Friedman and Hanke on Bitcoin

Cato ^ | Feb. 20, 2014 | Steve H. Hanke

[1rudeboy]

In 2008, Bitcoin was mysteriously introduced to the world in an obscure, technical paper written under the pseudonym Satoshi Nakamoto. By late 2013, the financial press was filled with reportage on Bitcoin and its dramatic price increase.

Well ahead of Satoshi Nakamoto, Nobelist Milton Friedman, champion of free market economics and noted expert on money and banking, anticipated the coming of digital currencies, and foresaw the potential impacts that they would have on finance and economics.

In a 1999 interview, Prof. Friedman concluded:

I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill hand it over to you and then there’s no record of where it came from.

You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.

Prof. Friedman’s anticipation of Bitcoin is truly remarkable. He even understood the concept well enough to anticipate something like the Silk Road scandal involving illegal Bitcoin transactions.

In April 2013, Nathaniel Popper of The New York Times reported on Bitcoin in an article titled “Digital Money is Gaining Champions in the Real World”. In his reportage, Popper asked me if I thought Bitcoin had the makings of a speculative mania like the 17th century Dutch tulip bulb frenzy. My response was clear and unambiguous: “To say highly speculative would be the understatement of the century.”

Subsequently, the price action in Bitcoin confirms my diagnosis (see the following chart). In January 2013, one could buy a Bitcoin for about $13. By late November, one Bitcoin would have set a buyer back over $1100. And what about Bitcoin’s price volatility? As shown in the chart, Bitcoin’s volatility is truly fantastic.

While the price currently fluctuates around $600, Bitcoin remains far from secure. Serious discrepancies in price exist even between exchanges. For example, the price of a Bitcoin on the Mt. Gox exchange has fallen by over 50% in the past week, while the price of the exact same Bitcoin on the BitStamp exchange has fallen by only 3% in the same time period.

[mmichaels1970]

For example, the price of a Bitcoin on the Mt. Gox exchange has fallen by over 50% in the past week, while the price of the exact same Bitcoin on the BitStamp exchange has fallen by only 3% in the same time period.

The 50% drop has more to do with poor management and administration of Gox itself. Gox prices have collapsed in order to keep people trading there despite not being allowed to withdraw their funds.

Exchanges that are working properly have shown only that 3% price drop. And part of THAT drop is due to the panic caused by the collapse of Gox.

[mmichaels1970]

Bitcoin ping.

[Errant]

Thanks mmichaels1970

Click to be Added / Removed.

[nascarnation]

Thanks for the pings.
This thing is a thrill ride, although I’m just watching it from the sidelines.

[Errant]

This thing is a thrill ride

Yep... lol

[mmichaels1970]

This thing is a thrill ride, although I’m just watching it from the sidelines.

I agree. It makes for a good solid hour of discussion at my weekly "have a few beers in my cousin's garage" meetings.

[Norseman]

>>Gox prices have collapsed in order to keep people trading there despite not being allowed to withdraw their funds.<<

Or, put another way, some people are willing to bet that Gox recovers and are buying Bitcoins from people who doubt they’ll ever be able to withdraw their deposits, and so are willing to take a 50% haircut to recover some of their funds. Want to bet they immediately convert to one of those dreaded fiat currencies once they’ve got their 50% back?

Welcome to the Wild, Wild, West all over again, where you trade in the local bank’s currency and take your chances.

Bitcoin is a farce. Not only is it too volatile, and unreliable too as Gox illustrates, to serve as a form of transaction money, but it’s too complex an instrument to even know if you’re securing it properly if you just want to hold it for a time as an investment.

[Norseman]

>>Gox prices have collapsed in order to keep people trading there despite not being allowed to withdraw their funds.<<

Or, put another way, some people are willing to bet that Gox recovers and are buying Bitcoins from people who doubt they’ll ever be able to withdraw their deposits, and so are willing to take a 50% haircut to recover some of their funds. Want to bet they immediately convert to one of those dreaded fiat currencies once they’ve got their 50% back?

Welcome to the Wild, Wild, West all over again, where you trade in the local bank’s currency and take your chances.

Bitcoin is a farce. Not only is it too volatile, and unreliable too as Gox illustrates, to serve as a form of transaction money, but it’s too complex an instrument to even know if you’re securing it properly if you just want to hold it for a time as an investment.

[WashingtonSource]

Bump

[mmichaels1970]

Welcome to the Wild, Wild, West all over again

I love it. That's how it felt when the internet first went widespread.

[Lee N. Field]

I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A. The way I can take a $20 bill hand it over to you and then there’s no record of where it came from.

I have heard it said that paper currency pretty much all has detectable traces of illegal drugs on it, from the hands it's been through. It doesn't matter to any one.

[mmichaels1970]

I have heard it said that paper currency pretty much all has detectable traces of illegal drugs on it, from the hands it's been through. It doesn't matter to any one.

Paper money has also been stolen by thieves (hackers) when not adequately secured.

[SandwicheGuy]

Bitcoin is a farce. Not only is it too volatile, and unreliable too as Gox illustrates, to serve as a form of transaction money, but it’s too complex an instrument to even know if you’re securing it properly if you just want to hold it for a time as an investment.

If I were really nasty, I would save this post and re-post in one year /grin But I am not, and merely observe that it is usually best to best on the trend. That way you don't have to hope nobody remembers this post next year.