ECON430-Topic #3: Bitcoin, Blockchain, and Monetary Policy

Bitcoin is the most popular of the new phenomenon of crypto-currencies. One of the main reasons there appears to be so much buzz about the virtual currency is that there is a definitive limited amount of the currency, and enthusiasts believe that it could replace the centralized control of central banks over monetary policy. What might be more important about Bitcoin is the innovation of blockchain, which to put it bluntly means that the same electronic thing cannot be in two places at once. Think of this more like an eBook, which must be checked out by an individual, versus a streaming audio file which can be accessed by millions. Banks are eager to jump on the bandwagon and use blockchain to help them reduce their own costs of transferring money across and within entities. Recently, Satoshi Nakamoto–the ‘inventor’ of Bitcoin–may be nominated for the Nobel Prize in Economics, mostly for the invention of blockchain.

The appeal of Bitcoin as a currency stems from it’s perceived similarity to gold. Like gold, Bitcoin has a limited amount of currency ever available meaning prices of all goods are expected to fall over time. Unlike fiat currencies which have increased in quantity over time and led to rising prices. However, there are currently 662 crypto-currencies trading on the open market, implying that there are an infinite number of ‘finite’ currencies. So, it could be that the finiteness of crypto-currency is not a novelty after all. Does this undermine the ability to declare Bitcoin the end of government control of currency? Does this eliminate the credit created by banks, or do people demand credit in a way that Bitcoin cannot foreseeably provide? Is Bitcoin a safe store of value? It is intended to be safer than typical bank money, but there have been many publicized thefts in recent years.

The current market capitalization of Bitcoin is less than $5b USD, selling at a price of around $320, and only a week ago was trading at $408. While this is down significantly from the all time high of around $1,110 in December 2013, it is still nearly three times higher in value than it was just two ago. Compare this volatility to other globally accepted currencies and see if Bitcoin (or any other crypto-currency) measures up as a reasonable store of value. Imagine if the euro went from 10 per dollar, to 2 per dollar, then back up to 4 per dollar. While Bitcoin is the most popular crypto-currency, it may not yet measure up as money if it does not serve the reasonable functions of money. Compare Bitcoin to other forms of money to help you determine if it can serve as money.

One 0ther possibility is that these crypto-currencies will never develop into full-fledged money that competes with central bank and bank developed money. For example, the website Reddit is introducing their own cryptocurrency to award their contributors and users, and Microsoft is trying to make it easier for banks to use blockchain. It is doubtful that the recipients of this crypto-currency would expect Reddit to be the only issuer of currency in the world. What role do you think these types of crypto-currencies will play in the future if Bitcoin (or some other) does not actually develop into a currency? What role will crypto-currencies play? Are they a fad, or are they here to stay?

As many countries attempt to devalue their currencies at once, we may be experiencing a race to the bottom. Inflation in the U.S. is low, with expected inflation rates of around 1.7% over the next several years (actually quite a bit lower even more recently). The ECB is also dealing with low inflation, and even deflation in countries like Italy. Falling global inflation rates have likely contributed to the falling price of gold, a typical inflation hedge. Countries trying to ease credit terms have increased their money supplies at relatively more rapid rates than before the financial crisis, and the ECB is easing the types of activities it is conducting. While this might be inflationary in the long term, it hasn’t created inflation to date, nor has it raised inflation expectations among the general public. Is this general easing of credit conditions expected to stabilize markets which have suffered large price declines (e.g., housing) and allow for more labor market and credit market flexibility? Would this flexibility open up the economy to a more rapid recovery? Or should we simply allow the economy to take the necessary time to return to a healthy state? What role should fiscal policy play in this economic reconstruction if any?

There are a lot of questions I posed above, so pick one and go with it.

20 thoughts on “ECON430-Topic #3: Bitcoin, Blockchain, and Monetary Policy”

  1. Bitcoin will never be a currency because of its deflationary aspect. With a limited supply, the scarcity of Bitcoin means Bitcoin prices will go up, and that brings about Bitcoin deflation. And if prices will undoubtedly increase, there is no incentive for people to spend their Bitcoin because they know it will be worth more tomorrow (1). In fact, the majority of Bitcoin users (64%) have never used their accounts (1) which means that money is lost forever. Also the deflationary aspect implies high volatility, as shown when Bitcoin price dropped 13% in one day (2). This extreme volatility is unacceptable for a trusted currency.
    There are systematic issues with Bitcoin as well. The security is not perfect as theft is very possible and likely, displayed by the experiment of Newhart (3). The security is based on a password, so if someone knows your password everything can be stolen, and if you forget your password, the money is lost forever.
    Lastly, the possibility of anyone creating a crypto-currency hurts the value of Bitcoin as the main currency. There are already 662 crypto-currencies out there (4), and as Reddit is creating one for their users (5) it shows an easy of entry in creation of a new Bitcoin.
    It is clear Bitcoin cannot become the new form of money, but as far as if it is a fad that will fade away, it should not. Black market transactions will always be in demand, and an online currency that cannot be traced will clearly be preferred over the physical transaction of cash. Unless a new technology comes out that will trump Bitcoin, it should be the best method for black market transactions.

    (1) http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/

    (2) http://www.coindesk.com/bitcoin-price-drops-11-fall-below-350/

    (3) https://www.cryptocoinsnews.com/researcher-bitcoin-stolen-off-back-public-experiment/

    (4) http://coinmarketcap.com/all/views/all/

    (5) http://www.coindesk.com/reddit-50-million-new-cryptocurrency/

  2. Bitcoin (BTC) and other crypto-currencies raise an interesting debate on whether or not they are a viable form of money. The European Union recently ruled that BTC must be treated like a currency, rather than being treated like a commodity (1). Despite this ruling and some opinions that BTC should be considered a currency, it will only retain its real value as a crypto-asset in which investors can find opportunities for arbitrage and capital gains.

