One Big Issue With The Bitcoin EconomyMarch 12, 2013 12:57 pm
Bitcoin is trading at an all-time high, and interest in the Bitcoin economy is picking up again. The Bitcoin economy, loosely defined to include all Bitcoin transactions, has started taking some shape now – but we wonder if there is a big issue with the way it is shaping up.
A currency has two key characteristics: Trust and Wide Acceptability. Obviously, one drives the other. Now, let us carefully analyze the way Bitcoin is making progress. We are seeing a lot of marketplaces emerge, which play the role of ‘middlemen’ – basically they will take Bitcoins from you, and they would pay USDs to the merchant. Bitspend is a good example. “Stop waiting for your favorite online retailer to accept Bitcoins. Place your order through Bitspend – we’ll handle paying the retailer for you.” – While this seems like a normal progression for a new money exchange medium (i.e., currency), if you look closely, you will realize that something is just not right.
So we ask the obvious question: Who are these middlemen? In many cases, these are a group of early believers, backed by folks who do not want to miss out on the next 10X thing. Why is that an issue? Is that not how everything is supposed to work – you have a set of early believers, and then the concept goes mainstream?
Well that is how it works for concepts – not currencies. Remember, we are talking about a commodity (whose primary purpose is to get circulated and used for transactions) that has been hoarded heavily – some estimates say that 75 percent of Bitcoins are hoarded.
The way this economy should have shaped up is this: Where it is difficult to put a dollar value, transactions should happen in Bitcoins. Like in the early barter days. So for example, some ‘domains’ would be Bitcoin enabled. Like some services on the Internet. Domain names for instance. Nobody knows what their dollar value is. Thats a good candidate. And then, as these services or products get closer to a dollar value, Bitcoin would move accordingly.
If you think about it, the current model, where you have these ‘middlemen’ saying ‘Just pay me in Bitcoins. I will pay for what you need in USDs ‘ – is not natural. It would just get the hoarding levels up. It is one big issue with the Bitcoin Economy – and would impact its health in a bad way.