Posted on 03/01/2014 7:33:41 AM PST by Kaslin
Just before the bankruptcy of the Mt. Gox bitcoin digital-money (or virtual-currency) exchange, Japanese finance minister Taro Aso predicted the inevitable failure. “No one recognizes them as a real currency,” he told reporters. “I expected such a thing to collapse.”
I totally agree with Mr. Aso. For weeks and weeks I have been tweeting and broadcasting that bitcoin is not real money. It is not a reliable medium of exchange, nor is it a reliable store of value. It has no central-bank regulation, network operations, or even centralized issuance. And because of its wild price fluctuations, bitcoin can never be a reliable payment system.
The virtual currency originally offered a way to make transactions across borders without third parties like banks. But the collapse of Mt. Gox -- with 850,000 bitcoins unaccounted for, summing to $425 million of losses, according to many reports -- illustrates the grand failure of this digital experiment.
Venture capitalist Ezra Galston writes in the Wall Street Journal, “without a regulatory framework, credible payment processors -- such as PayPal, Dwolla or Square -- cannot service bitcoin exchanges. And because payment processors are vital for converting fiat currencies into virtual deposits, bitcoin operators will be forced to move downstream into the black market.” Mr. Gaslton concludes by asserting that “the bitcoin community must embrace external regulation to ensure that credible vendors may participate in payment processing.”
Hundreds of bitcoin supporters have tweeted attacks at me for arguing that bitcoin is not real money. But historically, money must be a reliable medium of exchange, and a reliable store of value. Bitcoin meets neither of these definitions.
How can you transact using so-called digital money when prices fluctuate by hundreds of dollars in the space of an hour, or less? You might think you bought something for $500. But by the time the retailer processes payment, the so-called digital-currency price drops to $100.
Both buyers and sellers lose big because bitcoin is not a reliable medium of exchange with a dependable store of value. It is backed by nothing but pure speculation. You can’t even hedge it, because there’s no interest rate. You can barely even get a price quote -- not for the value of the product being bought or sold, but for the value of the monetary medium of exchange.
Years ago, Arthur Laffer warned that many currencies around the world lacked “the moneyness of money.” He was referring to third-world-type currencies. But bitcoin would qualify as well.
Now, I’m not going to defend the value of the dollar, which has depreciated substantially over time. But this unfortunate depreciation has happened over long periods of time -- not ten-minute intervals.
Of course, I’d love to see a gold- and commodity-backed dollar. And maybe future bitcoin reformers can restructure in such a way. But the dollar is accepted around the world by governments, banks, businesses, and consumers because it is a reliable medium of exchange, even if its store of value has deteriorated.
The dollar serves as a payment mechanism, has a central issuer, and is regulated. When the bitcoin people created their digital money as a way of avoiding banks and regulators, they forgot, or maybe never learned, the classic day-to-day requirements of a currency.
So fellas, please go back to the drawing board. I’m all for the digital revolution and trading assets online. But money is different. It must conform to certain long-held principles. That’s why bitcoin is not real money now, and why without huge reforms it will never qualify as real money in the future.
Why would a someone using bitcoin as a store of value be bothered by an increase in the purchasing power of that money?
You mention that your car could sell for different prices. I agree, and if you tell me bitcoin is a commodity like a car, I’ll totally agree with you. I was arguing that it is not money.
I would argue that money is a commodity, the distinction being its elevation by the market to that role in a mostly unique fashion is a consequence to its superior overall utility in the characteristics important to civilization in money.
Meanwhile, the TV host learned that, unlike money, bitcoin is an access code to something else online. I can show people money and they can’t steal it unless they actually take it from me.
If you give them the access codes to an account that has your USD denominated assets held inside, and they transfer those assets to themselves, have they stolen money?
I don’t know why you think that a cash transaction is irreversible.
You're misunderstanding the usage of the term in this context.
I stated in my previous response that a merchandise return for refund isn't a matter of the bitcoin protocol, but a seller choice in the marketplace.
Cash as you understand it is an irreversible transaction in this sense: when you hand me $100 dollars for a car you no longer have the $100 dollars to spend again.
