The Bitcoin Central Bank’s perfect monetary policy
themisescircle.org
themisescircle.org
> Fractional reserve banking entails the creation of new money that is fungible with already preexisting money, i.e. it can be used interchangeably within the currency’s payment systems. This is impossible with Bitcoin.
Not true. Currency can easily be issued against bitcoin. When USD was backed by gold, there was plenty of fractional reserve banking and no-one could issue more gold. In fact, there is already debt-based money backed by BTC issued on the Ripple network.
EDIT: I should add, that fractional reserve banking does not mean infinite money supply. Depending on the amount of reserves required (by customers, government, etc.), as long is it's greater than 0%, there is a limit on the supply. E.g. if the reserve is 20%, only 80 BTC can be loaned against 100, and only 64 against wherever the 80 is deposited, and on-and-on until it approaches 0. Fractional reserve is not necessarily a bad method to allow for risk assessed expansion and contraction of money supply.
> ...blah blah... make it certain that ... Bitcoin will be adopted as the global currency
Oh really? It's certain that the globe will adopt a currency because of it's asymptotic money supply and proof of work algorithm? That makes no sense at all.
The world will adopt bitcoin because it's an efficient means of exchange and safe as a value store / investment from dilution by central banks.
Also, the "security" row in the currency comparison chart is misguided. Bitcoin is far less secure than bank maintained fiat currency networks, because in the latter, fraudulent transactions and electronic theft are generally reversible.
Debt-based "ripple" bitcoin (or any other similar system) is not fully interchangeable; you can use BTC IOUs within ripple and pass them around, but you cannot send an IOU across the bitcoin network. This is different than with fractional reserve; where 'created' money can be withdrawn, spent, and intermingled without any differentiation.. I can spend a fractionally-reserve created dollar at walgreens as easily as a bona-fide fed printed dollar bill.
You cannot send a Ripple BTC to my bitcoin-qt wallet, nor will bitpay/coinbase/blockchain or any other blockchain-audited wallet accept a btc-iou.
edit: i basically agree with your other point that the the stated reasons in OP are not the reasons bitcoin will likely undergo s-curve adoption
The process of redemption of BTC IOUs for actual BTCs on the Ripple network resembles the process of redemption of gold-backed USD for gold. Similar to gold being transmitted over a different network than gold-backed USD (the former being physical,) BTC backed notes would be transmitted over a different network - something like Ripple.
Fractional reserve banking can also be practiced directly with BTC, simply by lending against deposits.
(explained here: http://www.cnbc.com/id/101048897)
That's an understatement! It was the national policy of an entire country i.e. France (well I guess not all their citizens directly practiced this suspicion) to withdraw its gold reserves in the US for precisely this reason, until nixon closed the window in 1970.
Doesn't pretty much every major country still keep some fraction of its gold reserves in the basement of the NY Federal Reserve?
There is, however, a key difference in that unlike contemporary FRB, any FRB with bitcoin will necessarily have all of the inflationary effects of monetary expansion through debt exactly counteracted by deflationary effects of debt amortization and bankruptcies.
Fractional reserve banking can happen with Bitcoin, but as a user, you do not have to participate. You can hold your coins in your own wallet and not have to worry about what your bank is doing with it. This means you can never lose your coins from a run on the bank.
Now, if you want to, you can loan your coins out with interest. Or you can give them to a bank and collect an interest rate. But when you do this, you're taking a risk, and you should assume any losses from this risk on your own, and nobody needs to be insured for it. If you don't want to lose your coins, keep them in your own wallet.
You do not have to use a bank account for USD - you can use safety deposit boxes or other secure locations. This is analogous to how you would store large amounts of bitcoin privately.
I think the incentive to use a bank for BTC will ultimately be greater than for USD, since the risk of theft is less predictable or manageable by the average consumer. Holding a large bitcoin balance is terrifying - any keylogger or other compromise could result in complete loss. With physical USD, at least you know intuitively how to protect it.
