Tuesday, December 3, 2013

A Calm Analysis of Bitcoins as a Currency

I got quite a bit of backlash for writing a couple of days ago about bitcoin (post here). My criticisms were fairly mild—I’m not unsympathetic to the drive behind making bitcoin work.

“Where’s bitcoin?”
Uh . . .
But even such mild criticism of the bitcoin enterprise was enough for some of the bitcoin-faithful to denounce me as a heretic, or worse, an apostate. Or worse, a shill for the banksters and their minions. Or worse still, a fucking idiot who didn’t know shit-all about bitcoins and what they represent—the future!

Okay . . .

To be clear, I am not against bitcoin, or any other of the so-called “cryptocurrencies” (cybercurrency sounds more accurate, but I’ll stick with the current convention). Neither in principle nor in practice do I object to these immaterial, manufactured, fiat currencies. Hell, I’ve had a bitcoin wallet since 2011, when I parked a few hundred bucks in it when it was at $8 a BTC.

So I’m fine with bitcoin—but I’m not a mindless cheerleader for the thing.

When talking about bitcoin, cognoscenti have to admit, and neophytes have to understand, that bitcoin does not do all that people claim it does. Far from it, bitcoins and other cryptocurrencies are severely limited.

Anonymity/Privacy: Bitcoin is not anonymous or private. All exchanges require you provide your banking and verifiable address information before they will set you up with a bitcoin wallet, in order to comply with anti-money-laundering legislation. So dreams of evading the Eye of the NSA are misbegotten. As if to add insult to injury, some exchanges automatically identify the public key with the owner’s email, which again makes it a snap to connect the wallet to the person. If your bitcoin public key is connected to your real name even once, it’s a matter of a simple Google search to identify the “anonymous” bitcoiner. Why does this matter? Because it’s no trick to connect the public key to specific blocks of bitcoins. And bitcoin blocks are easily tracked. Consider Bitcoin Block Explorer, which does this task. Thus you can track the transactions the individual carried out with relative ease. A big middle-finger to dreams of anonymous buying and selling with BTC.

Security: Wallets haven’t been hacked (yet), but they’ve been phished. There’ve also been numerous thefts/frauds involving the exchanges, which seems to be the weak link in the whole bitcoin enterprise. You can find bitcoin theft and fraud horror stories here. To take just one such nightmare, in 2011 Bitomat—then the third-largest exchange—lost its bitcoins. (Lost in the literal sense: The owner of the exchange lost access to the bitcoins file he had.) Imagine if the third largest U.S. bank, Citibank, lost all $1.3 trillion of its depositors’ money? With no recourse to make its depositors whole, except the good intentions of Citibank’s owners?

Fungibility: Individual bitcoins are not fungible (able to be replaced by an identical one). They are uniquely identifiable, and easily linked to a specific wallet. (Paper currency is also uniquely identified—but not so easily indentifiable with a particular wallet. Pick up a found dollar bill on the street, and you will never find out who owned it before you—unlike with a BTC.) Thus lack of fungibility allows for all sorts of possibilities whereby a subset of bitcoins might somehow become invalid or valueless for reasons beyond the control of the owner of that particular BTC. For instance, it is possible that at some future date, a class of bitcoins—say bitcoins involved in some nefarious scheme—are declared “marked”, and thus anyone who ever had contact with them becomes either enmeshed in a law-enforcement dragnet, or discovers that those “marked” bitcoins are rendered valueless at some point in time. Conversely, some governmental power might dictate that only some bitcoins that they sanction are “compliant”—thus making everyone else’s worthless. Farfetched? Tell me that after the FBI unloads the 144,000 BTC they seized from Silk Road.

Limited Bitcoin Supply: When created, bitcoins had a built-in limit as to how many could be mined, just over 20 million, a point which will be reached in 2140. This means that bitcoins are a deflationary currency: Demand for the currency will always outstrip supply. Thus it creates the near-perfect conditions for a deflationary spiral. It pays to buy and hold bitcoins, rather than spend them. Thus bitcoin can never be a viable currency, because it will always smother any market built to take it. The only market that will always boom is the market for BTC, rather than for any good or service bought and paid for with BTC.

These are some—though by no means all—of the rational, reasonable caveats and objections to bitcoin as it now exists.

