The Fair Price of a Bitcoin is Zero
neweconomicperspectives.org
neweconomicperspectives.org
EDIT: Some context: "First, all financial instruments are accounting creatures. They are the asset of the bearer and the liability of the issuer. Gold coins were the liability of, e.g., the King, Federal Reserve notes are liability of the Federal Reserve, and coins are the liability of the Treasury."
An ounce of gold is worth a lot even prior to being minted into a coin. As such you could melt it, cut it in half, etc and it would retain it's value. That means it might technically be the liability of the government or the king, but practically speaking they're not. I could buy krugerrands, francs, golden eagles or whatever, melt them down and make jewelry out of them and it doesn't screw up the books of any of their issuers.
https://en.wikipedia.org/wiki/Eight_real_coin#United_States https://en.wikipedia.org/wiki/Coinage_Act_of_1792
b) money is a free-market good as in your example above. all the government was doing was weights and measures standardization.
c) only fiat (paper) money is a liability of the government because the original deal (FRNs) was that the notes would be exchanged for coin. That is why the note says promise to pay the bearer a dollar (which is a denomination of weight of silver or gold).
My point wasn't so much that money has to be a commodity with an underlying value. It was to point out that the notion that "money is an asset to the holder and a liability to the issuer" might be the author's definition of money, but it's not THE ONLY RIGHT definition of money.
If gold can effectively be money, sans minting into coins that means that the earth is the issuer. Do we "owe" the earth an ounce of gold by virtue of having mined it? If so, do we then "owe" the earth a ton of steel for every ton we extract? And what happens if/when that gold or steel leaves the earth on one of the Voyager probes?
I'm making absurd arguments to point out that the author's definition of money is absurd. I'm not trying to troll but to illustrate a point. I think his definition of money works fine when you're issuing bills or notes, but it breaks down when people are using commodity money with none of the "debt" part that gets brought to play with notes.
When people start issuing paper notes redeemable for bitcoins then I'll accept the author's definition of money. But right now people are trading the actual commodity itself so his definition of money falls flat in this circumstance.
"Rapidly becoming a marketable commodity" is vastly different than being "the most marketable commodity".
In Nazi Germany everyone used the Reichsmark except for American POWs there, who used cigarettes. Right now in Argentina they use pesos and dollars. Furthermore the official exchange rate set by the government isn't the true exchange rate that you can get on the street. http://en.wikipedia.org/wiki/Prisoner-of-war_camp and http://en.wikipedia.org/wiki/Argentine_peso
Even here in the US there are plenty of people willing to trade or barter or accept slightly alternative currencies. I might argue that something's money-ness is related to it's acceptance as a medium of exchange. Probably not linearly, but in some way. There are network effects for money just the same as everything else that humans do.
At home I've got US coins that are labelled as dimes but I can take them to quite a few places and exchange them for at least $1.25 in today's paper dollars. Why? They're pre-1965 dimes and they've got some silver and that makes them worth more.
To try and pin down "money" as "absolutely this one thing always and forever" is a bit of a fool's errand because money is as one friend of mine put it a "shared delusion". It's a decidedly human construct and while you can pass laws, you can't actually control people's behavior. If everyone decides that bitcoin is money it doesn't matter what the law says about dollars, they'll be just as worthless as this author thinks bitcoin is now.
Bitcoin is in a hypermonetization melt-up phase.
No, its not. That's the process of printing money to pay off a debt. Or the act of a government making something legal tender. It might even be a tenable name for something becoming money (which isn't just a marketable commodity.)
Things often become marketable commodities -- even rapidly, especially when they are newly discovered or new uses are discovered for them -- without becoming money.
> Bitcoin is in a hypermonetization melt-up phase.
What is that even supposed to mean?
> (which isn't just _a_ marketable commodity.)
You got that right. It's _the_ marketable commodity.
> What is that even supposed to mean?
A melt-up is the opposite of a melt-down.
Let those of us who are interested in furthering the Bitcoin economy do so unencumbered by pundits.
Economics is like quantum physics: if you claim to understand it, you don't understand it. Let the experiment play out, and caveat emptor.
Bitcoin would be much more encumbered if it wasn't relevant enough for the pundits to pontificate on it.
There is extreme bias in the news community (on both sides) because of their investment (or lack thereof)... And possibly a certain amount of attempted market manipulation as well.
In other words, almost everyone writing about bitcoins is full of shit. Take everything you read, on all sides of the issue with a grain of salt.