    BTC’s extreme volatility does not allow it to be considered a viable currency like the euro, pound, dollar, or yen. For example, a volatility time series of bitcoin to US dollars (USD) reveals the dramatic difference in volatility between the BTC/USD and the USD/Euro. From August 2010 to November 2015, the BTC/USD fluctuated up to 16% in its standard deviation of daily returns. In the same time frame, the USD/Euro never went over a 1% standard deviation of daily returns (2). Investors cannot reasonably hold Bitcoin and expect it to store value because of its high volatility. Bitcoin prices (in USD) have ranged anywhere from $0.06 in 2010 to an almost $1000 max price in 2013 before dropping back to current prices of about $330 (3). For a currency to be valid, it must hold a certain amount of value for investors and ensure that it will not be expected to have massive losses in value. As seen above, bitcoin fails to do that.

    However, bitcoin could be seen as a great chance for investors to see massive returns if they take advantage of arbitrage opportunities and predict the value of the bitcoin correctly. From April 2013 to November 2015, the S&P500 has increased by about 26% (4). In that same time, BTC has appreciated by about 82% (3). This does not explain the full story, however, as the S&P500 has experienced a generally steady upward sloping trend in its price while Bitcoin has fluctuated wildly, topping out around $1000 in late 2013. Had an investor been able to capitalize on the rapid change in BTC prices, a fortune could have been made from the opportunity. In addition, the different markets to trade Bitcoin in have prices that differ from $320 to $340 (5). This represents a clear arbitrage opportunity for investors to buy BTC at a low price and sell it back in another market at a higher price. The efficient market hypothesis shows that BTC cannot hold a real store of value because it is exposed to significant arbitrage opportunities and is too volatile to be counted on as a real store of value. Therefore, BTC should not be considered a legitimate currency and should only be used as an asset for investment.

    (1) http://blogs.wsj.com/moneybeat/2015/10/22/eu-rules-bitcoin-is-a-currency-not-a-commodity-virtually/
    (2) https://btcvol.info/
    (3) http://www.coindesk.com/price/
    (4) http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#{“customRangeStart”:1259557200,”customRangeEnd”:1446264000,”range”:”custom”,”allowChartStacking”:true}
    (5) http://coinmarketcap.com/currencies/bitcoin/#markets

  3. Crypto-currencies will continue to be treated as fringe currencies due to a number of difficulties.
    In creation, these currencies were given out as rewards to contributors of an online system, such as Dogecoin or bitcoin. They then got their value from the services provided by users to attain the coins themselves (1). Why should people trust the non-governmental creators of these crypto currencies to not expand the supply of their currencies, even if they have taken a vow to never do so (2)? This lack of trust over what coin holders believe future supplies (and therefore unit values) will be should create instability. The supply situation of Bitcoin is too similar to gold (thought as a limited supply with the possibility to rise), which countries started to rid as a backer of national currency starting in the Great Depression.
    Dogecoin, the sixth ranked crypto currency in terms of total market cap (3), was initially created as a joke (4). There is a high degree of a lack of seriousness with many of these (i.e., who is going to pay someone in Sexcoin?), especially since stable governments did not issue them, which is true amongst traditional currencies.
    There have also been problems with currencies being hacked, as was the case with Dogecoins on Christmas Day of 2013 (5).
    Unless problems like these can be addressed, which seems unlikely, these currencies can stay around, yet only provide limited value.

    1 – http://www.ibtimes.co.uk/bitcoin-litecoin-dogecoin-guide-crypto-currency-mining-1433245
    2 – https://www.quora.com/Why-is-Bitcoins-cap-set-at-circa-21-million-coins-and-not-more-or-less
    3 – coinmarketcap.com
    4 – http://www.entrepreneur.com/article/251073
    5 – http://gizmodo.com/millions-of-meme-based-dogecoins-stolen-on-christmas-da-1489819762

  4. Bitcoin has been popular amongst many online currencies, and advances in technology could propel the growing popularity for bitcoin further. To boost security with this online currency, blockchain was created to act like a “huge decentralized ledger that records every transaction and stores this information on a global network so it cannot be tampered with” (1). The push for greater regulation and protection for online currencies is illustrated by recent thefts associated with the relatively new phenomenon. One episode of theft has been reported by a CEO who “was robbed of bitcoin after leaving [his] account information in his car” by a valet driver (2). Technology has made it easier for theft to occur as seen by researcher Tal Newhart. After a t-shirt displaying a QR code and an encryption algorithm, smart phone users easily scanned the shirt and gained access to the bitcoin account (2). Soon after, all funds from the account were withdrawn.

    Obviously seen as a huge drawback for online currencies, blockchain is a step in the right direction in helping to further financial security amongst crypto currency users. However, there are delays in developing blockchain, because tracking different types of transactions can be rather difficult; derivatives could take as long as five years to develop while syndicated loans could take less than a year (1). Despite this, one of the benefits of developing blockchain is its potential derived efficiency in reporting financial transactions. As the Bank of England notes, blockchain could remove a third party intermediary while also securing digital transactions, saving time and money (1). Furthermore, the technology giant, Microsoft, has become increasingly more interested in developing blockchain as it notes the potential of the application when combining “cryptographic security [and the] reliability of blockchain” (3). The improved development of blockchain by an industry leader could boost the credibility of using crypto currencies. The technology employed in the endeavor can be “used to secure and verify the exchange of any data,” which could improve financial reporting and reduce the amount of theft that occurs with online currency.

