Bitcoin Is Not Real Money

Townhall.com ^ | March 1, 2014 | Larry Kudlow

[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.

[cynwoody]

Bitcoins don’t require work. They require that you have money to buy expensive processors.

Gold doesn't require work. It only requires you to have a gold mine.

[CharlesWayneCT]

No matter what you can build in your basement that could “mine” “bitcoin”, Gates could build a million of them at the same time.

Maybe you can’t make any bitcoins, but if you could, Gates could make a lot more.

If you couldn’t make a dent in bitcoins, it wouldn’t be the case that bots could be profitably mining bitcoins.

Why would anybody ever build a single computer to mine bitcoins if, as you insist, you can’t make a dent with 50 supercomputers?

Up until now this conversation has made sense, but what you are saying now doesn’t mesh with everything I’ve read about bitcoins.

If you told me that bitcoins are like the lottery, it would still be true that the guy who can buy a million tickets has a better chance of winning than the guy who struggles to buy one.

Although I think your complaint is that there are so many computers currently working together on bitcoin that adding one computer can’t make much difference.

But if that were true, then you couldn’t explain why people would build a computer to do bitcoin. If it makes money to create a computer to do bitcoin, creating a thousand will make a thousand times more, at least for the millisecond it takes for that addition to bump up the difficulty.

Maybe though you are just agreeing with those who say that the time to mine bitcoins is past, because we’ve reached the point in the difficulty curve where anything you add to try to make more just drives up the difficulty to where the effort was a waste.

But what doesn’t make sense is to claim that you, in your basement, can profitably work to make a miner, but that 1000 other people could not do so at the same time; or one person with 1000 times the resources you have.

[TsonicTsunami08]

25 Bitcoins issued per block. Bitcoin is not the only cryptocurrency being mined.
There are industrial players mining Bitcoin because they are so valuable. The time for mining Bitcoin is way passed for the individual.

There is an entire ecosystem being built right under your feet but you can’t see it. Just as with your inability to envision networked home appliances. Just because you don’t see it coming doesn’t that it is not coming. Beleive me FRiend, it’s coming.

You said:

“Although I think your complaint is that there are so many computers currently working together on bitcoin that adding one computer can’t make much difference.”

I have no complaints, I’m a volunteer not a victim.

[CharlesWayneCT]

I meant “your complaint” about my argument. Not your complaint about bitcoin. The only thing you’ve said that was close to a “complaint” was that building a bitcoin miner was the hardest thing you had ever done in your life, harder than even being a marine. But I didn’t take that as a complaint, just as a statement of effort. I agree with you that hard work is not something to complain about.

I’m not clueless about technology as you suggest; my dismissal of the idea of a refrigerator having a drone deliver milk and eggs to my house is one of efficiency, not capability.

There are many things that we could do today, and many that we can imagine doing tomorrow. Being able to do doesn’t mean it makes sense to do it.

I’m not sure if something like bitcoin will ever make sense; for the sake of this thread, my objection is to the idea that bitcoin today has a utility for the common person as “money”. I look at is more as a speculative investment, something I clearly don’t want from the cash in my pocket.

As someone who does probably half my consumption on the web, often through proxies like paypal, or site-purposed currency like the “notes” we spend in “StageIt”, I do have some understanding of the utility of such things; I presume that when bitcoin is mature enough, or when something that replaces bitcoin is mature enough, the big players like paypal and google will incorporate the concepts into their structure.