F.A. Hayek's Dreams of Bitcoin

Bitcoin is insanely hot right now! The price has surged this year, and it has shown significant volatility, with a potential for massive swings up -- and down. Bitcoin is a digital currency (sometimes called a cryptocurrency) supported by blockchain technology, which is a distributed, digital means of processing transactions that creates a permanent digital ledger.

FinTech, Bitcoins, and Blockchain

Bitcoin and blockchain technology are part of one of the four cornerstones of FinTech: money and payments. As one of the world’s top-ranked currency forecasters, I am especially interested in the future potential of digital currencies. As an economist, I wonder if Austrian economist, F.A. Hayek, would have dreamt of Bitcoins.

Would Austrian economist F.A. Hayek have dreamt of Bitcoins?

Hayek was a free-market economist, who was well-known for criticizing the monetary system we have, in which there is a government monopoly over the issuance of currency. While some Austrian economists favor a return to the gold standard, there are problems with that plan. For example: there isn't enough gold to transact on. This is part of the reason that currencies became fiat in the first place. The dollar became the global reserve currency, in part, because there are enough dollars out there to facilitate transactions. Of course, gold prices have trended higher in dollar terms since the end of the Bretton Woods system in the 1970s.

For Hayek, a return to the gold standard would be unreasonable, because it “would probably lead to such a rise (and perhaps also violent fluctuations) of the price of gold that, though it might still be used widely for hoarding, it would soon cease to be convenient as the unit for business transactions and accounting.” (Hayek, 1976, pp. 130-131). In other words, while using gold as a medium of exchange would limit currency devaluation potential, just announcing that it would be the benchmark could make it unreasonably priced. Hayek was quick to point out that "we certainly can do better than [the gold standard], though not through government (Hayek, 1976, p. 130). And this is where Bitcoin comes in.

In the late 1970s, Hayek explicitly advocated for privately created currencies to replace government-issued currencies: “We would get for the first time a money where the whole business of issuing money could be effected only by the issuer issuing good money" (Hayek, 1979, p. 23). Of course, blockchain technology and Bitcoin did not exist in the late 1970s. Personal computers barely existed!

But, Bitcoin could fit the bill – as might other blockchain-supported digital currencies. As such, it is possible people will turn more seriously to these digital currencies, if public trust in the safety and surety of their monetary value can be secured. This is a critical challenge for Bitcoin, because its wallets have been hacked in the past, causing a rapid loss of confidence -- and value.

Here is the link to an article about a recent Bitcoin hacking scandal: https://www.bloomberg.com/news/articles/2016-08-11/bitcoin-hack-upends-world-of-700-yields 

Past hacking scandals around Bitcoin wallets have hurt the currency.

No one is worried about the U.S. Dollar or the Japanese Yen losing value, because of a hacking scandal. But this is a risk for Bitcoin, and past hacking scandals around Bitcoin wallets have hurt the currency. Ensuring Bitcoin wallet security will be critical for preserving and supporting its value, because there is no banking or deposit insurance on Bitcoin accounts.

But those risks are now relatively quiet, and fundamental factors have supported Bitcoin's move higher - in addition to market euphoria and technical factors.

Supply and Demand

As with all markets, there are two factors that have been driving Bitcoin prices: supply and demand. The analysis below comes from work I wrote in September 2016 as part of the MIT FinTech certificate course I completed.

Demand for Digital Currencies

We live in an uncertain era of unprecedented central bank quantitative easing that has engendered a ballooning central bank balance sheets. If concern about these – and future -- central bank policies increases, then Bitcoin and other digital cryptocurrencies, along with the blockchain technology that enable them, are likely to offer investors, consumers, and individuals alternatives to government-produced currencies. Instead of gold being viewed as the only potential store of value (which is unreasonable, because using gold as a currency would only make its value spike, thus making it inviable as a currency alternative), these private currencies could offer the public an alternative. The low transaction costs of digital currencies, and their existence outside of banking are likely to make them increasingly attractive for use in transactions, as the means of hedging currency risk, and as investment vehicles.

Supply of Digital Currencies

The trick to preserving the value of Bitcoin and other digital currencies will lie with the restriction of the monetary supply. Bitcoin is created through an award process, known as mining, which is tied to the processing of Bitcoin payment transactions. This is very different than the creation of a government-backed currency that simply prints more of the currency is uses at will. For Bitcoin and other digital currencies, if the supply can be limited in such a way as to avoid devaluation, it would fulfill Hayek’s dreams – and further disrupt the government-controlled system of fiat currencies. That is something Bitcoin actively did in 2016, by reducing the payout to miners by 50 percent.

It certainly explains part of the significant rise in Bitcoin's value this year!

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Best,

- Jason Schenker

Tags: #Bitcoin #blockchain #digitalcurrency #cryptocurrency #futureofwork #automation #robots #robotics #jobsforrobots #markets #economy #AI #ecommerce #tech #supplychain #materialhandling #Hayek

Jason Schenker is the author of multiple books, including Commodity Prices 101, Recession-Proof, Electing Recession, and Jobs for Robots. He is ranked the world's leading financial market futurist, and he is a columnist for Bloomberg Prophets. Jason Schenker is the President of Prestige Economics and the Chairman of The Futurist Institute. He holds a certificate in FinTech from MIT.

Sources:

Hayek, F.A. (1976). Denationalisation of Money: The Argument Refined.

Hayek, F.A. (1979). “A Free-Market Monetary System and the Pretense of Knowledge.”

Hacker Photo Copyright: andose24 / 123RF Stock Photo