The problem is that gold is not like bitcoin, and bitcoin not like gold.
Suppose we all switch immediately to a gold standard. When the value of the currency rises too high, more people will go and mine it. When the value of the currency falls, fewer people will mine it. So in actual fact a gold standard resembles the behaviour of an Australian-style (yes, Australian) monetary policy, which is having money supply governed by a central bank who have an explicit inflation target.
Meanwhile, the supply of bitcoins is fixed. For all time. And they are destructible in a way that gold is not.
Bitcoins will always be irreversibly leaking from global supply. People throw their harddrives away. Delete the files accidentally. A high energy particle strikes some cheap RAM and flips a bit, rendering a bitcoin worthless, and so on.
While in theory the supply of bitcoin is meant to reach a fixed limit, over the long run it will peak and thereafter always be shrinking.
Not expanding. Not even holding constant. Shrinking.
Nobody's economics says that a shrinking monetary base is a good idea.
An interesting twist on the basic problem with fixed-price gold standards but you might be right for countries that have gold in the ground outside of controlled mines. But a fixed-price gold standard is a big fail no matter what price is set and subsequently has to be defended by the central bank. It worked "somewhat, sub-optimally, for a while" in the old days of a handful of developed slower-non-realtime economies that could coordinate policy and had the rest of the world colonized, today, no chance. Central bankers will never again go for it because they have learned that politics and private banking will always screw with the money supply for short-term objectives.. and no matter what fixed gold price you set, before long there'll always be a run on your gold. Better to mark reserves to market (as France has pioneered in the 70s and the ECB and others do today), so you don't need to constantly defend or redefine your fixed price, can manage the currency supply based on both long-term mandates and short-term needs and have its performance evaluated in gold and/or other currencies by the market forces, too.
"Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high" ;)
It's funny that the "free-market advocates" these days favour a government-controlled fixed gold price, which they call "the return to an honest gold standard". Right now we have an "almost free-market gold price" in "almost free-FX-market floating (competing!) currencies". Not quite there yet according to some pundits but that's where the world is heading and has ever since the Nixon shock. Definitely a pretty impressive move that has emerged toward a "free market in moneys", what's not to like! ;)
But they are divisible in a way which gold (or even dollars) are not: https://en.bitcoin.it/wiki/FAQ#How_divisible_are_bitcoins.3F
"A bitcoin can be divided down to 8 decimal places. Therefore, 0.00000001 BTC is the smallest amount that can be handled in a transaction. If necessary, the protocol and related software can be modified to handle even smaller amounts."
Dividing bitcoins into small micro-denominations does not solve the problems of deflation in the same way that adding zeros to Zimbabwean currency doesn't solve the problems of inflation.
Even the "leaks" from the gold supply are predictable and reversible. A lot of gold is used in electronics these days. It winds up either in recycling centres, where it can be recovered, or in landfill, where if the price of gold rises high enough it becomes commercially viable to mine the landfills.
Bitcoins cannot be un-destroyed. They are information without physical laws to guarantee their continued existence. Their manufacture and destruction are both one-way functions.
The supply of bitcoin will peak and begin an irreversible process of shrinkage.
Indeed, those who cannot steal bitcoin will be incentivised to cause the destruction of other's bitcoin. Call it the Bitfinger Scenario.
The point still stands, though, what happens when those 2.1 quadrillion units of currency get destroyed trillions at a time? Wont' we run out? Well, yes. However, when that happens we just slap another zero on the end. At present you can break a single Bitcoin into 100,000,000 pieces (known as Satoshis), but perhaps in the future we'll decide to add another 6 zeros on the end. Thus you could have 0.000 000 000 002 Bitcoins (we would almost certainly not speak of full Bitcoins by that point--there are already major movements wanting to use mBTC and uBTC as the standard units since 1 BTC is impractically large for most commerce). This maintains the scarcity model that Bitcoin enthusiasts are so enthused about while dealing with the money supply issue.
Source: http://www.reddit.com/r/explainlikeimfive/comments/1rls76/of...