    (1) http://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html
    (2) https://www.cryptocoinsnews.com/researcher-bitcoin-stolen-off-back-public-experiment/
    (3) http://www.engadget.com/2015/11/11/microsoft-bitcoin-currency-banks/

  5. Bitcoin needs to serve as three things for it to be considered money: a store of value, a medium of exchange, and a unit of account. First, as long as bitcoin is as volatile as it is, it can’t be a reasonable store of value. Looking at volatility of bitcoin/USD vs. the especially volatile Brazilian real/USD is a stark contrast (1). The real question is whether the value of using bitcoin will exceed the costs of the volatility, which is likely fall in the future (2). Second, bitcoin is only a medium of exchange if people accept it. This is less likely as long as volatility is an issue. Methods such as Bitpay are used to facilitate the acceptance of bitcoin, but mobile payment systems such as Square and Apple Pay have reduced the aura of using bitcoin in online transactions (3)(4). Perhaps the largest obstacle of bitcoin being widely considered as money is it’s lack of being a unit of account. We pay for bitcoin in dollars and also compare the value of bitcoin and other cryptocurrencies in dollar amounts (5).

    It may be feasible for bitcoin to develop into a currency if a) the volatility decreases and b) if it becomes more widely accepted as a medium of exchange. The one aspect that will hold it back from any viability is it’s lack of ability to be considered a unit of account, which requires a substantial period of time changing people’s attitudes and feelings about their preferences of currency. It’s hard to imagine a situation where portfolio’s are full of instruments are valued in bitcoin, let alone the groceries at the store.

    With all that being said, the best thing to come from the bitcoin revolution is blockchain. Efforts by companies such as Microsoft to allow banks to use blockchain for transactions show the viability of this technology (6). Current private money moving companies exist such as Western Union and MoneyGram, but the processes are outdated, complicated, costly, and slow (7). Blockchain works to make each transaction accountable, reliable, and quicker. Companies like Bitreserve have started with free online money transactions, and if safer and more quicker than the alternatives can work towards revolutionizing online payment systems (8).

    (1) https://btcvol.info/
    (2) http://www.forbes.com/sites/timothylee/2013/04/12/bitcoins-volatility-is-a-disadvantage-but-not-a-fatal-one/
    (3) http://documents.jdsupra.com/8c6d3cb1-6dbb-42b4-88b1-bb1902236b12.pdf
    (4) http://www.forbes.com/sites/greatspeculations/2015/01/29/why-apple-pay-and-dollars-are-killing-bitcoin/
    (5) http://coinmarketcap.com/currencies/views/all/
    (6) http://www.engadget.com/2015/11/11/microsoft-bitcoin-currency-banks/
    (7) http://www.marketplace.org/topics/world/surprising-complexity-moving-money-across-borders
    (8) http://recode.net/2015/07/05/forget-bitcoin-what-is-the-blockchain-and-why-should-you-care/

  6. The global economy is experiencing widespread deflation that has put pressure on potential growth. This situation is complex in that global leaders seem to be fighting an uphill battle. Even with large scale easing programs, the European Union’s core inflation remained at 1.0 percent year-to-year in August, 2015 (1). The United States’ has also struggled with a rate below target as the annual percentage change in the PCE Index fell to approximately 0.26 in 2015 Q3 (2). To further hinder central bank credibility, the 5-year forward inflation expectation rate is still suppressed below the Fed’s target 2 percent rate (3).

    Why has extensive easing of credit conditions not translated into higher prices? One possible explanation could be weak aggregate demand due to global uncertainty. Low demand for borrowed capital to use for investment has weakened European entrepreneurs’ confidence in their future marginal profitability (4). Additionally, increasing globalization and emerging market risks have increased the sensitivity of domestic prices to changes in global commodity and currency markets (5). As lower global input prices and exchange rates pressure the inflation rate inside borders, the productive capacities of firms are further depressed.

    It is possible that increasing the money supply supports the capital stock that is necessary to support growth. This is not the only part of the solution though. There is hope in another perspective that refers to the recent changes in the American labor markets that could signal rising prices. Nonfarm job openings have risen above nonfarm hires, which has not occurred in the past fourteen years (6). Decreasing slack in the United States’ labor market has been proposed as a catalyst for future wage and price acceleration due to increasing demand for skilled workers (6). If firms cannot fulfill that demand, then the U.S. government needs to utilize increased fiscal spending to support the decreasing slack in the labor markets and the structural growth of the economy. Components of these policies could include capital infrastructure projects and tax reform.

    (1) http://www.ft.com/intl/cms/s/0/b5926b52-4fbe-11e5-8642-453585f2cfcd.html#axzz3raYyCoHe
    (2) https://research.stlouisfed.org/fred2/series/PCECTPI
    (3) https://research.stlouisfed.org/fred2/series/T5YIFR
    (4) http://www.wsj.com/articles/italys-economic-woes-highlight-dilemma-for-european-central-bank-1412110302
    (5) http://www.bloomberg.com/news/articles/2015-11-10/europe-s-quiet-currency-war-besets-nations-losing-inflation-grip
    (6) http://us10.campaign-archive2.com/?u=451473e81730c5a3ae680c489&id=7c8a86b3fa&e=733fe68f9c