The last one especially—that bitcoin inherently creates deflation, thereby stunting any economy and preventing it from growing—ought to be enough to dismiss the claim that “bitcoin is the currency of the future”.

But even if we let slide and/or set aside these objections/caveats, it still has to be acknowledged that bitcoins will never be the dominant currency for a very simple reason: There is no necessary market or seller that requires bitcoins exclusively.

I’m highlighting “exclusively and necessarily”, and made a to-do about it in my last post, because I want to make clear that I am using those words in the strictest sense: There is no market which buyers have to participate in (necessity), and which only accepts bitcoins (exclusivity).

To make these two conditions easily understandable: Imagine for the sake of argument that all food sellers without exception accepted bitcoins exclusively. Food is of course a necessity for all people; can’t live without food. So if I necessarily have to buy food, and all supermarkets/restaurants/hotdog-stands/whatever accept bitcoins exclusively, and will refuse any other currency, then bitcoins will become the dominant currency in the food market.

Thus under those hypothetical conditions, bitcoins would be a useful, necessary currency.

This exclusively and necessarily condition for a currency is really pretty powerful, and it’s one that cryptocurrencies fail to meet. The Chartalists—currently operating under the pseudonym “Modern Monetary Theorists”—with whom I virulently disagree with about deficits, still have a point when they define a currency as the medium of exchange that the government will exclusively accept in payment of taxes, taxes which the citizenry necessarily has to pay off for fear of getting penalized by said government. If you have to pay off the government in dollars, then you need to earn dollars. Thus dollars become the currency in the economy, as per the MMT argument.

At this time, bitcoins are not exclusively needed in any necessary market. That’s why it’s not a currency. Sure, lots of stores/people accept bitcoins as payment—but will any of them turn down dollars for their goods or services if you offer them? Or if they do, is there no other place where you can get an acceptable replacement product/service with dollars instead of bitcoins?

You see my point. This is what I mean by saying bitcoins will never be a dominant currency. Because like it or not, they aren’t necessary for a person to function in the economy.

If they ever do—if Ralph’s or the IRS decide to only take payment in bitcoins—then we’ll talk about cryptocurrencies being the “currency of the future”. But for now, cryptocurrencies are not currencies—they are an asset class.

And there’s the rub: If cryptocurrencies are not currencies at all but merely an asset class, no different from real estate, precious metals, equities, or bonds, then cryptocurrencies ought to be analyzed both collectively as merely one more asset class, and individually as one more exempla of this new asset class.

Things then become clear—and the dangers become obvious as to investing in cryptocurrencies: They float on nothing but air. They have no intrinsic value. Their value depends not on some thing, but rather on a relatively small group of people saying it has value.

Think about it: Every other asset class is backed by a tangible asset. Equities by the company’s assets, ditto bonds. Real estate by the physical land.

What about gold?”, ask some of my critics. “Gold and other precious metals do not have intrinsic value!

And you know something, they’re right: Precious metals do not have intrinsic value. However, there always has been and always will be a large group of heterogeneous people who will accept precious metals—gold, silver, platinum—in payment for some good or service. Don’t believe me? Take a brick of 420 ounces of gold to any assayist or jeweler anywhere on earth, and see how well you do.

If bitcoins or any other of the myriad cryptocurrencies get to that point, then there will be nothing to worry about. But for now, that is not the case. Only highly specialized people in a rather limited universe will trade bitcoins for dollars.

Therefore, bitcoins is nothing but speculation. A flyer that’s just gone parabolic.

So . . .

At my Strategic Planning Group, I discuss other issues, such as possible dollar collapse, looming commodity spikes, and other investment contingency planning. If you are interested, check out the SPG Preview Page.

35 comments:

  1. I really appreciate a critical view of Bitcoin, especially from someone that holds some and has done for a while. This is exactly what we need, critical open discussion, accepting the floor in the Bitcoin system. I don't think Bitcoin will become the next world currency, but I think it it will be around for a long time, and that it does have value, just not the value everyone would want it to have.
    However, I don't think you've put forward a very concrete argument as to why. In some cases you have, but here's a few counter arguments to what your article.

    anonymity/privacy: localbitcoins don't require AML/KYC. Bitcoin can be anonymous beyond the level required for the average person when using local bitcoin, in combination with a mixer (including inherent mixing involved in most web wallets.) You're right that it's not hugely practical for the average Joe, but the average Joe doesn't need 100% anonymity. PGP isn't hugely practical, but lots of people still use it through choice or necessity. Also, Bitcoin isn't sold as anonymous. In fact, numerous devs have explicitly stated Bitcoin should be assumed to be anonymous. But neither should credit/debit or other bank transfers.

