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.
“Except not a single one of these retailers holds their bitcoins more than a few milliseconds before they convert them to an actual currency CONTROLLED BY A GOVERNMENT.”
I know of retailers who do exactly as you describe, and others who keep substantial amounts stored in bitcoin.
“Not to mention pricing is 100% in terms of the putative “value” of a bitcoin in terms of an actual currency CONTROLLED BY A GOVERNMENT.’
Value isn’t controlled by government. It is simply a measure of the value in a currency.
“Therefore, bitcoins in the retail world would be 100% useless unless immediately convertible to an actual currency CONTROLLED BY A GOVERNMENT and no retailer would accept them.”
Exactly! The movement and storage are not controlled by government. It is different from a piece of gold, but similar. You buy a bar of gold. You can measure it in any currency. You hold it outside the system. You are not required to cash it in. The price is always quoted in a currency - telling you the amount of the current consensus value of the gold. If you want to quit holding your gold, you sell it in some currency in order to make your store of value liquid. You then can move it or use it.
You and also move or spend bitcoin or other cryptocurrency - as a currency.
“In other words, bitcoin is NOT a currency, does not function as a currency,”
It can be used as currency.
“and has value as a medium of exchange solely because of its convertibility into an actual currency CONTROLLED BY A GOVERNMENT.”
I would go further. It is accepted for the identical reason currencies are always accepted... confidence. Once confidence in any currency and the government it represents fails, hyperinflation results. In the case of bitcoin, that confidence isn’t in the government currency, unless there is confidence in that government. It is in the other value of bitcoin - freedom to do things with a measure of privacy. It is a connecting piece between many currencies worldwide and is without border. It move through a distribution channel without friction, like bank wires. Without mandatory government reporting of the transfer.
In short, it exists because of the lack of confidence in government actions that erode privacy and freedom.
You an argue it isn’t the exact equivalent as government backed currency. Fine. I don’t think people use bitcoin because they think it is exact. They use it because of perceived freedom and privacy.
For full disclosure, I have never owned a cryptocurrency. I have and do own gold.
My personal theory is that the US govt and Europe (the failing governments) are letting this experiment proceed to learn from it. They would love to force the use of their own digital currency in order to tax and control every purchase. Perhaps they can plant a chip in the forehead or hand of every human and require it to buy or sell... this would allow them to track and deduct your taxes instantly.
Thanks for the conversation.
Part of the problem in any discussion of the US Dollar, Euro, Bitcoin, etc. is basic concepts. Money & currency are not the same things. There is a similar problem with Media conversations about government/country/nation. They throw those terms around too as if they are interchangeable.
Bitcoin is closer to a currency than it is to “Money”. Money has to be a store of value. Currency can stand in for money as a medium of exchange.
Paper money is currency. The US Dollar — when it was backed by Gold & Siver — was real Money. Now it is “Fiat Money”.
“To “divisible” I would add “into an understood unit of quantity.” Currency without a dollar, guilder, krone, or franc; i.e., without a single defined “unit of account” would be a pain in the ass. Even gold dust had “ounces” with which to account. “
You’re correct, “understood unit of quantity” should have been in the list! Thanks for pointing that out.
Aso as in “Ah….so”
July 6 2012
Executive Order — Assignment of National Security and Emergency Preparedness Communications Functions
Bitcoin WILL be shutdown. Just a question of when.
Exactly.
I will say that as easily as the Dollar is exchanged electrically today, I’m a little fuzzy on why a product like BitCoin is necessary.
Now, I will admit that it could be a safe haven should the Dollar go sub-orbital. Fact is, that could tank a whole lot of other currencies, and perhaps even an electronic version like BitCoin.
You need stable economies for something like BitCoin to exist. If international currencies are impacted negatively seriously, something like BitCoin won’t be the savior IMO.
Speculation considerations were all that was driving it IMO. Those considerations couldn’t sustain it. Either the structure was flawed, or something else caused BitCoin to go down in ashes.
Next...
Then why file bankruptcy if it’s not real?
How can that be?
My bank account has the same value today as it did last week. I don’t have to beg people to tell me what the value is minute by minute, or worry about whether I can find someone to take payment when I want something.
Or worry that the product I want to buy will double in value between the time I pick it and the time I close my order.
Bitcoin is lousy money. The prime requirement of “money” is that it serve as a good medium for transfering the value of work I do through to the redemption of that work for something I want.
I would not want to be paid in company stock, and I certainly would not want to be paid in bitcoin, unless I could immediately convert it to cash.
And I’m guessing that there is not one person at FR, even the most rabid pro-bitcoin person, who has converted all of their cash to bitcoin.
I find your argument is unpersuasive, because bitcoin value relative to commodities fluctuates wildly, making it useless as an exchange medium between my work and my compensation.
The purpose of money is to give me a way to work now for some purpose, and later to receive product or service that I need that is an appropriate value for the work I did.
