On the future of Dogecoin, BitCoin, and other cryptocurrencies of the non-realm

An email query from Brad DeLong reminds me of this old Bart Taub paper, “Private Fiat Money with Many Suppliers” (jstor):

A dynamic rational expectations model of money is used to investigate whether a Nash equilibrium of many firms, each supplying its own brand-name currency, will optimally deflate their currencies in Friedman’s (1969) sense. The optimal deflation does arise under an open loop dynamic structure, but the equilibrium breaks down under a more realistic feedback control structure.

There is also Marimon, Nicolini, and Teles (pdf) and the work of Berentsen., all building on Ben Klein’s piece from 1974.  This literature has been read a few different ways, but I take the upshot to be that a) a monopolized private fiat money might be stable in supply, to protect the stream of future quasi-rents, and b) private competing fiat monies will not be stable in overall supply, for reasons of time consistency and also the competitive erosion of available rents.  In other words, when it comes to the proliferation of cryptocurrencies, the more the merrier but not for those holding them.

I don’t agree with the modeling strategy of this 1981 Kareken and Wallace paper on the indeterminacy of equilibrium exchange rates, but still it is another useful starting point.

Addendum: Krugman adds a bit more on Bitcoin, from a friend of his, John R. Levine.  Here is the final bit from Levine:

My current guess is that the Bitcoin bubble will collapse when there is some bad news, e.g., a regulator demands registration of Bitcoin wallets, people try and cash out, and find that that while it’s easy to buy bitcoins, it’s much harder to find people willing to buy back nontrivial amounts, very hard to collect the sales proceeds, and completely impossible without revealing exactly who you are.


Dogecoin is great. It's like Bitcoin but the people in the community think the whole thing is a joke, so when something goes wrong they have a good laugh and learn from it, instead of screaming that the rest of the world has to change to adapt to them.

I fully expect that Dogecoin will be as much a part of the next Occupy Wall Street style populist left movement as the Guy Fawkes mask was to the last one, and it will leave an even more lasting impression.

One statistic I'd like to know is what fraction of Bitcoin transactions are Bitcoins traded for goods-or-services versus Bitcoin-for-fiat-currency.

Anyone know?

Isn't part of the point of Bitcoin to make it impossible to know such things about it?

I'd estimate about 1% of my income/spending is in BTC and the rest is USD. Good question, as most people jumping on the bitcoin bandwagon are speculative investors. I don't mine btc, but I accept them as payment for web design services and hosting. I also received btc as part of my day job's Christmas bonus and use them to buy/shop online. Maybe a good 20% of my Christmas shopping was done with btc.

In order for it to really become accepted as a currency and not just a speculative investment, more people need to accept btc as payment for goods/services and more people need to start spending them.

But Bitcoin does not have any controlling firm and the supply is limited and unchangeable by the nature of the design. It is closer to commodity than to fiat currency, with the algorithm playing the role of the physical scarcity and costly new production. The 'fiat' of a human currency-issuing institution is simply not descriptive of that situation.

Paper is a commodity too. The point is that competing suppliers make a run for the available rents, and the supply of such cryptocurrencies as a whole does not have an obvious limit.

Never, ever underestimate the power of "first to market". In my field I deal a lot with patents and I find that first to market is usually stronger than even a strong patent portfolio (Google, Dell, Cisco and even arguably Microsoft started with weak patent portfolios and relied on being first to market). In the case of bitcoin, if they have cachet, why would anybody care to try another bitcoin?

Further, George Selgin should have been mentioned--the father of private bank.

Finally, bitcoin and cryptocoins today are like the wildcatter banks of yesteryear: as long as their fiat paper is backed by liabilities at the bank--deposits--then you can and did have 100s of competing fiat currencies, with booms and busts but no permanent crash. A limited supply of something with cachet is valuable--it's called "ART" Modern art looks terrible but has a utility because it is scarce and people like it because it was 'first'--be first to splash paint on a canvas and you're famous (Jackson Pollock); be second and you're ignored.