  7. Bitcoin depends on a technology called “Blockchain” that keeps the currency exclusive and encrypts the money so one is not able to replicate it (2). This technology, like Bitcoin itself, is new to the financial world, so people will automatically mistrust something they do not understand; however, this “Blockchain” technology is not only used by Bitcoin or crypto-currencies, it is used by other institutions like those buying and selling stocks (1, 3). If investors trust “Blockchain” to protect their stocks, it is viable enough for exchange.
    As for the volatility of currency, there are much more volatile systems that do very well financially, such as stocks (4). The stock exchange can drop drastically, some stocks at a daily average of 8% (4). While this constant change of value of stocks may be too volatile to use as currency, since most people would not want to go to the store and find out they cannot buy milk because their Bitcoin is not worth anything, the Bitcoin is likely to stabilize over time (1, 5). In fact, a Washington Post article displays 4 charts that explain Bitcoin is likely just going through normal booms and busts while it is still new (5). Bitcoin and crypto-currency is a new system that needs time to develop. Once people become more familiar with “Blockchain”, Bitcoin, and other crypto-currencies, it is likely to stabilize and the warring crypto-currencies will likely coordinate amongst one another.
    With the idea of digital currency, in the last few years there has been a drastic rise in hacking theft (6). These hackers have targeted healthcare institutions, banks, wealthy people, and even the government. Their breeches in data and electronically stored and transferred money make it obvious that there needs to be a new financial system fitting for the digital age. While Bitcoin has been hacked, it is at the cutting edge of encryption because it was created and lives on the web (7, 8). With that, Bitcoin is likely just strengthen the encryption of the digital currency over time (8).
    What is extremely valuable though, is that this Bitcoin also has the potential to change the status quo of the bank-run financial system (1, 3). After the stock market crash, terrible recession in 2007, and the huge bank bailout, the world became aware of the flawed banking system. This is what spurred movements like Occupy Wall Street, and has given rise to presidential candidates like Bernie Sanders who spreads a message of breaking up the banks. Bitcoin may be a key to the future of an increasingly digital world.
    References
    (1) http://www.bloomberg.com/news/videos/2015-07-30/bitcoin-is-a-viable-digital-currency-lee
    (2) https://bitcoin.org/en/how-it-works
    (3) http://www.sci-tech-today.com/news/Bitcoin-s-Value-and-Popularity-Surge/story.xhtml?story_id=10000C82W0Q0#
    (4) http://www.marketvolume.com/stocks/mostvolatile.asp
    (5) https://www.washingtonpost.com/news/the-switch/wp/2014/02/03/these-four-charts-suggest-that-bitcoin-will-stabilize-in-the-future/
    (6) http://www.economist.com/news/business/21677638-rise-hacker
    (7) http://www.bloombergview.com/quicktake/bitcoins
    (8) http://www.technologyreview.com/news/536641/a-new-competitor-for-bitcoin-aims-to-be-faster-and-safer/

  8. Blockchain, the technology that supports Bitcoin, is a “huge decentralized ledger that records every transaction and stores this information on a global network so it cannot be tampered with” (1) In other words, it creates a reliable “transaction cloud”. This technology has major implications for capital markets, banking, and monetary policy. In regards to banking, it has the ability to lower transaction costs, provide more transparency, and improve regulatory control (2). For the capital markets industry, many think that the adoption of this technology is only a matter of time (1). This is because Blockchain would enable more secure transactions, as well as more efficient and transparent market structures. It would also shed light on the huge OTC market as well as dark pools (3). This blockchain technology has the potential to revolutionize the financial services industry, but its implications on monetary policy might be even more exciting and monumental.

    Traditionally, when monetary authorities want to stimulate the economy they manipulate (decrease) the instrument/policy rate. Historically this has been done by changing the amount of reserves in the system so that the policy rate clears at the target rate (4). This, in theory, is supposed to transmit through the economy by means of various different policy channels such as the portfolio balance channel, wealth channel, and bank lending channel (5). The actual effectiveness of these policy channels is hard to quantify because it indirectly tries to alter the public’s behavior and guide expectations rather than directly stimulating it. Banks, borrowers and capital markets must “take advantage” of the low rate environment for actual effects to take hold. Noble-winning economist Milton Friedman coined the term “helicopter drops of money” referring to the notion of a central bank providing direct stimulus to households and businesses without the need for the policy to transmit through various channels and rely on private credit creation (6). HSBC stated that if the economy moves toward a system where all transactions were recorded in a Blockchain type of technology, than the government/monetary authority would have more information and insight on what is actually happening in the economy. As a result, the monetary authority would be able to more directly and accurately stimulate the economy by essentially eliminating the need for financial intermediaries and transmission channels when increasing the money supply in the hopes of stimulating the economy (6).

    The Bank of England has also noted that the Blockchain technology has the potential to facilitate more effective policy tools, specifically when monetary authorities reach the zero lower bound of nominal interest rates. Andrew Haldane, the BoE’s Chief Economist, stated that the bank could issue state-backed digital currency which in turn would allow monetary authorities to implement negative interest rates thereby “relaxing” the zero lower bound and providing for more effective monetary policy (7). Negative nominal interest rates would be stimulating in nature because it essentially creates a tax on holding money, therefore incentivizing businesses and households to spend and invest increasing aggregate demand and output. He also notes that Blockchain technology has the ability to establish trust from the public, one of, if not the most important aspect of money.

    Although these applications for monetary policy are very exciting, much more research needs to be done to determine the legitimacy and practicality of it as well as if the technology and computing power exists to actually make it happen. Ironically, the Bitcoin advocates who are condemning a centralized government controlled monetary system might have actually provided these same hated authorities with the necessary tools to strengthen their control over this very system.

    Sources:

    1. http://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html
    2. http://fsblog.accenture.com/capital-markets/wp-content/uploads/sites/2/2015/06/CM_ATS_POV_Blockchain_in_the_Investment_Bank-web.pdf
    3. http://ftalphaville.ft.com/2014/09/11/1967942/boe-on-the-potential-of-the-blockchain/
    4. https://www.newyorkfed.org/research/epr/08v14n2/0809keis.pdf
    5. https://www.bostonfed.org/economic/wp/wp2006/wp0601.pdf
    6. http://www.businessinsider.com/hsbc-says-the-blockchain-could-be-used-for-radical-central-bank-helicopter-money-policies-2015-11?r=UK&IR=T\
    7. http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech840.pdf

  9. Bitcoin as a specific case is unlikely to take over as a global currency. However, crypto-currency technology in general could drastically change money. The largest advantage of crypto-currencies is their ability to lower transaction costs (1). However, that ability is not reliant on the cryto-currency being politically neutral. There is nothing stopping the United States government from creating their own crypto-currency, pegging it to the dollar, and then waiting for it to spread based off of the dollar’s position as the international reserve asset. All transaction cost savings would be maintained by these new “crypto-dollars.” This would not undermine the central banks’ ability to perform monetary policy since all central bank assets denoted in dollars could be easily be restructured into crypto-dollars because of the pegged exchange rate. Additionally, every other government which issues fiat currency could do the exact same thing. Bitcoin is not likely to become money, however crypto-currency technology is likely to make money even more useful. For example, Reddit’s decision to offer crypto-currency to contributors as essentially a share in the company (2) is really no different from a corporate governance structure where workers are rewarded with equity shares. Reddit is trying to reward content creators with equity so the best content creators are invested in Reddit’s success. The fact that they are using crypto-currency technology to do that is merely an application of the technology not a revolution in thinking created by the technology.

