Bitcoins will fail

In my earlier post, I had written about history of internationally accepted currency and history of seigniorage.

Currencies were amongst the oldest form of tax and were issued so that states/countries could sell copper (of worthless metals) at the price of silver (unlike popular perception gold was rarely a medium of exchange). Today with Fiat money, the government is able to sell sheets of paper for whatever denomination they choose. Understandably, many people are questioning the carte blanche of US government to print more money. Hence they propose that bitcoin is the solution. However I believe otherwise. Let me analyze it through 2 aspects… economics & marketing.

Economists believe that the power of a currency comes from its ability to address 3 needs:

  1. Universally acceptable medium of exchange
  2. Unit of account
  3. Storage of value.

Clearly a currency that appreciated 100 folds in a year is a bubble. Its volatility will not make it a prudent place to store. What if the current rather than appreciating debases itself by a hundred, what happens to the bitcoin denominated loans/investments?

It is also not a good unit of account. I was surprised to see the home page of Bitcoin Bangalore conference.  They were charging $150 to the participants. Which is humorous and self-defeating for multiple reasons. It is valued neither in the local currency Rupee, nor in the target currency BTC. If the organizers & geeks who promote bitcoins cannot price their events in Bitcoins, why on earth will anybody else?

I have read endless articles about the gaining acceptance of bitcoin. But I am yet to see any merchant/website/store to price its goods in bitcoin. Without a stable pricing, the bitcoin price is established by the exchange rate and I see no reason of this phenomenon changing in the near future.

Some might agree that this currency is nascent and things might change. Hence I am bringing in the marketing aspect.

Bitcoin = Dodgy online transactions = drugs trafficking + laundering = illegal, crime, fraud…

Experience -> attitude ->behavior. Do you think Bitcoin can clean its act soon?

The only glorious example of bitcoin is Silkroad. Naturally if you write reams and reams on how bitcoin can help you evade authorities, how you can perform illegal/drugs/hitman/firearms/smuggling transactions, you are going to attract the wrong kind of crowd. Today any bitcoin wallet holder immediately gets tagged as a potential terrorist or outlaw.

I would say that cryptographic currency are there to stay, but it’s time that bitcoin should dissolve itself and take a rebirth. The message should be, the global village needs no boundaries.. esp. not the artificial ones erected by governments & banks for their own vested interest. We use the New Bitcoin not because we are outlaws, but we believe that order has to be restored and USD’s debasing has frustrated us.

Problems of a Universal Currency: Globos (part 2)

I might fancy Swiss chocolates, but Swiss factories will not accept INR. I need to pay them in Swiss Francs.

Currency prices fluctuate every second. So I would not like to trade in Swiss Francs, not the Swiss trader in INR. Hence the need of International Currency like Euro/USD. Both Parties agree that the International Currency will have the same purchasing power tomorrow as it has today. Hence it can be used as a reference.

In the previous post, we had discussed the rise and fall of the various international currencies over the past 2500 years of coinage. But why do one need a currency?

My economist friends would quickly point out that money has 3 uses:
1. Medium of Exchange: It eliminates the transaction problem that usually occurs with Barter system. Your Soft Drink vendor might not fancy the idea of buying grain, but he will surely accept coins.

2. Unit of Account: Since all values and numbers would be converted to the local currency, Money allows people to record and measure their financial data and allows easy comparison.

3. Storage Value of money:
Grain, meat and produce is perishable. However coins are not. Ideally speaking I could store money for eternity and it won’t diminish in value (lets forget inflation for the time being) This fact also facilitates in loaning money and raising capital.

If these are the only purposes of money, then a blanket Universal Currency makes sense. After all:
As we saw in the swiss chocolate case, the more universally accepted is the currency, easier will it be to do trade. Also the easier it is to trade, the more variety and cheaper would be the prices of goods and services. Then why is it that in spite of 2500 years of using money, why there has been no lasting attempt to make an international currency?

To understand money, we have to understand why coins were minted and currency issued. Currency have always been a means for a strong state to leverage on its economic and military strength and raise money.
A coin always had some part of Copper (or other cheaper metal) Yet the value of the coin was historically always equal to its weight in silver/gold. So in effect the more coins a state would mint, the richer it will become. However to do so, the state had to ensure that the world accepts its currency at face value and not the intrinsic value (value of the metal)

Sooner the USA and later the whole world realized that they can issue Fiat Money. Hence now if GoI issues a 1000/- bill, it basically creates a 1000/- for itself out of thin air. But like it Zimbabwe if the government fails, the local currency is rendered worth the paper it is printed on. Now this ability of a government to raise money to fund its deficit is too tempting to resist.
Suppose like in EU, we are able to convince government to be thrifty (easier said and done), the question that still remains is redistribution of the new currency that is printed. Look at the opposition that some of the EU members have against inclusion of Turkey in the alliance.

Ideally speaking every country allocates a larger part of its budget for development of backward regions. However if you start doing this on a global scale, then the rich states object. They feel that their wealth is appropriated by the state and squandered away.

This problem will not go away until the world truly thinks itself as a part of a global village. Euro, in spite of all the hiccups, could achieve that. So there is no reason why the rest of the world could not. However in the decade to come, this looks a bit tricky matter.