Bitcoin may have a bright future, though I think personally as it becomes popular the governments round the world will kill it off with regulations, as it undercuts their monopoly, so I'm staying out.

Google btw was first to market with a certain proprietary way of indexing searches, that they have since patented in various incantations, just in case somebody brings up Altavista.

That's not first to market in any way. That's patenting a breakthrough innovation. First to market applies to easily clonable products or services.

Well Google is easily cloneable, as their index formula is in the public domain. What they patented (from what I can tell from Google Patents) are some derivatives to their original formula. Their original public domain index formula is as follows: the more pages that link to a page, the higher in popularity on the Google Search Page that page appears. Anybody can do it, and a few have tried (DuckDuckGo anybody?) but nobody tops Google because of first to market. Even Bing, which pretty much gets the same results as Google (but is a bit worse in a few things like converting currency etc) is a distant second.

Never, ever overestimate the power of "first to market". Remember altavista and myspace.

Altavista was inferior to Google due to the lack of the indexing protocol I mention upstream. Myspace was killed by adverts--as the founders acknowledge. Had Myspace not had ads (like BTW Facebook is getting into now, a dangerous sign), it would be still around--due to first to market.


No true Scotsman?

Altavista could have held out forever against Google if they didn't make their homepage a bunch of "portal" crap in a misguided attempt to monetize their search business. Google wasn't just better at searching, but they made the experience very nice and simple so even dial-up users could search for things in seconds.

Finance is fundamentally more conservative than most other tech pursuits. it takes a whole lot more reluctance to put your money in something new compared to clicking on a new link and feeling, "hey that's interesting". Being older and more established does give bitcoin an edge right now.

However, a minor downside is that if laws are made with bitcoin specifically named in the law, then alt-coins might have an edge.

Never, ever underestimate the power of “first to market”. In my field I deal a lot with patents and I find that first to market is usually stronger than even a strong patent portfolio ...

If this is true, then doesn't it mean patents are not very important as a incentive to develop technology?

You're asking why anyone would care to try something other than a first to market bitcoin?

There are many reasons, one is that it is more difficult to mine a bitcoin than another coin, though the USD involved may be similar (or 1000000 of some other coin = 1 bitcoin etc). The other is there are dedicated ASIC machines that can mine bitcoins FAR FAR faster than a normal system, so these people have an advantage when it comes to new bitcoins. This is a reason to NOT use bitcoins (why should you invest now, when you have less to gain? ... when you could just hate on the bitcoin and make its value go down, or invest in something with a more promising gain or even equal gain?), or to believe they are worth less than they are... when enough people believe that, it will truly be worth less.

It does have some advantages in acceptace though, these will help it, but if a vendor accepted multiple types of coins, it would lose that very quickly for other reasons.

A commodity is useful in and of itself, not just in its ability to be used in transactions.

Put differently, just because something is scarce doesn't mean it's valuable.

I really see no future for bitcoin or its potential successors. I would be very surprised to hear of any Ph.D. economist,who has any measurable portion of his or her wealth invested in it, let alone thinking that it could be a viable medium of exchange.

> let alone thinking that it could be a viable medium of exchange.

So in other words, Bitcoin represents a cheap way to test the global worth of modern academic economics as understood by credentialed experts, and if it succeeds without dire consequences, we have successfully learned that the many millions spent on the field over the past decades were wasted?

Yes, in the grand scheme of things this is a very cheap test. Imply what you will about the field, but for those who lose money on it, I guarantee it won't be academic economists.

Cryptocurrencies tie together many fields. To specialists in each of those fields the reaction is "this can't possibly work," followed as it continues to work by "this cannot possibly continue to work." To people who span many fields it is just inevitable now that it is in motion.

Bitcoin is awesome as an economic experiment. Anyone who just ignores it is a fool because, no matter what, we will have some valuable lessons come out of it.

There are horror stories of people having their bitcoin-to-dollar transactions held up for months by the Magic-the-Gathering-exchange or just lose by Coinbase. I don't know what fraction of the total those represent, but without decent regulation you have to prepare for the worst case.