That's nonsense. The post is a result of applying a particular economic theory of how money works to something that is apparently trying to be a form of money. This theory of money might be wrong in general, or it might for some reason not apply to bitcoin specifically. But to dismiss it simply as "bias" is willed stupidity - it is a way of avoiding addressing the actual arguments put forward in the post.
(The specific theory being drawn on in that post is called Modern Monetary Theory; it isn't generally accepted by mainstream economists: https://en.wikipedia.org/wiki/Modern_Monetary_Theory )
Austrian Economic theory comes closest to this ideal.
If you had to read just one article I'd recommend http://unqualified-reservations.blogspot.in/2011/04/on-monet...
But if you have the time you could read all his articles on economics conveniently collected at moldbuggery.blogspot.com (under economics)
I see it every day. One of my coworkers used to be into Bitcoin and owned a fair number and then decided to donate them away when they were still a few dollars a pop. These days he can't stop making predictions about how Bitcoin is going to fail and how it's all a bubble and ponzi.
It's unbelievable how some people are unable to deal with their cognitive biases.
http://www.amazon.com/Mistakes-Were-Made-But-Not/dp/01560339...
Thus, instead of a debt-based economy, it will be a verification based economy.. which is a little funky, and I don't know if there are models for it yet.
/mostly-tongue-in-cheek
You can think of bitcoin as "backed" by speculators. It has a market price, because speculators will give you other currencies for it. That is what makes it useful for value transfer (trade).
And the more it is demanded for trade, the more liquid it will be, leading to less volatility and less risk for speculators.
Whether the price holds up in the long run or crashes to near-zero is impossible to predict. But it is now safe to say that it could go either way. It depends on the choices of people and governments.
Bitcoin has already proven (or very close) that digital currency that is purely a financial asset (not demanded for jewelry, industrial use, or taxes) is viable.
I don't see how bitcoin not meeting certain a priori definitions that were created before digital currency was even a possibility, are relevant. It seems likely to me that the blogger is either confused about abstract ideas relate to reality, or is dishonest.
Plenty of things in the world can be considered worthless if you aren't interested in them.
I'm quite happy for people to continue living in a world where sending money goes through several 3rd parties, all taking a cut and adding delays, but I don't want to be one of those people any more.
You don't have a way to pay someone else BTC without participating in the system at least once.
I'm excited by Bitcoin but it isn't financial liberation.
- The author thinks Bitcoin users are either irrelevant crackpots (anarchists/libertarians) or criminals?
- Gold is valuable and Bitcoins are not because digging in the ground is fundamentally more valuable than discovering large prime factors of numbers?
- The author doesn’t like the properties of Bitcoin, or Bitcoin is not useful to national governments because they can’t control it (not a monetary instrument, can’t reduce supply, etc)?
- The author believes Bitcoin is doomed to collapse to essentially no value?
- The author believes people who engage in Bitcoin trading are involved in a Ponzi scheme?
I’m not sure what the point is, but to be fair, I’m not sure it matters. Bitcoin is useful for those who value its properties, and there are many people who do. No one can wave off these people by labeling them as money launderers, anarchists, or Ponzi schemers (which I don’t think is even true); nor will such statements, or analyses such as this article, prevent anyone from trading Bitcoin, buying or selling with Bitcoin, or holding Bitcoin. And since Bitcoins are fungible and becoming ever more so as time goes on, regulations and laws will prove difficult-to-impossible to enforce, in a manner very similar to P2P file-sharing (but with all the technical lessons of P2P sharing now learned).
You might bet against Bitcoin specifically because of one or more technical flaws, but digital currencies in some form, and specifically currencies not controlled by any nation or corporation, are here to stay.
Cryptocurrency is a brilliant thing, but we need a better way to model its place in our world. I'd like to see someone develop a first-principles model to help us better understand the consequences of decentralized cryptocurrency. The right model could highlight the areas where more development or reform are needed.
You can provably destroy bitcoins by sending them to an address with no private key (this is provable). Believe it or not, this is actually useful for stuff like http://www.proofofexistence.com/
Hence the premise of this article, even if you take the underlying economic theory at face-value, is flawed.
Isn't this statement just as valid when applied to USD?
"Bitcoins are Purely Speculative Assets" would be an excellent line from the article to use as a title. Or perhaps as a comment put it: "Bitcoins are an Intangible Commodity Asset"
Gold billion has no value as a monetary instrument. But obviously it, like Bitcoin, has value as a unit of account because it is scarce.
Note that saying it has no fair price as a currency by no means implies it's worthless. It's just that its worth is purely speculative like any intangible asset like art, intellectual property (e.g.: patents), wine (or at least "valuable" wine whose cost bears no resemblance to how much it cost to produce).
