Question really says it all. What would an economy based around bitcoins, or similar crypt-money, look like? Could it function, and if so would it have any odd market behaviors?

In this scenario there is NO government backed money. No dollars, euro, or other exchange medium produced or backed by a large organization. Will bitcoins suffice for economy? Will constant inflation of new bitcoins slowly destroy the economy with time? Could the economy crash if a bank server went down and all bitcoins 'disappeared' etc?

  • $\begingroup$ Nature fears vacuum. Someone would reinvent paper money if there were no institutions stopping him from doing so. Nevertheless mostly bitcoin based economy is interesting case. $\endgroup$
    – jaboja
    Aug 5, 2015 at 19:52
  • $\begingroup$ No, because it would require everyone to have a computer-like device (smartphone &c) in order to do any sort of transaction. $\endgroup$
    – jamesqf
    Aug 5, 2015 at 22:23

4 Answers 4


In today's world, not a chance. Too many people, especially older people and people in less developed countries, depend on cash and paper notes of debt.

Therefore I will assume we are talking about a world in which everyone has the means to spend and receive whatever the currency of choice is, and I will answer the rest of the question as such.

  1. Will constant inflation of new bitcoins slowly destroy the economy with time? No - the US dollar is in fact constantly inflationary, as are most other fiat currencies. Just think of all the times you've heard someone talk about how much cheaper things were thirty (or more) years ago. Things weren't cheaper, the USD has just been undergoing (slow and steady) inflation. Also note - Bitcoin itself is actually deflationary in the long term. It is currently in a (ten or twenty year) period of inflation, but eventually new bitcoins will stop being created. This is very much untested in an economic sense, and raises questions on whether bitcoin itself is sustainable in the long term (As an aside, I personally think it is). But this doesn't mean an economy can't run on a different cryptocurrency that is inflationary.

  2. Could the economy crash if a bank server went down and all bitcoins 'disappeared' etc? Qualified no. Cryptocurrency is by nature decentralized. Meaning it doesn't reside on only one bank's server, anyone who wants to can have a copy of every transaction that ever occurred on the currency's network. So a single server going down would not crash the economy. It's a qualified no for two reasons:

      First, nothing is stopping a bank from doing fractional reserve banking. This is what all banks do today with fiat currency. They only actually hold a small fraction of their depositors' money. This causes big problems if there is a bank run (when everyone wants their money at once) - that's why the Greek banks had to close. But that's really not a risk that is unique to or introduced by cryptocurrency - it's a risk that exists in the real world today.

      Second, someone could find a bug in the cryptocurrency itself. This would have more of the effect you are looking for in that it would probably crash the whole economy if it was bad enough. This could happen in bitcoin for example if SHA-256 was broken. In the least drastic case, the economy would grind to a halt temporarily while the developers worked on a fix. In the worst case, the developers might not be able to work on a fix because the economy isn't working. Two factors could mitigate this. First, the economy might run on multiple different cryptocurrencies, and a fatal bug in one might not crash the others. And second, chances are if a bug is bad enough to break the currency the person discovering the bug would disclose it responsibly (because the percentage of people who benefit from the entire economy collapsing is so much smaller than the percentage who would lose), giving the developers time to fix it.

  3. Will bitcoins suffice for economy? My answer is a qualified yes. Odd market behaviors would include being deflationary (if it's bitcoin), and the fact that you would need a world in which battery powered devices and internet connections would last longer than any potential blackout (a catastrophic blackout or internet outage lasting days or weeks would wreak havoc on the economy no matter what the currency is, though it would definitely wreak much more havoc if all money was electronic).

One last thing to note - If civilization is space-faring, and there isn't a method of communicating faster than light, then cryptocurrencies won't function between planets. All currently existing cryptocurrencies are dependent on messages being able to propagate to most users within a few seconds, which isn't possible if users are light-minutes apart.