> There are horror stories of people having their bitcoin-to-dollar transactions held up for months

That injustice to a handful of holders is almost as terrible as outright theft that the inflationist CBs commit against fiat holders on daily basis.
I'd rather take my chances with unregulated private currency issuers, thank you very much.

What academic researchers say about bitcoin can safely be ignored - it's no more or less useful than something you hear in bar or read on the Web. It's laughable how these "scientists" can't agree on almost anything when it comes to altcoins - even Austrians disagree about the nature of bitcoin.

And Dogecoin users never leave you wishing they were all dead.

i wish they were all dead

> There are horror stories of people having their bitcoin-to-dollar transactions held up for months by the Magic-the-Gathering-exchange or just lose by Coinbase.

You know, MtGox never actually sold Magic the Gathering cards; Jed McCaleb had simply been working on CCGs (he developed The Far Wilds) and had the domain name handy when he decided Bitcoin really needed an exchange site.

More importantly, what makes you think the horror stories are worse for Bitcoin than elsewhere? There's plenty of horror stories about online entrepreneurs seeing their money locked or taken by Paypal with no recourse. And over the past few months, I was working on toting up all my personal finances back to 2003 into some accounting software, including all my Bitcoin transactions, and I was a little horrified at how regularly I was being raped by ATM fees (separate fees for balance inquiry, withdrawal, *and* being at a different credit union), overdraft fees, wire fees, etc etc - and naturally, the interest didn't come anywhere close to it. My Bitcoin transactions on the other hand... night and day.

But how many PhD economists are super- rich? Most PhDs, I would venture to guess, are highly risk-averse people, not the type to start up their own firms or invest in a speculative currency

"I would be very surprised to hear of any Ph.D. economist..."

You wrote this wearing a monocle I hope.



Don't most cryptocurrencies meet the "open loop dynamic condition" (unless I'm misunderstanding, which is easily possible, since the definition is rather complicated)? All the existing cryptocurrencies that I know of specify the exact growth trajectory of the money supply in advance.

Dear Tyler:
Last year, iirc, you asked your reader to suggest ideas for the blog.
I thought it was a great post- maybe this year, you can ask your readers, where can liberals and conservatives find areas of agreement, or areas where they can agree on what data or information is needed to resolve a dispute.

Tyler, have you read Selgin's recent paper on synthetic commodity money? (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118)

He makes an interesting distinction between synthetic commodity money and rule-bound fiat money. His account of the Iraqi Swiss dinar was also fascinating -- a fixed, never-to-be-increased supply of paper fiat.

But isn't the limit the trust that people have in the currency and that is no different from any other currency? Is it possible that people can have trust in a currency without a government backing it?

The answer to the last question is yes.

Trust in BitCoin? Not if Krugman has anything to say about it. Is it possible that people can have trust in a currency if those who don’t like the implications of its success have influence over people’s perceptions?

Re. Addendum, I predict a whimper rather than a bang, as interest and fashion erodes.

A whimper ... I think the best way to view it is that Bitcoin is Beanie Babies for Billionaires [mea culpa: a blog post of mine]. To be a means of payment requires lots of infrastructure, a stable value, on and on as many have pointed out.

As to the academic side, I had a student do a history of currencies in the Ottoman Empire because the only other literature I knew focused on the shift of pound to dollar. One data point doesn't provide much power to distinguish among theories. But clearly the ability to lend / invest working balances – the store of value aspect – and to borrow [credit cards!] are pretty important in the real world.

But if it whimpers, then it's solved the deflation problem, right?

The problem in bitcoin is that the number of bitcoins will have a limit. For example, it will be limited to 21 million coins. There are some instances that coins are lost like the one who have dumped his hard drive with lots of coins. Bitcoin can't detect if the coins are dormant or lost forever.

How is this a problem? Bitcoin are divisible. The world could be run on a single bitcoin divided sufficiently. The key technology is the blockchain. The price of the bitcoin or the specific quantity is not relevant as long as the quantity is fixed.

