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Why Bitcoin is Flawed from a Monetary Reformers’ Point of View

photo of Michel Bauwens

Michel Bauwens
25th May 2012

Excerpted from Anthony Migchels:

“Bitcoin’s existence is very useful for all monetary reformers as it will allow us to gather information about the strategies that the adversary will use to disable it.

Notwithstanding these revolutionary breakthroughs, Bitcoin does suffer from a basic flaw. It’s designed to behave like Gold. Nakamoto clearly believes Austrian Economics to the last word, including the idea that hyperinflation is the main threat to the system.

As a result Bitcoin suffers from the same problems as Gold: it is deflationary and expensive. There is never enough of it. True, Bitcoins can be divided in ever smaller denominations, so ‘physically’ there will never be a shortage, but it means Bitcoin is designed to appreciate for ever and this is the definition of deflation.

Worse still, Bitcoin does not address the interest issue. There is no possibility for cheap credit and if the unit matures, a banking system will be necessary to provide credit based on deposits.

Not only will this exacerbate the scarcity of money, it will also lead to very high cost for capital.

Yet another problem is that with a full reserve banking system as required by bitcoin (and Gold too, by the way) would allow the Money Power to mop up the money supply through compound interest within one or two decades, as you can find out here..

The basic conceptual flaw is, that Austrian Economics believes a currency should be a good store of value first and foremost. This is the fatal mistake: money is a means of exchange, and it is the agreement to use it as such that gives it value, not the other way around. This is even true of Gold today: the reason Gold is now expensive, is because many investors are speculating it will be currency again.

Because of this design flaw, Bitcoin is being hoarded by its users. They prefer to have it sit in their ‘account’, instead of spending it, hoping it will appreciate. As a result turnover is lower than it could be. The unit is already an object of speculation, hindering its primary function: to finance normal trade.

Bitcoin is a revolution and a badly needed bit of fresh air. Peer to peer and independent of banks and Government it is an example for all of us. Yes, we should press for reform at the Government level, but no, we should not await it. There is a free market for currencies and it is ours for the taking.

However, it is not credit based and it does not allow for interest free credit. It’s deflationary by nature, which is very problematic.

Its decentralized peer to peer nature and its convertibility mechanism are its main strengths. If these can be harnessed in interest free credit based units, the Money Power would be really hard pressed.

Bitcoin is a shot heard far and wide, but it is only the proverbial first shot across the bow.”


9 Responses to “Why Bitcoin is Flawed from a Monetary Reformers’ Point of View”

  1. Matthew Slater Says:

    As I understand it, Bicoin consists of two separate mechanisms – the mining and the wallet system. The mining and the gold analogy are monetarily dubious, but the wallet system, in which P2P wallets validate each other seems very useful.

  2. Anon Says:

    This is precisely why the OpenUDC project was started: openudc.org/

  3. anon Says:

    No, bitcoin is not like gold. With gold, a government can claim to hold such-and-such an amount in Ft. Knox, and who’s going to call their bluff? With bitcoin, it’s all in plain sight, the very picture of transparency.

  4. Vergilius Says:

    Ok, I’m sorry, what? Really?

    First thing: Nakamoto obviously doesn’t believe Austrian Economics “to the last word,” because the entire enterprise flies in the face of the regression theorem.

    But that’s just a nitpick. The rest of the piece? Repeated unsupported assertions that interest is bad and deflation is bad.

    The implication seems to be that deflation is bad because no one ever spends money when currency is appreciating. This is just false. It’s not like no currency has ever appreciated and we need to guess or something. But even if we did, people will only seek to increase their cash balances to the extent that they value future goods over present goods. Unless they plan to eat their BitCoins, or something. The very fact that people ever take out loans at interest when inflation is low or negative demonstrates that some people value present goods more highly than future goods. There is no risk of everyone hoarding cash balances indefinitely.

    The interest thing is just silly. It seems that in the author’s world, bankers never eat. Or lose money to defaults. They just hoard their interest payments *forever.* And then, after “one or two decades,” they have ALL THE MONEY. Because, you know, once one thing becomes money, you can never use anything else to trade with ever again. When the bankers have all the gold, or Bitcoins, or whatever, it’s game over. The fact that everyone else is using silver, or some new electronic currency, or hell, seashells, as media of exchange is totally irrelevant. The bankers have ALL THE MONEY and no one else has any.

    If the absurdity of the author’s line of reasoning isn’t apparent from the forgoing, let me offer this:

    The cheese industry always sells its cheese for more than it costs to make. It is MATHEMATICALLY INEVITABLE that after “one or two decades” of collecting “cheese interest,” the cheesemakers will control ALL THE MONEY. The rest of us will be slaves to the lactose-industrial complex. Who else will join me in solidarity against exploitation by big dairy?

  5. Mike Riddell Says:

    My view is that localised or community currencies need to counteract and counter-balance the negative effects of money.

    The fundamental flaw with money, as a currency, is that incentivises unsustainable actions. It makes people greedy, it makes them nasty and horrible to other people, it makes them consume the earth’s resources. It makes them pollute our minds with ads, our bodies with poison, and our rivers with filth.

    What we need is a currency that is only ever issued into existence (money is only ever LENT into existence) for contribution to community. In other words using the principles of timebanking where one hour of my time given to the community is as valuable as one hour of your time given to the community.

    Time is abundant but it’s also scarce. I blame money for making it scare but there we go.