    security: Bitcoin is pretty secure. Saying Bitcoin is insecure because an exchange got hacked is like saying US dollars are insecure because someone robbed the bank. Bitcoin is a new technology, and it's usage is different and new to all of us, there's bound to be human error. Hell, look at RBS' outage the past day or 2. That's very different to the security of a technology though, which is Bitcoins sale point. It doesn't make any claims that it will prevent it's users from doing stupid things.

    fungibility: could be a problem, but again, not how you describe. Bank notes have serial numbers on them, bank notes can be counterfeited. You could get some $1 bill change off someone in one shop, go to another shop and that $1 bill gets rejected because you got given a counterfeit. There is no system for this yet with Bitcoin (e.g. tracking or logs of tainted coins) but things like Coinvalidation and others are trying to bring it it. This is a bad idea. But your original point about Bitcoin having low fungibility because coins can be marked or rejected because of association with crime is no more applicable to Bitcoin than it is to USD. So it's not a problem at the moment, but it could be in future if there are some bad services run on top (again, same with other currency)

    Finite limit: I'm not sure how I feel about this one, but I'll present a few counter arguments for you anyway (not saying I agree with these either, but it's some food for thought/devils advocate.) Gold is a finite resource, we lived happily with that as a currency or sole unit of account for a long time. Also, the assumption that people wont spend is generalising rationalism to an irrational population. If what you're saying is true, the volume going through all the exchanges combined would be equal to the volume of Bitcoins produced in a day (because nobody would sell, so only coins being sold would be those fresh onto the market from miners.) That's clearly not the case. There will always be a core of people (be it maybe just geeks nerds and criminals) that will use it for trade because of their own beliefs, regardless of the value (like early early adopters) and as a result, there will always be people trading between it and fiat.
    Finite resource will encourage hoarding from some though, and there will be inevitable bubble bust cycles from waves of media attention, people hoarding, value stops rising, crashes back down to actual transaction count based value and repeats. But it will never go below the market value assigned by that relatively small group of people that do actually use Bitcoin for it's transactional value rather than as get rich quick scheme.

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    1. Thank you for than Anonymous. I like the blog because it prompts robust discussion in a lot of different areas but I think that already for the 3rd time in one week, I find myself disagreeing with Mr. Lira. Not only does he not understand bitcoin as a currency (All we need to do is look at his statement that bitcoin serves no useful purpose!?! As though there is some objective standard for utility! Despite the fact its already been used by individuals to travel across europe and the US, it's not useful!?! Then he invokes the idea that people need to understand the inner workings of bitcoin. Like 99% of the population understand any fiat currency and how they are ripped off in the most monumental scam that ever been perpetrated on people across the planet? Or that 99% of the population don't need to understand PCI-DSS (the standard for doing secure payments online) before they can do any type of online shopping? How clueless can you be? A person have a certain amount of bitcoins, he or she see products and services each of which cost a certain number of bitcoins and then make a decision whether he/she believe that it is worth exchanging his/her bitcoins for that particular product or service. It's not rocket science!

      Second, Mr. Lira doesn't understand that the majority of the value of bitcoin is in the network. The ability to exchange your bitcoins or even make payments in bitcoins is order of magnitudes cheaper than using any other payment of transfer network on the planet. As well as being available for use 24/7. That Mr. Lira fails to grasp these things speaks to the lack of the intellectual rigour in many of his arguments.

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  2. So in summary, I think Bitcoin will not become a world currency (e.g. replace all other currencies.) But it doesn't have to be all or nothing, live or die. It seems counter intuitive to say categorically Bitcoin can't be a currency, because it is functioning as one at the moment. It's just the majority of it's users don't use it as a currency.
    Even if you conclude Bitcoin doesn't rationally make sense to use, plenty of irrational features and behaviours have survived through many generations of humans. You can say Bitcoin won't last forever, but nothing ever does. Take fiat currencies for example: the average life span of a fiat currency is 27 years. Does that mean we should just not use them?

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    1. I'll answer the points from your earlier comment here.

