Some blog comments that I found useful the last few days - Bitcoin edition

Although these are old they summarize well some of the problems with deflationary currency and with the attempt of maintaining two currencies in parallel. They stress some aspects that I had overlooked in my recent post on Bitcoin.

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We live in a capitalistic society. Lets assume, we will replace the dollar by bitcoins. And now let us found a company to produce some goods we want to sell. First we need money. We get it from a bank or investor, let's say 100 Bitcoins. The investor gives it to us for 10%. So in a year we have to pay back 110 bitcoins. The goods we want to produce could all together be sold for let's say 130 bitcoins. So we expect to win 20 bitcoins.

While we build up our company and produce the goods, the value of the bitcoin increases. What does it mean? Our debt increases in value, the material we bought, looses its value. When we start selling our products, their value in sum is at 105 bitcoins, because our consumers expect to get more out of a bitcoin then when we started our business. Our bank/investor still expects 110 bitcoins, which is 5 bitcoins more than we made.

---- "ThomasW" commenting on a piece by Joshua Gans in Economist's View, December 2013.

Incidentally, yes, Bitcoin could conceivably become a currency if enough merchants decided to transact in Bitcoins. The problem with this is that Bitcoin would be inevitably pushed out by the dollar because two-currency zones are inherently unstable. Part of the idea of currencies as fiat is the idea that standardization provides economic benefits. An economy where the workers are paid in Bitcoins but have to buy services in USD means that exchange markets would be a complete mess, with every payday pushing Bitcoin prices skyward as employers hurriedly bought Bitcoins to pay their employees with, only to fall back down again as those Bitcoins were then hurriedly sold by their employees to buy USD again and continue the cycle anew. The only people who would make money would be the currency exchangers, adding a deadweight loss to the economy by taking their spread each payday. The economy would eventually abandon either Bitcoin or USD because doing so would be more optimal. But they would likely abandon Bitcoin. USD has the fiat of the largest military power on the planet behind it, Bitcoin has a bunch of idiots with overheating video cards.

And in fact, that's exactly what's happened to the Bitcoin economy, albeit on a smaller scale. You simply can't promote a traditional capitalist currency without being a government with guns on your side and a claim to power.

---- "Libertardian" commenting on a post on the Buttcoin blog, ca. January 2013.