Cryptocurrency race to the bottom?

I don’t know a whole lot about , but from what I’ve heard (a) governments, unable to fight math, will soon crumble, or (b) Bitcoin is nothing more than a scam meant to enrich its inventor and early adopters and increase the gap between haves and have-nots, or (c) both.

I’d guess none of the above. If Bitcoin speculation, increased acceptance of Bitcoin for real goods, or both continue apace such that the Bitcoin phenom grows for a long period of time (all questionable), I predict that governments and any other entity with a large measure of control over how it can demand payment will launch their own cryptocurrencies, seeking endowments for themselves much as Bitcoin’s inventor and early adopters may have gained.

First a quick aside on the welfare and distributional effects of an endowment for cryptocurrency initiators, and Bitcoin’s in particular. It doesn’t matter all that much, at least :* with zero transaction costs (perhaps cryptocurrencies will get us closer to that ideal) resources will be put to their most efficient uses, regardless of initial distribution. Of course reality will diverge from perfect theory, but given gross inefficiencies that exist in the world today, it’s hard to say that whatever change could be engendered by Bitcoin taking off would certainly be worse. Regarding distributional effects (i.e., equality), it’s hard to see how at least in the short term potentially massive wealth for the Bitcoin inventor and early adopters changes much. It is doubtful these people are among the pre-Bitcoin megarich. Scam or not, I don’t see how Bitcoin distribution increases or decreases inequality significantly unless one expects Bitcoin to become the only currency in the world. I consider this highly unlikely.

Because, repeating close of first paragraph: once Bitcoin is considered as tested and important, any entity that can would be crazy to not seek a windfall for itself by initiating a new cryptocurrency with rules such that it can gain a significant fraction of the wealth embodied in the currency for itself, as the Bitcoin developer and early adopters supposedly have. A significantly powerful entity (i.e., a government) would be significantly tempted to initiate new cryptocurrencies regularly, just as the temptation holds to inflate traditional fiat currencies now. These entities, and many others besides, will also want to experiment with cryptocurrency rules (e.g., Bitcoin’s decreasing minting to a set limit, constant growth, other?).

I have no idea how any of this will play out. On one hand, what are the competitive pressures that will drive cryptocurrency evolution? Is it conceivable that network effects could result in only one cryptocurrency holding value, perhaps Bitcoin? On the other hand, if cryptocurrencies become economically important, they will surely have deep and far reaching effects, even if those don’t include the sudden collapse of governments and the rise of a Bitcoin oligarchy. It seems well worth thinking ahead about these effects from a variety of perspectives: one example.

Also recommended: Bitcoin, what took ye so long? on strands of thought preceding Bitcoin, by Nick Szabo. Indeed, go read everything Szabo has written.

I understand that emotions run high concerning Bitcoin. “Race to the bottom” in the title of this post is merely intended to provoke. The phrase is often abused. Feel free to disabuse me of any incorrect thoughts.

Oh, and feel free to send ฿ to 153ofsZ1PrnCnDGjvWAenRJc53TRhR9BzK.☻

11 Responses

  1. Ben Abuya says:

    Although I agree with a lot of what you said about competing p2p currencies, I’m not sure how governments fit in. They’re just not that good at providing products in a competitive environment.

    What competitive advantage would a government have in the p2p currency market, and what examples are there of a successful government product marketed in a competitive environment?

  2. Ben, the competitive advantage a government has is that it can force lots of people to pay it, it pays lots of people, and it can furthermore mandate the currency used for such payments.

    Governments have been hugely “successful” (defined as market dominance, not necessarily optimal for consumers) at providing security and currency in a competitive environment, i.e., the world.

  3. Ben Abuya says:

    Mike, Government is already doing all that. It has market dominance offering a terrible product. Bitcoin is growing despite those government advantages precisely because people believe it’s resistant to the kind of stuff governments like to do with a currency. p2p is hard, messy and slow. It’s a bad fit for a centralized body that can trivially move bits around in a big central database.

    As for market dominance in security and currency, those also happen to be two sectors for which all governments outlaw competition. There’s nothing competitive about them.

  4. A given P2P system such as Bitcoin is in theory a bad fit for a centralized organization, but I’m suggesting that such organizations can go above this by dictating which P2P systems to use when interacting with such an organization. Of course there being a P2P system involved at all is a very significant change, but its effects and magnitude of any such effects on the distribution of power is uncertain at best.

    Governments compete with each other, especially over long time periods. We live in a world of competing protection agencies with massive market failure in that sector.

  5. I may be confused about Coase’s theorem(s). At the very least, take with a mountain of salt, assume a constellation of caveats. Prompted by

  6. billybobbitcoin says:

    I posted what you’re talking about as bitcoins #1 mode of failure a while back

    One requirement for bitcoins value is its scarcity. Competing bitcoin-like currencies essentially remove that scarcity and make it infinitely inflatable by starting new bitcoin networks. The only savior of that is network effects like you mentioned. Hopefully that will be enough. There is actually another savior which is CPU warring. Bitcoin miners will already be in the perfect position (because they wield enormous computing power) to wreak havoc on upcoming bitcoin-like currencies (by controlling more than 50% of the network) and they will have the motive to do so.

    You predict governments and people with control over payment methods will launch their own networks. I think it is more likely an entrepreneur will see this as an enormous opportunity and start a new very similar network but bootstrap it in a much more effective way.

  7. billybob, I’m not sure I’d call competing currencies a failure mode, unless one is a Bitcoin speculator.

    In the near term it is much more likely that a non-government entity will successfully launch a Bitcoin competitor. In the longer term, I’d expect government-initiated currencies to be more important.

  8. Newbee says:

    But currency is based on trust. Even our current money. Do you trust an entrepreneur more that an open source system? In the Internet usually the first one will win. That is the second difference than in a normal market. See amazon and eBay

  9. Newbee, I’m not sure what your point is. Amazon and eBay aren’t open source. I’d want any cryptocurrency to have an open source implementation, like Bitcoin does.

  10. […] the long term, I’m sticking with my prediction of almost two years ago that “governments and any other entity with a large measure of control over how it can demand […]

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