  • $\begingroup$ hmm, this is a great answer, but it also made me realize that I don't think a single crypto-currancy can keep up with technology. Since it has a set number of bits of encryption, which are theoretically to expensive to brute force. However, if computers continue to grow at an exponential rate an encryption of x bits may be unbreakable today, but not in a generation. Wouldn't this make any single crypto-currancy be doomed to collapse due to technological development, when old coins become too cryptlogically weak? $\endgroup$
    – dsollen
    Aug 6, 2015 at 14:21
  • 1
    $\begingroup$ @dsollen No, it just means the cryptocurrency would need to be updated every so often. This is already built into e.g. Bitcoin I believe, although I don't know the specifics of how that would be done... $\endgroup$
    – Kromey
    Aug 6, 2015 at 18:01

Bitcoin, among other things, was designed for a logarithmic inflationary curve; the money supply exploded in the first few years as an incentive to set up "Bitcoin miners", but very quickly fell off. Without a change to the built-in rules of the software as used by the millions of nodes making up the currency transfer network, there are predicted to be a trivial number of new Bitcoins entering the market sometime around 2030 (miners would be looking for transaction blocks that hashed to an all-zero value, an event which theoretically has a 1 in 2^256 possibility) and once the 21 millionth Bitcoin is mined, the software will intentionally destroy its ability to produce any more (we're currently at about 12.5 million).

It's also designed to be so widely distributed that you would essentially have to destroy the Internet to disrupt Bitcoin record-keeping. There are many fictional stories along the lines of destroying the debt record by strategically targeting data warehouses of major credit companies in a simultaneous hit, causing an unrecoverable loss of account data. Bitcoin is designed specifically to resist any such effort through an utter lack of centralization. It's believed the original motive for this was to prevent sovereign governments being able to control the currency by exercising eminent domain over central transaction-processing servers; in the Bitcoin network unlike most fiat currencies, there is no such thing.

What would kill Bitcoin, if anything, is an increase in computing power and/or cryptanalysis such that the SHA-256 algorithm used to evaluate "blocks" of Bitcoin transactions becomes trivial either to brute-force or to reverse. If you can traverse the 256-bit keyspace at will, you can manipulate the Bitcoin network to your liking by generating specially-crafted transactions to either produce a desired hash or change the contents of a block without changing the hash. Given this much computing power, the inherent "value" of a Bitcoin as a set absolute amount of computing power required to process and evaluate transaction blocks would also diminish to zero.

Brute force of the 256-bit keyspace is not currently believed to be possible with binary hardware; if we developed a computer that operated with perfect efficiency at the electron level, gave it all the energy the Sun will produce during the remaining 5 billion years of its yellow stage, and set it to brute-force the 256-bit keyspace, the sun would go red giant at about 2^215 keys. Quantum algorithms might arrive at an acceptable answer more quickly and efficiently; currently the quantum computers available have "qubit" counts in the low single-digits, while a qubit count at least equaling the binary length of the input or answer (so at least 256 qubits) would be required to "break" SHA-256 in this way.

So, the short answer to your question is "yes"; Bitcoin would be a perfectly functional world currency in the absence of any sovereign currency such as the dollar or euro. The main problems would be a lack of monetary policy tools; you can't tailor the money supply to fit the economy's use of the currency. When the size of the economy outpaces growth of the money supply, the money becomes more valuable than anything it can buy, a phenomenon called "deflation" which is typically very bad news. Due to the smaller growth of the Bitcoin supply compared to other currencies, Bitcoins are already very "large" units of currency compared to other market currencies; one Bitcoin is about $280. This has been mitigated by subdividing Bitcoins into arbitrarily small fractions (currently the smallest we deal with is the satoshi, one hundred-millionth of a Bitcoin).


If the question is narrowly and concisely interpreted to mean "can an economy function with an electronic-based crypto-currency in the absence of government/large organization-backed-exchange medium" the response is an unqualified NO (thus obviating the sub-questions about market distortions and market implosion).

A. Human (above, I don't possess enough reputation to comment) also says "no" at the outset, but then charitably recasts the question to mean 'can an economy function with an electronic-based crypto-currency backed by the user's government/large organization currency of choice' and answers 'yes'.

Keith S. answers 'yes' to the original question without any modification.

I answer 'no' for two reasons

  1. No medium of exchange has value unless it can prevent, mitigate, or reduce coercion and/or violence.
  2. Mediums of exchange have little practical value (only possessing speculative value) unless people can agree, within a relatively narrow range, the present value of the medium relative to some other good/service/value - and is why these are known as 'mediums of exchange'.

Bitcoin possesses practical value in relation to current currency (USD, JPY, EUR) due mostly to its speculative value, and to some degree to Bitcoin's intrinsic properties (anonymous yet transparent transactions, known current and future pool size, suicidal disincentive to subvert the bookkeeping).

