The Bitcoin Economy is upon Us

Bitcoin is on the verge of becoming a respected and widely used means of exchange. News stories indicate that the cryptocurrency has achieved some important milestones that put it on the brink of mainstream acceptance.

The most dramatic development is that Bitcoin is now more stable than one of the world’s great currencies; the Pound Sterling, The Independent reported. That’s right a blockchain-based digital ledger; that’s less than 10 years old, is more stable than the historic currency of the British Empire.

Bitcoin is now More Stable than the Pound

The pound’s 10-day historical volatility dropped below that of bitcoin’s during the week of July 3, Independent writer Andrew Griffin noted.[1] The cause of the change was Brexit; which effectively pulled the rug out from the under the pound. The pound lost around 10% of its value right after Brexit; a drop that was similar to the one right after the Nazi invasion of France in 1940, The Conversation pointed out.

The pound has recovered some since then but it Bitcoin has been holding steady; with a value of $658.71 (£501.35 or €599.97) on July 24, 2016, despite the halvening, which was expected to cut its price. The halvening was a feature built into bitcoin that cut the amount bitcoin miners can make in half, it occurred on July 9. It also had little effect bitcoin was trading at $659 at the end of the day on July 8 and $649 on July 10, according to data provided by our friends at Coindesk.

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This shows that bitcoin might be a more stable currency than the pound or government-printed money. The cryptocurrency seems to respond better to dramatic events than the government money.

That’s a paradigm shift of monumental proportions that nationalists are not going to like. A probable outcome of the shift is that nationalistic luddites like Donald Trump will start trying to ban bitcoin.

Central Banks get on Board the Bitcoin Bandwagon

News like that shows us why central banks are now studying the possibility of offering their own cryptocurrencies. Two economists at the Bank of England; Britain’s central bank, have written a paper that recommends central banks offer digital currencies – The Wall Street Journal reported.

A national cryptocurrency would give a permanent boost to the economy and give central bankers more control over the economy, John Barrdear and Michael Kumhof claimed. They think cryptocurrency would make it easier for central bankers to tinker with the money supply.

Theoretically a central banker would be able to increase; or decrease, the money supply at the push of a button by using cryptocurrency. One way this might be done is to give every citizen a digital wallet and then put a specific amount of cryptocurrency into it at a time. Another is to lower values through mechanisms like the halvening.

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That would bypass the banks; and allow instant for instant economic stimulus every time the central bankers wanted it. It would also greatly increase the central bank’s power which would not make Rand Paul; and other Federal Reserve critics, very happy.

Basic income advocates; and libertarians, might get on board because it would eliminate the need for a social services bureaucracy. Such a move would also threaten the banking system because banks would not be needed.

Blockchain Might Give Central Banks total Control over the Money Supply

Under such a scenario banks might become obsolete Peter Stella; the former central banking chief at the International Monetary Fund, told The Journal. That might occur because it would replace the present system; in which money is kept in bank deposits insured by the government, with one in which all money is effectively kept the central bank.

The most interesting aspect of such a system is that private banks would not be able to create money, with credit backed by their depositors. Under the present system, a bank can simply create more money by increasing a customer’s account balance. In the new system the central bank would decide how much money each citizen gets; which sounds like a central planner’s or a Leninist’s dream economy.

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One result of this might be that the entire money supply would be under the control of the central bank. Given the track record of some central banks that’s not very reassuring. Some economists; including the late Milton Freidman, blamed the Federal Reserve for causing the Great Depression. More recently some people have blamed the meltdown of 2008 on former Federal Reserve Chairman Allen Greenspan.

There are many obstacles to such a paradigm shift, the biggest of which is all the people who prefer physical money. That includes those who distrust digital mediums; and goldbugs who think that the only real funds are precious currencies.

How Cryptocurrency Might Tear Society Apart

Another potential problem is all the people that do not participate in the digital economy; such as the 48.222 million US adults[2] that do not use the internet. What would happen to them? A major problem here is that those least likely to use the internet; are the people most likely to be of low socioeconomic status including the poor, the elderly, religious and ethnic minorities and the less educated.

Such a development would greatly increase the digital divide and income inequality. A disturbing result might be to effectively cut off a percentage of the population from the banking system and the economy. Another would be a system of digital peonage; in which those with access to the digital currency would use it to exploit those who did not.

Bitcoin as the Mark of the Beast

My guess is such proposals would be met by violence, civil disobedience and organized anti-technology movements. Many of which would be led by religious people; who would see digital currency as the mark of the Beast, from the Bible’s Book of Revelation. The Beast is another name for the Antichrist; the son of Satan and future world dictator, that many Christians and Moslems believe will appear in the last days.

Central Bank of Nigeria
Central Bank of Nigeria

“And no one could buy or sell anything without that mark, which was either the name of the beast or the number representing his name.”  – Revelation 13:17 taken from the King James Bible.

Other opponents would be socialists. libertarians, and all the lower middle class people whose clerical jobs depend upon the banking system. The prospect of nasty new class divides and class warfare exists here.

Has Bitcoin gone Mainstream?

The majority of bitcoin use is for legitimate business transactions not fringe activities. Researchers from Germany’s Central Bank, the University College of London and the University of Wisconsin-Madison believe the amount of bitcoin used for “legitimate payments, commerce and services” now exceeds that used for black market purchases, gambling and mining.

The bitcoin economy has gone through three stages the researchers theorized in a paper[3], a Coin Desk article indicates. The first was dominated by mining; when bitcoin was dominated by hobbyists and geeks, and had little value. The second was dominated by sin activities; such as drugs, gambling and porn, or the black market.

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We are now in the third stage when bitcoin is being used for legitimate transactions, such as paying for shoes from Overstock.com. That means big business is slowly pushing the black market to the fringes of bitcoin.

It looks as if the bitcoin economy is almost upon us whether we want it or not. One has to wonder what havoc it will wreak and how the average person will react to it. Given the rise of Trump and Brexit that reaction will not be pretty.

 

[1] “Pound sterling becomes more unstable than Bitcoin following Brexit,” Andrew Griffin The Independent, 10 July 2016.

[2] The Pew Research Center estimated that 15% of US adults never used the internet. The United States had a population of 321.442 million people on July 4, 2015, according to the US Census Bureau. 15% of 321.442 million is 48.22 million.

[3] The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships

July 1, 2016
Deutsche Bundesbank

Paolo Tasca

UCL Centre for Blockchain Technologies

Shaowen Liu

Deutsche Bundesbank

Adam Hayes

University of Wisconsin – Madison – Department of Sociology; The New School – Department of Economics