Interlude: Credit on Bitcoin?

Socrates debates the sceptical Glaucon

Socrates: You say there will never be much credit on Bitcoin. Tell me, Glaucon, what do you mean by “credit”?

Glaucon: I mean lending and borrowing. Credit in the sense of promises to pay in the future rather than immediate settlement.

Socrates: So you mean claims on Bitcoin, not actual Bitcoin itself?

Glaucon: Exactly. IOUs, loans, deposits — all those require trust, and Bitcoin was built to eliminate trust. Therefore, Bitcoin and credit don’t mix.

Socrates: Interesting. You believe credit depends on trust, and Bitcoin removes the need for trust. But if credit could be issued without trust, would you still object?

Glaucon: Without trust? That sounds impossible. Lending always involves uncertainty.

Socrates: Does it? Suppose a merchant issues a bill of exchange payable in Bitcoin, and that bill is guaranteed by a chain of other merchants, where each verifies its validity and stands ready to redeem it. Has trust been eliminated?

Glaucon: It is greatly minimised, perhaps. But even so, such systems will remain small. People want final payment, not promises.

Socrates: Do they? History suggests otherwise. From ancient trade to the gold standard, credit systems built vast economies atop scarce money. Why would Bitcoin differ, if it shares gold’s scarcity?

Glaucon: Because Bitcoiners are ideologically opposed to credit. They don’t want “paper Bitcoin” or claims that could fail.

Socrates: Then ideology, not technology, would be the limit. But ideologies evolve under economic pressure and in special situations. If merchants find it advantageous or profitable to extend credit safely on Bitcoin, will they not do so — regardless of ideology?

Glaucon: Perhaps some will, but it can’t scale. There’s no central bank to backstop defaults.

Socrates: And yet, must credit require a backstop? Or can mutual guarantees serve that role, as in the age of private bills before central banking?

Glaucon: That world collapsed — undercapitalised wildcat banks, panics, fraud.

Socrates: Indeed. But those systems lacked digital transparency and cryptographic auditability. Now every issuance could be verified in real time and fraud detected early.

Glaucon: That changes things… Still, liquidity might be thin. People hoard Bitcoin; they don’t circulate it.

Socrates: So the issue is not whether credit can exist, but whether holders will part with their Bitcoin to fund it. If returns compensate for risk, why wouldn’t they?

Glaucon: Because Bitcoiners prefer self-custody, not lending.

Socrates: Well, businesses can issue just a bill of exchange in payment of goods. Bitcoin only needs to be sent at final ymaturity, after 30, 60, or 90 days. So as there is no custody — what remains of the objection?

Glaucon: You’re saying Bitcoin could host credit without banks and without trust.

Socrates: I’m saying that if we define credit as time-shifted exchange, for which Bitcoin provides unstoppable settlement, then credit on Bitcoin is not a contradiction — it’s an evolution.

Glaucon: Then perhaps my claim should be refined. Not that there will never be much credit on Bitcoin, but that there will be no unbacked credit.

Socrates: That, I can agree with. The difference between “unbacked” and “trust-minimised” is the difference between illusion and reality. That’s why I say that only bills issued against value, thus backed by real goods, are valid credit for a general money substitute.

Glaucon: You have made a clever case, Socrates, but it all collapses on one fact: Bitcoin is too volatile. No one will borrow or lend in a money that can swing 20 percent in a week. Credit needs stability, not chaos.

Socrates: A powerful argument indeed. But tell me, volatile against what?

Glaucon: Against goods, services, other currencies — the real economy! If I lend one bitcoin today and it loses a fifth its value before repayment, I’m ruined.

Socrates: Then you are not describing volatility in Bitcoin itself, but volatility in the exchange rate between Bitcoin and the fiat system, are you not?

Glaucon: That’s semantics. The world still runs on fiat, so that’s what matters.

Socrates: True — for now. But in credit, what matters is what both sides agree to settle in. Suppose both lender and borrower denominate and earn in Bitcoin, within a circular Bitcoin economy. Would the volatility you speak of still matter to them?

Glaucon: Perhaps less, but such a Bitcoin circular economy barely exists. There is maybe one or two dozens globally.

Socrates: And yet, every credit system began small — merchant credit in medieval fairs, bank credit in Renaissance Italy, even dollar credit in the 19th century. Credit superstructure growth itself breeds stability. Why would Bitcoin be exempt from this dynamic?

Glaucon: Because Bitcoin lacks a stabilising mechanism. Gold had long-term price anchors; central banks later added monetary elasticity. Bitcoin’s supply is fixed — it can’t absorb shocks.

Socrates: You confuse monetary elasticity with credit elasticity. Even under a fixed supply without central banks, merchant credit can expand and contract credit — through bills of exchange. Could not such peer-to-peer credit smooth volatility by redistributing liquidity over time?

Glaucon: In theory maybe, but in practice, lenders won’t risk their capital until volatility subsides — and volatility won’t subside until there’s more credit. It is a chicken-egg problem.

Socrates: A fair paradox. Yet history offers a resolution: stability emerges naturally from credit, not before it. The more an economy prices and denominates credit in a money, the more stable its purchasing power becomes. Volatility is not a brick wall but a symptom of youth.

Glaucon: That’s wishful thinking. Bitcoin’s volatility is structural — fixed supply meets speculative demand.

Socrates: Indeed, speculative demand is the present state. But what happens when credit channels allow long-term productive use of Bitcoin — financing trade, production, logistics, and inventories? Would not speculative cycles give way to intertemporal exchange?

Glaucon: Maybe. But until then, it remains gambling, not credit.

Socrates: So we agree that volatility prevents short-term fiat-referenced credit, but not necessarily productive merchant credit within a Bitcoin-based economy.

Glaucon: That’s a very narrow loophole.

Socrates: Narrow today, but even the world’s broadest rivers begin as trickles.