11:20
Bitcoin investors are saving up trouble

A £230 million fortune is lying buried in landfill in Wales. James Howells, a computer engineer from Newport, says he accidentally threw away a hard drive containing Bitcoin, and has now secured financing from a hedgefund to dig up the rubbish tip. In San Francisco, another computer programmer has just two chances left to remember the password to $220 million worth of Bitcoin.

As these two stories illustrate, Bitcoin is many things, but a useful currency isn’t one of them. The problem is that the supply is limited, so the amount of coins in circulation can’t expand or contract as the economy does. This means that value held in hard drive at the bottom of a dump, or locked behind a forgotten password, can be permanently lost from the system – it’s not like banknotes where a central bank can just print replacements.

But an even bigger problem is that the finite number of Bitcoin – it’s stipulated in the source code that only 21 million coins can be created – locks in deflation. As Milton Friedman, among others, pointed out, a growing economy needs an increasing money supply. By analogy, a restaurant that starts doing 100 lunches a day instead of the previous 50 needs more plates and cutlery. Increasing the velocity with which they’re used doesn’t cut it – increasing the quantity does.

Sure, Bitcoins are divisible, but that doesn’t meet the need to increase supply. Of course, introducing more money into the system has to be done judiciously to avoid causing inflation. But if you have an expanding economy and a fixed money supply, you have more goods and services available for the same amount of currency, so prices will inevitably fall. That is, a fixed money supply sets in stone the deflation we don’t want.

There are those who like the idea of a non-expandable money supply, but best just put them in discredited corner with the gold bugs. That we really don’t want deflation should be obvious in a debt fuelled economy. If incomes and prices fall then everyone that owes debt starts to default because the value of those debts doesn’t fall in lockstep. It was the fear of this that triggered the first round of quantitative easing back in 2008 and 2009. Preventing deflation is essential if we want to avoid recession turning into depression.

Bitcoin does have some uses. As a speculative asset it’s been doing excellently for years now. Given that the price is rising – currently – against other monies it seems to have at least a temporary use as a store of value. That variance in relative value does mean it’s not particularly useful for conducting transactions, but that’s not necessarily a problem in the short term. Ultimately though, the limit on issuance means Bitcoin isn’t going to work as a more general currency.

This amuses me, as one for one of the original claims to how great the cryptocurrency was going to be was its hard limit on issuance. Those lauding it missed why we stopped using gold – we want to have a money supply that can increase as the economy does.

Bitcoin’s eventual failure as a money, rather than any other use we might put it to, is built into its very design. The lesson I take from this is that planning is one of those things that just doesn’t work in economics. Cryptocurrencies were hailed as a bright new dawn, but money is a few thousand years old and we’ve made a lot of mistakes along the way. But, through trial and error, we’ve hit upon something that works – and I think it’s a mistake to ignore the lessons from those experiences.

It could be, of course, just that I’m an economic conservative. But if the enthusiasts are correct, and Bitcoin really is the French Revolution of monies, it’s going to fail.

Sourse: capx.co

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Category: News | Views: 123 | Added by: danyagames2007 | Tags: #Bitcoin #Bitcoi Price #BTC | Rating: 5.0/1
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