      Re. anonymity, you wrote, “You're right that it's not hugely practical for the average Joe, but the average Joe doesn't need 100% anonymity.”

      My answer: Then why is bitcoin and other cryptocurrencies being sold to the Ave.Joe as 100% anonymous if it's not? If he reads the fine print, then Ave.Joe learns it's not anonymous—but the impression being put out there is that it is.

      Re. security, you say that bitcoin is secure. Then you write, “Saying Bitcoin is insecure because an exchange got hacked is like saying US dollars are insecure because someone robbed the bank.”

      My answer: So far bitcoins are secure. And in the heare-and-now, I'm pointing out that the exchanges aren't secure. If a bank is robbed, depositors don't lose their money. If an exchange gets hacked, bitcoin owners lose their BTC.

      Re. fungibility, you wrote, “But your original point about Bitcoin having low fungibility because coins can be marked or rejected because of association with crime is no more applicable to Bitcoin than it is to USD.”

      My answer: Money involved in bank robberies is marked with dyes that make it irredeemable (by law) and unusable as a practical matter. Those bills are recycled by the Federal Reserve. The same could be done to a subset of bitcoins, making anyone who transacted with those coins exposed to who knows what, since the (as it were) trail of title of each bitcoin is readily available.

      Re. the limited supply of bitcoin, you didn’t really argue me. At best, you said that “Gold is a finite resource, we lived happily with that as a currency or sole unit of account for a long time.”

      My answer: Gold was creating the deflationary pressures that constrained the world's economies and led to the rescinding of Bretton Woods and the abandonment of the gold standard in 1973. That's why gold went from $35 an ounce in 1933 to $1,200 today, even though dollar-inflation in those 80 years has not been 3,500%.

      Appreciate your thoughtful comments.

      GL

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    2. You say “Then why is bitcoin and other cryptocurrencies being sold to the Ave.Joe as 100% anonymous if it's not?”

      US Dollars are sold as having value, when they have no value. The only people selling Bitcoin as 100% anonymous clearly don't understand Bitcoin, people mis-selling it, kind of like what the banks here in the UK do with their services all the time. Does that mean GBP is worthless or of any less value as a currency? No, it just means the people preaching it as 100% anonymous are speaking from authority they don't have and should be fined just like the banks are fined for mis-selling.

      Re: exchanges

      GB£ are secure SO FAR. Regarding exchanges, as time goes by, more and more exchanges are refunding customers when hacked (see “Beware the Middleman” Christin et al.) When banks first came around and got robbed, do you think the reimbursed their customers? I suspect not. Part of this issue is legislation. If a bank got robbed, do you think they would pay you back if they didn't have to? I don't think they would. Clear legislation surrounding Bitcoin (e.g. requirements to refund thefts) will alleviate this issue and offer legal recourse if you’re not refundd. I’d say it is a temporary issue, or a teething problem. Furthermore, did you know, approximately 4 out of 10 exchanges shutdown and not all refund customers. Did you also know, 9 out of 10 new businesses fail, and not all refund customers.

      You say “Money involved in bank robberies is marked with dyes that make it irredeemable (by law) and unusable as a practical matter.”


      That’s assuming the dye packs work and the money is stolen from a bank. I imagine 99% of money is not stolen from a bank and therefore can’t be marked with dyes. Furthermore, you didn’t respond to my point “You could get some $1 bill change off someone in one shop, go to another shop and that $1 bill gets rejected because you got given a counterfeit.” And you also are assuming that because something is associated with crime, it won’t be accepted. 80%+ of bank notes have traces of cocaine on them, but you don’t see them getting turned away, or people arrested, so why would the same happen with Bitcoin? As I said, Coinvalidation are trying this, but it would still require vendors to opt in.

      Re: Gold’s deflationary pressures

      I’ll give you that one, I agree Satoshi basing Bitcoin on the Gold Standard may not have been the smartest ideas, so an analysis should probably mention although that’s an issue with Bitcoin, other cryptocurrencies don’t have the same limitation. However, you still didn’t respond to my point that you’re assuming a market place of rational actors. Not even Wall Street is full of rational actors and that’s visible by how far off most economic predictions are. So applying theories based on rational to Wall Street is seen as a bad idea, and you’re applying it to Bitcoin, which is accessible to anyone with the internet. Do you think the average Joe bothers to do the rational thing and zoom out to at least the 1 year view on a price chart before making a Bitcoin purchase? You yourself even pointed out some irrationality around Bitcoin with people saying it’s 100% anonymous. It’s not rational to say that unless you’ve understood why, but people still do it. The world is not rational, and as I said, plenty of irrational things that last for a long time.