    (1) http://qz.com/545949/satoshi-nakamoto-anonymous-creator-of-bitcoin-is-nominated-for-a-nobel-prize-in-economics/
    (2) http://www.coindesk.com/reddit-50-million-new-cryptocurrency/

  10. It’s clear that Bitcoin and other crypto currencies are picking up momentum as a potential new currency, but will they ever be equal to any given state issued currency? It’s an interesting debate, and also an amazing example of technological innovation and specifically its impact on the financial world. Lots of people have made millions using Bitcoin, but it’s also aided many blackmarket transactions. So the other question remaining is: does the Bitcoin’s obvious value and innovation worth the risk of giving such a powerful tool to criminals? On one hand plenty of criminals achieved prosperity before Bitcoin—hand in hand with the Silk Road—aiding their shady trade.

    First of all some issues with the Bitcoin have to be examined. For one the money supply is not rigorously monitored by hundreds of economists at the Federal Reserve, rather its simply implemented blindly by an algorithm (1). An algorithm could potentially be smarter than a slew of economists someday, but today it seems like it would be a dangerous move.

    If and when the Bitcoin becomes more commonly used as a medium of exchange than fiat money it could be the next step to a unified global economy. It seems like the stuff of science fiction, but once the kinks are worked out in the future there is no reason the Bitcoin shouldn’t be the vehicle of a new world institution(3).

    One last thing that needs to be considered is the role that other crypto currencies play in relation to Bitcoin. When more money is demanded it’s possible that another crypto currency could fill the need. But to a certain extent the entry of new crypto currencies muddies down Bitcoin’s significance. There are currently 669 crypto currencies as of today (2).

    With all the other crypto currencies entering the scene it defeats the Bitcoin’s purpose of decreasing government sovereignty over currency, but there is still a place for Bitcoin today. They decrease transaction costs among users, and vary in value so many people can invest in them. Love it or hate it, and regardless of whether or not it will conquer the world Bitcoin is here to stay.

    (1)http://www.ft.com/intl/cms/s/0/e9db5fda-9242-11e3-8018-00144feab7de.html – axzz3rnGW1Wx4
    (2) http://coinmarketcap.com/all/views/all/
    (3) http://www.bloombergview.com/quicktake/bitcoins

  11. Crypto-currencies are perhaps the brightest invention in modern economics and Satoshi Nakamoto may be nominated for the Nobel Prize in Economics. However, while these crypto-currencies may have great potential ahead of them; the likelihood that crypto-currencies such as bitcoin will eventually replace the U.S dollar is almost none. One of the biggest challenges that crypto-currencies faces is that they do not serve as a unit of account. In the U.S. economy all goods and services are measured in term of U.S. dollars; even crypto-currencies are measured in terms of dollars; more importantly, the IRS treats crypto-currencies as property for U.S. federal tax purposes (1). It will take a very long time and it will be very difficult to get everybody to start thinking in terms of bitcoins. Another challenged is that some people and some small business still prefer to do business in cash. Crypto-currencies users have to convert their virtual currency to U.S. dollars and extract cash from an ATM or bank in order to do business with those individuals. On the other hand, individuals and businesses that prefer to conduct electronic transactions only can use alternatives methods of virtual payments that do not require payment in crypto-currencies but rather U.S. dollars. Services like PayPal and Apple Pay accommodate these types of businesses and consumers so they can use “virtual U.S. dollars” instead of cash.
    One last significant challenge is the trust in services providers. Wim Raymaekers exposes this crypto-currency challenge in his article “Cryptocurrency Bitcoin: Disruption, challenges and opportunities”. Raymaekers mentions that “Consumers must feel safe in the knowledge that their Bitcoins will not get stolen from their wallets or lost if their exchange disappears. Several Bitcoin exchanges (eg Mt. Gox, BitInstant, flexcoin) have been subject to security breaches in which Bitcoins were stolen and the exchange collapsed, resulting in losses for individuals.” (2) Raymaekers also notes that cyber-crime also happens in online banking application; however, banks guarantee consumer deposit and also protect them in case of fraudulent activity. This is not the case of Bitcoin service providers.
    Crypto-currencies may serve as a medium of exchange in many online transactions and perhaps they will serve a purpose on the economy. But unless we have a major shock to our current economic infrastructure and the way we conduct our daily business, it is very improbable that crypto-currencies will become our main currency.
    (1) IRS Virtual Currency Guidance. https://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance
    (2) Raymaekers, Wim. Cryptocurrency Bitcoin: Disruption, challenges and opportunities. http://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?sid=38a50981-932c-4f78-aac4-855955f3b867%40sessionmgr113&vid=0&hid=117

  12. With increasing technological innovations coming forth, Bitcoin has, again, become a topic of conversation. While there are a variety of standpoints about whether Bitcoin can truly become a currency, the potential currency faces numerous barriers that could hinder its chances of ever becoming more than a technological fad.

