BitCoin, Chastened

The wannabe economist in me has been following the BitCoin phenomenon with great interest during the last few months. The algorithmic side of bitcoin is fascinating, but a few things bugged me about the system. One of them was that the maximum number of bitcoins that can ever exist is limited to 21 million.

Most of the coverage on bitcoin has been bubbly-positive even though it’s not certain you can reliably convert bitcoins into real currency.

Adam Cohen took a wonderfully lucid stab at bitcoin on Quora recently, focusing on the built in deflation that is a result of the hard limit on the number of coins that can exist. He makes the point that early adopters holding bitcoins will automatically get richer and it smacks of a scam.

While scam is clearly not the intention of the creators, deflation is any economists worst nightmare and built-in deflation will probably result in bitcoin being stillborn.

One thought on “BitCoin, Chastened

  1. This is *exactly* what I was thinking about bitcoin as well.

    If your money supply does not increase at least at the same rate as productivity and population, then you are guaranteed an economy in permanent deflation.

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