      Just to clarify, I’m not saying Bitcoin is perfect. But it has value, it is a currency, and it will have some value for many years (even if just in niche groups.) This post is titled a “calm analysis of Bitcoin as a currency.” Analysis involves considering both sides which you haven’t done other than your introduction where you say you’re not against Bitcoin. Perhaps a more accurate title might be “Why I don’t think Bitcoin is a currency.” My main issue with this article is you’re painting Bitcoin as objectively bad, when in relation to existing systems, and parallels to the real world, it’s actually not anywhere near as bad as you make out (hence my many analogies.)

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    3. Even though a new modern era idea, still the same old scams can be pushed through and DEFINATLEY not a good idea to welcome Bitcoin.

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    4. Divisibility - Bitcoin can be sub-divided, right?

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    5. "Gold was creating the deflationary pressures that constrained the world's economies" - I disagree. Gold was creating the deflationary pressures that constrained the world's *governments*, like it should. We went off the gold standard because governments wanted to evade the discipline that gold provided. IMHO we need to separate money and government, which is why I created Shire Silver at about the same time bitcoin was created.

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    6. Gonzalo, You say, "If a bank is robbed, depositors don't lose their money." LOL! So, I put my money in a bank. The bank spends it a the casino (can you say credit default swaps!), even the FDIC has something like 5% of the full deposits outstanding in most US banks (which by the way I had to pay for against my wishes - if I wanted insurance against losing my money in said bank, I wouldn't put it in said bank. The only reason we do is because it's the only way to get paid if you work and if you keep you money at home, you get accused of either money laundering or tax evasion). Plus I'm losing on average 2% per year (through money printing and far more since 2007) which over say 50 years equates to about 65% of purchasing power of my funds! Plus we all know that the banks will have first dibs on the FDIC insurance as they moved most of the CDS into the FDIC insured part of the bank. And lastly we all know that when the ball drops, governments worldwide are going to confiscate bank deposits in order bail out the banks, just as they did in Cyprus. So you're really deluded if you believe that anyone is going is going to get they money back. Which is why so many people are moving to bitcoin.

      As for gold supposing creating deflationary pressures, that's just silly. The governments were all overspending (and the US worst of all) which created a boom bust cycle. It's not difficult to understand. When you spend more money than you have, you go broke. And when governments go broke, they print money. The US ending Bretton Woods was only about the US finding a way to keep financing its foreign wars while spending ridiculous amounts of money on so called social programs, that has created massive cycles of dependency in the population.

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    7. There is 370 times more money in deposits at US banks than the size of the Federal Deposit Insurance Fund. I don't see how anyone can say that if a bank is robbed (or more to the point fails) that they will get their money back!

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  3. I appreciate your thoughtful comments on Bitcoin. Could you comment perhaps on the avenues where Bitcoin is a required form of payment? What about services like Silk Road? Granted, the black market is not attractive, nor is it mainstream, but it is an example of where payment is taken exclusively in Bitcoin.

    The other issue brought up by everyone from you to Krugman is that Bitcoin has no intrinsic value. What about its value as a payment system? You have some, so you (unlike many who say this) have experienced the amazing ease of sending arbitrary amounts of money around the world, securely, in seconds. Combined with the network effect, currently this is to me the biggest inherent value of Bitcoin. I say the network effect because, yes, other crypto (or cyber) currencies exist, but Bitcoin has far and away the greatest acceptance and use at this point. I'm interested to hear your take on whether or not that constitutes intrinsic value and why.

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  4. I'll argue with you about the finite nature of Bitcoin with one point: infinite divisibility changes everything.

    People also get caught up in the whole $1000/BTC deal, or the 1 BTC = 1oz of gold nonsense. A BTC is an arbitrary amount; I very well could say that 1 mBTC = $1 and as long as you think in mBTC, you no longer have to deal with thousands of dollars in your head.

    The price will level out. Will there be speculators? Sure, but even government fiat currencies have speculators. Day by day, Bitcoin continues to reach more and more acceptance in retail and consumer transactions. And the friction of those transactions is near-zero.

