Sunday, April 14, 2013

Vires in numeris, or salsipuedes?

After the last few days, it's pretty clear there are some significant obstacles to Bitcoin becoming a widely-adopted currency.   Recapping a bit:
  • Its exchange rate against reserve currencies is extremely volatile.
  • It is fairly illiquid.  I've watched several Bitcoin exchanges now.  I've seen significantly slow servers, extremely thin order books, huge spreads and significant price differences across exchanges (arbitrage, anyone?).  This is simply not a mature market by any stretch.
  • There does not appear to be very much of a pure Bitcoin economy.  For the most part, a price quoted in Bitcoin is actually a price in some reserve currency converted at the going rate, and quite likely the seller is going to turn around and convert the proceeds to a reserve currency at the next opportunity.
  • While the Bitcoin protocol appears reasonably secure, there are plenty of other ways to lose Bitcoins, and once they're gone, they're gone.
  • While Bitcoin aims to be a decentralized currency free from the influence of banks and governments, most Bitcoins are held by one of a small number of accounts.
  • Right now The Man does not seem particularly interested in trying to control Bitcoin use.  That could change.
  • Bitcoin's deflationary model, under which the money supply will never be more than about twice what it is now, has drawn considerable fire from economists.
  • Bitcoin is far from the first attempt at establishing a private currency, or an internet currency (anyone remember Flooze, or Beenz?).  It may well be the first, or one of the first, with its particular technical characteristics, but it's not clear at all that that buys anything.  Private currencies as a whole do not have a great track record.
And yet ...

A currency works if enough people want it to work.  If a solid cadre of core Bitcoin users arises (or has already arisen), doing its business entirely or almost entirely in Bitcoin, then (as the Economist's Free Exchange blogger points out) they would not need to care much how many dollars a Bitcoin was or wasn't worth.  In the ideal case, it becomes more and more convenient for someone who accepts Bitcoin in payment to turn around and use it directly for something else of value, rather than exchanging it, the economy grows and we're off.

The acid test is whether there can be stable Bitcoin prices, that is, whether someone offering an item for X Bitcoins today will be offering the same item for X Bitcoins tomorrow, and roughly X next week, and next month.  This would allow people to save or invest Bitcoin like an ordinary currency.  This probably still requires stable exchange rates with reserve currencies.  If Bitcoin appreciates, that X Bitcoin price starts to look expensive and buyers will be strongly tempted to buy from someone who takes dollars or Euros.  Likewise, if Bitcoin depreciates, sellers will be strongly tempted to raise the Bitcoin price, lest outsiders take advantage of the low prices.

To make all this work, we need some combination of
  • Stable exchange rates with reserve currencies
  • Significant ecosystems of items available only in Bitcoin
  • Enough people with a strong determination to use Bitcoin no matter what, regardless of the financial consequences
My feeling, personally, is that the odds are stacked pretty heavily against this, but I've been wrong many times before.

(Vires in numeris, Latin for strength in numbers, is Bitcoin's semiofficial motto.  Salsipuedes is informal Spanish for "Get out if you can.")

1 comment:

earl said...

salsipuedes? "the power of salt," "strength in salt"? A little help, here.