Why Bitcoin Might Solve Age-Old Economic Problems

Travis Patron, founder of Diginomics, a bitcoin news organization where professionals can take courses on the economics of bitcoin, explains why bitcoin’s statelessness has the potential to solve a long-standing international currency flaw.

The Federal Reserve Board notes that while the U.S. dollar has many benefits as a world reserve currency for conducting commerce and services, it is not perfect.

     One of the main weaknesses of the dollar is the Triffin dilemma, which arises when a country must balance short-term domestic and long-term international economic goals.

     Such a dilemma results in a trade deficit when a country must meet international demands for its currency.
     However, for the depreciation of the US dollar caused by the "Triffin Dilemma", Bitcoin's stateless characteristics can solve the shortcomings of this international currency and provide a pillar for today's increasingly interdependent global economy.

Triffin Dilemma

     Economist Robert Triffin first explored the issue of international currency, involving the status of countries holding reserve currencies and the impact of such social roles on domestic trade deficits.

     This monetary arrangement is often cited to illustrate the problems that arose with the dollar as a store of currency under the Bretton Woods system.

     A country that issues a reserve currency that other countries also want to hold must be willing to provide additional currency reserves to meet global demand, and such an arrangement will inevitably lead to a trade deficit.

     In March 2009, in the midst of a global recession, Zhou Xiaochuan, governor of the People's Bank of China, expressed his dissatisfaction with the composition of the world's reserve currencies.

     Known for his reformist tendencies, Zhou Xiaochuan articulated the need to create “an international reserve currency that is not tied to a country.” He insisted such an international reserve currency could provide the stable value, regular issuance, and supply needed for the long-term prosperity of the financial sector.

     Zhou's proposal is unheard of, and economists are unsure whether the IMF's Special Drawing Rights (SDR) will make the world accept the dollar being surpassed in importance. There is no solution to the proposal yet.

     However, is it possible for such an “independent international reserve currency” to be issued starting in 2009? Can Bitcoin serve as an independent domestic money supply and thus solve the Triffin dilemma?

John Nash's View on Triffin Dilemma

     John Nash, the late famous mathematician who contributed to the invention of Bitcoin, also advocated monetary reform to solve the "Triffin dilemma."

     Nash's ideal goal was to establish an international reserve tool that could operate independently of national control, maintain stability over the long term and interrupt the possibility of currency shortages.

     Such a money supply would be able to operate in an automatic, global manner and provide a nationwide channel for savings. Due to his selfless enthusiasm for cryptocurrencies and virtual currencies, Nash's name has always been mentioned in the introduction of Bitcoin.

Can Bitcoin solve the Triffin dilemma?

     The “Triffin Dilemma”, which refers to the difficulty of countries issuing reserve currencies while maintaining international liquidity to manage international savings levels, continues to be an obstacle to economic growth. But perhaps Bitcoin could be a viable solution to the Triffin Dilemma?

     If we assume that a currency that can solve the Triffin Dilemma needs to provide the following functions, then we may think that Bitcoin basically meets the requirements perfectly.

1. Stable value
2. Issuance based on rules
3. Manageable supply list

     Based on recent Bitcoin price fluctuations, Eli Dourado estimated that Bitcoin's stability could match the performance of the euro over the past 15 years. As the product continues to gain users, the Federal Reserve in Washington also estimates that Bitcoin users double approximately every eight months.

     Rules-based issuance is perhaps the most interesting aspect of Bitcoin economics. Here we have a paradigm shift in how monetary policy is managed.

     In the twentieth century, central banks and people’s decisions were the catalyst for monetary policy, but today this role is played by cryptocurrencies that are issued based on time-limited algorithms. Computer-based approaches to controlling the issuance of currency have the potential to provide a sound basis for monetary policy because it can adjust with external changes, such as the Bitcoin mining hash power index.

     Finally, Bitcoin’s supply schedule is relatively inelastic compared to traditional currencies. We can accurately predict the supply of Bitcoin at any point in time (past & future) and make necessary adjustments to domestic policies.

     Peter Šurda, an economist in Vienna, Austria, believes that the inelastic nature of Bitcoin supply will lead to a reduction in domestic business cycles. This feature of Bitcoin will allow domestic governments and companies to accurately predict future changes, and therefore have a great possibility to adjust the destructive nature of business cycles in a timely manner.

     Indeed, by enabling individuals to learn about cryptocurrencies, conduct transactions, and overcome internal divisions to use them as a valid form of payment, Bitcoin continues to gain new users. It is now on the verge of becoming a global storage tool that has great potential to solve the age-old Triffin dilemma.