    One of the greatest problems with Bitcoin is its rigidity. The idea behind Bitcoin is that it will increase at a specific rate over the course of time and, eventually, it will reach a cap that limits the creation of the currency (1). As a consequence, an inflexible, innate monetary policy is put into place (1). As seen with the crisis in Greece, their inability to print money as a result of being a part of the European Union has limited their ability to bail themselves out. While this is not exactly the same type of case, Greece is, still, restricted to having the same monetary policy of the rest of the European Union. It is similar because of the inability to control monetary policy in the case that Bitcoin was the primary currency. One of the “advantages” of Bitcoin is the built in deflation, which could appear advantageous in an economy where “inflation” wars are occurring, however, this eliminates public choice (2). Moreover, the effectiveness of inflationary tactics, according to critics, including Barro, is based on the “unanticipated” actions (3). If individuals are expecting a specific policy, then they will adjust their actions to meet the expectations. As a whole, the lack of control of monetary policy could prove to be problematic if Bitcoin were to become anything more than a technological fad.

    Although Bitcoin has its critics, the “blockchain” component that allows individuals to track transactions has increasingly been adapted as companies like IBM have begun to develop their own versions of it (4). IBM intends to utilize its similar technology to create its own digital contracts that will be “recorded publicly and securely on the world-wide computer network” (4). The benefit of this system is the instantaneous transactions that can ensue more securely, with the ability to share the same “system of record” (4). While Bitcoin faces steep obstacles to become a true currency, it can still provide assistance for further technological advances through its blockchain technology.

    (1) http://neweconomicperspectives.org/2013/04/talking-bitcoin.html
    (2) http://www.economist.com/blogs/freeexchange/2014/04/money
    (3) http://www.sfu.ca/~kkasa/barro83.pdf
    (4) http://www.wsj.com/articles/ibm-adapts-bitcoin-technology-for-smart-contracts-1442423444

  13. Whether or not bitcoin can be considered currency is a grey area. There are many arguments against bitcoin acting as a currency due to high volatility, imminent deflation because of a limited supply, and the difficulty in adjusting to using bitcoin for some people (1). The IRS has even decreed that bitcoin is a form of property, as oppose to currency, meaning any increase in value of owned bitcoin is subject to a capital gains tax (2). The belief that bitcoin is widely accepted is also debased because many companies that claim to accept bitcoin actually use a bitcoin broker middleman. When goods are purchased from the company with bitcoin, the bitcoin goes to the middleman and the middleman gives the dollars to the company, so the company never actually keeps a stock of bitcoin (3). This is presumably because the volatility of bitcoin is seen as a risk by many companies, thus reducing its value as a currency.
    Bitcoin, however, is surely accepted as currency in some markets, specifically by people who prefer the anonymous nature of bitcoin and do not want their purchases tracked (4). Venture capitalists have invested more than $800 million dollars in the crypto-currency since 2012 in attempts to help bitcoin surpass the many issues holding back from being currency (5). One investor is working on making bitcoin more accessible to people not as familiar with computers through a product called Dark Wallet, which would be a browser plugin that allows people to simply spend, receive, and manage bitcoin (4). Also, the supply of bitcoin will not reach its maximum value until the year 2140 (4). Although deflation in the value of bitcoin must take place then, the currency has over 100 years to be used which is longer than the average 27 year lifespan of most currencies (6). Although many issues still need to be addressed before bitcoin can be adopted as currency, volatility in particular, it would not be impossible to see larger sects of people using bitcoin as currency.

    1. http://www.theatlantic.com/business/archive/2013/12/why-bitcoin-will-never-be-a-currency-in-2-charts/282364/
    2. http://www.usatoday.com/story/money/business/2014/03/25/irs-says-bitcoin-is-property/6873569/
    3. http://time.com/money/3658361/dell-microsoft-expedia-bitcoin/
    4. http://www.newyorker.com/currency-tag/dark-wallet-a-radical-way-to-bitcoin
    5. http://www.coindesk.com/10-vc-firms-bullish-on-bitcoins-potential/
    6. http://georgewashington2.blogspot.com/2011/08/average-life-expectancy-for-fiat.html

  14. The race to the bottom started when China devalued its currency, triggering exchange rate declines elsewhere in the world on concern that countries will move to protect exports (1). Since then, several countries have started to cut interest rates, in hope to prevent a deflationary period. Looking at the ECB, who have for the first time dropped to negative interest rates, in an effort to reduce borrowing costs for households and companies, driving demand for loans (2). The efforts to combat deflation are applied because, deflation is harder to beat/control than inflation, but when you look at countries such as Greece, a devaluation of their currency could actually help with lowering exchange rates, and making their exports increase and give Greece a chance to become more competitive in the market (3). The main point of easing is to make bong purchases lower interest rates, and to increase household consumption and investment, however, with low ownership of financial assets and different regulations across Europe, prevents easing of having a substantial effect on consumption and investment (4). Therefore fiscal policy is a better way of helping the eurozone reach this goal.

    With many countries devaluing their currencies, it has a big impact on the U.S., whose currency is up 16% on the Feds trade weighted index of 26 countries (5). This seems unfair for the U.S., but forces them to also have a slight devaluation of the dollar to remain competitive and keep trade up. All of these impacts are movements that will not create a rapid recovery of the market, but create a hope that the market will not spiral into deflation, or worse, hyperinflation for countries that are not doing so well. The U.S. is being impacted by the global market, and this is where fiscal policy should come into play for the monetary unions. A fiscal policy would allow each individual countries of monetary unions to adjust its interest rates and spending, to help better provide a cushion for shocks that occur and be better prepared to adjust.
    (1) http://www.bloombergview.com/quicktake/currency-wars
    (2) http://www.bloombergview.com/quicktake/europes-qe-quandary
    (3) https://www.quora.com/Why-would-exiting-the-Euro-and-devaluing-its-currency-help-the-Greek-debt-crisis
    (4) http://www.usnews.com/opinion/blogs/world-report/2015/02/12/only-better-fiscal-policy-can-save-europe
    (5) http://www.bloombergview.com/articles/2015-02-06/america-is-ready-for-currency-wars

  15. Bitcoin has attracted a lot of attention in recent years, with good reason. It is the most widely used cryptocurrency (1), and it utilizes blockchain technology – a revolutionary ledger system that is incredibly secure (2). But could Bitcoin replace the dollar and other currencies world wide? The short answer for the time being is no. One could go into many economic reasons as to why this is the case, such as its volatility and limited supply, which have already been mentioned in this blog stream. There is also a very simple (and arguably most critical) reason why Bitcoin will likely not overthrow today’s currency that even non-economists will understand – it is doubtful that older people would be able to use Bitcoin, let alone know what it is, “If your grandma had a hard time understanding how wi-fi works, Bitcoin may just melt her brain. (3)” Bitcoin cannot become common currency when a large proportion of the population does not use it. In addition to the elder generation being unlikely to start using the cryptocurrency, “the rate of merchant acceptance of bitcoin is declining (4).”

