How Five Economists Think About Bitcoin
techcrunch.com
techcrunch.com
As for economists' views on something they've never studied, I'm reminded of I. Fisher, Prof. of Economics at Yale, saying in 1929 "Stocks have reached what look to be a permanently high plateau." ... and how many people told me with utter certainty and hifalutin credentials how stupid Wikipedia was and how much it would fail. Or Linux, for that matter.
Some things work better in practice, not in theory. Or at least need time for the theory to catch up.
A tulip looks pretty in your garden, (many) internet companies make money, and houses are a basic necessity. Bitcoin, on the other hand, is a purely social phenomenon. It has value only because other people think it has value.
The argument trotted out at this point is some variation of "but there is value in having an anonymous, decentralized currency." And that may well be true. But the high valuation and extreme volatility of bitcoin (not to mention its inherent deflationary character) is actually a hindrance to its use in that manner. Who will accept bitcoin if its value can fluctuate 100% in an hour, and who will spend them if their price just keeps going up?
There's no "inherent" value in any form of money. Whenever you hear someone say "inherent" or "intrinsic" when talking about money, run the other way.
(Yes, even commodity money. It may have direct-use value in addition to exchange value, but both kinds of value are market phenomena, and totally dependent on the surrounding society and capital structure.)
Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
The law is simply the threat of violence, which is what makes it so distasteful. http://en.wikipedia.org/wiki/Executive_Order_6102
> not some wishy-washy magic agreement that people wake up with
Agreements are voluntary and magical, what's not to like? It's the other stuff that's wishy-washy (involuntary arrangements).
> Tax laws, debt laws, torts, fees, fines, etc. are what create the demand for fiat currencies.
There's no reasons these same things won't work for bitcoin. Private mediation and arbitration already exist that support bitcoin. Things like contracts are built into the bitcoin protocol and will facilitate many of the things you list.
> Bitcoin does not have such a source of demand. It has no particular utility at all; nobody will ever suffer for lack of Bitcoin money.
Pretend the bitcoin market is only used for black market activity, it would still have a large utility. Plenty of people on the market would see one less revenue stream.
So when the value of the Euro swings 30%, it's because somebody passed a law changing its value?
Zimbabwe's government wrote a law saying its currency's value was now zero?
No. Any money has value because there's a market for it. Legal tender status helps by guaranteeing certain markets, but even that is no guarantee.
If it can be cashed out immediately into another currency, that's not too big a problem, I think. Note that there's a huge difference between accepting bitcoins and listing prices in bitcoins, though.
But to reply in kind, how are greenbacks these days?
The OC argument to seems to be, bitcoin and beany babes are expression of the same idea and beanie babes flopped. Ergo bitcoin will fail.
Hence the question about greenbacks, which are now not worth a continental.
Yes, you can say that greenbacks are doing great, comparatively speaking, but than if greenbacks ~= dollars and beanie babies ~= bitcoins, than you are bound to say that.. beanie babies are at least moderately successful
Which if I understood the OC correctly it is exactly the opposite of what was implying.
Cheers
On a more serious note, you've really contributed nothing here. The parent post is saying that a crash does not necessarily imply that something is useless and going away, giving examples of where crashes haven't affected whether or not people still value something.
You're anecdote doesn't even work. Like tulips there was a market bubble for Beanie Babies which burst, but Ty still sells them.
The same goes for the transaction fees.
This:
> Bitcoin does not have anonymity; ...
is thus not true.
If you purchase your coins through an exchange, it becomes traceable, off course.
It's the outward facing economists, the ones who you actually hear from, that project a kind of false confidence in their models.
> It would really be something if intelligent people chose to invest more trust in a currency system built and managed, in large part, by anonymous computer hackers than they did in currency systems built and managed by governments of the people, by the people.
Chris Robert doesn't seem to understand the mathematics behind bitcoin. The whole point is that the bitcoin network doesn't require any trust, or rather, it only requires trust that the longest block chain is mostly honest and that the current understanding of cryptography and computational complexity theory is correct.
Then we have Robert McMillan:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
This is a common straw man argument. Which bitcoin enthusiasts have claimed that bitcoin needs to be a "workable replacement currency"?
> Furthermore, as it has no apparent use-value (unlike, say, Platinum), this kills it entirely.
Technically, since a bitcoin is a proof that a certain amount of difficult computational work has been performed by or on behalf of the current owner of the bitcoin, there is some use-value. Bitcoin can be thought of as a networked version of Hashcash that allows the work to be performed in advance. Mail servers could be configured to require that a tiny amount of bitcoin be attached to every message it receives, hopefully making most spam unprofitable. This is probably merely an oversight by Mr. McMillan, but does this really even matter? What is the apparent use-value of a government-issued currency like the USD?
Matthew Bishop poses an interesting question:
> But what if a sovereign state was to issue an algorithm-based currency? Would that drive fiat money out of business?
I wonder if it would also drive non-governmental crypto-currencies out of business.
