With cryptocurrency we appear to be on at the beginnings of something entirely new. There is no denying that the technology is both novel and potentially revolutionary. Its very nature threatens the long held government monopoly on currency. We indeed live in interesting times. Today we see new cryptocurrencies released on an almost daily basis. Will any of these be valuable? Will the instigator Bitcoin retain its value? The purpose of this post is to analyze cryptocurrency using the principles of Contentionism and make informed predictions about the role of cryptocurrency in the future.  To predict the future we must first fully grasp the present. Let’s start with a look at the strengths and weakness of the future contenders.

Centralized Electronic Fiat <---> Hybrid Currency <---> Anonymous Distributed Cryptocurrency

Electronic Fiat: Reports of my death have been greatly exaggerated
Fiat currency despite its bad press has strengths as well as weaknesses. Its advantages include easily reversible transactions with the ability to go to the court system in cases of fraud or theft. Theoretically (on a purely technical basis) fiat should be a comparatively a cheap system to run without the high cost of a proof of work system. These strengths are offset by some very large disadvantages. Electronic fiat is centralized with a single point of failure. It is non-anonymous  with significant implications regarding privacy. Its largest weakness, however, is that it can be (and is) debased at will by the central issuer.

Anonymous Distributed Cryptocurrency (ADC): The bane of centralized control
Such a currency is decentralized, anonymous, and untraceable. Decentralization removes the possibility of a single point of failure. Anonymity protects privacy concerns. Such a currency would be protected from any centralized debasement efforts and be essentially untaxable. As a small predictable debasement is desirable in a currency this could be done in a decentralized fashion. These benefits come at a price. The decentralized nature of the system requires expensive proof of work computations to protect the network. This must be paid for either via monetary inflation, or transaction fees.  Transaction times must also be slower than those of a fiat system. Finally, the direct challenge to tax collection may cause governments to outlaw these in some countries. Despite this it seems very possible that anonymous distributed cryptocurrency will come to dominate the virtual economy.

Hybrid Currency Systems:  A non-anonymous coin for the physical economy
Many cryptocurrencies will try to take a middle ground and hope to retain their decentralization while falling into line with regulation. Such a system will lose anonymity while (hopefully) retaining decentralization. If decentralization can be maintained it can be taxed but it cannot be debased by a central authority.  Lack of anonymity may open up the possibility for reversal of transactions (via mandated court order). Any such Hybrid system regardless of design will be vulnerable capture and forced conversion to electronic fiat (more on this below). If it can survive centralization efforts a hybrid system may come to dominate the physical economy.

Given these features what will be the use of each of these forms of currency in the future?

Electronic Fiat: Will likely be preferred for transactions that are high risk and have a high likelihood of transaction reversal. It will also be used to pay taxes. We need only look at the preference of ASIC buyers to use credit cards and the current low price of Bitcoins on MtGox to see this.

Anonymous Distributed Cryptocurrency: Will find a home in the virtual economy. It is likely to be used for nonphysical transactions and for small transaction with a limited need for reversibility. It will also be used for the purchase of illicit goods as well as a mechanism for tax avoidance. In times of government insanity (massive taxation, unrestrained fiat debasement, extra) such currencies will offer an escape hatch for those looking to flee centralized control.

Hybrid Currency Systems:  Hybrid systems will be decentralized but lacking anonymity will be inherently venerable to centralization and government capture. Sufficient government effort can force centralization of any non-anonymous system. Government will be loath to give up the power of money printing. It will thus have a strong tendency to capture any strong hybrid system so that it can be converted into electronic fiat. A Hybrid system can only survive if this tendency is checked.

Understanding the future possibilities is facilitated by an understanding of the underlying dynamics of Contentionism in the economy. Contentionism is the realization that socialism (top-down organization) must exist, while acknowledging the cyclical failures of socialism and the necessary counter-balancing force of anarchism. The concept of Contentionism is explored in depth in the Economic Devastation thread so I will refer readers there for further explanation.  

Future currencies are likely to trifurcate into one of the three classes discussed above. Value will likewise shift based on the underlying dynamic balance in the economy. In times of debt free responsible governance, fiat will be preferred and rise in relative value.  In times such as ours cryptocurrencies are likely to dominate. Governments will have the ability to destroy any successful hybrid system via forced conversion to electronic fiat. However to do so would force much of the value stored there into anonymous distributed cryptocurrencies (beyond government reach) this fact may or may not restrain government from attempting such actions.