The problem in the past with creating electronic cash is - how do you stop someone spending money from an electronic wallet, then restoring the wallet from backup and 're'spending the money? In essence, how do you stop electronic counterfeiting? The bitcoin protocol is a method for handling that question, by means of a distributed verification network that actually logs and thereby confirms all transactions. Thus, once money is spent from a wallet an entry is made in the ledger and attempts to 're'spend from a restore of that wallet will be rejected by the verification network.
This ability to create electronic 'hard money', free of inflation by governments or reckless fractional reserve banking practices, with a verification system that is also decentralized globally and not subject to government or banking regulation (the regulation is in fact the math and rules underlying the verification and building of the ledger), is the appeal of bitcoin.
Billions of people on this planet have smart phones, but no access to banking.
Bitcoin is a method of payment, a medium of exchange, that allows two parties to make a trade of that medium of exchange, in minutes, without being subject to third party fees that account for billions and billions of dollars.
Your last point about concern for volatility was correct, but also highlighted what I was trying to note — that if you want a stable value, you should immediately convert your bitcoin into real money.
What if you want stable, or appreciating value?
The same would be true if someone paid you in company stock, you’d immediately sell it and take the cash, or if the game show host gave you a free vacation, you might instead ask for the cash equivalent.
Would you be mad if you immediately cashed the stock and it rose 18%?
But if bitcoin was functioning as “money”, there would be no need to convert it to real money to achieve the goal of money.
The only 'need' to convert it is due to the degree of adoption, which is still infant. Pesos work as money in a lot of storefronts, but there are more places they don't work. That bitcoin can and is converted into many local currencies to facilitate additional markets isn't a drawback. That various medium of exchange can be exchanged for one another is a non sequitur for dismissing any of them as money.
Let’s just deal with the first point, where you ask “Why would a someone using bitcoin as a store of value be bothered by an increase in the purchasing power of that money?”
The answer to that question is important. Why do you think the Feds work so hard to avoid deflation, if deflation would make everybody who “holds money as a store of value” so happy? Why do we actually favor a small inflationary bias as a guard against the tiniest deflation?
The answer is that deflation is disastrous for an economy, much more so than inflation, because it has a large positive feedback.
But remember, we want money to be a STORE of value, NOT an investment. It is easy to see why a worker would dislike inflation, if they were paid a value of $100 for their work, but then when they “cashed in” on that stored value, they only got $50 worth of “value” for their work.
But now, what about where they are GETTING that “value”? Imagine you are the person who created something to be purchased by another. You probably created it at the same time the other person did their work for which they were paid. So, they did $100 worth of work and got paid cash, and you did $100 worth of work creating an object.
But now, you go to trade that object reflecting $100 worth or work, and because of deflation, you can only get $50 in cash for it. Sure, they other person is happy, but you are very sad.
Deflation, just like inflation, creates winners and losers. And you do NOT want “money” to create losers, so you also don’t want “winners”. You want money to be neutral.
But back to the spiral. The real societal problem with deflation is that it encourages people to NOT spend money. Inflation encourages people to spend their money immediately. This does somewhat push prices up more, as demand outstrips supply. But pushing prices up means people will be paid more money, and increases economic output, and so you get into a kind of “rising tide”.
With deflation, people hold their money, knowing they’ll be able to buy more for it tomorrow. So the economy falters, and people have to drop prices more to draw in demand. People are laid off, and so while those WITH money come out ahead, more and more people don’t have money. You end up with the Great Depression.
Now, if bitcoin is a commodity, or an investment product, then it is great that it goes up in value, and those who lose out do so knowing that investments gain and lose. But don’t pretend it is “money”.
BTW, while I now understand your definition of “irreversable”, it has nothing to do with my argument that bitcoins tend to set up a “all sales final” mentality. NOT just because of a choice of those selling things, but out of necessity.
You can’t offer a 30-day money-back guarantee on a sale with a “currency” that can double or half in value in 30 days. That would be like offering a money-back guarantee on the purchase of stocks. You’d essentially be taking an arbitrage risk, something a store has no interest in. It has nothing to do with whether your money can be duplicated, it has to do with whether the value of your product relative to the “money” can be accurately predicted.
Electronics for example tend to have a “restocking fee”. Why? Because stores can predict the change in value of electronics over time, and can use the restocking fee to cover that cost. Car dealers don’t generally give a money-back guarantee (sometimes they will do a 3-day return policy) because cars are known to drop greatly in value as soon as they are not “new”.
