What benefits does Bitcoin (i.e. cryptocurrency) offer?

Question

I really, really like moderate inflation. I live in Sweden where the interest rates just went negative because we are on the brink of deflation, and the rate of inflation we have now is far too low. We have huge problems attracting foreign attention and the swedes don't want to take out loans to invest since paying them back ten years down the road hurts just as bad as paying them now (and there's a real risk it might take more to pay them back later, if we go into deflation). It's a real head ache that's all the talk in our financial world.

Getting a hold of Bitcoin is very, very hard and expensive. The value of it has deflated dramatically from when it was introduced, and despite occasional crashes, it could very well just keep climbing in value. It also has a cap, which to me looks like it would unleash a deflationary spiral that would only end once we find a new currency (like the Great Depression was alleviated when we stopped using the gold standard).

But, I'm a computer scientist and I just can't stop finding bit coin supporters everywhere. It has thousands of evangelical missionaries using blogs and magazines to tout it as a means to liberate us from the bankers. I don't know, can't computer scientists be just as corrupt? It looks like dot coms with access to good cryptographic algorithms and server farms who can work in parallel could game the system even more, and once they've swept up all the bit coins they would wield more power than nation states.

Am I missing something? What does bit coin bring to the table that is worth disregarding deflation? Does it bring positive GDP growth? Ease of investment? Monetary power to the people? How? And, I keep coming back to this, wouldn't all these positives be completely wiped out once the 30s come knocking deflation style?

Why does this currency have so many supporters? Are everyone mad?

Answer 1

I'd say that some benefits of Bitcoin and other cryptocurrencies (i.e. "altcoins"), include:

1. Decentralization -- which is advantageous for those who are skeptical of monetary policy, runs on banks, etc.
2. Anonymity, or at least the perception thereof -- with increasingly comprehensive monitoring of transactions (particularly non-cash transactions), those seeking relatively anonymous methods of exchange have traditionally been out of luck in the realm of digital transactions. Bitcoin has widely been regarded as a "digital cash", providing some measure of relative anonymity in online transactions, though this is a decreasingly accurate perception as government databases cataloging transactions grow in sophistication (and some of these databases, such as that of the FBI's, have been opened up to public developers via coding marketplaces like Kaggle). Some altcoins, such as Monero (XMR), add measures to enhance the benefit of relative anonymity.
3. Portability -- they can be easily stored and transported offline (paper-based hashes or QR codes), on portable media, over the Internet, with or without the aid of a "wallet" or bank-like service.
4. Region Neutrality -- unlike fiat currency or Eastern-only currencies such as Perfect Money, cryptocurrencies seem to have less bias based on location or language.

Answer 2

One of the patterns to watch for, which may or may not be a benefit, is what happens during periods of capital controls, account confiscations, hyperinflation, or other financial controls imposed on citizens. Many people will highlight Cyprus as an example, but that's only one example and it's too early to tell if it will be an alternative electronic safe haven for savings (whereas physical commodities aren't). An enthusiast may say this will be a benefit, but there haven't been enough periods to determine this.

Examples:

A family in Venezuela, before experiencing hyperinflation, manages to convert 50% of their savings to bitcoin to hold until the central bank gets in control, then re-converts their savings. In this case, bitcoin is only used to preserve savings, like gold would, electronically.

Capital controls are imposed on families in Greece, though one family managed to move 50% of their savings to bitcoin. [Assuming here] When Greece creates its own currency after leaving the Euro, the family re-converts their bitcoin, able to retain a part of their savings.

Why isn't this a benefit now and not settled? It depends on what attempts are made to stop the above examples from happening, and if - over the long run - this is even possible in the electronic age (China seems to think so); for instance, the Venezuela family may convert some of their savings, but have absolutely no way of re-converting it or trading with it to someone else. Also, if the value of bitcoin fluctuates too much (going from 200 to 1000 to 200), this creates a problem in that someone may buy bitcoin to preserve savings in a crisis, only to lose a huge amount of value when they re-convert because bitcoin's value has fallen. This would be compared and contrasted with a basket of commodities, which is the current popular approach for the above problem.

Forgot to add, what I'm looking for on this is post crisis. When a country experiences one of the above - severe capital controls, hyperinflation, etc, and moves beyond it, but has trouble getting investors to return, do they open the door to bitcoin? If this is a pattern that emerges, then bitcoin, on the basis of this point, does have some advantages. Recently, notice how quickly Russia changed its perspectives on its former oligarchs who had left the country => a country, which was anti-bitcoin, might suddenly be pro-bitcoin when it needs capital.

Answer 3

To the question "can't computer scientists be just as corrupt?" of course the answer is yes. The thing of it is that every bit of bitcoin is open source so everything is trust and verify with bitcoin. With status quo banking everything is trust and.... trust some more.

Everything that I'll list as a benefit could equally be seen as a deterrent to a statist.

Bitcoins are decentralized. That means that no matter what a court says, they can't be confiscated, assuming a secure wallet. There's no amount of banking security you can instill that supersedes a court from ordering a bank to transfer your funds out. Of course, this sounds bad if you live in a country with low corruption and will never become corrupt. However, if you live in a country that is or may become corrupt then this is clearly good.

Being decentralized also allows for cheaper transfers of money. I can send a bitcoin to someone on the other side of the globe with the same ease that I can send bitcoin to someone in the same room as me.

Keeping money secure with bitcoin doesn't require a bank so you are never forced to choose between keeping cash under a mattress or accepting a negative savings rate.

Answer 4

Bitcoin as a store of value is an improved version of gold.

A bitcoin based system would be like returning to the gold standard, without the actual need of any intermediaries or trusted parties and with the convenience of a digital medium with respect to a physical material.

In the book The Bitcoin Standard: The Decentralized Alternative to Central Banking the author argues that many of the current macroeconomic problems are caused by getting rid of the gold standard, and allowing central banks to artificially create money out of nowhere. Central banks are now in charge of artificially maintain equilibrium internationally among many currencies and nations, without a common underlying denominator (gold). This was done at the beginning of the World War I in many countries. Unfortunately the very nature of gold (it is physical and need protection, therefore is better to store it in central vaults, therefore it need a centralized system overlooking it) caused centralization in the long term.

If you buy this line of reasoning, you understand why using Bitcoin could achieve the good things about a gold standard (everybody share the same base unit, sound store of value since durable, scarce, etc.), but improving on that. (no need for centralization, digital, scarce by default, not subject to future macro changes like asteroid mining, etc.)