Bitcoin’s Babysitter Dilemma and the Domino Effect

Paul Krugman in 1998 wrote an article on the Capitol Hill Babysitting Co-op.  Pascal-Emmanuel Gorby summarized Krugman’s point  in this article in Forbes:

The story of the baby-sitting co-op is that a bunch of people agree to baby-sit for one another, so that they don’t have to pay cash for adolescents. To make sure everyone does their fair share, the co-op uses coupons equivalent to an hour of baby-sitting time–sort of like an alternative currency.

 

A problem arose when people tried to hoard coupons to build a reserve and then run it down. The more people tried to hoard coupons, the less people were willing to go out and get their babies sat. And since there were less coupons in circulation, there were less babies sat. The baby co-op, in other words, had entered a recession. It was in a classic liquidity trap.

The co-op decided to issue more coupons, and all was well again.

One question facing bitcoin is, is this a real concern for bitcoin?

Currently, absolutely.  Due to the fact that all bitcoin transactions can be traced on the block chain, we can find out what addresses have the highest store of bitcoin, even if we can’t easily find out who belongs to what address.  We can see that there is a lot of money that is being kept immobile.

This tells us a couple of things about bitcoin. Through the recent up, and down, swings, there are people who are comfortable enough with digital currency to keep it locked up in bitcoin. There are a lot of reasons other than an expectation that bitcoin might spike to explain this, but certainly people who believe in bitcoin and acquire them will want to save them in the hope that their value will rise.

Will this cause the same kind of hoarding spiral experienced by the moms of Capitol Hill? Probably not.  For a lot of reasons.

Right now bitcoin is going through a speculative, growth phase. Opportunities to use bitcoin as actual cash are rare enough so that when a bar in London decides to accept it, it is big news (in the bitcoin world). On the other hand, stories like that are becoming more and more common. People want to use their bitcoins and the hard-core enthusiasts understand that it is only by using them, that the economy will grow enough to make them worth using.

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One of the factors that will elevate bitcoin out of the realm of the hobbyist is that it does solve real-world problems.

Just this last week we have seen the interest in Argentina spike in response to a troubled currency (although the reason for this spike is disputed),

Kenyans begin to adopt bitcoin with the introduction of a wallet there. Kenyan have been primed for a move to a digital currency by widespread use of M-Pesa, a mobile minute plan that has evolved to be an in-essence digital currency.

And finally, there was Cyprus, a country built up and then brought low by attempts to turn the island into a Mediterranean Caribbean. When those efforts failed, the government of Cyprus tried to engineer a “bail-in” of the banks.  A bail in is when those that have savings and checking accounts in the banks are forced to put up the money to save the bank.  This caused some Cypriots to shift their money out of the Euro and into bitcoin causing the great spike of 2013.

 

And then, there will be another. Some other struggling country will see the first and decide that it should make the switch as well.  This country will enjoy the same benefits to its economy.  And the world price of bitcoin will spike, causing the citizens of both countries to see an increase in wealth.

And then a third, and a fourth. …

Through all of this, it will not be a smooth ride in the bitcoin markets. Just like last April when we saw a huge increase in the price of bitcoin only to see it almost immediately plunge, we will see the price soar and dip.  This will create both huge opportunities, and lots of hardship. But, not so much for those in the adopting countries. The people inside the countries that adopt, they will be dealing with bitcoin on a day-to-day basis and will hardly feel the swings (I speak from experience as I live in Japan and have seen the yen rise to almost 150 to the dollar and sink to 78. Yet milk stayed the same price).

For those outside those countries, it will be a different story.  The spikes will cause people to buy in, and it will also cause some of the old hands to cash out when they hit a price-mark. Most people in the first-world will want to have their money back in fiat since bitcoin is unlikely to replace the dollar or Euro anytime soon.  On a day-to-day basis for these countries, bitcoin will remain a speculation and paying the electric bill will still be done by credit card.

Finally, enough countries will have adopted and, inside the first-world countries, enough business will be accepting bitcoin, that its economy will begin to rival the wealth of those counties. At this point, bitcoin will be become the world reserve currency. Currencies will start pegging to bitcoin because of its stability and the value of a deflationary currency.

At this point, we will be buying sticks of gum with satoshis (0.00000001 BTC). The largest holders of bitcoin will no longer have their funds in private addresses, but will have them invested in banks that lend bitcoin out in return for interest. A deflationary currency, rather than being detrimental to the world economy, would be beneficial in all sorts of ways. Just as an example, no employee would need to ask for a raise – their pay would stay the same and they would always just be able to buy more with it. Read more in this article by Jon Matonis at Forbes.

So, in the final analysis, is the babysitter co-op the death of bitcoin? No likely. The domino effect of adopting countries will take care of that for us.