Tuesday, 31 December 2013

Banks, bubbles and Bitcoin

"I don’t think that the -coins we are seeing now are the last word in digital currency. They are experiments. And I do think there is a bubble in the making, which will burst noisily at some point. But unlike others, I don’t regard this as a bad thing. Just as the dot-com bubble and bust was an essential part of the evolution of the Internet, so the bursting of the -coin bubble, when it comes, will enable a new digitized financial architecture to emerge.
"So bring on the -coin bubble and bust. I want to see what grows in its place."

Me, at Forbes.

4 comments:

  1. My opinion of Bitcoin has changed a lot recently. Originally I thought it was a healthy development, something that might keep central bank-issued currencies honest (i.e. drag them kicking and screaming back to being a reliable store of value).

    But with all the Bitcoin bubble brouhaha, I'm much less convinced by this, because I'm much less convinced that cryptocurrencies in general are going to be useful stores of value given that there's no obvious limit to them. Bitcoin itself is limited by design, yes; there's a hard and known limit to the number that can ever be mined. But there's nothing special about Bitcoin as a cryptocurrency. The bubble mania has sent money flooding into others, such as Litecoin, in the hope that they'll be the next Bitcoin. And if that goes on for long, you can bet that Tomcoin, Dickcoin and Harrycoin will appear to soak up the next round of greater fools. Ultimately the whole thing has to collapse, and when it does I doubt that Bitcoin will be spared for being the first to make headlines.

    What is it that you want from your new digitized financial architecture, and do you think that it can be achieved without one single protocol being somehow "blessed" as the One True one?

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  2. Today, 1st January, I went on about Interest and how we will return to gold dust.

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  3. In the last bubble I learned that libertarians have a huge blind spot for bubbles, and that they will not change their mind because they believe that markets are good and governments are bad. Blogs and tweets don't change beliefs.

    But I like your point that Bitcoin's popularity is due to the short comings of government backed money. It seems to me that tax, trade, and labor policies have long emphasized businesses over households, which have caused developing nations and large businesses to be net savers and caused more households to be borrowers. That wasn't sustainable and created bubbles, as well as higher inequality among households.

    Central banks created more base money and held long-term interest rates low, which stopped the panic but not the fear. Banks won't lend to create more money, and governments won't borrow more, because they fear that households won't have the higher future income needed to repay increased private or public debt. So ironically the shortcoming of government backed money is that in spite of QE there is a general shortage of currency among households.

    QE was initially effective because it accepted credit risk. Since then it has helped investors that front-run central banks, but done little to aid households. We need actions that help households. I can see how governments can do that, and maybe central banks can with ingenuity beyond QE to push money to consumers.

    But how can Bitcoins help the median household? Some of Bitcoin's technology may be salvaged in future government backed currency transactions, but for now it is a libertarian red herring that distracts us from the discussions we should be having.

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