Unit 3 Lecture Notes

A third alternative scenario in which Bitcoin grows is one in which it continues to survive without ever becoming a mainstream global monetary system, but remains as a fringe alternative which people only resort to in times of economic crisis. Its continued existence would provide citizens with a quick way to exit from their local currencies and still have a monetary system to use to trade with others, in case central banks mismanage the supply of their currency. This credible threat, in turn, would make central banks far more careful about managing their currencies and would force their hands into limited inflation and into reigning in the credit creation mechanism of their financial systems. Perhaps it will take another example of hyperinflation happening and the local population switching significantly to bitcoin to make other central banks aware of the threat. In this scenario, Bitcoin would lead to an improvement in monetary policy around the world as countries need to adhere to harder monetary policy to ensure their survival.

Bitcoin, for all the talk about its growth, still requires a significant amount of time and attention to understand and operate safely. It is something that a very large number of people will find very hard to navigate reliably. Technology will be built that will make dealing with bitcoin easier, but the logistics of dealing with a private key and public key are likely to remain, and these are challenging for most people. There is a significant advantage to the familiarity of what has worked for a while, and this could hamper bitcoin's growth. A good way of understanding the difference is that in the personal desktop market, even though Linux is a free alternative available for free, most people prefer the comfort of using a proprietary platform like Windows or iOS. Perhaps Bitcoin will remain in this state for many years, with not enough of a critical mass of users developing to create momentum for a comprehensive shift.

In this scenario, Bitcoin would increase the possibility for exit from the current financial system, but either through its own limitations, or through the many advantages that governments can bestow on their monopoly monetary systems, the current monetary system would continue surviving. Bitcoin would remain as a monetary vigilante in the shadows of every monetary system. As soon as credit creation increases in a way that brings down the currency value significantly, wealth begins to find its way to bitcoin. Seeing as bitcoin is hard money, it is not possible for anyone to increase bitcoin production as a response to this increase in demand, and so the value of bitcoin would likely appreciate, making this an increasingly attractive prospect for citizens. Some currencies may collapse, but perhaps the long-run effect is that current central banks will reform their monetary policies enough to ensure these kinds of periods happen less and less frequently, and that the familiarity and the legal and tax requirements for using the current monetary system maintain its advantage over bitcoin in the long-run. As I discuss in The Bitcoin Standard, the most effective policy governments could adopt in this regard would be the gold standard, which would seriously undermine demand for bitcoin by making hard money easily available for anyone with the current monetary system. With the monetary and fiscal discipline that a gold standard enforces on society, individuals would have little incentive to switch to the complicated world of bitcoin.

In such a scenario, bitcoin may have failed in becoming the global monetary standard, but it would have undoubtedly succeeded in its real mission of building a sound global monetary system. It would remain like a vigilante, in the shadows of every society, ready to heavily punish any diversion away from a gold standard by rewarding heavily those who defect from it. That threat in turn could deter governments from trying it enough times to force everyone to adopt bitcoin.