These valuations can be predicted because we know the “money” is essentially constant. Bitcoin is nowhere near that yet, and therefore stores dealing in bitcoin cannot offer “money back”.
Now, they COULD offer an “equivalent value” back, very easily. They could say “we will give you a 30-day ‘equivalent value’ guarantee, where the day of purchase we will set the value based on the U.S. dollar, and if you return the item, you will receive back bitcoins equal to the same dollar value on the day of return.
Of course, what you have really done in that case is offered a purchase/sale of bitcoins as part of your transaction, which is now denominated in REAL money, the dollar.
Heck, BitCoinStore says that right now, bitcoins are worth $671. Not quite the $675 of yesterday, but not much of a change. But the REAL importance of that is that, at the bitcoinstore, in order to provide their customers an idea of value, are comparing bitcoin to a REAL currency, the dollar.
BTW, a good response to this might be to note that at a store, like the Potomac Mills Outlet mall, they have a “currency exchange” area, where they show the values of all the different currencies relative to the dollar; but all of them are real currencies. I often found it fun to compare prices in canadian dollars whenever I went there.
You have no knowledge of what you speak of. Have you built a mining computer? Have you spent days , weeks, months optimizing its performance. Have you read thousands of forum entries and through trial, error, learning, discovery built something that performs correctly?
I am 55 years old. I have dug ditches and swung a pic axe. I currently work in the field of radiation oncology, I was/am a Marine. Beleive me FRiend I know what work is and I can tell you that I have never worked so hard in my life as I have these last months learning this new technology. I am drilling down deeply to gain a full understanding of the technology that I know “ KNOW “ is going to change the lives of every human being on this planet.
My confidence in this technology comes from my understanding of history and my small but ever growing knowledge of computer science. The Bitcoin protocol is the most important breakthrough in the history of computer science. It is not a coin, it is a decentralized autonomous network that before its discovery was impossible to imagine.
Your objections to this technology comes from your ignorance of it.
Try to understand what you are talking about before you speak so authoritatively on a subject. You’ll forgive me but you come across as quite boorish.
You speak of working extremely hard to optimize a piece of hardware. Yes, someone would have to do that, until it "performed correctly".
But once you have that, hardware is reproducable. You could build a million of them, in a factory in India. Maybe we haven't created the perfect box yet, so maybe we really are still in that wonderful creative stage, but it will happen, sooner rather than later. In some ways it sounds like a cool hobby.
Now, what i don't know is the details of what these computers are actually calculating to "earn" a "bitcoin" (or is it giving birth to bitcoins? I guess you could look at it a lot of ways). Is this calculation going to save our planet?
Although the way you said it maybe you are saying that just the creation of bitcoins with this computer is what will change the world. Like if bitcoins would save the world, we could make billions of them in an instant, they are just electronic creations.
But in fact, if we simply grant everything you said, what you are describing is not "currency". My argument is that bitcoin is not "money". Your argument is that it is:
The Bitcoin protocol is the most important breakthrough in the history of computer science. It is not a coin, it is a decentralized autonomous network that before its discovery was impossible to imagine.That sounds really cool, but it does not sound like "money".
I wouldn't pretend to think you'd be impressed by what I know, or shocked at what I don't know; I work very hard to not indicate what I actually do know.
In case you consider that too rambling, short answer:
Nobody works hard to CREATE money. You work hard, and get PAID money.
Mining gold is very hard work. Gold is not money, it is a commodity. If you want to argue that bitcoin is a commodity, go right ahead. I’m saying it is not “money”.
is akin to thinking Confederate Money will be valuable someday soon because "The South is going to rise again"
Bitcoin will stay viable as long as people have confidence in it not because of some gimmick. And the Confidence level has taken many hits this year.
“Bitcoins don’t require work. They require that you have money to buy expensive processors. Then you let computer programs run. That is not work, although the next generation probably thinks that this is work, which makes me fear for our country, because they don’t understand what actual work means.
These are people getting out of college who think you earn money chopping down trees on minecraft, if you know what i mean.”
That is what you said.
