Monday, February 25, 2013

Bitcoin liquidity revisited - Save Bernankestan


Recently I wrote about how the viability of bitcoin was limited by the risk of total, sudden liquidity collapse . The argument can be summarized as saying that without institutions whose business is transacted in it, bitcoin suffers from a bootstrapping problem whereby a crack in the crypto scheme would create an instant wave of counterfeit and debasement. Since there is no entity to restore trust in the currency with a guarantee, e.g. no central bank or government to offer a sovereign guarantee, a crack would make bitcoin illiquid and worthless. 

I said that bitcoin would only ever be useful on the black market, since without legitimacy from legal institutions, the only commodity of last resort it may ever be readily exchanged for will be drugs or other contraband.  

Circumstances have changed since I argued that point, as a number of online gambling sites are beginning to take in and pay out bets in bitcoin. It is a game changer since, more than blackmarket commodities, now bitcoins may be traded for _risk_.