes down to two things:
– Inflate money at a low positive rate to force surplus to be invested and generate growth.
– Directly recycle surplus though a combination of taxation and inflationary spending.
The first use of inflation is monetary, like interest rates. The second is fiscal, using inflation to catch what nominal taxation can’t. Bitcoin evades both taxation and inflation, making monetary policy impossible (if it succeeds in a big way). This is of course what libertarian supporters want.
The libertarian supporters are either extremely selfish or deluded. The world of their dreams would be characterised by extreme and increasing concentration of wealth and income as well as declining yields for every kind of investment. When surplus isn’t recycled in nominal terms and the money supply isn’t increasing, investments necessarily will yield diminishing returns. The price/earnings ratio of all assets will keep climbing, while total output and consumption will be well below capacity and keep falling.
Bitcoins are good for individuals, but very detrimental to the common good.