    Reiterating what others have already said, blockchain is definitely a positive technological advancement and is moving currency toward a hybrid digital economic model at the present time (5). Maybe, a similar cryptocurrency, that improves on some of the issues Bitcoin presents, could overthrow currency as we know it in years to come, when the majority of society has grown up with today’s technology. But until then, Bitcoin will not become the standard currency.

    (1)http://coinmarketcap.com/all/views/all/
    (2)https://bitcoin.org/en/faq#what-is-bitcoin
    (3)http://www.bitcoin.cm/index/news_article/308/rise-of-the-bitcoin-may-just-melt-grandma-s-brain/
    (4)http://www.nasdaq.com/article/bitcoins-price-doesnt-matter-but-the-volatility-does-cm542294
    (5)http://recode.net/2015/11/09/say-the-big-bad-b-word-bitcoin-and-the-internet-of-money/

  16. Crypto-currencies appear to be more of a phase that will eventually be replaced by some other technologically advanced currency. Considered to be a benefit of using cyrpto currencies is the ability for users to use the internet to transfer money quickly over far distances. For example the cyrpto currency Bitcoin “can be used as an effective means of sending funds all around the world (1).” In opposition to this supposed benefit of using the internet to use crypto-currencies, there will always be the issue with how reliable the internet will be in a given location. In a technology review over Bitcoin, Simonite believes the higher and higher the volume of Bitcoin transactions increase there will be corresponding delays (2). To illustrate a potential consequence to this Simonite acknowledges, “If you want reliability, you’ll have to start paying higher and higher fees on transactions, and there will be a point where fees get high enough that people stop using Bitcoin (2).”

    Another obvious drawback to Bitcoin is the ability for certain stores to accept it as a method of payment. These issues refer to the need for Bitcoin users to convert to fiat money so they can pay taxes or spend on other expenditures that don’t accept crypto-currencies (3). Ultimately crypto-currencies though understandably beneficial in certain aspects, require too much adaption to our current economy to be more than just a fad.

    (1) http://cryptorials.io/real-power-bitcoin-lie-purchasing-power-vs-remittance/
    (2) http://www.technologyreview.com/news/540921/the-looming-problem-that-could-kill-bitcoin/
    (3) http://www.coindesk.com/can-bitcoin-deliver-promise-worlds-unbanked/

  17. As mentioned above, much of what attracts people to bitcoin is its finite supply. Its program was written to decisively cap the supply of bitcoins to 21 million which protects against the possibility of any form of human intervention to increase the supply. This absence of a discretionary regulator adds to the credibility that the real value of the coins will likely only rise in the future (1).

    The deflationary nature of bitcoin would prevent it from serving as a unit of account, therefore hindering its ability to gain traction as a viable form of currency. However, if bitcoin did become the replacement base currency of America, its deflationary characteristics could have severe negative impacts on the domestic economy. If users continuously expected the real value of their bitcoins to rise, they would always have an incentive to sit on the coins instead of spending them in the market. This expectation of falling prices would decrease both borrowing and today’s consumption, and could place the economy in a “deflationary trap (2)” This exists when persistent expectations of deflation cause monetary policy to become ineffective; manipulation of the interest rate would no longer have the ability to bring the economy out of recession (2). Additionally, if wages were paid in the naturally deflationary bitcoin, unemployment would be expected to rise as a result of the rigidity of wages, or “the fact that wages generally don’t adjust downward (3).” Lastly, a deflationary currency could exacerbate natural depressions by decreasing aggregate demand as debtors experienced an “increasing the real burden of their debts (2).” These damaging economic implications of an inherently deflationary currency will lessen the likelihood of a cryptocurrency like bitcoin ever overtaking the dollar as the national currency.

    (1) http://positivemoney.org/2014/04/bitcoins-fatal-design-flaws/
    (2) http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_r=0
    (3) http://www.economist.com/blogs/freeexchange/2014/04/money

  18. While many people are raving over Bitcoin as having potential to develop into a currency, there are some reservations. For example, even though Bitcoin can serve as a means for exchange its volatility calls for concern. This uncertainty over whether the price will soar to $1,110 as it did two years ago or if it will crash to $320 as it has done recently displays how Bitcoin is not a good store of value and hence does not have the capability to replace the dollar. In the future, if it becomes common for most companies to accept Bitcoin then the volatility will decrease and could make for a good store of value and strengthen the argument for it being a currency (1). However, with Bitcoin currently being similar to stocks (price volatility and having an exchange) the crypto-currency cannot adequately be relied upon to replace the central banking system. This does not mean Bitcoin is a short-term fad and Bitcoin should be expected to stay around long term. No, it will not replace the dollar as a currency unless many things such as volatility are addressed, but people will continue to use Bitcoin to earn a profit speculating.

    (1) Hill, Kashmir. “21 Things I Learned About Bitcoin From Living On It For A Week.” Forbes. Forbes Magazine, 09 May 2013. Web. 18 Nov. 2015. .