  6. herzmeister Says:

    We still haven’t quite understood money. It has diametrical requirements: It must be scarce in order to be universally accepted (i.e. without authoritarian force), but it also must be abundant (i.e. not in the way of bartering goods and services).

    I believe Bernard Lietaer’s work comes close to a solution: He proposes dual currency systems.


    Bitcoin would be a patriarchical currency here, but one of the best we’ve ever had at that, because it’s open and transparent in how it works. It’s controlled by an authority, but that authority is incorruptible computer code that everyone can review.

    A patriarchical currency *has* to be scarce in order to be universally accepted. Where- and whenever such a currency proves to be insufficient to back a community’s economy, people can resort to local currencies, time trading, the Ripple system etc to provide ad-hoc liquidity. These are naturally credit- and thus trust-based concepts and abundant, but therefore cannot be used for anonymous, long-distance trading.

    It’s indeed like yin and yang.

  7. Augusto Holt Says:

    I agree with the author that Bitcoin is useful as an experiment but his thinking is completely wrong about the flaws in Bitcoin from a monetary standpoint.

    Bitcoin is designed to behave like gold because gold is money, and it is the best money that the world has ever known. It has lasted for six thousand years as money, whereas all fiat currencies (paper money) without exception, have collapsed, harming the very people the author is interested in protecting. All of the fiat currencies of the past that have collapsed have done so from hyper-inflation. The most recent example being the Zimbabwe Dollar. This is not philosophy or opinion, or something based merely on belief; this is fact. Hyperinflation is inevitable in fiat currencies, and this is destructive to the people who hold those currencies. Even without it, inflation (an increase in the supply of money) at a set rate harms savers as their money loses value.

    Bitcoin does not suffer from the same problem as gold; it shares the advantages of gold. Gold is not ‘expensive’ it holds its value over time. A statement like this betrays a lack of understanding of the author about the basics of monetary theory.

    The argument against Bitcoin that it does not address the interest issue is a red herring. Who offers what services in Bitcoin is up to the entrepreneurs that create services with it, and it must be said, that the one billion Muslims on the earth are forbidden from participating in banking that involves interest; does this mean that the author believes all Islamic banks are fundamentally flawed? There is no ‘interest issue’. Money needs to be scarce in order for it to have value. The fact that Bitcoin is scarce is one of its attractive qualities. When we hear phrases like ‘hight cost for capital’ we are listening to a subjective opinion; capital has a cost that is set by the market, not by the wishes of observers with a political agenda.

    We then get a common fallacious argument; the ‘hoarding problem’ this has been refuted time and time again, and there is no reason for me to explain it here, use the Google. Suffice to say for those who know, the ‘hoarding problem’ is Keynesian claptrap.

    Money should be a good store of value first and foremost. Money with this property means that you can save it without it losing its value. Savings are the source of capital, not the government printing press. The designer of Bitcoin understood this, as do the people who understand that gold is the best money man has used to date. Money is a means of exchange, this is true, but its form is important. If money is created by the State, its value can be arbitrarily decreased to fund cronyism. This is theft from the people who use the currency. Anyone who argues for this form of money is arguing for the theft of value from the poor.

    The author then states, again, that ‘gold is now expensive’; he clearly does not understand that the value of gold has not changed; it is the value of the fiat paper money that has decreased as the State’s fraudulent expansion of the money supply has robbed everyone. What he is feeling is misdirected outrage as subconsciously, he understands that he is being stolen from, without being able to put his finger on precisely where the criminal is or how he is stealing.

    Bitcoin is not being hoarded by its users. It is being traded every day in a very limited number of retail outlets that are accepting it. Once again, to refute the fallacies of ‘the hoarding problem’ you should use Google. Bitcoin’s primary function is to act as a medium of exchange and eventually, it will act as a store of value, once it is widely accepted. That is the purpose of all money.

    I agree with the author that we should not wait for the government to reform money, and that there is a free market (for now) in currencies. I suggest that if he thinks Bitcoin would operate better with a steadily increasing money supply, that he downloads the source code for Bitcoin, fork it, and change it so that the number of Bitcoins in circulation increases as Keynesians prescribe. We can then test each currency against the other in the market, and see who wins. I think that in such a contest, Bitcoin will win, because its behaviour will be more money like over time.

  8. PG Says:

    Very good critique.

    It only lacks the notion that money (or currencies) is a public good, a commons. Therefore it must be managed as such.

  9. Gabriel Says:

    If you design a new currency that is not forced upon anyone. Would you design a currency that will decrease in value? Not protecting the users who take a risc and than ask people to use your currency. It might work if you force it upon people as a government can do, but not otherwise.

    It must be designed to increase in value over time and Bitcoin is designed to do so.
    You can think of it as a built in interest rate.

    I my view it does not make the currency expensive, it makes it cheap.

    If you want to buy something worth $500 you can get use Bitcions worth $500 and buy your stuff. The amount or the value of the currency does not matter. The only thing that matters is that you do not have to pay a high transaction fee.

    In my view an expensive currency would be a currency designed to make you lose value.
    Such as Fiat.
    Yet Fiat is needed by governments as a tool to control export, increasing the wealth of the population. However as governments competes in lowering the value of their currencies the store of wealth is affected negatively.

    As Bernard Lietaer says, we need two kinds of currencies.
    Bitcoin and gold are two that could be the other kind. But gold was not designed to function electronically, its hard to prove you own the gold.
    We all know that business and our currency is moving online and you can prove you own the Bitcoins.

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