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Tuesday, June 25, 2013


Yesterday I went to the "Glasgow Skeptics" lecture on Bitcoins.

I have previously lamented the "Skeptics" absolute refusal to even consider scepticism on global warming but this was rather different.

Bitcoins are a computer generated online currency. New Bitcoins get created at a falling rate and will do so until there are 20 million of them. Currently there are 11 million with a total value of just over $1.1 billion. It is my opinion that they cannot currently be forged and that it will take several decades of the operation of Moore's law before it becomes theoretically possible and even then it will not be practical.

This is the strength of Bitcoins - they are a fiat currency backed by nothing but popular belief. However, unlike other fiat currencies they cannot be inflated away by government's "quantitative easing.". Since their value depends entirely on belief and not subject to the normal rule of economics, that incre4ased demand will increase supply, they are entirely vulnerable to speculative swings (this has already happened at least once).

Their success shows

(1) that there is immense demand for a currency that is not going to be inflated away by governments (or typically in the "skeptics" opinion, by banks)

(2) since this system of exchange can run automatically with virtually no running costs, banks charging for debit card transactions is pretty much pure profit. The extent of these charges is concealed by them being paid by merchants but any economist agrees that, in a competitive market, it doesn't matter whether transaction costs are paid by the buyer, in which case they are passed on, or by the seller. In either case they are eventually paid by the seller, but it is always politically more stealthy to make them seller charges. In Britain (& I assume in other countries where the banking industry has been able to lobby, it is illegal to charge extra for credit cards sales which means prices are marginally higher for everybody.

However it is clear from the Bitcoin system that the entire banking with credit cards system is money for old rope and will, in due course, be swept away by something of which I suspect Bitcoin is a harbinger. But possibly it will be Bitcoin itself - in which case, bearing in mind that world GDP is $70 trillion and there are 20 million, if they cornered a significant part of the market the stable value would rise to about $1 million each they can be bought and sold in infinitely divisible fractions).

Personally I think Bitcoins would be an excellent investment, despite the fact that they have no physical reality, for somebody with a few thousand they fancy risking. In effect what is happening is that early adopters are gaining the profits which, with credit cards, go to banks, but here go into fuelling demand and therefore the value of Bitcoins. The lecturer insisted that Bitcoins are mildly deflationary, in that they should continue to represent a fixed quantity of global wealth, but in fact they represent more a fixed amount of the wealth of users so that if usage increases manyfold so must their value.

Warning: If governments decide to crush Bitcoin - for example the US government making "possession" of them illegal as it did with gold in the 1930s - it would greatly reduce their usage and thus their market price and anybody who was in it for short term speculation would lose. Ah well. Even so I do not think anything short of the world's governments, perhaps through the G20, attacking it, would finish it off.

In questions I mentioned the African experience, mentioned by libertarian MP Douglas Carswell ----- of trading by mobile phones in which the trade is carried out in mobile phone credits. This is similar in effect though it is not a fiat currency, so long as they are backed by the phone company's promise to redeem them on demand, i.e. so long as the phone company is solvent.

It was interesting that the "Skeptics" gave space to this libertarian free market idea. Though it is not marketed as such. A number of people in the audience recognised how this undercuts big government's "democratic" right to inflate the currency, tax massively and restrict trade in such things as drugs and were suitably opposed. Perhaps there are quite a lot of people who, once they get beyond the political labels turn out to be old fashioned small government liberals after all

Also interesting that the lecturer Matthew Campbell-Sturgess is a young SNP councillor. Compare and contrast with the SNP MEP candidate Christopher Stevens who, at a different meeting, explained that the major division in British politics is not over EU membership or "independence" within it but over whether the future economy should consist of more government inspectors and regimenters, as he and the SNP wished and why they supported the EU, or fewer and more wealth creators as "right wing" libertarians like UKIP want. Clearly the division does not merely run through British society but through the somewhat schizophrenic SNP too.

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