Sunday, 2 November 2014

Bitcoin´s Achilles´ heel

The bitcoin dream: if only it could be money. Imagine!

Why is bitcoin not money? Because its price in terms of real currencies is not relatively stable.

Let´s assume for some unknown reason bitcoin´s price would become relatively stable with a 2% decrease in real value per annum. That would make it a medium of exchange with a relatively stable price that could be used as a relatively stable store of value, very similar to the US Dollar, Euro, British Pound, etc.

What would happen in a country with high inflation like Argentina?

People would start keeping their savings in bitcoin, they would start pricing their products in bitcoin, they would start doing business only in bitcoin, all prices would be stated in bitcoin. The CPI could be calculated from items priced only in bitcoin. Bitcoin would be able to be used as a unit of account for accounting purposes.

Result: it would be as if the Argentinean economy were dollarized: i.e., the economy would stabilize. However, the stabilizing currency would not be the US Dollar, but bitcoin.

Unfortunately this will never happen because bitcoin is not money. It is not a medium of exchange with a relatively stable price.

Bitcoin´s inherent quality of never being able to have a relatively stable price is thus its Achilles' heel.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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