    Care to share what you sold those BTC for?

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    1. He never said he sold his BTC position..

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    2. "Will there be speculators? Sure, but even government fiat currencies have speculators"

      Speculation in government fiat currencies creates all sorts of problems, but we survive anyway because gobvernment fiat currencies actually represent a real value.

      People are paid wages in fiat currencies. Those currencies are used as a store of value, encoding the labour that you sold to your boss in order to receive that money.

      So there is an actual relationship between the productivity of an economy and the currency, even if it is distorted and damaged by unproductive currency speculation.

      You can't say the same about bitcoins, because you and I are not paid in bitcoins (and if we were, we would be well advised to either get a better union or get a better job). The only relationship between a bitcoin, and real, productive, labour value is when you can convert real fiat government issued money into bitcoins and vice versa.

      Why would you ever do that when its easier not to take that extra, unnecessary step? You wouldn't - unless you were speculating on the bitcoins, which is Mr Lira's entire point. Their cheif value is as something that will increase in value due to more people coming on to buy it.

      This makes it fundamentally different - and fundamentally far more abritrary and fictional - from fiat currency, which represents real value in terms of hours worked to produce something tangible, even if it also is subject to speculation.

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  5. The anonymity vs pseudonymity, security of exchanges and coin tracking issues have been discussed at lengths in more specialized forums so I won't touch that here. It's fine that you're attempting to explain them to a less familiar audience. I'll merely note that there are ongoing efforts to improve the situation, including but not limited do designing new cryptocurrencies (zerocoin being one such attempt.)

    Regarding the limited bitcoin supply, I'm not sure it belongs in the list, for a couple of reasons. Most obviously, it's consistently been advertised as such, and there's no argument to the contrary here. But more interestingly, you're invoking the deflationary spiral. Common definitions of the concept involve production output and wages, which is conspicuously absent from your explanation there, and generally would not seem to apply to bitcoin. Not yet anyhow.

    Further down, you notice that bitcoin is not mandatory. Assuming that you believe deflationary spirals can happen at all, do you believe they could happen to a currency that co-exists side-by-side with others in a same market? Could you explain the mechanism through which that could occur?

    The bottom half of your post explains why bitcoin cannot ever become a dominant currency because it is not currently mandatory and exclusive. But you are mixing the present tense and the future tense in that logic. All you can assert from bitcoin not being mandatory is that it is currently not a dominant currency.Then it keeps being fuzzy, jumping from "not currently a dominant currency" => "will never be a dominant currency" => "is not a currency" => "is a commodity". That's unfortunate.
    Is there a better argument to be made for bitcoin not being a currency?


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    1. Good comment.

      To take your last comment first: Good catch, noting my slipperiness on my present-future, “not-currently-a-dominant-currency/will-never-become-a-dominant-currency” sidestepping. It’s a fudge that doesn’t really matter, because the deflationary nature of bitcoin (discussed below) renders the future-adoption of the bitcoin as a currency a moot issue. It won’t ever happen, precisely because of bitcoin’s deflation.

      Before that, you asked, and I quote, “Assuming that you believe deflationary spirals can happen at all, do you believe they could happen to a currency that co-exists side-by-side with others in a same market?

      My answer is, if two currencies are working side-by-side in an economy, and one is noticeably deflating while the other is not (or one is noticeably inflating while the other is not, which is essentially the same thing), then capital will flow from the higher-inflation currency to the lower one. We see this in border areas like Geneva, where residents were exiting the euro and rotating into the Swiss franc until the Swiss National Bank had to peg the franc to the euro at CHFr. 1.20. Today, because of the defended exchange rate (you can’t properly call it “fixed” now can you), there is still euro-franc exchange wobble, but not enough for ordinary consumers to move en masse from one to the other. (That’s what I mean by “noticeable inflation/deflation”.)

      Finally, you write, “Common definitions of the concept involve production output and wages, which is conspicuously absent from your explanation there, and generally would not seem to apply to bitcoin.

      My answer is, bitcoin deflation happens at a different point in the deflationary spiral than most people discussing the issue focus on. Normally, in describing a def-spiral, people say, “Unemployment begets curtailed spending, which makes factories lower their prices, which makes them earn less, which leads them to produce less and eventually fire workers, who thus spend less, and so on.”

