Bitcoin: A Look at Major Freedom's Currency

      On Friday  same bad news in China caused the Bitcoin to lose half its value in one day-from $1000 to $500. 

      http://www.antipope.org/charlie/blog-static/2013/12/why-i-want-bitcoin-to-die-in-a.html

      Krugman then got the Bitcoin folks seriously riled when he referred to Bitcoin as evil in a post. 

      http://krugman.blogs.nytimes.com/2013/12/28/bitcoin-is-evil/

      As he says they failed the humor test on that one. 

      http://krugman.blogs.nytimes.com/2013/12/29/the-humor-test/

     I've not said anything about the  Bitcoin craze until now. I guess the one thing you have to admit that its' been a great investment. This is in part because of the way it is designed. Basically Bitcoin is designed to be deflationary. As the number of Bitcoin in circulation goes up very slowly, this means the stock price will soar. 

     So solely as an investment vehicle it's tempting-much as gold is. I mean gold has gone up a great deal over the last 10 years but this is not at all about fundamentals as the gold bugs might like to tell you-'People realize the dollar crisis is at hand so they're buying gold hand over fist.' Basically gold commodities has some real upside potential but it trades like this because this is how many commodities trade not because of the fantasies of a Major Unfreedom that it might come back as a currency. 

   The way Bitcoin is structured then by definition gives it the ability to soar. However, it also gives it the ability to tank. Indeed, it's certainly met the hopes of the gold bug Rothbardian , anarcho-capitalist set who designed it in being deeply deflationary and so being a very lucrative investment. Yet as a commentator over at Charlie Stross' blog points out:

    "As long as bitcoin was deflationary (i.e. the price of goods and services was going down, in terms of bitcoins, i.e. the value of bitcoins was going up), everyone was happy. And the fact that there was no central bank to prevent run-away deflation was considered a good thing. This is because everyone was looking at bitcoin as an investment, not as a currency. But once things turn inflationary (i.e the value of bitcoins is going down), it turns out there is no central bank to prevent runaway inflation either."

     "For fun, calculate what the inflation rate has to be for a currency to lose half it's value in a 24-hour period. Lets just say that Zimbabwe and the Weimar Republic should no longer be the (ahem) gold standards for runaway inflation."

    "The thing about the inevtiable, it has a bad habit of actually happenning."

     http://www.antipope.org/charlie/blog-static/2013/12/why-i-want-bitcoin-to-die-in-a.html

     Say what you want about the Bitcoin-deflation was wanted and they've gotten it. Yet the commenter is right: it can be subject to not just sharp deflation but also sudden wild inflationary sprees and turns. So it's not exactly giving us 'price stability.'

      As Stross says this was consciously designed with an extreme libertarian agenda in mind. It hopes to topple the worlds central banks and take us back to the idyllic years of 19th century capitalism. Again, though this is hardly price stability with such wild day to day swings. Stross also rightly points out that inflation and deflation are not opposites. Deflation is a much more noxious phenomenon on the economy than inflation. 

    My guess is that however long Bitcoin lasts it's upward movement no more means we're going on the Bitcoin standard than upward movement in gold means we're going back to the Gold standard. As Stross points out Bitcoin is showing how malign a social phenomenon deflation is. 

   "t's also inherently damaging to the fabric of civil society. You think our wonderful investment bankers aren't paying their fair share of taxes? Bitcoin is pretty much designed for tax evasion. Moreover, The Gini coefficient of the Bitcoin economy is ghastly, and getting worse, to an extent that makes a sub-Saharan African kleptocracy look like a socialist utopia, and the "if this goes on" linear extrapolations imply that BtC will badly damage stable governance, not to mention redistributive taxation systems and social security/pension nets if its value continues to soar (as it seems designed to do due to its deflationary properties)."

   Yes I know Sumner thinks there's good deflation and bad deflation-good deflation is like what we had in the early to mid 20s and the bad part is what we had starting in 1929. However, even if you by his distinction-'supply side vs. demand side' deflation, this is clearly the bad kind of deflation. My guess is we're going to learn a lot from the Bitcoin experiment and what it's mostly going to be is another reason why the gospel of currency competition is all wet. 

  P.S. Matt O'Brien has a great satire about Bitcoin
 
  http://www.theatlantic.com/business/archive/2013/12/the-greatest-investment-opportunity-since-dogecoin/282607/