I accept your objection about Grandma not understanding security. But you forget liquidity. Since MintChip (and similar) do not present a significant improvement in transaction costs over Bitcoin, they would have to outcompete Bitcoin on liquidity. And that’s not easy. There is an enormous logistical problem. Not only you have to make sure the infrastructure is in place so that everyone can process those transactions, people need to learn how to use them and prefer to use them.
And what would they do with the banks? If they attempt to replace them, they won’t be very happy. If you attempt to upgrade them, then the logistics become even more complicated.
There is also the issue of multiple currencies (whereas Bitcoin is one), so this would have to be done globally rather than within one country to be effective.
I’m not saying it’s impossible, it’s just more difficult to pull off than you present. Bitcoin has a first mover advantage.
PS I might be biased because I work for a cloud provider.
To address the “bitcoins aren’t backed by anything (represent no claim on anything)” objection, I’d like to ask what specific benefits a backing is deemed to provide.
Gold or a gold-backed dollar (assuming for the sake of argument that this backing is completely non-fraudulent and will definitely be honored) appears to have at least the following advantages over a pure fiat dollar:
The government cannot inflate it.
Its market value can never go to zero.
Is there any other benefit to having a backing? If not, we can dismiss #1 since bitcoins cannot be inflated either (this would require a change to the protocol that is Bitcoin, and this would then be Bitcoin-2 and probably not be adopted by many people*).
That simply leaves us with #2. The market value of a bitcoin could indeed go to zero, but we already knew this. This constitutes no new objection.
In conclusion, provided there are no other benefits of backing, and since bitcoin has the first benefit (#1) and everyone already acknowledges that it lacks the second one (#2), the reminder that “bitcoins aren’t backed by anything” boils down to the simpler and familiar “bitcoins could go to zero” objection.
–
On the other hand, if other benefits are deemed to accrue from having a backing, it seems clearer to enumerate and argue about those benefits specifically (benefit #3, #4, #5, etc.).
*If this is controversial, I’d like to bookmark this point in the argument so that we can come back to it after settling that question.
The potential of total collapse in value might seem to be “worth the risk” for a few hundred or even thousand dollars. But is Gramma Marge really going to put her multi-million dollar life insurance payout at risk of total collapse in value, regardless of how low it makes “transaction costs”??
As for the “Bitcoin can’t be inflated”, a) this isn’t strictly true and b) I’m more concerned about a MintChip copy-cat system that claims to be like Bitcoin with the essential difference that its supply can be “controlled” for “policy purposes.” Sure, the Bitcoin early-adopters will never be fooled by this but the masses easily will be… which means that all the hubbub about the uninflatability of Bitcoin could be fairly easily hijacked for propaganda purposes in promoting government-issued (and inflatable) digital fiat currencies.
Right now most people aren’t using bitcoin as a value store. This is rational because of its youth as an entity, and the previous price crash. However, that sort of boom-bust is a fairly typical curve you see replicated when anything becomes popular and then stabilizes in interest.
We should simply dial it back to strategies to fix what you fear. Are you afraid of devaluation? Simple, don’t hold large amounts of value in bitcoin. Use it for transactions between what you want and a commodity that excels at value-store, like gold or silver. This is why the idea of a gold or silver backed bitcoin is largely irrelevant. As long as it has a fairly stable exchange-value, as it does now, you can buy whatever you want for value store.
Just because past currencies typically had the dual uses of exchange value and value store doesn’t mean a future currency can’t just as easily separate those aspects.
It’s a possibility that is too remote to reasonably contemplate at this point. Maybe if the US government wanted to spend several billion dollars on hardware for the sole purpose of destroying bitcoin, they could pull it off. But most people would probably be able to exit the system before they’d taken control, getting most of their value out of bitcoin, and it wouldn’t stop a successor from being built hardened against such an attack.
The genie is truly out of the bottle. Bitcoin is thermo-nuclear currency.
That would only lend legitimacy to Bitcoin. Secondly, such a system couldn’t be P2P if they expect to control it, thus it would be subject to things like DDOS, hacking, and still couldn’t prevent people from escaping onto Bitcoin if they wanted to.
The virtue of Bitcoin in getting around legal barriers still exists. As long as government allow open access to the internet, either worldwide or within any country (intranets), bitcoin in general or a local version will be possible.
First of all, there is a wide variety of actors on the market with requirements for different forms of a medium of exchange. The requirements are heterogeneous. We can use the term “transaction costs” to refer to them in general, but empirically this manifests itself in many ways. So unless the state medium of exchange really is form-invariant as Bitcoin, there will always be a gap in the market left for Bitcoin.
