Governments head toward Bitcoin without realizing it

This weekend, Ecuador joined at least 5 other countries in walking toward a future that replaces paper and coins with cryptocurrency. But, are these national experiments likely to lead to the future that comes to mind when we think of Bitcoin?

AWildDuck offers this 2-sentence analysis:

  • Most governments and national banks that experiment with cryptocurrency have no intention of empowering citizens nor decoupling their monetary supply from political control
  • But in the end, that’s exactly where they are headed

Ecuador 5000 SucreThese national experiments are fascinating. Including Ecuador, there are at least 6 national efforts to embrace cryptocurrency around the world, including two in Africa, two in Latin America, Iceland and Israel.

It’s unfortunate that each potentate has created a disparate, internal and proprietary currency. Most of these territorial adopters have adopted neither a mathematical supply cap nor a permissionless blockchain. They buy into the legacy ‘wisdom’ that controlled inflation is necessary to stimulate spending and grow an economy.

Perhaps they see cryptocurrency as a an evolutionary mechanism to lower the production and distribution cost of coins and bills and thwart counterfeiting—just as  many countries have switched from paper bills to plastic. That’s a limited view of a very positive revolution in the making. The leaders and central banks of many countries seem to miss the point. It’s not just about new technology. It’s about free markets, limited supply, public trust and citizen empowerment. In fact, it’s all about growth, free markets and the expansion of wealth.

Hopefully, these experiments are just a step toward combining monetary policy with an open digital currency while fostering a grass roots revival of public trust… Eventually, governments will recognize that properly implemented cryptocurrency—one that is free to usurp the national mint—leads to increased faith in government. At least, if one’s  government demonstrates a willingness to decouple politics from monetary policy.

Ellery Davies is a founding member of CRYPSA, the Cryptocurrency
Standards Association. He is also chief editor at AWildDuck. Catch
all of his Bitcoin articles here.

Bitcoin Adoption: Series of reactions

What is Bitcoin?

Bitcoin-05Sure—You know the history. As it spread from the geeky crypto community, Bitcoin sparked investor frenzy. Its “value” was driven by the confidence of early adopters that they hitched an early train, rather than commercial adoption. But, just like those zealous investors, you realize that it may ultimately reduce the costs of online commerce, if and when if it becomes widely accepted.

But what is Bitcoin, really? To what class of instruments does it belong?

  • The most ardent detractors see it as a sham: A pyramid scheme with absolutely no durable value. A house of cards waiting to tumble. This is a position of my close friend, JD, a former IRS auditor and the first to comment on this post below.
  • Many people recognize that it can be a useful transaction medium—similar to a prepaid gift card, but with a few added kicks: Decentralized, low cost and private.
  • Or is it an equity asset, traded by a community of speculative investors, and subject to bubble psychology? If so, do the wild swings in its exchange rate diminish its potential to be used as a payment mechanism?
  • Does Bitcoin have the potential to be a full-fledged currency with a “real value” that floats based on supply and demand? Can something that lacks intrinsic value or the backing of a bank or government replace national currency?

Regardless of your opinion about Bitcoin, it does one thing that few pundits dispute: Although the exchange value fluctuates, it reduces transaction costs to nearly zero. This characteristic, alone, is a dramatic breakthrough. It was achieved by virtue of its designer overcoming the “double-spend problem”.

Peering Into the Future?

Removing friction is certainly what it is all about. As a transaction medium, Bitcoin achieves this, but so does any debit instrument, or any account in which a buyer has retained house “credit”.

Bitcoin_pullback-sCurrently there is a high bar to get money exchanged into and out of Bitcoin. It’s a mess: costly, time consuming and a big hassle. Seriously! Have you tried using an exchange? Even the most trusted one (Coinbase of San Francisco) makes it incredibly difficult to get money in and out of BTC. Fortunately, this situation is gradually improving.