I stated that “ You have no knowledge of what you speak of”. I have no ( factory in India to build a million of them ) at my home. I wish I was being funny, I stand by my statement, you don’t have a clue .
You are absolutely correct. I did not take into account that, rather then just buying the computer to “mine” bitcoins, you might have to scratch-build it. And yes, that would be “work”, although I wouldn’t call it a job. Well, you might argue it is a job because you believe that the program is going to save the world, but kit-building something you could buy from Amazon seems more like a hobby or a passion than “work”.
I spend a lot of hours (hundreds) putting together a lego train layout for a train show. I could have spend a couple thousand dollars and “purchased” the entire thing, but it was a lot of fun and hard work building it, and I got “paid” by the smiles of the kids. But I wouldn’t call it a job, or say that I worked hard to earn those smiles.
I apologize for marginalizing the work you have done kit-building a computer to create bitcoins. I’m sure that was a difficult task.
I’m surprised though that you really meant that building a computer was harder work than being a marine. I’ve built computers, and I’m pretty sure marines work a lot harder than I did.
One of the machines listed costs $6000, and is said to mine 1.1 bitcoins per day.
At the current value of $623.30, it would take 10 days for this machine to pay for itself, which makes me wonder why everybody isn't buying one. I presume that they will just make it "harder" to mine bitcoins, so that we don't flood the market.
Yep, you don’t get it. You’ll understand the day the drone flies your milk and eggs to the house because the refrigerator reordered what you used up.
I should point out that commenters make some good comments at that site. For example, why didn’t the company building those things just set them up to mine bitcoins? Or maybe suggesting they will have already done so, and by the time you get them, the algorithm will be upgraded so these things will be worthless.
If so, I guess the same thing would happen if you were building your own box. I have to think a computer company will be better at building these boxes than a guy in his garage. At least the average guy in his garage, somebody in their garage will be the inventor that makes the quantum leap.
Of course, if someone MAKES a quantum leap, their computer will then make every other mining computer worthless.
The whole thing plays like a video game, except people are throwing around real money. Of course, people pay real money for online video games.
Whats the hash rate of this machine? I can guarantee you that the machine is on back order with no date certain for delivery.
By the time you receive it the machine will not be adequate as the mining difficulty increases exponentially.
This comment for example was a pretty good argument: A fool and his moneys are soon parted."
I looked at mining bitcoins a couple of weeks ago for fun, and here's what I learned:
1. Bitcoin is incredibly volatile. When the Bank of China said that their branches couldn't conduct business in Bitcoin, the currency dropped from $1100 to $700. You can't calculate ROI when the currency can shift so dramatically. You might make a fortune in bitcoin, and you might lose big time.
2. The mining difficulty keeps increasing...which means that the machine you buy today will be completely and totally underpowered in 6 weeks. Underpowered machines aren't worth plugging in (seriously - they're junk after a few weeks).
3. There's a fantastic calculator you can use to figure out if a particular mining machine is worth buying here: http://mining.thegenesisblock....
Put in the cost of the machine, power reqs, and the date you plan to deploy it and it will show you how long it takes for a fancy new ASIC mining machine to become totally worthless.
Buying the TerraMiner IV, for example, will cost you about $4k by the time it's all said and done (assuming the value of one bitcoin stays at $740).
Bottom line: DON'T WASTE YOUR MONEY. The "get rich by mining" goldrush is over.
I guess that means you could call it "work" to keep trying to update your computing power to stay ahead of the curve. Doesn't seem like work that has any real value to the world, but it seems mean to make a moral judgment about that. On the other hand, that was my point so I guess I'm mean when I say that I find it funny how many kids these days tell me they are going to earn a living playing computer games professionally. Bitcoin mining looks similar to me.The more I think about the economics, the more it seems clear to me that you can't buy a machine and make money. Theoretically, the risk of an endeavor allows a venture capitalist to make money by just throwing money at a business. But if the "business" is bitcoin mining, and the money is just used to purchase a computer, then it makes no sense.
After all, if I have a company that can build a bitcoin mining machine that would actually pay for itself in 10 days, clearly I'd turn it on and mine bitcoins, because in 20 days I'd make twice as much money as I would selling it.
And if I was unscrupulous, I'd offer it for presale, get someone else to pay for it, use it to mine for 20 days, and then ship it out when the difficulty was too high for the machine to make me enough money. Like a ponzi scheme.
