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Monday, November 11, 2013

Free Money for Everyone

Radical entrepreneurship in Bitcoin makes it the exemplar

Bitcoin has been making headlines lately. With the recent shutdown of the website Silk Road and the subsequent rise in price, BTC continues to surprise and confound.

Though much uncertainty remains about the future of Bitcoin, there is one reason why people interested in free markets should take note: We are being treated to a rare glimpse of what free-market competition and entrepreneurship in a monetary good would look like. 

Without any central regulation, there are scores of Bitcoin entrepreneurs working at making it easier to understand and to use Bitcoin. These entrepreneurs are challenging conventional ideas about what the market can supply and what it cannot, for money is one of those goods that is strictly regarded to be in the domain of government provision. 

There are several common arguments in favor of a monopoly supplier of money along with government regulation through a central bank. One such argument is that the provision of money and monetary services suffers from the problem of asymmetric information. The argument goes like this: One person in every transaction is better informed about the true nature of the good or service than the other. This asymmetry of information can lead to poor market outcomes or to market failure if the ill-informed people opt out of the market or if the better-informed take advantage of the ill-informed.

One frequently used example is that depositors are not as well-informed about banks’ true balance sheets or the value of the assets as the banks themselves. In the event of a panic, depositors of even sound financial institutions start bank runs due to a lack of trustworthy information. This could cause fundamentally solvent but merely illiquid banks to go bankrupt, and even lead to system collapse. The prescribed solution to this problem is for the government to provide deposit insurance that reassures depositors merely by its presence, preventing unnecessary runs.

The asymmetric information problem with Bitcoin is huge. If you are an average computer user like me, Bitcoin seems confusing and abstruse, something meant only for the initiated. Chances are you have little to no idea what a Bitcoin really is. How can you begin to trust and use something that you don’t even understand? Of course, in a marketplace, this lack of information presents opportunities, entrepreneurial gaps to be exploited for profit. 

It used to be that lurking on online Bitcoin forums was the only way to get information. Now, there are companies that publish magazines and even a Bitcoin Foundation that works at making information available and easily accessible to the uninitiated bystander. Take for example Bitcoin Magazine, launched in May 2012, available for a subscription of about $9 a month while many of its lead articles run free on its website. One can find articles meant for amateurs as well as geeks. Under its “Bitcoin 101” category online, there are several articles that decode Bitcoin language and break down concepts and explain them in an easy way. Ever wondered if Bitcoin has been hacked? Bitcoin Magazine has you covered with “Common Misconceptions about Bitcoin.” Having a hard time understanding all the terms like “blockchain,” “mining,” or a “hash”? Check out the two-part series, “Introduction to Bitcoin Terminology.” 

There is even a free magazine named yBitcoin making its debut this fall; its publishers claim that it “eloquently demystifies the most disruptive innovation since the internet.” You can subscribe here. The company Bitpay, now the largest Bitcoin payment processor, has several informative videos on its website that elucidate how the system works and how the company adds value. What’s your excuse for not understanding the basics now?

Asymmetric information is of course everywhere. Markets work at solving this problem every day. Simple examples of websites like Yelp or Rotten Tomatoes that provide cheap and accessible information in return for making a profit illustrate this point. Free-flowing exchange and trade require both parties to be well-informed about the goods under consideration, and the situation is no different with money. The entrepreneurs surrounding Bitcoin are proving that the market’s ability to reduce the cost of acquiring and disseminating information works with money just as well. 

Such is important for yet another reason, not directly related to Bitcoin. We have become accustomed to having it easy when it comes to “choosing” our money. Most of us don’t think twice about which bank we put our money in. Institutions like a central bank that monopolizes the money supply, and government deposit insurance, have the perverse effect of making us complacent and reducing the incentive to gain information about the good in question. In a free market for money, much of that onus would shift back onto consumers. It would be up to consumers to be well-informed and much more vigilant about buying and holding a certain currency or monetary good. We can, of course, expect specialized entrepreneurs to arise and fill the gap by providing good quality accessible information. However, much like buying a car, a house, or even choosing which mutual fund to invest in, the choice of currency in a free market will require us to study a little. 

It’s a small price to pay to circumvent central banking. Are we up for it?


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  • Malavika Nair is an Assistant Professor of Economics in the Johnson Center for Political Economy at Troy University. She is also an associated scholar of the Ludwig von Mises Institute.