But a form-invariant medium of exchange makes it impossible for the state to achieve a lot of its goals, for example regulation, control and tracking. So it is faced with two conflicting requirements. If it goes full-form-invariant in order to maintain a certain level of control over the money supply, it needs to give up a lot of its other powers.
The second thing is that unlike historical fiat reforms, it is impossible for the state to redenominate Bitcoin. It can only redenominate financial instruments denominated in Bitcoin. Also, there is the issue of compatibility, which makes it easier to differentiate the products and therefore treat them as having a different price. This makes it more difficult to use Gresham’s law for the state’s benefit.
The compatibility enforcement also alleviates your worry about inflating Bitcoin. Instead of inflating “the old” Bitcoin, you’d create two different versions of Bitcoin, mutually incompatible. It becomes the equivalent of people voluntarily choosing to switch from grams of gold to grams of silver, which would increase the nominal money supply (denominated in grams) but it can’t just occur randomly.
In other words, if the state tries to tackle Bitcoin, some of the old tricks won’t work anymore, and some would come at a higher cost.
55-page European Central Bank white paper on virtual currencies (mainly Bitcoin). Surprisingly well-written, even references Hayek and the Austrian school.
This was striking: “The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation.” – European Central Bank
The report concedes btw that bitcoin is essentially equal to cash, as it is equally hard to control and track as hard card. But check this out:
But the report’s last conclusion regarding the negative impact of virtual currencies on central banks was, to be honest, a startlingly candid revelation by the ECB.
As it is written in the report’s Executive Summary,
“[virtual currencies] could have a negative impact on the reputation of central banks, assuming the use of such systems grows considerably and in the event that an incident attracts press coverage, since the public may perceive the incident as being caused, in part, by a central bank not doing its job properly.”
and:
“The theoretical roots of Bitcoin can be found in the Austrian school of economics and its criticism of the current fiat money system and interventions undertaken by governments and other agencies, which, in their view, result in exacerbated business cycles and massive inflation.” – European Central Bank
WordPress.com, overwhelmingly the largest blogging platform on the internet, global traffic rank #22 with tens of millions of users, now accepts bitcoins.
“Despite the virtual nature of Bitcoin, users
value the currency for many of the same
reasons people trust Federal Reserve notes:
they believe they can exchange the currency for
goods, services, or a national currency at a later
date. As such, Bitcoin is currently accepted as a
form of payment at hundreds of legitimate retailers including vendors selling clothing, games,
music, and some hotels and restaurants.7 In addition, the unregulated nature of Bitcoin,
combined with its other unique features, attracts criminals to this form of payment and transfer
method.”
Not to mention the new Bitcoin Store with 500,000 computer hardware products available through wholesaler Ingram Micro. The store only accepts bitcoins, and is reportedly in many case much cheaper than Amazon and NewEgg.
I awoke to incredible news this morning. Leading web publishing service WordPress.comannounced that they will begin accepting the nonpolitical cryptographic money Bitcoin as a payment method for various upgrades.
Then I remembered that WordPress.org powers our online publishing platform. It also powers the blog platform for The New York Times, CNN, Reuters, Mashable, NBC Sports, GigaOm, TechCrunch, ELLE Girl, RealClearPolitics, TED, National Football League, General Motors, UPS, eBay, Sony, and Volkswagen…
I had a funny thought recently. We have different kinds of money: commodity money, fiat money, and credit money.
But what if we characterized bitcoin as debit-money; the opposite of credit-money.
It’s money because you must pay into the system before you can spend anything.
This is reflected in over-the-counter exchanges which will sell you bitcoin for basically any currency.
Ah, you may say, but what of miners, they are not paying money into the system.
No, but you can’t mine bitcoin without putting a lot of capital into the system first and turning those resources towards mining, and those resources have a non-zero dollar cost–electricity, computer hardware, maintenance, storage space, etc.
Bitcoin must have value in part because it’s 100% safe to assume that each bitcoin has had resources put into its acquisition. This is further helped by its crypto-nature which ensures that inflation can’t destroy that value.
It’s just a thought, but maybe there’s something to it.
I heard a rumor that Bob Murphy is working on a new article on Bitcoin. I’ll be interested to see his thoughts at this stage. Doug French did his graduate thesis on tulipmania and he seems sympathetic to Bitcoin. Anyone know what other major Austrians are saying about Bitcoin recently?