  19. The enhanced technology bitcoin introduces has been predicted by some to be an inspirational stepping stone parallel the development of the Internet; “much as Mosaic spawned Internet Explorer, Firefox and Google Chrome” (3). In this manner, the competition between crypto-currencies does not necessarily undermine the finiteness of bitcoin or any other crypto. Rather, bitcoin could spawn the creative destruction and competition to bring about a crypto-currency as a leading global currency. Bitcoin is still in the beta stage of development (3), and since it’s creation, mathematicians and computer scientists have been studying the technology in search of design flaws- unable to find anything (4). “Every critique people have of bitcoin, so far, can either be answered with ‘the designer anticipated it and has a solution built into the system’ or ‘there’s a service that can be built on top to address the problem’” (4).

    One of the main deterrents to adopting Bitcoin as money is currently the high level of volatility affecting people who hold Bitcoin making it an uncertain store of value and standard of deferred payments, especially in comparison to other currencies (8). The safety of bitcoin’s store of value has been called into question in other ways. Although the block-chain technology is revolutionary in terms of it’s ability to “lead to more efficient and transparent systems to track and record financial transactions, or could improve upon existing systems used by banks” within a system that is practically impossible to fraud the sheer impossibility of digital theft does not alleviate the concern of physical theft (1). It has been seen that “bitcoin, the technology that’s meant to revolutionize the way we think of money, is simultaneously revolutionizing the way we get mugged” (6). This increase in bitcoin related thefts might require third party involvement to enhance accountability, much to the chagrin of bitcoin purists (5).

    If volatility stabilizes with time, the next concern is how to bring about the widespread adoption of Bitcoin as the currency and unit of account. In an attempt to rectify this front, around October Bitcoin loan market maker, Bitbond, has launched a website http://www.bitcoinppi.com, a purchasing power parity index for bitcoin inspired by the Big Mac Index, making the bitcoin more approachable to the average consumer (9).

    Ultimately the world is still very much divided on whether bitcoin and crypto-currencies are a “bubble with no intrinsic value” (2), are only able to maintain “niche appeal” (2), or if they are here to stay (4). Europe’s top court has ruled that bitcoin “must be treated like a currency—not a commodity—for tax purposes” (7) while “the U.S. Internal Revenue Service ruled that bitcoins would be treated as property, not currency” and could thus incur capital gains taxes (2). Governments are making rulings about how to treat bitcoin and they are divided. Europe’s ruling, among other factors like increased integration of bitcoin and block-chain technology in the private and banking sector, show strong indications that bitcoin is gaining support (10).

    (1) http://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html
    (2) http://www.bloombergview.com/quicktake/bitcoins
    (3)http://blogs.wsj.com/moneybeat/2013/12/19/bitcoin-evangelists-see-path-to-a-cashless-utopia/
    (4)http://www.bloomberg.com/news/articles/2014-10-07/andreessen-on-finance-we-can-reinvent-the-entire-thing-#comment-1623906360
    (5) https://www.cryptocoinsnews.com/man-held-gunpoint-bitcoin-comes-forward/
    (6)http://observer.com/2015/02/bitcoin-crime-wave-breaks-out-in-nyc/
    (7)http://blogs.wsj.com/moneybeat/2015/10/22/eu-rules-bitcoin-is-a-currency-not-a-commodity-virtually/
    (8)http://www.businessinsider.com/goldman-completely-debunks-all-the-arguments-for-bitcoin-2014-3
    (9) https://www.cryptocoinsnews.com/bitbond-unveils-bitcoin-version-big-mac-index/
    (10) http://www.cnbc.com/2015/11/11/banks-could-use-bitcoin-technology-by-next-year-study.html

  20. Why are crypto-currencies like Bitcoin valuable? What is the incentive behind using Bitcoin over another form of virtual money? Supporters of Bitcoin tout its finite supply and lack of regulation as reasons to use the popular crypto-currency (1). This supposedly prevents a government from devaluing money and manipulating the economy with monetary policy. However from FBI seizures of roughly 179,000 resulting from illegal transactions accounts for approximately 1.5% of all Bitcoin mined (2). As Bitcoin is best viewed as a high risk asset, there is nothing stopping the government from essentially conducting open market operations to influence the Bitcoin market. So while its finite supply does guarantee that it will be a deflationary currency, the government will be able to exercise some control as a result of its current holdings of Bitcoin.

    Returning to an individual’s reason for using Bitcoin- what are they? Not many vendors accept the currency, and many that do simply convert it to the local currency for the purchaser or are a third party reselling website (3). Bitcoin is not a safe alternative to money as it is easy to lose, and has no entity backing it. The value is volatile (4). There is nothing stopping a vendor from simply taking Bitcoins and never delivering services besides public opinion. And it is less than legitimate. Bitcoin is supposed to be anonymous much like cash- much of its value is tied up in that purchases made are not easily traced back to the purchaser (5). However because the use of blockchain all transactions are traceable and can eventually be used to find who own various Bitcoin wallets.

    Additionally many uses of Bitcoin come from the transactions of illegal goods and services. After the shutdown of a large drug trafficking and assorted other illegal activities site the value of Bitcoin fell 11% (2). Although it has since recovered, likely because of the huge media exposure the currency received, this shows that Bitcoin is tied up in the black market. As such these crypto-currencies will likely always be around as they are an effective and fairly easy way to conduct illegal transactions that would otherwise be impossible to the average person.

    (1) https://bitcoin.org/en/you-need-to-know
    (2)http://www.forbes.com/sites/andygreenberg/2013/10/25/fbi-says-its-seized-20-million-in-bitcoins-from-ross-ulbricht-alleged-owner-of-silk-road/
    (3)http://www.coindesk.com/information/what-can-you-buy-with-bitcoins/
    (4)http://www.coindesk.com/price/
    (5)http://www.forbes.com/sites/kashmirhill/2013/05/09/25-things-i-learned-about-bitcoin-from-living-on-it-for-a-week/

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