Bitcoin is the recent online-only addition to the world’s 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. 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 had increased in quantity over time and prices have risen.
As many countries attempt to devalue their currencies at once, we may be experiencing a race to the bottom. Countries trying to ease credit terms have increased their money supplies at relatively more rapid rates than before the financial crisis. 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?
Regulators in the U.S. are interested in understanding the transactions that take place using Bitcoin for a number of reasons. The “Silk Road” online marketplace was shut down and Bitcoin was the currency of choice for many otherwise illegal transactions. Iranians who have been unable to access dollars for international transactions in dollars have turned to Bitcoin to get access to otherwise embargoed goods. It is probably unlikely that Bitcoin is banned, since the transactions are private, but how much does this undermine government activities? Is it more likely than not that the government finds a way to regulate and tax transactions that take place in Bitcoin?
Finally, while Bitcoin is itself a currency that is limited in quantity, does this mean that someone couldn’t create a Bitcoin2? Or perhaps a Nioctib (Bitcoin spelled backwards)? As long as these alternative currencies were accepted couldn’t there be an infinite number of them? Would 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?
There are a lot of questions I posed above, so pick one and go with it.