BitCoin Under Fire
marginalrevolution.com
marginalrevolution.com
If he converts everything into dollars and dollars are being devalued, he loses. Is he saying that dollars are the only solid currency in the world, and everybody should convert all their assets into dollars as fast as possible?
Apparently not. Try spending dollars in a store (both in the U.S. and many places besides) and see if it works.
They are only worth something because people accept them as payment.
Including the U.S. government as payment for debt. If the most powerful government in the world says dollars have value, it's not so easy to lose all of that value, even without it being a backed currency.
Is he saying that dollars are the only solid currency in the world, and everybody should convert all their assets into dollars as fast as possible?
Most of the world uses non-backed fiat currency now, not just the U.S. People do convert their assets into and out of dollars (and other currencies) all the time.
So what exactly can I get from the US government in exchange for dollars? (I am not a US citizen).
However, to answer your question directly you can get interest from the US government in exchange for dollars by buying US Treasury bonds.
Some of those people are the IRS, who will throw you in prison if you don't turn over a sufficient quantity of said paper. That guarantees a minimum level of demand for dollars.
There was a case some years ago in Germany where something similar happened. A local initiative introduced a local fiat currency, and initially people did not pay taxes on sales etc. in that currency. At some point, this got the government's attention, and soon after that, the tax advantage was gone. People had to pay their taxes in Euros.
Something similar will happen to BitCoin if it takes off. It may be somewhat harder to enforce for the government, but then again, paper cash transactions are anonymous, too. You still pay sales tax when you purchase something with paper money. There is no truly fundamental difference here to how BitCoin works.
If I have a hundred thousand dollars, I can buy a Porsche. If I have a hundred thousand bitcoins, I can't buy anything, because I doubt I'll find a buyer for a hundred thousand bitcoins.
I'd be interested to know: what's the largest bitcoin-to-dollar (or bitcoin-to-real-goods) transaction that has ever taken place?
Keep in mind thats BTC-USD trades, not "notional value spent".
Apparent largest transaction was 400k bitcoins: http://www.bitcoin.org/smf/index.php?topic=1346.0
It would be difficult to transact 100k BTC with one counterparty, but could be reasonably accomplished in a few days via electronic exchanges (mtgox).
The trade of US$ in the currency markets is on the order of several trillions per day. Now imagine what would happen if somebody truly wanted to exchange a few trillion US$ for Euros, and keep those Euros...
China effectively traded around 0.2 trillion USD for yuan and kept the USD last quarter, the impact is not that big.
More generally looking at the volume transacted does not tell you much about the depth of the market; you need to look at the order book for that. Looking at the bitcoin market there are several lots of over 25k sitting within 20 cents on each side of the bid-ask, this means it is extremely likely one could carry out a directional 100k trade with relatively small market impact if spread out over a few days.
As for China though, I would like to point out that those trades must be seen in relation to the massive net flow of goods from China to the US (and other parts of the world). The trade you claimed is actually bigger than Chinese net exports for that quarter (which I find somewhat surprising, I have to admit, but probably that just balances out with what was happening in the past), but it's in the same order of magnitude.
If China did not do such trades regularly, the Yuan would be expected to appreciate in a noticeable way, making current trade arrangements more difficult to maintain. Essentially, if China did not make such trades, it would be forced to restructure its economy towards domestic consumption, and it would force the rest of the world to start producing more of their own stuff again, or swallow the price increases.
So to claim that the impact of those trades is not big is problematic.
Bitcoin doesn't have this vulnerability, unless the majority decides it does. There cannot be rapid inflation due to "printing" bitcoins, unless the majority decides to allow it. The system cannot declare bankruptcy, because it's not backed by anything which can determine its intrinsic value.
It's a foreign currency that no single anything controls. It can wax and wane in value compared to other currencies, as any value-exchange system can, but if it becomes "the" currency, it'll be the first stable, totally-trustable currency ever, because transactions and amounts cannot be faked. Assuming quantum computers can't be made cheap enough to allow attacking the system to be valuable, as it relies on public key cryptography and difficult hashing functions (not sure how quantum computing effects hashing functions).
The blog post seems to be: 1. If btc are liquid, everyone will want to move btc wealth out to some other store of wealth and btc will fail. 2. If btc are illiquid, then it fails by definition. Currently btc are at this stage.
Here's why I don't get it: 1. If they ARE liquid and its easy to convert btc value to other value, why would everyone want to move value out of btc? seems like people would want to move value IN to btc because of the other benefits (anonymity, instantaneous transaction). Regardless, it doesn't follow that easy value conversion predicates value drain. 2. "Bitcoin seems to be at this stage [of being unable to convert Bitcoin assets into other, non-Bitcoin assets easily now]" -- this seems to be false. There's a highly liquid market for BTC-USD (21k btc have traded so far today). Yes, its not easy to transact 500k, but thats true for most new assets including exchange listed backed equities.
q, m, v, and p remain relatively constant in that transaction unless the liquidity event causes a persistent decrease in the price level (no evidence that the current BTC market could support it, but also c.f. above my comments about immature markets and liquidity).
This seems to be a significant disadvantage, to say dollars, where no record of a transaction exists.
Am I missing something (that's what I'm assuming)? Or is having a list of all transactions viewed as a strength?
Seignorage is the difference between the cost of production - for paper money it's very low - and the value that is bought with the money.
In the case of bitcoin, they are about the same and any difference doesn't go to the designers or to the issuing network. The network is "paid" in cpu cycles (electricity) and spits out roughly the same value in bitcoins. But giving more power to the network doesn't make them come out any faster. In short, unlike governments who use inflation of fiat money as a very regressive wealth tax of last resort, the runners of bitcoin aren't getting rich off this.