Bitcoin Forecasting

Bitcoin May Solve the Triffin Dilemma

Although the United States Federal Reserve Note carries with it many advantages for conducting commerce and serving as a world reserve currency, its makeup is not void of imperfections. One of the main shortcomings of the USD is the Triffin Dilemma, a problem which arises when countries must manage both short term domestic and long term international economic objectives. Such a dilemma can lead to trade deficits when a country must also satisfy international demand of its currency. Where the USD falls victim to the Triffin dilemma however, the stateless characteristics of bitcoin may hold promise to solve this international monetary flaw, and provide the backbone for a more interdependent global economy.

The Triffin Dilemma

Reserve Currency Status
Reserve currency status by country dating back to the 1400’s

The economist Robert Triffin first brought to light an international monetary issue involving the nation holding reserve currency status and the impact such a role would have on domestic trade deficits. Such a currency arrangement is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. The countries issuing a reserve currency, which foreign nations would wish to hold, must be willing to supply extra money stock to fulfill global demand. Such an arrangement would inevitably lead to operating a trade deficit.

In March of 2009, in the midst of the recent Great Recession, the People’s Bank of China Governor Zhou Xiaochuan voiced his displeasure of the current makeup of the world reserve currency. Known for his reformist tendencies, Xiaochuan made clear the need for creating “an international reserve currency that is disconnected from individual nations”. Such an international reserve currency, he insisted, could provide stable value, rule-based issuance, and manageable supply necessary for achieving prolonged financial prosperity.

Zhou Xiaochuan’s proposal went largely unheard, as economists were not clear if the IMF’s SDR had the global adoption to overtake the dollar. No solutions have since been proposed. Yet is it possible that such a “disconnected international reserve currency” has been in circulation since 2009? Is it possible that the digital cryptocurrency bitcoin could act as a domestically disconnected money supply and therefore solve the Triffin Dilemma?

John Nash on the Triffin Dilemma

John Forbes Nash
John Forbes Nash, who was said to have made a breakthrough on Einstein’s formulas just days before his untimely death.

The late mathematician John Nash, whom some believe to be a contributor to the invention of bitcoin, was also an advocate of monetary reform in order to solve the Triffin Dilemma. The desirable goal, in Nash’s mind, was to create an international reserve instrument capable of operating independent of individual nation states while remaining stable in the long run, severing deficiencies found in credit-based money.

Such a money supply would be able to provide a national savings outlet while operating in an autonomous, global manner. With an obsessive focus on cryptography and ideal money, the introduction of bitcoin is covered with the fingerprints of John Nash.

Can Bitcoin Solve the Triffin Dilemma?

The Triffin Dilemma, where countries issuing reserve currencies attempt to simultaneously manage national savings levels with necessary international liquidity, remains to this day, a barrier to economic growth. However, could it be that the introduction of bitcoin brings forth a viable solution to the Triffin Dilemma?

If we assume that the prerequisites for a currency capable of solving the Triffin dilemma were to provide the following, it may be possible to argue that bitcoin is the perfect fit.

  1. stable value
  2. rule-based issuance
  3. manageable supply schedule

In a recent analysis of the price volatility of bitcoin, Eli Dourado estimates that the stability of bitcoin could match that of the Euro within 15 years. Largely a product of an increasing number of active users, the Federal Reserve Board of Washington also estimates that the userbase of bitcoin is doubling roughly every 8 months.

Rule-based issuance is perhaps the most interesting aspect of the bitcoin economy. Here, we have a paradigm shift in the management of monetary policy. Where central banking and human decision making were the catalysts for monetary policy in the 20th century, that role is now filled by algorithmic time-bound issuance with cryptocurrency. A computerized function on the issuance of money has the potential to provide a sound basis for monetary policy because it is magnitudes more capable of adjusting to changing externalities, such as the bitcoin mining hash power index.

Finally, the supply schedule of bitcoin is relatively inelastic compared to traditional forms of money. We can predict with a high degree of accuracy the supply of bitcoin at any point in time (past & future) and make the necessary adjustments in domestic policy. Peter Šurda, an economist from Vienna, Austria, argues that the inelastic supply function of bitcoin could result in a reduction of business cycles on a domestic level. This inelastic function of bitcoin’s monetary supply could allow both domestic governments and businesses to forecast changes with a higher degree of accuracy, and therefore, could quite possibly mitigate the destructive nature of the business cycle.

Truly, as bitcoin gains new users in the form of individuals learning about cryptocurrency, transacting it, and crossing the psychological chasm of viewing it as a valid form of payment, it inches closer to its rightful place as a global reserve instrument. Such an instrument, would hold tremendous potential to solve the age old Triffin dilemma.

Bitcoin Cybereconomy

Bitcoin Is Backed by Time Itself

One of the most commonly heard criticisms of bitcoin is that it is not backed by anything. What investors and enthusiasts must understand, is that bitcoin is not only a financial asset with considerable valuable, but it is regulated by a universal constant unlike any man-made money system which has come before it: time itself.

Algorithmic Regulation

If the USD is backed by the authority of its government and the largest force of military might on the planet – then what is backing bitcoin? Even if programmable, digital money brings intrinsically valuable capabilities, how can we have faith in it if there is no core party which oversees its acceptance and adoption?

This regulatory construct of bitcoin allows us to plot the supply schedule in a manner which is highly predictable while being uncheatable through manipulation found in traditional monetary policies. At the very root of what makes the bitcoin network tick, is a regulatory algorithm which determines that new blocks of bitcoin will be mined on average every 10 minutes. These ‘uncheatable’ maths which are intelligently constructed by system design, ensure that nothing can alter the predetermined issuance rate, nor the block reward halving rate, of bitcoin.

Every 10 minutes, more bitcoin become available at a disinflationary rate. That mathematical guarantee formulated by a crude form of artificial intelligence is the backing of a system which boasts remarkable intrinsic value.

Friedman’s k-percent Rule

American economist, statistician and writer Milton Friedman once posed the idea of replacing central banking institutions with a computer capable of mechanically managing the supply of money. He proposed a fixed monetary rule, called Friedman’s k-percent rule, where the money supply would be calculated by known macroeconomic factors, targeting a specific level of inflation. Under this rule, there would be no leeway for the central reserve bank as money supply increases could be determined “by a computer” and the market could anticipate all monetary policy decisions.

Will we ever see Friedman’s computerized banking institution put into action?

Considering the mining network of cryptocurrencies are the closest thing to an authority, and mining will only get more specialized and thus centralized in the future, we may well already have arrived. Friedman predicted the rise of a computer capable of automatically adjusting the inflation rate of money, and this is precisely what we see in the case of bitcoin.

As a regulatory algorithm intelligently adjusts the mining difficulty to make the issuance of blocks more or less difficult, bitcoin well resembles a working prototype of Friedman’s k-percent rule.

Bitcoin boasts the economic backing of a force magnitudes more intelligent and pervasive than the promise of men & military might: an uncheatable, highly predictable, chronologically enforced supply schedule.

The computerized function of the bitcoin system boasts remarkable intrinsic value. The cumulative value of this network will continue to grow as more users join the fold and payment in bitcoin becomes more accessible for every participant.

No money system we have seen to date can claim it is regulated chronologically. Bitcoin is backed by time itself.