The Economic Efficiency of Digital Currencies

capital flows

Bitcoin and other digital currencies are new kinds of money and exchange networks that are superior in nearly every way to state-controlled fiat money. Due to the fact that all monies are directly competing with one another as economic units, money create a zero-sum game of competitive economics against one another. When we see the kind of capital efficiency that bitcoin and other digital currencies exude from their near-zero transaction cost, scalablity, security, and most importantly not being controlled by any government, we can see there is no way that fiat money can ever win over digital currencies in terms of their economic efficiency.

Capital Efficiency

Capital EfficiencyBitcoin and digital currencies will always be a cheaper monetary systems to maintain and utilize than a fiat money, partially when we consider the cost of scaling and security over the long-term, and on a global scale. Due to the unique construction of digital currencies from a security stand point, digital currencies create nearly perfectly secure money systems at rest. Out of the box, through cryptographic functionalities built directly into digital currency protocols; they are magnitudes more secure, efficient, and scalable than fiat money. Fiat money must be defended from counter-fitting, banking fraud, note destruction, and physical theft. Fiat money will always be more expensive to service, use, and maintain as a whole monetary system than any kind of digital currency system because of those weaknesses and flaws. Digital currencies have greater security and scalability than their fiat counterparts as well.

Scalability and Security

mobile banking penetrationMoney markets are huge social networks of economic acceptance. This is why new, crisp $100 bills are accepted almost anywhere in the world due to the economic hegemony of the U.S. dollar. However, there is nothing in the dollar bills themselves that have true value; just that the next person who gets that bill will know that it is worth $100–a relatively stable value against many local currencies like the Venusalian Bolivar, or the Argentinian Peso which have both experienced bouts of hyperinflation.

Despite the wide acceptance of the U.S. dollar, it still has the fundamental problem of transport, security, and counterfitting that all fiat money has–a huge expense that cost the US economy about $250 billion dollars a year. That expense is imbued into all dollar transactions today, and corresponds to the amount of dollars that are being transacted within the global economy. With the increase in the size and scale of the U.S. dollar economy, so does the degree of fraud, and counterfeiting that occurs with U.S. dollars. This amount is proportional to the total supply of hard money, and is a fundamental flaw of any kind of state-issued fiat money. It is this scalability flaw that digital currencies exploits to be magnitudes more efficient at being a mode of exchange, and more importantly, a storage of wealth than any money there is today. Digital currencies have the capacity to scale so much more securely that fiat money that they will prove themselves to be more efficient that all fiat money over the next decade.

Capital Competition

capital competition Due to a condition that is similar to undercover interest rate parity, digital currencies will always offer an opportunity for profit over fiat. This is not due to an actual higher interest rate of digital currencies, but due to an increase in the demand for digital currencies over the total available supply. This causes for value appreciation as demand outstrips the limited supply. The distinct advantage here is that digital currency networks will never inflate the number of units faster than that which is dictated by the block reward. This creates an unmailable supply which cannot easily be changed, unlike all fiat monies.

When placed next to one another as whole monetary systems, bitcoin and other digital currencies will always out preform fiat currencies because of how both currencies create their structural value. Fiat money will always be bonded to a contemporary legal system that finds its value in the force of law, not the nature of value. Digital currencies on the other had have value because the nature of markets–people desire them because of the traits of good money that they exude.

Digital currencies will never have the same internal legal and economic burdens to service as fiat money does. This means digital currencies will always have a lower systemic transaction cost than any fiat system. Sovereign digital capital will always out preform state fiat capital.

Digital currencies are simply better forms of money than state-controlled money.

Conclusion

Funny that he sees that, yet bitcoin is going to destroy his wealth.

Funny that he sees that, yet he seems to be unaware that bitcoin and other DCs are going to destroy his wealth.

Due to the zero-sum nature of how currency competition economics function, bitcoin and other digital currencies present an existential threat to all forms of state fiat money. Bitcoin and other digital currencies have a lower transaction cost and greater security and scalability than fiat money. Over the next decade we are going to see one of the greatest transference of wealth the world has ever seen, and it will be from the failure of fiat money the coming economic hegemony of digital currencies.

5 thoughts on “The Economic Efficiency of Digital Currencies

  1. Hello sir, how do you feel about blockchain powered state currencies ? Let’s say a dollar or euro on a state blockchain. We’re probably heading for that kind of system or something resembling it and I was wondering what your take on it would be. Thanks a lot!

    • Hi Nate,

      I also see that happening, and I see this as the route that bitcoin and other cryptocurrencies will use to act as a sort of trojan horse to fiat monetary systems. While blockchain banking via USDcoin will radically change banking (and the ability to monitor ALL financial transactions), fiat money will still have the same intrinsic flaws that make them inferior to cryptocurrencies.

      Thanks for commenting!

      • Thanks a lot for your answer !

        Don’t you think that governments will keep pushing for a cashless society and that by using blockchain they might control all the transactions, forced onto the said blockchains if you want to be let’s say, paid or buy some food?
        I’m scared that something great like blockchain tech could be used against the people with monetary creation owned by the governments.
        Thanks!

      • Hi Nate,

        I have a lot to say on this topic, but in short, yes, government are going to try to use blockchain technology to build their cashless society. However, this really is a kind a trojan horse that bitcoin is to the international economic system. By governments creating their own digital currencies, they are really proving two thing:

        1) Cryptocurrenices have an economic value that is outside and beyond their control.
        2) That economic value governments cannot control are inherently political by their very nature.

        In other words, this would confirm that the emperors have no monetary clothes. All we need to do now is to point and laugh.

        In time I hope people will use their own volition to determine what better kind of money: ones their governments completely control, or ones that are impossible for them to control.

        Thanks again for the thoughtful questions!

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