Is Bitcoin similar to the Euro but without the good parts?
Traditional governments typically use two main tools to help manage economic cycles. These are fiscal and monetary policy. The first relates to taxes and government spending and the second to managing the money supply, inflation and employment. Here is a great video primer on what drives economic cycles.
In my reading and research on cryptocurrencies, a topic that seems to be avoided is how a government could effectively regulate its economy using a completely decentralized currency. The most recent analog to this idea seems to be the European Unions adoption of the Euro. The premise of the Euro is that by having a shared currency, the countries in the EU would benefit from a more free flow of labor, capital and trade (which are government policies in addition to all using the same currency). In spite of the promise, in 2009 we got a glimpse of the downside of this approach with the European debt crisis which offered us a glaring example of the challenges of solving sovereign issues without access to the tools of monetary policy. Countries like Greece that most needed to make changes to their money supply in order to stimulate their economy were unable to do so because of their lack of an independent currency.
The assessment above was a very oversimplified analysis of our closest existing cousin to a decentralized currency. The purpose of that was not to share an opinion on the Euro (which has both pros and cons), but to highlight the challenges of pursuing a monetary policy when you don’t have control of your own money supply. In the case of bitcoin, which doesn’t necessarily offer the benefits of free a flow of labor, capital or trade (since those are still government policies) what would happen if we went into a recession? Could any type of monetary policy be used to stimulate the economy? And who decides that?
If you are interested in a more detailed read on the topic, I found Naked Money to be a great book.