Friday, June 3, 2011

BitCoin and the Prisoner's Dilemma

I read a post the other day about how BitCoin generation is a Prisoner's Dilemma due to the fact that everyone could agree to use less resources with the outcome the same, except that human nature wouldn't allow it.
I think I've just come up with another example of the dilemma, which can be generalised to all other similar, speculative, trading vehicles: it's the balance between holding while the price is rising and selling enough to maintain liquidity.
If everybody holds onto their BitCoins, due to the belief that the price will keep increasing, then the price stops increasing due to a lack of liquidity, which I am certain would destabilise the unstable equilibrium that characterises a currency with no major backers. If everybody tries to sell to cash out, then the price stops increasing due to an oversupply.

For BitCoin to reach real acceptance and avoid the dilemma, there is going to need to be a long period of sustained, controlled release of coins onto the Market, in order to boost confidence and balance supply vs demand.
With so few coins, this could be done artificially by even a single effective marketer or well-funded backer, which is what Rick Falkvinge seems to be attempting (and I hope he succeeds), though the apparent health in the exchanges that exist seem to indicate that like the currency itself, it's promotion is well distributed.
At some point, however, the sovereign risk issue will come to the fore. Countries won't allow a P2P, anonymous currency to make headway. The Currency Act (1965) seems to say that the only currencies that can be used (which leaves grey area with respect to bartering of non-currencies) are that of Australia or another country, and BitCoin is neither, so to be promoted and used as a currency is probably already illegal here.

Anyway, that's an abridged version of the thoughts I've been having about BitCoin today.

Note: This post (on a Google site) was written on my trusty iPod with a smashed screen. It was still far easier to write than on my Galaxy S II, which I think needs to be rooted in order to delete all the pre-installed crap.

1 comment:


    this article focuses on a website that uses bitcoin to mask the identity of the people purchasing items.