Prior to money, we’d have to do this directly, which is inefficient. With money, if I want a TV set, I can clean your house even though you have no idea how to make a TV set; instead, you give me money, and then I can take it to a store and get a TV. I know how many hours I need to work cleaning people’s houses to get that TV. And while the dollar changes value, it is by such a small percentage of the price I am going to pay that I am much more concerned with the mentality of the company selling the TV, meaning that company might change the value they place on that TV relative to my work. But not relative to my dollar.
So, I decided to look at bitcoin price. And learned that you can’t even figure out what a bitcoin is actually worth.
Is it currently worth $580 dollars, or $620 dollars? What will it be worth in another hour? In another day?
I went to the bitcoin store to price a home theatre. I find this: Bitcoinstore $571.29
But they don’t sell a TV, just cheap home theater systems. Darn. I kept looking, but found a story about a bloomberg TV reporter having his bitcoin stolen:
“The guy that is hosting the series gave bitcoin gift certificates to the other two hosts. One of them opens up the certificate to reveal QR code of the private key,” he wrote. “They then proceeded to show a closeup of the QR code in glorious HD for about 10 seconds. Hilarious.”
I wonder if that is even a crime. After all, it isn’t real money that was stolen.
Then I found a link that said “Bought a TV with my bitcoin”. But it turns out they SOLD their bitcoin for CASH, and then used the CASH to buy the TV. I could do that with my old beanie-baby collection, but that doesn’t make beanie babies a currency:
“I cashed in some Bitcoin I had saved when I was mining them a couple of years ago. I took the money and bought a nice TV for my family. I went back and forth about buying one using BTC or just cashing some out and going traditional.”
But to be honest, someone commented that the guy didn’t have to cash out. Unfortunately, the commenter says he could go to the bitcoinstore, which as I noted doesn’t sell TVs.
“You do not have to go through the extra step of cashing out. There are online retailers that accept bitcoin as payment (like bitcoinstore.com) our you can purchase gift cards to use at local retailers (download the gyft app).”
Of course, a gift card is just a plastic card used for cashing out.
Then I find out that most places that sell you things in bitcoin have a no-return policy. Which makes sense, imagine offering a 30-day money-back guarantee, when your “money” could double or half in value.
I mean, so I spend 1 bitcoin on a nice TV, and then 3 weeks later I want to return the TV, but that bitcoin is only worth half of what it was before — I guess the company would be happy to take the return, and then sell the TV for 2 bitcoins. But if bitcoin doubled, then they won’t give me back one bitcoin for that TV.
Which is the problem. I work one day to earn enough to buy a nice dinner, I wait 2 weeks for my bitcoin paycheck but the bitcoin they give me is worth half, and then I wait for the weekend to take my wife to dinner and it drops another 20 percent.
That’s not money, I might as well get paid in company stock, except company stock won’t change price as much as bitcoin.
When you see people advocating bitcoin, they mention “buying some bitcoin”. That is investment, not a term of money. You don’t “buy” money. You use it.
Nobody is concerting their life savings to bitcoin.
I think you are wrong, because there are millions of really stupid people who will be happy to bet that the value of bitcoin will go back up.
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.
I can’t — when my country ceases to exist. At which point I’m guessing my bitcoin will be worthless as well, given I probably won’t be able to access an “internet”, even if I can find something called “electricity” and a thing like a computer that will work.
If the U.S. dollar becomes worthless, you better be stocked up on physical things you can actually use, like food and clothing, and probably guns and ammo. Bitcoin will be worthless if cash is worthless. Gold will be worthless, at least until some new semblance of order is created, which might not ever happen because you need smart people for that and we are a nation of idiots.
The nice thing about a can of corn is, no matter how long it sits on your shelf, when you finally “cash it in”, it is still worth one can of corn.
And so I go back to the bitcoinstore, and find this:
Bitcoinstore $568.92
Oops. I waited one hour, and all the prices at the bitcoinstore just went up by 3 bucks a bitcoin.
That is a 0.05%/hour inflation rate.
That is 1.35% per day inflation. That’s 3rd-world country inflation.
IN other words, in the past hour, bitcoin operated exactly like some 3rd-world-country “currency”. Which was the point of the article.
LOL!!
You laugh at me in a truncated internet slang, through a GUI over nodes and networks who’s technology is in its infancy. Attempt to educate yourself. The Bitcoin technology is the greatest breakthrough in computer scientific history. It has been five years since Satoshi Nakamoto dropped the white paper. The innovation in that time frame has been astounding and it won’t be long before everything will be distributed over a decentralized network. Everything in your digital life will live in the cloud, there is no doubt about it.
http://www.thebitcoinchannel.com/archives/28600
LOL!!!
oooooooooooooh, just read this. Care to back up that statement with a little wager? Tell ya what! I will 4X your time frame and give you 4 weeks. Not only will its level of acceptance not decrease, it will increase. I have $567.23 or the value of 1 Bitcoin that your statement is complete BS. What say you Mr/ Mrs Marlowe?
Of course we will have to use a trusted third party to hold the funds which in the future will not be necessary when Bitcoin 2.0 protocol rolls out.
LOL!!!
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