It seems logical that you can't possibly keep up. There are people who have millions of dollars available, and entire factories that can create machines. Nobody in their garage is going to be able to outproduce them, which means if there is an actual ROI to be had, it's going to be had by the millionaires with factories, not the guy in his basement no matter how hard he works.
But you are the guy working really hard building the computer. How are you managing to keep ahead of Bill Gates? Or maybe it's just that Bill isn't in it yet, and when he does decide to, bitcoin will both become finally real, and also finally worthless since he'll be able to put a million miners online in a day, and either flood the market, or simply drive up difficulty enough to put every other miner out of business.
Now that I think of it, bitcoin mining is a great example of "tragedy of the commons", and maybe a good study for game theory.
I can’t see drones being a useful delivery mechanism. On the other hand, I’ve seen the video of the Lego factory, and how it manages to deliver all the parts into the bags and then into boxes for all the different kits, almost entirely by machine.
How would the refrigerator know that my wife didn’t just leave me and I never ate eggs? Or that I actually need to stock up because my kid and his family are visiting for a week? Right now, my frig is pretty stupid, it doesn’t even know the ice machine isn’t actually hooked up.
I am actually too old. I am still amazed that Amazon can make money shipping me a TV for free to my door. Especially when it breaks and I have to pay $90 to ship it back to the company for warranty repair.
It also provides the information to allow one to conclude that bitcoin mining is actually one of the most anti-environmental actions you can take; it is like a left-wingers fantasy of what right-wingers would do to make money.
I say that because the computing power comes with a heavy electric power need. That is wasted power, because you aren't actually accomplishing anything for it except generating a bitcoin. That is a "waste" because at one time you could generate a bitcoin with almost no power, but the very NATURE of bitcoin is to make it take more and more and more power to make them, which means the entire energy usage is artificial, and not useful to the task.
So I'm surprised the green movement isn't up in arms with bitcoin destroying our planet by wasting all of our energy.
The "money" quote:
What we've got here, then, is a commodity (I hesitate to call it a currency) that has a current value, is free from regulation (for the moment), allows for completely anonymous ownership, and is both highly profitable and almost free to produce (if you're willing to break the law).There is no doubt that bitcoin has staying power, but whether that's just among criminals (and those who wish to traffic with them, like the Silk Road drug sellers and customers), or whether it will become a valuable trading commodity for the rest of us is unclear.
One click of a mouse and poof, you’re broke!!
Drones are useful.
http://www.wired.com/business/2014/01/delivery-drones-already-exist/
Are far as networked appliances go you just have to have vision, its all coming. No doubt about it.
Staying ahead of cyber criminals? Well, that would require a lot of work which I have invested. My machines are free of maleware and are scanned twice daily. Botnets were around before Bitcoin. You know, you get that email that your friend is on vacation and got hit over the head.... send money! And it comes from your friends email account! I call the friend and he answers the phone “ No, I didn’t get hit over the head.” He is getting calls from everyone in his email address book concerned about his well being.
I also have a dedicated machine that never goes on the internet, no wifi, no blue tooth , a self contained, safe environment run with an alternative operating system running on RAM only. Every time I reboot the machine, the memory is wiped. This all requires work, it doesn’t happen by accident.
That can happen in your checking account as well..
I have a theory that the feds are trying to dismantle bitcoin...Not a fan of the idea, but any government would see them as a potential danger to the State and eliminate it...so.....I wish them luck...but I’ll stick with the buck...for now..
But I do not agree with Kudlow...It is real money because it does have value and can be used as a exchange currency in some places..So to say it’s not real is bunk..But then Larry is often full of bunk...
This is an incorrect assumption.
” How are you managing to keep ahead of Bill Gates? Or maybe it’s just that Bill isn’t in it yet, and when he does decide to, bitcoin will both become finally real, and also finally worthless since he’ll be able to put a million miners online in a day, and either flood the market, or simply drive up difficulty enough to put every other miner out of business.”
Do a little research and find out why. Heres a hint, its built into the protocol.
You know, you could put 500 of the worlds most powerful supercomputers side by side and it could not put a dent in the hashing power of the Bitcoin network, you know that, correct?
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