As opposed to the Fed who can use the NSA to find out who has how many dollars, I presume?

A currency designed to mimic gold will perform, at best, like gold.

It's worse than gold. It's deflationary.

Can you transmit gold remotely? Bitcoin is a payment technology that has some gold like characteristics.

I think a reasonable analysis of private currencies ought to be conceived as a comparative institutions problem. Is the private issuance of currency a good idea *compared to what*? Fiat currencies have their own considerable problems especially when one's vision is world-wide and over long periods of time.

Whether it is a "good idea" doesn't matter so much as whether people are going to use your currency to buy & sell stuff.

My fear about Bitcoin is that it has largely stayed a speculative instrument. Unless people start to actually use it the future is bleak. You can only sustain a speculative boom so far.

The interesting thing about bitcoin is that it is discussed at all. It is an interesting technical feat, but otherwise one more of many ideas that show up.

Why is it even taken seriously?

I don't think it is too extreme to think that one of the major trading currencies could lose almost all value in the foreseeable future, enough of a likelihood that it is worth considering hedges. One of these times the printing and buying to peg the price may fail, with repercussions to all economies.

If bitcoin, or gold for that matter become a recognized store of value and exchange it will be because the alternatives are untenable.

The value of the btc comes from it's use as a medium of exchange (think worlwide paypal.com), plus all the speculator believing in the future potential of the btc as a medium of exchange. The technology is good. The market for it is surprisingly liquid across multiple countries. There is a significant possibility that it becomes the next Western Union/Mpasa with worlwide acceptance.

As if Bitcoin has not already abundantly demonstrated that it doesn't give a crap about theories!

We need more bitcoin users to read these papers and start behaving otherwise we'll never figure that Bitcoin stuff out !

Every speculative boom abundantly demonstrates the foolishness of skeptics. Till it goes bust.

And every widely adopted new technology is called a bubble at the beginning. So does observation that actually give us any insight?

Many people here seems to like to blindly dismiss bitcoins based on it's value as an investment. You are missing the big picture. Bitcoin is a new payment technology that allow anyone anywhere to generate a wallet that is like a bank account. This is very useful to the unbanked of the world who will be able to receive money remotely(remittance) and spend money remotely(Think sears catalog). Bitcoin has shown it's value to drug dealers in the USA, it will show it's value the third world as soon as it's easy to run on a cheapo cellphone. Bushmen will be ordering well pump replacement parts from china within 5 to 7 years. Distribution cost are huge in Africa due to the absence of trust and proper banking infrastructure. Bitcoins are going to slash these cost down.

Are there a lot of "unbanked" that own PC's?

They own $20 cellphones. It's only a matter of time before there is a standard $0.10 chip that does all the required work. It will be included in the cheap cellphones made for the 3rd world. Right now there is software that work on $100 android phones.

Assuming we get to your $20 smartphone, why would the unbanked Bushmen prefer Bitcoin over an online dollar transaction to buy their Chinese pumps?

You know, Brazil has a very complete and very functional financial system. Yet, I pay about a 30% surcharge on anything that I buy from, for example, China, if I count only the financial costs. How much do you think it'll cost to send that money from the middle of nowhere in Africa?

Note that I'm not talking $20 smartphone. I'm talking about a cheapo phone that has a bitcoin subsystem to generate a wallet and send/receive transactions over sms.

They will prefer the BTC because it will be their only option. They cannot open a paypal account. They cannot open a local bank account. Also the ones receiving remittances would probably sell the BTC for local currency to a merchant in the money changing business. It may have some use in paying rents, utilities, etc. Basically it will do what checks were for the last 150 years in the USA.


Let's assume you are right. Now empirically, given that Bitcoin has been around for a couple of years now, what percent of Bitcoin transactions are actual trades (for real good / services) versus Bitcoin for fiat-money swaps?

I just don't see it gain any use yet as a medium of transactions. All I see is hordes of speculators.