      At the hidden but implied step in this circle, where factories decide to spend working capital on continuing production, factories will refrain from spending bitcoins, if they perceive there is more to be made hoarding the bitcoin-currency than spending it on their production line.

      Hence the def-spiral of bitcoins—and hence why the inherent deflationary tendency will keep bitcoin and other limited-supply cryptocurrency from ever becoming a “real” currency, and keep it in firmly on the class of assets instead.

      Hope this reply is satisfactory. Like I said: Good comment, much appreciated.

      GL

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    2. Ah, my comment wasn't that good, but you're being nice ;)

      Thanks for your reply, much appreciated.

      Your answer brings up another thought to mind: What kind of endgame can bitcoin have?

      So far you're describing a scenario where the dollar value of bitcoins keeps rising out of control, while simultaneously bitcoin has no value as a medium of exchange.

      Interestingly, as soon as the rise stops (or at least stops being exponential), bitcoin gains some credibility as a currency.
      That would seem to include scenarios where bitcoin crashes to a fraction of its current exchange rate.

      How do you see this playing out? Will the world someday collectively wake up and take bitcoin down to a solid 0, or can you imagine some equilibrium exchange rate ever being reached somewhere between the deflationary pressure and the constraints this places on bitcoin-based transactions?

      Myself, I'm starting to lean toward some likelihood of reaching some form of equilibrium, primarily because we're seeing some amount of mercantile activity around bitcoin. Apparently, last month Bitpay facilitated over 50,000 commercial transactions. That's pretty far from Visa, but that's also quite far from zero. Interestingly, the shape for bitpay's number of transactions over time mirrors the bitcoin price chart (see http://blog.bitpay.com/)
      Yes, it's anecdotal, but it's interesting to try to reconcile that with the notion that bitcoin's volatility/deflationary tendencies are hurting its value as a currency.
      I'm curious to know how you see it all fitting together.

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  6. Bitcoins and Tulip Bulbs are more alike than we care to believe.

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    1. Absolutely. Bitcoin is the 21st century tulip craze.

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  7. Bitcoins are like HTML. The basic framework of a technology that will be improved upon and will have world changing utility in the future.

    The big changes are non-government issued currencies gaining widespread usage. Lower transaction fees. Financial transactions outside the scope of banking and government regulation or enforce-ability. Non-fractional reserve banking currency (can't be multiplied by lending in the banking system). Unable to be created by central bank.

    What I see in the future is multiple different cryptocurrencies including those backed by hard assets such as gold and silver.

    To have a silver backed currency you would need a trusted issuer who would match digital coin output with stored inventory. Blockchains would be calculated for profit based on very small transactions fees instead of mining with a small transaction fee to account for storage and insurance costs.

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  8. There is one difference between tulip bulbs and bitcoins. The market could produce a lot of Tulips to bring down the price. For bitcoins, this won't happen. Yes the market could get smaller, but I am pretty sure, that it will still be pretty big, when we cross the crisis.

    I do agree that it is not a great Medium of Exchange, because of its unstable valuation.

    But it is great for currency exchanges. If you want to transfer large sums of money abroad, it can be done much faster with Bitcoins, assuming that both sides can trade in Bitcoins.

    It's USP is exactly the ease of speculation :-). It is the only item that can be traded online, which will gain value over time (a property of Store of Value items like gold).

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  9. But can the market produce the right Tulip Bulbs? Because the "Semper Augustus" is very rare specimen. Just like Bitcoins this is an asset class, just like Wheat, Gold or Corn, only difference is its not widely accepted as payment, thus useless speculative HTML code in its present form, unlike Tulip Bulbs which were tangible assets.
    Bitcoins are the electronic version of Chucky Cheese Tokens albeit not everyone wants CC tokens, but that could change if the madness of the crowds gets involved.

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  10. Nothing is as practical as a good theory. To understand the price behavior of bitcoin, use the quantity theory of money; M·V = P·Q.

    Sudden price surge and hoarding is to be expected, not deflation: http://zeroprofits.blogspot.com/

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  11. "Necessary market or seller that requires bitcoins exclusively."

    That market will exist shortly. When existing currencies fail, as planned, then the "market of the beast" will save the day. All you need is the government issued mark, password, address, whatever you want to call it and you too can participate in the "market". Or starve if you don't have one.

    AND your beast coin account will be protected by Federal Beastcoin Insurance! What's not to like?

