The previous article on BitCoin has generated some strong defense by proponents, and since people usually don’t read comments I’m going to take some of those up here.
The main point BitCoiners make is that: while 21 million may be the number of theoretical BitCoins that can be mined – because it is divisible into 21 trillion bitcoin parts there are enough BitCoins. The world economy is $62 trillion to $75 trillion per year. The USA economy is $14 trillion, more or less.
BitCoiners claim that BitCoin is unique, different from dollars, for instance, because one bitcoin can be divided into a million parts (or more). Supposedly, dollars can only be broken down into 100 cents, and that’s that.
Both ideas are naive, extremely so. First, a dollar is an abstract money. All money is abstract, even gold coin. Gold has no general value except what we assign to it.
A dollar can have as many decimal places after it as desired. Accounting software handles fractions out to 20 or 40 decimal places. That is how the infamous old scam of the programmer taking round-off fractions worked. The source of his money was those fractions of a dollar below on cent. There is no difference between mill or less fractions of a dollar and mill or less fractions of a BitCoin. We can account for as many decimal places as we like.
Second, if you can understand that arithmetic can divide any currency into as many parts as desired, then the proposition that because one BitCoin is so highly divisible you will have enough available to run a world economy (or anything remotely non-trivial for a society) is obviously false. Tell me – if I told you that the Federal Reserve would stop creating collars to loan and declared millionths of a dollar as usable, what would you say? I think it would be something along the lines of, “Excuse me? What kind of idiot do you think I am?”
I don’t think anybody would believe that now there were more dollars in circulation. Simply put, you don’t create more dollars by subdividing cents! What a ridiculous proposal.
Any currency unit can be divided to an arbitrarily large number of decimal places. That is a function of arithmetic. Just because we don’t have coinage in those fractions doesn’t mean that they don’t exist. It’s true that the smallest coinage the USA has had is a half-penny coin (3 decimal places to 0.005) minted until 1857. But that is just a matter of physical representation practicality. It is astonishingly naive to believe that just because by convention we round things off at the second decimal place that arithmetic doesn’t operate on dollars like it does on anything else.
Currently BitCoin is trading at roughly $13. Price history shows a range over 2 years from below $1 to a high of roughly $30 with a median of about $5 since the peak. The theoretically possible 21 million BitCoins could have a ‘market capitalization’ of $630 million at $30 each. For those 21 million BitCoins to be able to support 10% of the USA’s GDP of $14 trillion would require BitCoins worth $66,666 each. That is an appreciation of 222,222% over trading peak. The gross domestic product of the globe in 2009 is estimated at $62 trillion per UN figures. That is roughly 3 times what BitCoin could provide if one millionth part of a BitCoin was somehow worth one dollar.
Folks – that’s one hell of a lot of currency deflation! No currency has ever deflated anything close to that. Ever. Not gold, not silver, not uranium.
Let us examine the relative divisibility of a gold backed currency alongside BitCoin. A standard 400 gram gold bar contains a bit over 2 molecular weights of gold atoms. (One mol of gold is 196.966 grams.) One molecular weight is 6.02214 x 10^23 atoms. Let us be generous to BitCoin and assume that it is impractical to account for less than 100,000 atoms of gold. (High accuracy scales can now weigh 3000 atoms of gold.) That will give us 6.02214 x 10^17 gold-bits per 196.966 grams of gold. Calculate it and you find there are 1,222 quadrillion gold bits in each bar.
In other words, one bar of gold provides more reasonable opportunity for currency division than all of BitCoin currently does. Gold has historic and intrinsic industrial value. And yet, gold has never seen appreciation such as BitCoin requires in order to fulfill its proposed role as a viable global alternate currency. In the past 100 years, the price of gold on the London exchange has fluctuated between roughly $210 and $1900 per ounce. From bottom to top that is a 904% appreciation. It doesn’t change much if you decide that the nominal $35 an ounce dollar peg was real (which it wasn’t.)
The degree of ‘deflation’ required to make BitCoin potential trading elements each worth one dollar is not credible.
1. BitCoin chart.http://bitcoincharts.com/charts/mtgoxUSD#igDailyztgCzm1g10zm2g25
2. UNdata – Table 4.1 Total Economy (S.1) http://data.un.org
3. Y. T. Yang, C. Callegari, X. L. Feng, K. L. Ekinci, and M. L. Roukes, “Zeptogram-Scale Nanomechanical Mass Sensing,” Nanoletters, vol. 6, pp. 583-586, 2006.
4. (2012). Gold and Silver Prices Since 1915. Available:http://www.macrotrends.org/1333/gold-and-silver-prices-since-1915