Bitcoin is not very useful in rich countries. It's only killer app is enabling illegal trades: drugs, gambling, etc. However much of the world reside in poor countries. For them the killer app is that it's going to be a worldwide paypal/mpasa with low transaction fees and no local government interference.

No: some currency will keep those costs down. It may be not be bitcoin. That's the problem.

The bitcoin train is headed that way and it's gathering speed. It already has a track record of operating without any government support in the american retail drug market.

So, have any economists that specialize in monetary economics had anything to say about Bitcoin? I appreciate Cowen and Krugman weighing in on this, but it isn't really their area of expertise.

That wouldn't help either, because it's quite possible that Bitcoin is not and will never be money or currency at all. It seems like it's more of a registry of "value", and there is nothing similar to it out there now. I think most of the mistakes made in thinking about Bitcoin on the part of economists run aground on that shoal. Nick Szabo, who I believe to be the inventor of Bitcoin, has a much wider vision of what "money" is and designed it accordingly.

What I find especially odd when economists talk about Bitcoin is the lack of appreciation of the incredible innovation at the heart: using cryptography to replace third party trust in transactions, and in particular the design of the blockchain. These things are NEW and they really need to get a better grasp of them before deciding what Bitcoin will or will not become in the future. That is, if they want to be relevant to the conversation they should.

"What I find especially odd when economists talk about Bitcoin is the lack of appreciation of the incredible innovation at the heart: using cryptography to replace third party trust in transactions, and in particular the design of the blockchain. These things are NEW and they really need to get a better grasp of them before deciding what Bitcoin will or will not become in the future. That is, if they want to be relevant to the conversation they should."

Great comment.

Tyler first wrote about the inevitable collapse of Bitcoin on October 17, 2011 when 1 Bitcoin was at $2.80 USD, it's at $752.60 right now.

Surely the baseball card makers could get out the old machines, cardboard and ink and print some new old Babe Ruth cards but they don't.

Bitcoin's impact may be akin to the Coinage Act of 1873, or what is called the "Crime of '73". Imagine if suddenly the only currency we had to transact with was BTC? This would be like the demonitization of silver of the 1873 act, the subsequent squeezing of the poor who's dollars are now worthless, and the accumulation of "gold" or in this case Bitcoin, in the hands of the rich. What occurred in 1873 was economic calamity, in large part due to the changes in the coinage policy of the United States.

If Bitcoin becomes popular, it may have to overcome its own self imposed coinage act of 1873. Its own deflationary spiral, the hoarding of speculators and the squeezing of the tiny folk, those who only want to use BTC as a means of transaction, may throttle Bitcoin regardless of what governments attempt to do to regulate it.

People are actually using bitcoin and other crypto currencies for many services and products. Doge Coin is largely used by the reddit people as a tips currency which is later used to buy actual goods like food and other items. Doge Coin is actually only a few months old and has been able to achieve this. DogeCoin is also being used by several websites as forms of payment and the services and goods are getting diverse. From web development, donations to dog centers, sex-toys, etc.

Crypto Currencies as a whole have there own exchanges online that cater to almost all the crypto currencies and some direct to dollars.

How many here have "actually" tried any crypto currency? By the way.

Cryptos have actually solved the problem that Paypal users have with that the transactions are easily revocable with Paypal.

Cryptos are a lot easier to use and the user base is definitely a lot easier to grow. It just takes one Crypto Currency to tie up with a big phone manufacturer and you have distribution and use to over a billion users worldwide. Momentum to large scale use is starting and this would increase the velocity.

Person to person transaction would then be inevitable. Near Field technologies with the likes of Wi-Fi and Blutetooth would facilitate person to person transactions.

With regards to government regulations. A crypto currency is hard to impose laws on. How will the governments monitor something that is not even decryptable to most hackers? This democratizes the system of exchanges a bit. And the nature of the currency that wallets are not only storable online and that the wallets are offline storeable also makes it easier for the currency to be less regulateable. All the goverment can really do is impose sanctions to users to help lessen the reduction of their monopolies.

The actual user base is growing. And in-fact trades to actual goods and services is also increasing.