Where Bitcoin really shines (or more accurately, when it will shine), occurs at the time when more vendors choose to leave revenues in BTC, pending their own purchases from suppliers, shareholder payouts, or simply as retained savings.

When this happens, all sorts of good things will follow…

  • A growing fraction of sellers leave their bitcoin in their wallets, realizing that they will need to spend it for their own labor and materials.
  • Gradually, wild exchange-rate gyrations diminish—not because fewer people are exchanging money, but because the Bitcoin supply/demand value is driven more by actual commerce than it is by speculation.
  • Sellers begin pricing merchandise in Bitcoin rather than legacy units (i.e. national currencies)—because they are less anxious to exchange out of BTC immediately after each sale.

When sellers begin letting a fraction of bitcoin revenues ride—and as they begin pricing goods and services in BTC—a phenomenal tipping point will follow…

  • If goods and services are priced in BTC, then everyone involved saves money and engages in transactions more efficiently.
  • If goods and services are priced in BTC, then the public will begin to perceive exchange rate volatility as a changing dollar rather than a changing bitcoin.
  • Eventually, vendors will begin spending the BTC that they acquire in commerce (or paying staff in BTC), rather than converting quickly back to national currency. More than anything else, this will transform Bitcoin into a stored value unto itself, and not just an exchange chit. This may seem to be a subtle footnote to adoption, but the ramifications are great. That earthquake is the world gradually moving away from centralized treasury-issued bank notes and toward a unified and currency that we can all trust.

People, everywhere, will one day place their trust in a far more robust and trustworthy mechanism than paper promissory notes printed by regional governments. A brilliantly crafted mechanism that is fully distributed, p2p, transaction verified (yet private), has a capped supply and is secure.

What Then?

O.K. So we believe that Bitcoin is the future of money and not just a replacement for credit cards. But what does this really mean? Can the series of cause-and-effect be extrapolated beyond widespread user adoption? Absolutely! …

Adoption of Bitcoin as a stored value (that means as a currency) leads to the gradual realization among governments that Bitcoin is not a threat to sovereignty nor even to tax policy. Instead it presents unbounded opportunity: The opportunity to stabilize markets, eliminate inflation, reduce costs and restore public trust. In short, Bitcoin will ultimately level the playing field, revive entire economies, transform the role of government, and save consumers and businesses billions of dollars each year.

Did I mention that Bitcoin is the future of commerce and a very possible successor to legacy currencies? Aristotle must be smiling.

Lease rooms in the US Treasury to pay off some of the debt brought about by inflation

Uncle Sam can lease the US Treasury building to pay off debt brought about by inflation

Is the US dollar backed by more than Bitcoin?

Bitcoin is getting to be a frequent topic here at AWildDuck.* Regular readers know that I am bullish on the exchange medium. Not just as an investment, but as an emerging world currency. And, as the story continues to unfold, the fundamentals just keep getting better and better.

Bitcoin has been around since late 2010. Less than 3 years. As an immature exchange medium, its wild swings make it too volatile to be recommended in any portfolio with short term objectives. But with bungling at the largest and earliest exchange and a perceived tie to the criminal bazzar, Silk Road, events have muddied the inevitable path toward legitimacy. They amplify the small risk and delay widespread adoption.

I’m cool with that, because with widespread misunderstanding comes opportunity for those that see the long term picture—especially when it comes to a tectonic paradigm shift. As a long term investment, Bitcoin is a slam dunk. It can’t go down, any more than an original Rembrandt can lose value in the long run.

But, what surprises me, is that three years on, we are still faced with pundits who fail to appreciate the dramatic tipping point that is looming just down the road. They point to volatility rather than fundamentals. Perhaps, most frustrating, they point to the lack of government backing or a central bank as a deficit rather than a bonus and—in fact—the Raison d’être.

Bitcoins are backed by something even better than US dollars

Backing that beats US dollars

Here is a new article from a credible source that ought to understand the intersection of technology with economics:

When armchair analysts dig into the risk or folly of Bitcoin as a currency or investment, I bite my tongue. (Well, not this time!).