The argument that bitcoin should not to succeed because it's deflationary is silly. Lots of deflationary assets exist and people are free to put their money into them, e.g. gold, stocks, and real estate. That doesn't stop people from transaction.
No, but arguing from the analogy of a gold standard hints at doing so.
> The argument that bitcoin should not to succeed because it's deflationary is silly.
Deflation and inflation are both, at the extremes, destructive. Bitcoin, by intention, is deflationary. However I have already demonstrated that it can easily turn inflationary.
Not through the dynamism of an open market, and not through the governance of a central bank. Simply because it is a closed system. Entropy will eventually destroy all bitcoins. And then what?
I think 22M bitcoins, given that (with minor changes to the network) can be infinitely sub-divisible with last us until then.
Subdividing a unit of value does not create new value.
Regarding fungibility, bitcoins are definitely fungible. They are interchangeable, of equal value, and sub-dividable.
Fungibility does not require that all parts be identical, only of equal value and utility.
By your argument, USD is not fungible because old 100 dollar bills may not be accepted in some places.
From Investopedia: "A good or asset's interchangeability with other individual goods/assets of the same type. Assets possessing this property simplify the exchange/trade process, as interchangeability assumes that everyone values all goods of that class as the same."
Where have I argued otherwise? Fungibility is not the issue.
Irreversible shrinkage of the monetary base is the issue.
> By your argument, USD is not fungible because old 100 dollar bills may not be accepted in some places.
You are now confusing fungibility with liquidity.
And I note that, unlike bitcoin, if I have a damaged $100 note, I can exchange it with the central bank for an new equivalent note.
Regardless, you seem very adept at unfairly attacking my vocabulary usage and finding inconsequential issues with bitcoin. Other than that I don't see much in what you are saying.
It doesn't matter that the number of bitcoins will slowly decline. Bitcoin is infinitely divisible, and whoever lost the money is the only it's a problem for. For everyone else that's a benefit.
Even if you were correct, such theoretical long-term concerns will not stop the adoption of bitcoin.
> It doesn't matter that the number of bitcoins will slowly decline.
I don't agree. And it needn't be gradual.
> Bitcoin is infinitely divisible, and whoever lost the money is the only it's a problem for. For everyone else that's a benefit.
Hence the "Bitfinger" scenario I alluded to.
> Even if you were correct, such theoretical long-term concerns will not stop the adoption of bitcoin.
No, but I think they would be sufficient to prevent bitcoin ever becoming legal tender.
"Subdividing a unit of value does not create new value."
So what? Neither does printing money. Mutually beneficial economic activity creates value.
The point is, the decline in the number of bitcoins does not impact it's usefulness for those who possess and transact with bitcoins.
Way up at my original post I was pointing out that bitcoin is not the gold bug's Huckleberry, because the monetary base will peak and shrink.
Rothbardians are very exercised by the problems of monetary policy. They take the view that a growing money supply causes distorted behaviour. They view a fixed money supply as less distortionary (and deflation as a net positive over time).
Bitcoin's fixed upper limit for total circulating monetary base, at first blush, fits neatly into that worldview. Except that, as I have pointed out, it doesn't. Bitcoin is not like gold because it can be destroyed. In fact I don't think any economic theory has ever seriously addressed the problem of an irreversibly shrinking money supply.
The thing is that we know inflation does cause problems. And so does deflation. That's why most monetary policy these days aims at neither. Instead the goal is to maintain approximately stable price levels over time. To do that you must grow the monetary base in rough correspondence to the size of the economy.
> The point is, the decline in the number of bitcoins does not impact it's usefulness for those who possess and transact with bitcoins.
The point is that it affects the ratio of bitcoins to goods and services in a way that cannot be governed or reversed. Some consider that to be a feature. I don't.
The problem with having a mechanism to adjust the money supply in proportion to economic growth is that someone has to make those decisions, and historically they have ALWAYS ended up abusing that privilege.