If crypto-currencies reach mass appeal to any third-world country or for that matter any country, the domino effect would be quick and irrevocable. And this is already happening. Crypto currencies have been around longer than almost any fiat based currency and that alone gives it significant weight because it has been allowed to spread wings.

And the thing with technology or software based currencies. Version 2.0s and 3.0s of the system are inevitable. Giving them a lot of leeway when it comes to regulatory systems. All other fiat currencies don't have the ease of changing that crypto currency systems have. Give that a think.

The fact that crypto currencies are changeable to dollars and other traditional currencies in minutes even seconds, in large and small quantities, also plays a big factor. They are also transactable even in great distances. This is what no other "token" currencies, that ensures anonymity and security, have had in the thoughts above that are pre-Internet.

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I'm not sure that Tyler ought to have mentioned my work, as some have suggested, since I've written little on the subject of competitive supply of irredeemable paper money. However, he might have mentioned the work of his colleague Larry White, who has a chapter on the subject, discussing the claims of both Taub and Klein, in his Theory of Monetary Institutions. In any event, it is misleading to suggest that Klein's theory relies on the fact that "paper is also a commodity," for the equilibrium outcome he considers is one in which fiat money has a value well-beyond that of its material components. That there is also a wall- or toilet-paper equilibrium is of course something that no one has ever disputed, and that no reasonable formal model would rule out!

The suggestion that competitive fiat money issuers would be driven to have their paper monies depreciate is itself an improvement on Hayek's suggestion that monies with more stable purchasing power would win out, for even if stable P were socially optimal (a claim I myself reject), private agents prefer higher to lower rates of return. But competing this way is tricky, for while it is easy enough to expand the stock of a fiat money to keep it from appreciating too rapidly when demand is strong, reducing the stock to compensate for declining demand can be a lot trickier, because the issuer has to have assets to dispose of for the purpose. And, if the issuer does possess such assets, any formal buy-back arrangement fudges the distinction between a fiat and a redeemable money.

In the end, the best solution in practice might just turn out to be rather humdrum: redeemability of paper money on demand in a fixed amount of some standard commodity, like gold.

Sorry, for "have their paper monies depreciate" please read :have their paper monies appreciate."

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I like the argumentation, but what about the value of network effects?

A new cryptocurrency would not only need to market itself (hence the cost which you are mentioning), but also would need to provide more network value to its bearers than that of the incumbent.

With bitcoin already so entrenched and increasing number of companies accepting it, the costs are significantly higher.

What do you think?

The fact that Bitcoin was 13 dollars three years ago and is now around 840 dollars says a lot about crypto currencies.

Most crypto currencies that are in wide use have been around the dreaded "1 year period".

Doge Coin, although being around for only nearly 5 months, shows much promise that it has had more users (miners, traders, etc.) compared to those that Bitcoin has had in it's initial months. That shows extreme promise. And I would agree the Doge community is more hospitable than that of it's Bitcoin counterparts. :-)

I believe that there will be not only one final crypto currency. As paper currency used to be regionalized (e.g. individual countries' currencies) crypto currencies will be divided into communities of followers and not regions. The more followers than the higher the value. The more people who use it then the more it will be valueable. That is why I am leaning towards the DOGE. It has more "mass appeal". Though there is no reason why Litecoin, Bitcoin, and the DOGE can not co-exist for the long-term in the crypto currency world.

It's all about breaking borders and barriers and not so much as breaking rules. Crypto currencies will level the playing field in commerce and capitalism all the while in a secure system.

By the way has anyone seen the TV Series "Almost Human". It's set in 2050 and one of the major crypto currencies that they use is Bitcoin. They even have a prop of a "physical" Bitcoin wallet. LOL. This bodes well. :-)

In every major science fiction series or film there has been the allusion of a crypto currency. Take into account Star Trek and Star Wars. So far we've been seeing the technologies in these shows becoming real (e.g. communicator = Star Trek = Cel Phones).

The future looks bright for crypto currencies. :-)

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