Let’s talk about item #2, If Bitcoin fails, it has no safety net. The argument is built around a premise that Bitcoin is backed by the “expectation of acceptance by others” while the US dollar is backed up by something more tangible (e.g. a government that can “step in”). That premise is wholly ludicrous. Both the dollar and Bitcoin have value that is backed by nothing tangible. And Bitcoin wins handily on the intangibles.

Background

In 1933, Teddy Roosevelt ordered Americans to redeem all private reserves of gold for printed notes. Americans were no longer allowed to own gold coins, bullion or certificates. (That left only the gold content of industrial products, jewelry and ornaments). For the next 40 years, the US insisted that it was still on a “gold standard”, because it amassed a stockpile of gold bullion in Fort Knox, Kentucky. With this as collateral, the government guaranteed the value of printed currency and it pegged the dollar value of what it printed. Of course, it was a guarantor only in theory, because it was illegal for US citizens to redeem their gold. They weren’t even allowed to own gold overseas.

From 1934 until the early 1970s, the value of a dollar was fixed at 1/35 oz of gold. In other words, the US government was effectively promising foreign treasuries the foreign trade settlement was bound by the transfer of gold at a value of $35 for each oz.

The dollar’s relative stability throughout the post war era was a result of the Bretton Woods agreement in which a large number of nations pegged their own currencies to the US dollar.* In fact, the value of the dollar increased, even though it was still worth 1/35 oz of gold. Everyone trusted the USA to maintain the value of its own currency with something. Most hoped that it was the gold at Fort Knox, but some economists say that it didn’t really matter, because the US was such a dynamic and growing economy, with a history of predictable inflation. And therefore, it had a high degree of trust.

But as we approach the ’70s, trust probably accounted for more dollar purchasing power than gold. In 1971, under Richard Nixon, the US terminated convertibility of the dollar to gold, even for foreign banks. By 1973, the US decoupled its currency from gold altogether, and in 1974, Americans could, once again, legally buy gold in any form.

So, what backs the dollar today? In academic jargon, it is a fiat currency.* To economists, it is backed by the full faith and credit of the US government. But in reality, this just means that the US can print or borrow more money to pay past debts. In truth, it is backed by something, but that something is no more than what backs a Bitcoin: It’s value is based on the confidence of the person accepting or saving the coin that it will be accepted in the future by someone else—and at a rate they can believe in today.

But wait! Though both the US dollar and Bitcoin are fiat money—backed only by the perception of buyers and sellers, in fact, Bitcoin has the distinct edge…

Why Bitcoin?

Why is the long term value of a Rembrandt painting unlikely to tank? To retain value, any asset must meet two criteria: Limited availability and precious to behold (I use art as a metaphor—preciousness can be anything valued by a pool of perspective owners). Bitcoin is a limited commodity by pedigree and it is precious because of a vast trust-matrix built on a foundation of mathematics. When a two-sided market develops around something with a provably limited supply, trust becomes more durable than decree.

Bitcoin is the future of currency because it has the edge in all areas: it can be more certainly trusted, it offers an advantage to saving, it is a stateless exchange medium and requires no backing. This isn’t to say it is not backed… In fact, it is backed by solid mathematical principles that are open to peer review.

In the long run, the dollar is a weaker and more risky currency than Bitcoin. It has no natural cap and is subject to counterfeiters and manipulation by the people who authorize its printing. A wallet or bank cannot easily be provably “backed up” and its value inflates rather than deflates with adoption. Although armchair economists who focus on protectionism, exceptionalism, or short term objectives may see some of these things as benefits, they are all serious deficiencies.

Advantage: Bitcoin

Ellery Davies is editor of awildduck.com. He is a frequent contributor
to The Wall Street Journal, Yahoo News, CNet and PC World.

Past Posts about Bitcoin

* Resources