To be or Not to be

Just over a week ago, the world's biggest (once-dominant) bit coin exchange-Mt Gox collapsed while half a billion dollars of customers cryptocurrency are supposed stolen by some anonymous hackers on the internet. Afterwards, Mark Karpeles, Mt Gox's chief executive, declared that 'There was some weakness in the system, and the Bitcoins have disappeared. I apologise for causing trouble.'-the bit coins ecosystem has passed away. (The economist, 2014)

In my past posts, I tend to use some objective points to discuss whether bit coins can be a successfully financial system or they just a bubble in the future. In my first two posts, I shown some backgrounds about what is bit coins; when bit coins came in front of us; particularly how it works. Subsequently, in order to find some key agreements, I figured out the characteristics of bit coins. Based on these, it seems that there will be a revolution for our current financial system. In general, in terms of dual character, what I said is we should not be too excited and the potential problems always along with a emerging thing. I tried to explore the depth and widened my horizon, as a result, I read some literature so that I complained with myself referring to Gresham's Law.

So far, as the first paragraph I shown above, the latest news has let me down. With glancing some agreements on the internet (also from some of my friends), I wonder if the bit coins are total a evil. Like all the spectators are rational, I would like to say sarcasm is the lowest form of wit. 

Bit coin is neither a angel nor a evil, we should have patience and let the bit coins do its work. To be honest, before I wrote this blog, I want to completely give a so-called 'reasonable point' on my topic. However, absolutely, I tried not to be such restricted that I should have said that bit coins is a undoubted evil and it dose seem to be a bubble. For human beings or for our financial system, in the course of advancement, every little changes may tend to be a brilliant idea; every try may make sense. 

To borrow Shakespeare's words, to be or not to be, it is a question. Let the market make its own decisions.The only thing we should do is that we need be patient and wait for the timing when bit coins would again possess rosy face.

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The critical thinking of the future of Bit coins-Based on the Gresham's Law

From the graph above, In April 2013, it shows bit coin-the digital currency spiked at $266 before plunging to $ 105 in wild ride conceivably  related to Euro crisis.(the guardian, 2013) Zoe, a editor from international business times, announced bit coins were flourished during Cyprus’ banking crisis due to worried European investor purchase of the entire currency in the face of the woe (story here). During past time, most individuals were perpetually overconfident of the future of bit coins. In my view, as I said before, such enthusiasm perhaps be premature (for more details, please see my last post).

In order to explain my point in a clear way, I would like to introduce the Gresham's law to see this problem for my readers. The applicable condition of Gresham's law is based on the gold standard. Comparing with gold, in essence, bit coins has the similar phenomenon which we can indicate that they have  the convergence nothing but one is digital(string of long database code) the other is 'real' currency. As I have described the decentralization one of the four features before, bit coins are not subject to the central bank. Also the supply of bit coins will stand still in the short run, if the price continue to soar, when you are possessing a great deal of bit coins, you will not sell them at all. Instead, you prefer hoarding these money which can lead to a reduction of liquidity. In perspective of Gresham's law, bit coins will be driven out of the financial market as a good money. Unless these digital currency being 'bad', individuals would spend them.  When such situation occurs, bit coins start to stop circulating. In reality, as a none fiat money, there is no face value of bit coins. Otherwise there is no intrinsic value based on the materials. The value appears when the voluntary exchange exists for bit coins.

In words, even we are confident that there cannot be a inflation. Once bit coins become a good money, that perhaps submit to a deflationary spiral that causes individuals or industries to abandon bit coins. Under this case, it is probably to lead a financial panic because there will be a everlasting downturn about the previous value of bit coins. Thus, a foreseeable crisis will burst.   

Reference: 

Philipp Güring & Ian Grigg, 2011. Bitcoin & Gresham's Law - the economic inevitability of Collapse. (link here)

David Mint, 2012. Bitcoins: What they are and how to use them. (link here)
Grinberg R. Bitcoin: an innovative alternative digital currency[J]. 2012. (link here)

Such enthusiasm may be premature

After analysing the features of bit coins, to some extent, bit coins seem to be conducive to the existing financial system. Yet some of its underlying negative impacts cannot be overlooked. 

We should be advised that these potentially particular money(bit coins) lacks authoritative backing and central control (Bryans, 2014). When bit coins go mainstream, obviously, states have little power in controlling bit coins. It seems that the status of centre bank would be a significant decline in the financial markets as well. Even the money supply of bit coins will be a stable level at 21 million in the future (for more details, please see my last post). Before the 'exactly' anticipated amount of currency circulation being reached, somewhere we need to be aware that its growing circulation area is adjusted by a system of specific algorithms basing on computers(Satoshi Nakamoto,2008). On the other hand it is influenced by network operations and the profit-maximising principle. In that cases, it is impossible to imagine what negative effects is going to exert on our current financial system, Besides the real demand of money supply fails to be accurately reflected in the operation of the market due to bit coins being a destabilising factor.

After all, in such an ‘anarchical world’, this issuing mode will be bound to adversely effect on the mechanism of currency issuing system and the control policies of central banks. At the same time, economic efficiency which is obtained in the course of issuing currency by central bank will also be hit because of the prevalence of bit coins. It means, namely, either the traditional seigniorage income can be compelled to reduce or the structure of the monetary base will be damaged(Walter,2012).

In conclusion, once bit coins are popularised around us, there is an issue that regulating the circulation of bit coins will be the first challenge for financial system as a whole.

Reference: 
Bryans D. Bitcoin and Money Laundering: Mining for an Effective Solution[J]. Indiana Law Journal, 2014, 89(1): 13. (link here)
Satoshi Nakamoto 2008. Bitcoin: A Peer-to-Peer Electronic Cash System (link here)

Walter Ochynski 2012. Account free possession and transfer of electronic money(link here)