Dec 2013

The essential problem with bitcoins is not security or terrorism but the initial allocation of value unrelated to the holder's true economic contributions.

Why should someone who owns the first few coins prosper simply as new people buy in, and thus as the price (per fixed number of coins) automatically rises? They created nothing new, and benefited disproportionately mere as early adopters/speculators. They are leaches on the system.

In a fair digital currency system, money is an abstract representation of the underlying asset. The coins themselves should have no intrinsic value.

The same problem exists when using gold as a reserve standard- rising economies with no gold assets are "taxed" by having to buy into established country's gold reserves in order to participate in a gold world economy. Existing gold holders enjoy the price per ounce’s rise as the world’s economy expands, even if they are members of a stagnating economy. A country with gold mines is ahead of a country selling fruit and pharmaceuticals- a sobering distortion that affects economic decisions in developing nations.

Yet another reason to relegate gold as purely a mutual insurance pool for the risk adverse.

A fair digital currency transition allows you to trade in your current dollars at a FIXED exchange rate. This kicks off the process on a level playing field, and uses long established currency exchange rates as a surrogate for underlying asset value (in this regard, Paypal is fairer than bitcoin).

However, it still has the problem of taxing existing currency holders when innovation creates new value, since you are not automatically issued new coins as a result of the innovation. Instead, the innovator have to accumulate coins as others buy their product, which means (due to the fixed number of coins) the existing value of everyone else’s  underlying assets has declined.

This "innovation deflation" is contrary to fairness and good stewardship.  Imagine you produce butter, and own a certain number of coins. Why should your butter asset be devalued, if someone else creates a better way to produce guns? True, simple economics will take away some coins away from less efficient gun manufacturers, and transfer them to the new, more innovative player. But, if in reality the entire economy is stronger and larger as a result of the innovation, the number of coins in circulation should rise in parallel.

Bitcoins has no mechanism to reward innovation. But then, neither do paper money systems, except at the national level by resetting currency exchange rates as countrys grow more efficient. Rough justice indeed.

One can argue whether governmental control over currency is a good thing. Having the power of the printing press is sometimes a politically expedient way to tax without appearing like a tax in times of national emergency, or to sweep out the old in preference for the new, or to fight a war without weapons. But the historical record proves this power is also frequently misused.

I tend to favor a fixed digital currency without governmental control (but with governmental oversight and regulation).

Rewarding innovation is a trickier subject, as is avoiding related structural inflation or deflation. I would certainly  automatically increase the number of coins circulating  in synchrony with population. Again, rough justice, but this maintains pricing stability because we know greater population correlates strongly with economic value creation. Stable currency values reduce concerns about the future, leading the average person better prepared to invest and plan wisely. The potential inflationary effect of more coins in circulation creates a powerful incentive to develop each “people asset” to their fullest potential. Ensuring that each person actually does expand the economy in parallel to their effort and creativity. Different countries would decide how to allocate the new coins- either on a pro-rata basis or to fund long term public investments.

Directly rewarding and measuring innovation, an economic variable long overlooked by economist and governments alike,