Without some confidence that bitcoin can be and will be exchanged for government-backed currency, or similarly-valued goods or services, bitcoin possesses less value than its cost of generation (electricity and hardware).

Bitcoin gets exchanged for currency, which is exchanged for goods and services. Bitcoin has negative value otherwise (as it costs electricity and hardware to generate bitcoins and maintain records of their transactions).

I do agree that currency itself possesses no intrinsic value, but its issuers have a stake in maintaining its current value.

It is true that no currency or commodity (gold, silver, gems, iron etc.) possesses intrinsic value BUT government-backed currency DOES maintain (above all else) one specific value: Taxes are assessed in terms of (local) currency and payable with that currency. Without governments/large organizations to levy taxes, and in absence of other mediums of exchange, one would be relegated to a barter system, a form of economy with very low potential for growth as there is ultra-low liquidity and almost no opportunity for investment and credit.

Could a future crypto-currency, with 'government' backing, yield a useful economic system, in the absence of currency? Sure!

Since the mid 1960's there's been increasing discussion of a world economy with so much surplus that there is an 'end to scarcity'. All basic material needs are met, globally. Creative work abounds, and I'll trade my garden-grown strawberries for you painting my shed. The underpinning of post-scarcity economies is that for the work that needs to be done, that no one wants to do, is performed (generally) by the young and middle-aged, and work is a form of taxation. Do nothing and you'll get a dormitory bunk, 'welfare gruel', shared internet access on a public terminal and basic clothing. Labor a month a year harvesting lettuce, digging ditches, providing hospice care etc. from 20-40 entitles you to some luxuries. Being the farmer, civil engineer or nurse for 10 years out of your life will earn you much more. Obviously there is incentive pay for difficult/dirty/long-duration/dangerous/skilled-professional work, and jobs well done, and penalties for slacking.

  • Want life extension? Work like hell for d decades

  • Want a permit to have a family? Work like hell for y years.

    A free market for labor needed and goods/services desired could be managed (ideally) with a crypto-currency, but would still require a government to be able to coerce those who would not honor contracts, to prevent or punish theft, vandalism or violence, and, ultimately, to intervene during emergencies (famines, disasters, plagues etc.) and of course, to regulate the market and transactions. Libertarian Anarchists/Capitalists would disagree with the 'government' part, but a group of people, legitimate, with the power to coerce, is a government by any other name.

So, if you're looking for a world with a secure, functional economy, transacted through a distributed crypto-currency without tangible paper notes or coinage, use labor value theory as your 'cashless as possible' alternative.

Finally, if your universe REQUIRES the lack of government/large organizations, to be cash-and-coinage-free, and necessitates a crypto-currency (sigh) I suppose you link crypto-currency to a reputation-based barter system.

As the recent de-nationalization of state-property in post-Soviet-Eastern-bloc-countries has demonstrated, you can give people titles to their flats, shares in the companies/farms/oil fields and mines where they worked and in a few years they were about as poor as they were under 'communism'.

In other words "After the aliens left and wealth was evenly distributed ..." if everyone got 1/th share of the world's wealth, in a short period of time, that wealth would be concentrated (again) in the hands of relatively few people.


Several minor and not so minor issues ... I believe such a system could be made to work, after a fashion, for a dystopia or cyberpunk setting. Not for an utopia. What kind of world do you want to build?

  • Criminals would have even more incentive to "capture" computers, either to capture the private key for bitcoins or to encrypt it in a ransomware scheme. Expect more spams and crime.
  • On the other hand, the tax office might insist on installing "official spyware" on all shop computers to increase tax compliance. Prosecutors might be able to demand your passwords and analyze all your transactions -- perhaps only with a court warrant in civilized countries, but not all countries are civilized. Imagine what happens in places like North Korea or Syria. Or at the US border.
  • You leave a digital trail whenever you buy something. My computer will know exactly how many donuts I buy, and how fast my running shoes wear out. Could Google find out? Or my health insurance?
  • Everybody would have to use some sort of networked computer to participate in the economy. Those who don't are cut off. If the computer is down even temporarily, you have a problem.
  • Casual charity dies. I might give some small change from my pocket to a beggar, but I won't stop to interface my computer/phone with his. Too much hassle, too much risk of catching a virus.
  • Same principle for little children. A physical piggy bank teaches saving. Will a bitcoin wallet do the same?

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