By L. Reichard White
With Bitcoin having broken $19,000 per coin – and fluctuating like the Prez in a negotiation – it and the many other cryptocurrencies built on block-chain technology are a real phenom. Will they last in any form?
Either way, it will be interesting to watch — because crypto currencies challenge the very foundations of the government-banker axis. They challenge banker ability to create and control the money supply and, for those who use them, truly anonymous crypto — which excludes Bitcoin itself — makes taxation truly voluntary.
While Bitcoin and its many relatives (see below) are each individually limited by math, the number of different brands is unlimited. This means the aggregate supply of cryptocoins is virtually unlimited.
Thus the prognosis isn’t good: The aggregate is what counts and since it is, for all intents and purposes, unlimited, as the aggregate supply approaches infinity, by the law of supply and demand, the value approaches zero. This drop in value would be experienced as price inflation of anything purchased with crypto. Likely massive price inflation.
But a lot of interesting history can take place before that happens.
There are at least three useful historical precedents:
First, beginning with the Tang Dynasty in China, the use of private “bills of credit” etc. — essentially paper I.O.U.s — issued by many sources. Second, the use of “assignats” and then “mandats” too during the last decade of the 18th Century in the aftermath of the French Revolution. The third is a surprise.
In the follow-on to the Tang Dynasty, it became all the fashion for groups and individuals to issue paper I.O.U.s and for people to use them as money. The aggregate supply of these notes became so large that, lacking product differentiation, by that pesky law-of-supply-and demand, they lost all or nearly all value.
While usually underestimated until experienced, such a disruption in the medium of exchange is more devastating to more people than any hurricane or other natural disaster could ever be.
For a current example, check out what’s happening in Venezuela right now (2017 A.D.) – – –
As a result of such things, the Chinese eliminated paper money entirely in 1455.
In the French experience, the legislature, despite experience with John Law’s “Mississippi Bubble” 70 years earlier, put paper “assignats” into circulation, supposedly based on and limited by the amount of land committed to back them. The politicians couldn’t control themselves of course, and kept issuing more and more assignats, which caused — supply-and-demand again — a drop in their value, resulting in massive price inflation.
The French politicians then got the bright idea of getting the “excess” assignats out of circulation by issuing a substitute they called “mandats” ass-u-me_ing they could get people to trade-in their assignats for them. This was called an “interconvertiblility scheme,” and, predictably, both asignats and mandats stayed in circulation despite the schemes. The increased aggregate supply meant that the value of both assignats and mandats dropped and so the price inflation got worse.
And that was with only two similar currencies circulating. How many crypto currencies are there? HINT: A lot more than two. Keep reading.
If things go far enough with crypto currencies, it will be necessary to remember that price inflation is usually misdiagnosed and blamed on producers and sellers for raising their prices. The correct diagnosis is: “Prices aren’t going up, the value of your money is going down.”
And, as the French proved again, especially in economics, mistaking the effect for the cause leads to really sick and twisted prescriptions. In the French case for example, a one-way trip to the guillotine for merely “having asked, before a bargain was concluded, in what money [gold/silver vs. paper assignats/mandats] payment was to be made.”
No, I’m not making that up. If a French merchant got caught asking whether you were going to pay in “specie” (gold or silver) or rapidly depreciating paper (assignats or mandats), by law it was literally “off with his head.”
The surprise example was the thirteen British North American colonies before the First American Revolution. The colonial governments got in the habit of issuing “Bills of Credit” — essentially paper I.O.U.s remember — and it became customary to use them as money.
Resonating with the Tang Dynasty, the governments, not understanding the danger — or not worrying about it — got in the habit of issuing more and more of these I.O.U.s to cover expenses — and people got in the habit of using them as money. Predictably this led to, you guessed it, “inflation.” This result became so disruptive that all thirteen colonies, individually, came to realize how destructive “emitting” Bills of Credit was and thus, even before the Revolution, understood the dangers.
That experience was so memorable that preventions found their way into the U.S. Constitution in Clause 1. Particularly, “No State shall …emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;”
Thus multiple crypto currencies — and the “interconvertibility schemes” already in progress– will be, I think, the ultimate Achilles heel of cryptocoins in general. Like assignats and mandats, they may be different in name, but they can all be used, interchangeably, as very similar media of exchange — which, by the Law of Supply and Demand, will likely EVENTUALLY make them, in aggregate, pretty much worthless.
You can get an idea of where things have been going just from the title of this page: A list of the top 500 cryto currencies.
In the mean time, they will likely make for some interesting gambles.
Another short-coming of Bitcoin in particular is that the total anonymity built into the block-chain algoritm wasn’t implemented for Bitcoin. This means they can be traced and so aren’t as anonymous as folks have been led to believe. Or even as anonymous as paper money. That’s why the FEDs were able to bust Silk Road. In fact, the FEDs can trace every individual Bitcoin if they want to go to the trouble.
While the block-chain technology used by cryto currencies is probably solid, there are outside-the-box dangers as well. For example, Mt. Gox, billed at the time as the biggest Bitcoin exchange, filed for bankruptcy protection in Japan: It apparently lost all of it’s patrons’ Bitcoins to hackers.
You can also easily “misplace” your bitcoins and/or lose the encryption key all by yourself. Gonzo crypto advocate Max Kieser himself admits to losing an unknown number of bitcoins for example. And apparently one absent-minded crypto millionaire trashed a computer with his crypto wallet on the hard drive. Now worth something like $20 million, he’s considering a sort of archaeological dig at the garbage dump.
SO, if you decide to get involved in the cryptocoin trade, Kevin, do regular back-ups of your “wallet” and think twice before trashing your device. And I’d suggest one of the coins that DID implement total anonymity. That at least gives it a little product differentiation. Probably, given the rapid evolution of things, very little.
You might try Maxcoin, named after Max Keiser of RT’s Keiser Report and pushed by Bitcoin guru Charles Hoskinson. Who knows whether it will make the cut, but you’d be in on the ground floor.
FWIW, the next step in Bitcoin evolution is being billed as Ethereum.
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L. Reichard White [send him mail] taught physics, designed and built a house, ran for Nevada State Senate, served two terms on the Libertarian National Committee, managed a theater company, etc. For the next few decades, he supported his writing habit by beating casinos at their own games. His hobby, though, is explaining things he wishes someone had explained to him. You can find a few of his other explanations listed here.
Mama’s Note: Thanks for a very interesting article. I’ve heard and read a good number of explanations for Bitcoin and similar things, but none have made any sense to me at all. I just don’t understand. How can anyone produce something from nothing – except wishful thinking? Blockchain certainly seems to have great potential for many things, but creating “money” out of thin air doesn’t seem to be one of them.