I find the following quote from Brett Gordon humorous. Economists don't seem to agree over whether bitcoin's deflationary nature is a benefit or a drawback. It's almost as if different people value different things.
> Two benefits are that bitcoins are inherently deflationary and transactions are anonymous. Given the recent slew of fiscal crises and increasing concerns about online privacy, these are two strong points in bitcoin’s favor—or whatever future crypto-currency arises.
This was the funniest thing to read for me. It flies in the face of two of the biggest complaints I see about Bitcoin (the third being the "it has no inherent value, not even status as legal tender").
You mention that Brett Gordon is disagreeing with many people when he claims that being deflationary is a benefit. Even in this same article you see the exact opposite being said:
> Unfortunately, as those familiar with Paul Krugman’s writings on liquidity traps know, Bitcoin’s known and finite supply dooms it as a workable replacement currency.
So there's two completely contradictory positions on that issue. But also on the anonymous transaction issue. Every bitcoin transaction is quite obviously public, so that right adjacent to this quote is Chris Robert's:
> The bubble can just grow and grow, so long as... the fundamental lack of anonymity doesn’t bother anyone.
So in the same article we have economists saying built-in deflation and anonymity are benefits of Bitcoins, while others say deflation will kill any chance of viability as a currency and that Bitcoin has no anonymity. What's a person to think, besides that many economists don't really understand Bitcoin and are probably just as speculative as the people buying Bitcoin at $250 several days ago.
Simplified version... Ask yourself this question: Why is money valuable. Answer: because I can buy stuff with it. Why can I buy stuff with money? Because it's valuable doh. This is circular of course, von Mises solved this by turning it into an infinite regress i.e. money is valuable because it was valuable before and moving the chain of reasoning backwards and arriving at the fact that money must have been valuable as a commodity before it became a money. There are certain characteristics that make one commodity more likely than another to become a money and to make a long story short that's why Austrians tend to favour the gold standard (because gold used to be a commodity then turned into a money). This would suggest bitcoins (and dollars, Euros and so forth) are bubbles. In the case of bitcoins one could even argue that if you could redeem them for the computational input you used when mining there is some commodity behind it.
With that and the disclaimer that Austrians are fringe at best and laughed at by many mainstream economists out of the way let's get to my opinion on bitcoins and fiat money.
I think that fiat money which is just backed by the word of the government that it's solid somehow works. Why and how I cannot explain nor do I seek to. But essentially I think that's why bitcoins could very well work, too. The backing is not by any government but rather by "internet consensus of sorts". In the information age that could essentially become a more powerful word of mouth backing (if enough people believe it it'll be stable) than the backing of any government.
I don't think this is the final iteration of this sort of currency but if we must have a fiat currency by all means please let it be one that allows for the privacy bitcoin has inherently built in. Ultimately though the currency that you have to pay your taxes in is the one that has the edge.
At the very least it shows that people are interested in a currency that is easy to use electronically, anonymous etc.
Because of fiat, of course.
To be precise, US Dollars are valuable because the US Government only accepts tax in US Dollars. Since taxes are levied on a proportion of economic activity by definition, that percentage of economic activity is instantly converted into demand for US Dollars. Additionally, thanks to legal tender laws, it's obligatory in the United States to accept US Dollars as payment for a debt. Thus, there is a large quantity of legally generated demand for US Dollars--enough to keep the currency valuable enough for other economic activities.
It is also no mistake or coincidence, for instance, that wages and salaries are paid in US Dollars. When you combine laws saying both "income taxes must be paid in US Dollars" and "income taxes must constitute a proportion of total earned income", it saves a lot of effort for the earned income to be denominated and paid in US Dollars. If you got paid in bitcoins, someone would have to calculate the value of bitcoins in USD, sell some bitcoins for USD, and pay the taxes in USD. Actually, this is exactly what happens with stock grants (in a publicly traded company).
Unless you can somehow generate similar amounts of demand for bitcoin, and simultaneously tightly couple that demand with major streams of economic activity, you won't accomplish the same thing. As far as I can determine, only the government can unilaterally dictate the currency that large, double-digit percentages of the GDP need to be denominated in.
(Granted, they could be still, but arguing from a lack of imagination is far less convincing.)
Not even remotely close to it.
"It is the future"
I am sure people will talk about it in the future -- as an example of a failed experiment in currency without authority.
This way the currency will be great for transactions, but ultimately unsuitable for long time value storage. It should be only slight modification and will remove a lot of the practical problems.
Multiple currencies will coexist, and if bit coin somehow overtakes USD, that won't say anything about what you pay taxes with.
I feel so sorry for those countries' governments - imagine being paid in currency which is completely worthless because it has no intrinsic value, not even that set by taxation! One wonders why they bother collecting taxes if the proceeds cannot buy so much as a coffee; wouldn't it save everyone a lot of time and hassle if they just dropped the pretense of taxation entirely?