    Honestly folks, this is so Machiavelli stupid it's unreal. I'm just a lowly atheist. Where are all of the smart Christians?

    Love of beastcoin will be the new root of all evil.

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  12. Bitcoin is a fake, scam, and fraud. Try making a car payment with bitcoin - NAUGHT; ask your landlord if you can pay rent with bitcoin - NAUGHT; that doctor appointment paid in bitcoin - NAUGHT; how about your property tax bill - DOUBLE NAUGHT; your weekly food shopping bill - NAUGHT; about the only thing you can buy with bitcoin is more bitcoin - duh?

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  13. I enjoyed reading your English language article. So much passes for English that ain't. I tip my hat to you, sir!

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  14. Any of you dimwits ever hear of Fukushima? It's an ELE (Extinction Level Event). A planet-killer in other words. While you're traipsing around on the treeless plain try and offer me all your bit bs (or silver or gold) for my can of beans and jug of water. Get a fucking clue children!! Subscribe (free) to Enenews and read the comments on a daily basis. Find out how out of touch you really are.

    ReplyDelete
    Replies
    1. Your comment on Fukushima is just bollocks.

      For your information, David Suzuki is a clown. His pronouncements on the topic of Fukushima are just laughable from a scientific point of view.

      Do not believe me on this. Get informed.

      Delete
  15. anand srivastava mentioned that bitcoin is excellent for money transfers, but unfortunately its volatility makes it too risky.

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  16. very good article. i believe that BCs fate will be decided in the next "official" crisis, which should be within a couple of years. if it lives through that it will stick for atleast the leangth of the next monetary system, whatever it may be. deep mistrust against centralbanks and goverments will do BC well,and vice versa. and i think the mistrust will be great, soon, not only among the few who care today.

    BC would be hard to use as a currency as stated, but the mistrust against fiat currency will perhaps bring us back on something resemeling a gold standard, even if it's doomed to fail after a while due to corruption. but i think all systems are. they need to be changed/collapsed, because ppl will always find ways to abuse the current system.

    i belive the freegold scenario could work well for a long period of time, and i see that BC could act as a middlehand aswell.

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  17. Bitcoin is fake, controlled by the money manipulators who are bilking it for all they can get. The same filthy bunch behind all the other scams enron etc etc. The owner said it was a idea woldn't sustain itself

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  18. Keep your bitcoins I'd rather be holding a couple Silver Coins n when the SHTF I can throw those Silver Coins in my water barrel keeping that water free from bacteria n whats the cost for a couple onces 40 bucks or so

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  19. I would be interested in a crypto-currency designed to automatically annihilate any unit of that currency owned by government or banks.

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  20. when/if the petrodollar starts to inflate/collapse for all to see, there will be a rush to all forms of stores of value, including BC. ppl with capital usually spread their risk, and if things are looking grim for the world reserve currency, what other currency is safe? pretty much all companies have loans, in a currency that is losing trust, and with interest that can bankrupt them very quickly. property is already priced high, and will go higher as money changes place.
    BC is a risky investment, but that doesnt matter if usually safe forms of money is losing credibility or prices are rocketing.

    BC might not be usable as a currency in the long run (not alone atleast. together with multiple other cryptocurrencies, more likely), but even if it wont, it can be used as a stepping stone to something new. the petrodollar will eventually fail, and during the time between this system and the next, what currency/form of payment would you prefer: a currency that looks like its about to lose its value (which means most currencies since its all fiat atm) or something of limited supply that is easy/fast to transfer?

    there is no way we are going back to a physical world when it comes to fast payment methods/transfers. its impractical and will end up being a debt based economy, again.

    I dont think BC will become a single world currency. I see a possibility of say BC working as a store of value and something somewhat similar as a currency, controlled by nations. BC will then always be a mean of escape from the nationcontrolled economy should mistrust arise, again. physical gold and silver has the same function, but is not as practical for small barter. I'll pay for my house with gold, but ill pay the plumber in my national currency or BC, depending on what he trusts atm.

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  21. You don’t actually need to include your banking information when creating bitcoin a wallet at blockchain.com or other trusted bitcoin wallet provider. An email address to verify your account is just what you needed. So it is 100% anonymous because your wallet address is set to be your identification or username when you use it to transact. It won’t be 100% anonymous if you transact in a different manner.

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