Think of it this way: bitcoin isn't a currency you buy goods with; bitcoin is a commodity you barter with. It's just a far more convenient commodity than chunks of gold or pieces of art.
What's fairness?
It's littered with idiosyncratic phrases and simply incorrect definitions. For example:
> Second, all financial instruments have a fair value that is defined as the discount value of future streams of monetary payments.
There's a grain of truth in there. Let's give the correct definition from Wikipedia:
> In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)—the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question.
In other words, it's nothing to do with "financial instruments"; it's how you value any asset. And it's not the "fair value" it's just one of many ways of valuing things. And it's not "the discount value" (as if there were only one), nor is it just "monetary payments"; rather it's all cash flows, in every direction, each one discounted appropriately.
And so on, and so forth. The author makes a big point of arguing that they aren't financial instruments so much as they are real assets. There's some truth to this; if I own a bitcoin nobody is obligated to give me anything in exchange; it doesn't exist as a liability on anyone's balance sheet. And? The same is true of a gold ingot. Or, largely, or a share of Apple stock; nobody is obligated to give you anything for that share. By the same logic, the "fair" value of gold (or Apple stock) is zero. Hell, the same logic would indicate the fair value of a Euro is zero. After all, nobody is actually obligated to give me anything for a Euro. I don't live in the EU, I have no EU debts, and no stores around here accept Euros. It's worthless! Except, you know, for the part where there's a large, liquid market where I can trade Euros for my local currency.
> Now what is the fair value of a bitcoin? It does not provide any income (Y = 0), it has no maturity given that it is not a financial instrument. For the sake of argument, we might assume that their maturity is infinite because we are stuck with them forever once they are created.
Taken literally, this means that you cannot sell a bitcoin. I would suggest that this is not true. You can actually sell bitcoins. People do this every day! In which case we plug in the expected value of the future sale in his fancy equation, discount it appropriately to account for the time value of money and the uncertainty of how much I'll get when I sell it, and find that...
...bitcoins aren't worthless. Huh, who knew?
Gold has some intrinsic value. If nothing else, it has some industrial uses. Bitcoin has no comparable intrinsic value.
Owning a share of AAPL common stock has value. You get voting rights in the company. You also have a claim to Apple's assets, although with a lower priority than any bondholders or other creditors. So owning AAPL shares does come with obligations from Apple.
Euros (or dollars) also have some value as fiat currencies. You can pay debts and taxes in euros. The government has an obligation to accept euros as payment for taxes. So essentially these currencies are your ticket to stay out of jail.
Bitcoin doesn't share any of these qualities with gold, AAPL, or euros. That was the author's point and it still stands.
The value of gold is not based on its intrinsic industrial uses. It shares this characteristic with bitcoins.
> So owning AAPL shares does come with obligations from Apple.
Not in the sense OP used. He was very explicit:
> One is that they are convertible into something else, another is that the issuer will accept them as final means of payment from his debtors.
Apple stock is not convertible on demand into gold or cash, nor is Apple obligated to accept Apple stock in payment of its debts. By OPs definitions, Apple stock is not a financial instrument, and thus has no value. (Note: Of course, as ever, OP has used an incorrect definition, but that's neither here nor there.)
But again, according to OP Apple stock is not a financial instrument; it shares this characteristic with bitcoins.
> You can pay debts and taxes in euros.
No, I actually can't, no more than I can pay them in bitcoins. If I had some Euros I could trade them for my local currency and use that to pay my debts and taxes, but the same is true for bitcoins. We can argue that the market for euros is much more stable and liquid than the market for bitcoins (very true!), but this is a difference of degree, not a difference of kind.
The differences between bitcoins and gold, euros, or Apple shares are real and significant, but OP has failed to articulate them.
This makes the Euro a traditional currency which bitcoin isn't. That's not to say bitcoin is worthless, since its value is really whatever someone is willing to pay for it.
Indeed, I can't claim that. Nor am I. It definitely is!
> This makes the Euro a traditional currency which bitcoin isn't. That's not to say bitcoin is worthless, since its value is really whatever someone is willing to pay for it.
I don't think we disagree. :)
Given that people pay real money for BTC, perhaps it is time to question the theory.
Btw, I found this really amusing: apparently the Tulip Mania never actually happened, or at least nobody knows for sure and lots of things seem to indicate that it didn't happen (overpriced tulips happened, but not a mania that made the common people join the frenzy and drove everybody to bankruptcy). It's on Wikipedia (the German version seems to be more clear about it, though).