Day: September 21, 2016

Decentralized Currency

Critics have cited Bitcoin’s decentralized nature as problematic to long-term investment, but this criticism deserves deeper analysis.  Notable dissenting voices include investor Warren Buffet and economist Paul Krugman.  Critics are entitled to their opinion.  In considering the potential demerits of Bitcoin, however, investors should be aware of the benefits associated with its decentralized character.  The intent of this post is to explore the failures of historical fiat currencies.  (For reference, fiat currency describes government issued and/or authorized money, lacking intrinsic value.) From fiat currency failures, the benefits of a decentralized system become clearer.

Currency Failures of the Past

Fiat currencies, similar to Bitcoin, are susceptible to shocks in value.  Since they lack intrinsic value, immaterial forces can dramatically influence their worth.  This post examines the failures of the German Papiermark, the Argentine Peso, and the Zimbabwean Dollar.

After Germany’s World War I defeat, the Treaty of Versailles mandated Germany provide war reparations to allied nations.  When Germany neglected payments, France and Belgium occupied areas of German production, which forced the German government to print papiermarks for salaries.  As the quantity of currency increased, the value of the currency decreased.  This induced a spiral of hyperinflation.

Following the 1973 OPEC oil embargo, Argentine budget and trade deficits threatened to collapse the economy.  In response to growing debt and civil unrest, the Argentine government printed money.  The value of the peso drastically decreased, until the government established a new peso to stabilize the economy.

The situation in Zimbabwe echoed that of Argentina and Germany.  Excessive government spending and economic problems led the government to overissue currency.  The government printed Zimbabwean dollars in higher denominations as the value of the dollar plummeted.

Lessons Learned

Each of these cases shares a common denominator.  Social, geographic, and political forces contributed to devaluation, and eventual collapse, of each of these currencies.  Bitcoin is exempt from these sources of error.  As an independent, decentralized currency, Bitcoin will not face pressure from foreign governments or internal unrest.  Monetary supply is fixed, which means that supply will not respond to changes in the world.  Effectively, Bitcoin removes the element of human error.

The argument of this article is imperfect for several reasons.

1. Historical currencies are tested under harsher conditions than Bitcoin through wider use and longer duration.
2. This piece overlooks the benefits of monetary policy, which have been used to stabilize economies.
3. Hyperinflation, which is the common source of failure among these currencies, could still occur to Bitcoin.

Despite these imperfections, the trend in other intrinsically valueless currencies points a finger at geo-political variables as the culprit for currency failure.  Since Bitcoin avoids geo-political variables, it may be less prone to failure.