Why Bitcoin will failSubmitted by Goldspan on Sat, 08/03/2013 - 21:06
History is littered with monetary schemes that were started for altruistic reasons. Bitcoin will be no different. The eventual outcome will be enriching the earlier owners of Bitcoin at the expense of the later owners. If you have studied monetary history at all what comes to mind is the Mississippi Bubble of John Law. In France in the early 1700’s the King had died and left the Thrown to a 12 year old. The Duke of Orleans was left to figure a financial mess for the new 12 year old King. With taxes just enough to cover spending and nothing to repay the massive debt, The King was not the only thing being buried in France, the people could not carry the load any longer. Money was becoming scarce as it was being horded from the threat of the future tax burden, and from the threat of a recall to deprecate the content. Along comes John Law with a scheme to create a paper monetary system called a land bank and almost overnight transformed the economy with this new medium of exchange. The French owned vast amounts of land in the new world west of the Mississippi and a company was formed to take advantage of that. In order to invest in the new company you had to exchange the debt of the King along with new paper money created by John Law, the frenzy was on. Until one day someone asked for a return of their investment and they wanted gold as promised….game over. Study John Law and the Mississippi Bubble….fascinating story.
Charles Kindleberger, an economic historian at Yale University, believes Law's intentions were legitimate and that the Mississippi Company was intended to be a real enterprise.
(If you don’t know this author…….please get to know him. His book titled “Manias, Panics and Crashes” has put him as the foremost expert on bubbles and on this topic.)
Here is the relevance to Bitcoin. Almost all (at least the ones I have study) monetary systems start out the same way….the existing system is just becoming too burdensome. But all started out with a common feature…..an anchor. They are all tied some way to something that has some intrinsic value, to the only real thing that has any monetary intrinsic value….species (gold or silver). These are not just shiny metals objects that look good once decorated with a king's features……it represent a real store of value. An ounce of .9999 fine 24 karat gold has a barter exchange equal to other means of production in the economy. The effort it takes to mine, refine and transport an ounce of gold, back in the day would exchange for 400 loafs of bread. An ounce of gold would buy a really nice suit of clothes with all the accessories, believe it or not, but about the same as today. This represents real value……value in other goods and services produced. The gold represents the efforts of the miner to provide a preferred medium of exchange while exchanging it for the goods and services he desires to live a more comfortable life. The baker accepts the medium of exchange because he knows the tailor will accept it for a suit of clothes. All know that the only way for the medium of exchange to expand is if the miner puts in the effort to mine an additional ounce. The same effort to make another 400 more loafs of bread or tailor another suit. This represents a store of value because you could count on it to remain across time and even across continents.
This is the problem I see with Bitcoin,there is no anchor. Here is what I found on Wikipedia for the concept of mining Bitcoin.
The processing of Bitcoin transactions is secured by servers called bitcoin miners. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology. In addition to archiving transactions, each new ledger update creates some newly minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. To accommodate this limit, each bitcoin is subdivided down to eight decimal places; forming 100 million smaller units called satoshis per bitcoin.
OK tell me if I am wrong here but the only effort in the mining of more bitcoins is the process of exchange of bitcoins. An analogy of this would be a gold miner’s medium of exchange increases in value every time there is a transaction made in gold. This is not mining…..this is inflating the number of units based on the velocity of exchange, but bitcoins rate of inflation is decreasing by half every 4 years until all are in use…. at an arbitrary number of 21 million in the year 2140.
Just a thought here….if this were to become successful, how many people in 2140 would think it was a conspiracy?
From wikipedia also:
Bitcoin has no central issuing authority. Nodes on the network are programmed to increase the money supply according to a pre-determined schedule until the total number of bitcoins reaches 21 million. Operators of these miner nodes can then hold their new bitcoins, sell them on exchanges or trade them for other goods and services at their discretion. Currently, 25 bitcoins are generated with each block found which occurs every 10 minutes on average. This amount, called the block reward, will be halved to 12.5 bitcoins within the year 2017 and again roughly every 4 years thereafter until a hard-limit of 21 million bitcoins is reached around the year 2140. As of March 2013 over 10.5 million of the total 21 million bitcoins had been created; the current total number created is available online. In November 2012, half of the total supply was generated, and by end of 2016, three-quarters will have been generated. By around 2140, all bitcoins will have been generated with the final years producing only fractional units. To ensure sufficient granularity of the money supply clients can divide each bitcoin down to eight decimal places (providing a total of 2.1 × 1015 or 2.1 quadrillion units
The problem, as I see it, is that bitcoin only value is it’s medium of exchange, without any real effort. It is ripe for fraud and manipulation, but what fiat monetary system isn’t. The automatic systems of growth to a finite number of units along with the division into smaller increments are intended to eliminate the problems of past monetary failures but cannot control human nature. As the medium of exchange and perceived value increases, HORDING will occur. The earlier owners of the bitcoin will have an advantage…….their bitcoins exchange value will represent more economic value then it took to produce them along with the other good produced in the economy. So they will either receive a greater return on investment (which violates the medium of exchange) or they will HORD them and will look for a different lesser medium of exchange. Grasham’s law will take over; bad money will drive the good money out of circulation. Then you will hear the cries that the medium of exchange is INELASTIC ; there are just not enough bitcoins in circulation…….then comes the INFLATION!
And everyone that owns bitcoins will be damaged by the receivers of the additional new bitcoins. The new receivers will be able to purchase the production of the baker and the tailor at the expense of existing bitcoins owners because there is no effort that would require resources being diverted from other production opportunities. A disruption will occur in the pricing mechanism in the market place and the medium of exchange will be destroyed. And the conspiracy theorist will have a another field day!.......those dirty bitcoin bankers!