Bitcoin, a post-meltdown currency for the rich?

kristyWealth of Networks

An article from P2P Foundation

Bitcoin, a post-meltdown currency for the rich?

Though being one of the first socially sovereign currencies with a peer to peer protocol (but also with a design that replicates and reinforces the artificial scarcity mechanics of the existing currencies), it’s no secret that part of the enthusiasm from Bitcoin stems from the right wing of the libertarians, i.e. the social force that systematically chooses the side of the privileged and that seeks a world without any form of social protection.

While I have no information on the personal background of the author, the reasoning expressed in this column does explain the enthusiasm that Bitcoin is generating in some social circles.

We reproduce it in full:

Michael, on Why you can’t afford NOT to invest in Bitcoins:

“Many astute observers have noted that our global civilization appears to be headed towards a major resource crisis, as peak oil, peak freshwater, peak arable land and other imminent limits combine with declining mineral resources and ocean diversity, and an increasingly chaotic climate, to mean that it will soon become difficult even to feed the world’s population, let alone prevent the economy from collapsing.

As a result, increasingly many countries will become filled with hungry, angry people demanding that their government provide for them or be replaced – as is already happening today in many Arab countries. Therefore, as governments become increasingly desperate to hold onto power by raising revenue to provide demanded social services, many of them will begin to either (1) tax the wealthy and/or corporations at high levels (as happened in WW2), or (2) simply print large amounts of money, which effectively taxes the wealthy and redistributes wealth downwards, by devaluing the existing dollars which are mostly being held by wealthy individuals and corporations.

Therefore, I believe there will soon be a major flight of the world’s liquid wealth away from sovereign currencies into other classes of assets. However, most other assets are not nearly as liquid as currencies. Gold is heavy and difficult to transport, or else if you just own it on paper, you have to trust some third party to hold your gold in your name (while charging you high transaction fees). And stocks have the added problem that if a company has a lot of its holdings in cash or currency-denominated derivatives, the company’s value may fall along with the currency.

The one exception to this set of problems is Bitcoin, the world’s only anonymous crypto-currency, whose base supply is predetermined by a peer-to-peer protocol, and can never be hyperinflated by central banks or governments under political pressure. It can be easily transmitted over the Internet with negligible transaction costs. And it can be made difficult for governments to trace through the use of online “laundromats.”

Thus, I believe that, relatively soon, Bitcoins will in fact come to dominate the global economy as its preferred medium of exchange and liquid store of short-term value, while existing sovereign currencies collapse as the smart money flees from them, because the governments and central banks that are clinging desperately to those currencies will cause them to be devalued, under political pressure, via destabilizing monetary policy decisions.

We can estimate what the equilibrium value of Bitcoins will be once the transition to them is complete. It has been estimated that the total base supply of the world’s sovereign currencies (physical coins and bills) is in the neighborhood of $4.4 trillion. (For our present purposes, we ignore the secondary money supply in bank accounts and other currency-denominated instruments, since that same financial infrastructure could be recreated on top of Bitcoin.) The analogous base supply of Bitcoins is only 6.6 million today, and is limited to grow to no more than 21 million over the course of a decade or so. Therefore, each Bitcoin will eventually be worth over $200,000 in today’s dollars. (This is not a problem for the usability of the currency, since it is easy to exchange millionths of a Bitcoin.) In the last couple of weeks, Bitcoins have been trading for $10-20, so in other words, Bitcoins should eventually appreciate by around 100,000x or so.

How long will this take? Historically, for the last several fiscal quarters, Bitcoins’ value have been increasing about 10x per quarter, so the transition of the world economy to Bitcoins may take only a year and a half, especially if the economy continues to deteriorate in the meantime. Even if Bitcoin’s growth slows and it takes somewhat longer, the fact that multiple resource crises are imminent still suggests that it will not take too many years.

And meanwhile, as this is happening, the value of traditional sovereign currencies will collapse at an accelerating pace. Therefore, if you keep a lot of your assets in liquid form, I think that you simply cannot afford not to move a significant fraction of these liquid assets into Bitcoins or Bitcoin-denominated holdings. Otherwise, you may be left holding the bag when the resource crisis hits and governments start calling in their sovereign wealth to keep their populations from revolting.

Sure, Bitcoin has had its share of growing pains in recent weeks, what with a handful of high-profile thefts, a major exchange getting hacked, and senators complaining about the use of Bitcoin to buy illicit goods. However, I believe that these are just minor bumps in the road, as far as the long-term transition to Bitcoins is concerned. Theft is easy to prevent by simply encrypting one’s electronic wallet with free software like Truecrypt (and a long passphrase) whenever one is not actively spending one’s coins. Encrypted wallets can be backed up as many times as desired to prevent loss. And when exchanges and other Bitcoin-related sites are hacked, they will just come back stronger and more secure and resilient.

In conclusion, the fundamental rationale behind the recent Bitcoin “gold rush” is sound, and its future is bright. I believe it can only continue to grow, and that the banks and governments will be unable to stop it. It is everyone’s best hedge against a chaotic redistribution of wealth, which will surely happen as soon as the coming global resource crisis hits in earnest. “