Currently we have representatives of banks, hedge funds, and investment trusts making those decisions. Who's interest do you think are reflected in monetary policy?
They don't have to want to do it.
> Currently we have representatives of banks, hedge funds, and investment trusts making those decisions.
US anti-banking conspiracy theories aren't generalisable to all central banks.
Fungibility does not require that all parts be identical, only of equal value and utility.
Also, regardless of whether you find bitcoin useful, clearly others do. And several hours for confirmation of a borderless, nearly fee-less, irreversible financial transaction certainly falls with the bounds of "easily transferrable" for me.
I'm not really sure what the point of your contrarian position is. Seems just that... contrarian.
There are several steps missing between the statement "Bitcoin will go up in value" and "I should invest all my investable assets in it". One big missing step is, what is the optimal way for one to allocate one's portfolio, given some set of expectations, uncertainties and correlations?
There's been a lot of work in this area (optimal portfolio construction), some of it very good. My favorite starting point for this field is the Kelly Criterion. https://en.wikipedia.org/wiki/Kelly_criterion
While I sympathize with the article's enthusiasm for Bitcoin, I wish people would shut up when they have no idea what they're talking about.
EDIT: if you want to get deep in the weeds you can read more about Modern Portfolio Theory here: https://en.wikipedia.org/wiki/Modern_portfolio_theory. I don't endorse every idea you'll find there, but they are all better than the notion that you should invest 100% of your investable portfolio in whatever asset has the strongest forecast, as the OP apparently believes one should.
In other words, don't invest all your money in it.
I wish people would continue reading instead of stopping at arbitrary points to rant.
From this perspective, money is one of the first distributed computation networks, however given the mass of networked computation available there may be other ways of solving the distribution problem that have even less friction than a currency.
These days however we have a global network of universal turing machines attached to an increasingly large array of robots, and so things that are not algorithmically possible to do in a monetary system are now completely feasable and some of them may have considerably less friction.
"The [Bitcoin network] enforces the strictest deposit regulations in the world by requiring full reserves for all accounts. This is the digital equivalent of the Chicago Plan or the Austrian 100% reserve gold standard. Under this regulatory regime, money is not destroyed when bank debts are repaid, so increased money hoarding does not cause liquidity traps, instead it increases real interest rates and lowers consumer prices. This is a self-stabilizing cycle as higher interest rates incentivize hoarders to invest, while deflation increases consumption due to the wealth-effect on hoarders. The BCB prevents lending out of deposits so that it can properly target money supply and avoid the destabilizing effects of commingling the credit and payment systems."
Others have argued[1] that fractional reserve Bitcoin banks can exist, but the point is that the Bitcoin protocol itself is full reserve. Yes, intermediaries may try to convince consumers to entrust their Bitcoin wallets with them, but that hasn't gone so well[2]; Bitcoin "banks" that fool around with fractional reserves are playing with fire.
UPDATE: Coinkite, which describes itself as a "Cryptobank", addresses[3] the need to have verifiable, full reserves: "You should also be wary of bitcoin startups which claim some percentage of your coins will be in cold storage. If you do not know the details of the public keys used, it will be impossible to know if this is true, or if they are using those amounts as play money. With Coinkite, you can audit where all your funds are at any time."
[1] Of course you can have fractional reserve Bitcoin banks http://www.cnbc.com/id/101048897
[2] List of Bitcoin Heists https://bitcointalk.org/index.php?topic=83794.0
[3] Coinkite FAQ https://coinkite.com/faq/money
But nobody knows what new attacks people will come up with, either against 256 bit ECC or SHA2.
If it's to be broken, it will most likely be due to someone finding a flaw in the way those primitives are assembled. In the nearer term, the main risk is people finding attacks on the implementation (in practice nobody uses 3rd party implementations).
If some quantum computing mechanism is developed that negates all cryptography entirely, then we will probably be living in a world with unlimited computing power and the robots will have taken over anyway.
That is of course precluding the discovery of a major flaw.