Bitcoin should be pegged to the dollar. The advantages are numerous, opines Max Keiser in this article on the Huffington Post. He likens a BTC peg to the dollar to the Chinese pegging of the Yuan to the dollar at an artificially low rate. This allowed the Chinese to build up their manufacturing infrastructure cheaply and become a truly competitive economic power. He also lays how how a peg would eliminate volatility. BTC stability would allow business people to start accepting and using bitcoin confident that they won’t be the big losers in a swing, allowing the BTC economy to really grow. It might also have the effect of removing the FinCEN target on the backs of the exchanges.

Pegging BTC to the dollar would have some of these effects, but it would also take away several of its key advantages.

1. BTC is divisible. It is intended to go through growth spurts (and busts) like the ones that we have seen. The problem is not so much that there is volatility, but in making sure that people know that that volatility is a normal part of the maturing of the currency. One big disadvantage of pegging BTC to the dollar is that eventually it would have to be unpegged. And given the incredible rise in value it is reasonable to expect, that unpegging might be enough to unhinge the entire BTC economy.

2. Due to the fact that there are only a limited number of bitcoins in existence, and their total value (including those that are in cold storage or lost) is a bit over one billion dollars at 100 dollars per BTC, then the world BTC economy can only be one billion until the currency is unpegged. This, in-and-of itself, would limit the growth of the bitcoin economy and discourage the kind of fiat investment BTC is going to need for it to see a truly stellar breakout.

3. The reason for BTC to exist is as a challenge the depredations of big banks and government. If banks were good corporate citizens, conducting the business for the good of the community and only taking a reasonable profit, then there would be no interest in a challenger like BTC. If governments protected the commons and stood up for the little guy against the aggression of powerful, monied interests, then there would be no need for BTC. Take that away and BTC will be trying to compete with fiat currencies on their home turf. And it will surely lose. It will simply not offer enough of an advantage for people to risk switching over.

The inception of BTC is, at its heart, as a form of protest to the current structure.

In fact, as BTC takes hold, we are going to see some benefits in the fiat currency markets. Since BTC can be sent effortlessly, and nearly cost free, overseas, banks will need to rethink their wire transmission services. Since bitcoin can be used in stores without the high CC fees, credit card companies will need to rethink how they treat both their merchants and card holders. Ever had a 35$ late penalty applied? Ever thought it was unjust? And when business start paying in bitcon, the benefits will snowball.

4. BTC is going to become a supplement to gold as a store of money. More than that, it is going to be the savior of many a boomer’s retirement. Over the last forty years, we have seen the erosion of our middle class. Retirement plans became 401Ks which then were wiped out because the actions of a rapacious financial sector. As BTC takes hold, as long as they realize their own self-interest, those boomers can see a return of the hope for their future. Pegging BTC to the dollar would eliminate, at least for the time being, that hope.

After that crisis, I have watched with great interest our response to the crash. Have we learned from our mistakes? Have we put appropriate safeguards in place? In fact, if anything, things have gotten worse. The banks have learned that they can crash the economy and the worst that will happen is that they will get a few sharp word as they are given a taxpayer funded handout.

“The stock market is about to have a devastating decline; we will see Dow 5,000 before we see Dow 20,000.” This, according to Terry Burnham, a former Goldman Sach’s trader in this Market Watch article by Paul Ferrall. His claim is that Ben Bernanke’s actions are have caused another 1928 bull-market sucker’s rally. We are now riding on a false financial high, and the crash that is coming will be even more devastating because we won’t have the reserves on hand that we had last time to pull ourselves out of the hole.

Of course Burnham and those like him are voices in a field. They are Cassandra’s who never get believed until it is too late. Why, it will be argued, don’t others see this if it is true. And Burnham’s answer to this is simply one of greed. What he calls our lizard-brains “lead us to buy stocks after they have gone up and blind us to the obvious realities.”

It is for these reasons, that I feel that the BTC volatility that Keiser wants to protect us from is not the real problem. The volatility, and weak foundations, of the traditional financial establishment is. Pegging BTC to the dollar would take away its single greatest advantage — helping us ride out the storm that is coming.

For a contrasting view of the future of BTC, I invite you to read this blog post by J.R. Willet on “Bitcoin’s Dystopian Future” on the Lifeboat Foundation website.

I am not an economist and I am a relative newcomer to BTC. If you agree, disagree, think I got the facts wrong, or just want to say “Hi!”, I want to hear from you. Please leave a comment.