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.
I don’t think money is a placeholder for time. Money is a placeholder for work. It allows me to separate my work from my reward by a period of time, but money is not that time.
Now, I might look at how much money I make for an hour of work, and that would translate to “time is money”. I’d know that I could make X dollars an hour doing my job. Then I’d look at everything else I could do for an hour, and say “is that worth X dollars”/
I used to live like that, and it made it very hard to take vacation, especially when my employer would pay me for excess vacation at the end of the year. But as I got older, my time became more valuable to me, so it was easier to take off of work.
On the other hand, I’ve done odd side jobs that paid me almost nothing per hour; I’d be driving to such a job, thinking that the entire day of work would be about one hour of my real job. In that case though, I was deciding that the work was enjoyable enough that it was worth the money difference.
The reason it is so important to have a stable currency is that you need people to believe that money is a good medium for exchanging the value of work. I don’t want to have to find something I can do for the guy who fixes my car, so that we can exchange equivalent work time. I want to do my own job, get money, take it to the repair shop, and have them repair my car. Money makes an efficient economy, but not when that money changes value wildly from day to day or week to week.
And if we are talking money, going UP in value is as problematic for the economy as going DOWN in value. You don’t want money to be an investment.
So; it'll be all GONE by 2018?
Not in MY area!
Different brands ALL jump to the tune of some unnamed Master, often 2-3 times a DAY!
Time is defined quite rigidly - like MARRIAGE.
Gravediggers do a fixed amount of 'work'; removing a certain amount of dirt from the ground.
One man can use a shovel; or another a backhoe.
Which one's time is more valuable?
My conclusion? Your timing sucks. BTW complaining about Moore's Law is futile it will always be that way. I do not think you really understand how the Government calculates inflation and controls prices to keep it low. Energy, for example, is not used to calculate the core inflation. Also, let me know if you feel the urge to buy more gold.
It’s a good point. The question is whether you want a number controlled by the state or a number that you voluntarily sign up for in a worldwide distributed system of commerce. In the end it won’t matter. But before we get to the end it would be nice to stay out of the clutches of the state.
In the digital economy being built around bitcoin the unit of work is output. If you produce output you get paid. Often it’s a contest to see who can produce the output the fastest. These can be extremely small, one answer in a forum that takes 5 minutes will be sufficient to get paid.
The difference between a $5 street hooker and a $1000 call girl?
;^)
That’s a great analogy. The politicians (or their servants at the Fed) print up big bucks to buy the latter. But it turns out they got nothing extra for their money and maybe even less. They will go the way of the dinosaur.
I wanted to make a snarky response, but in the end, I’ve always told people that if they want to make money in the stock market, they should find out what I am doing, and do the opposite.
This has been pretty much universal. So for example, I finally put a tiny amount of money into a “commodity fund” — and yes, I did so right before the bottom dropped out on gold and silver. It is like a superpower, only in reverse.
On a non-snarky response — there is no such thing as “good timing” when it comes to buying consumer products. Whatever you buy, it will be cheaper later, before it becomes outdated and a new product appears that costs what yours did, but has a lot more features.
A new phone might cost almost as much as my first phone cost. On the other hand, if you wanted to buy a phone that had the features of that first phone I bought, you could get it at the dollar store.
So what is inflation? Is it the cost of the “standard” telecommunication device today, compared to the “standard” phone of 30 years ago?
There’s a reason that energy and food are not in the monthly core inflation numbers; they simply change in price way too often, and for reasons having little to do with the actual economy.
They are not ignored though, and are part of the larger inflation picture. They are included in the Consumer Price Index. And there are many who argue that CPI is actually over-measuring inflation, and are trying to use a different CPI number for adjusting things like social security payments (I’m not pushing that myself).
But regardless of that, weren't derivatives and the aftermath bad enough to make anybody shy of new financial schemes today?
That is an excellent question. If I taught economics, I think I would use that example as a class exercise. It is not trivial.
Quick answer is that the guy driving the backhoe will be paid more than the guy with the shovel — if the job is big enough.
This is because a shovel is a much cheaper item than a backhoe, even if you rent the backhoe (I’ve rented a trencher before, it is a similar decision to make). There is some small level of training to use the backhoe, but a competent person could learn this in an hour (again, a trencher is a bit easier, but somewhat comparable and I was able to learn it quickly). But experience makes the job go more quickly.
So, you bid the job for $500. Now, how do we maximize profit? Suppose it is $200 + $50 an hour for the backhoe. You have three laborers available. Person A will shovel, work for $40 an hour, and will take 10 hours. The other two drive a backhoe. Person B has 20 years experience and is paid $200 an hour, and will take 1 hour. Person B has 5 years experience, makes $80 an hour, and will take 2 hours.
So, A will cost $400. B will cost $200 + $50*1 hour + $200*1hour, or $450. C will cost $200 + $50*2 hours + $80*2 hour, or $460.
So in this case, if you could afford a 10-hour job, the shovel is cheaper. If however you have to pay double time for overtime over 8 hours, then A is $40*10 + $40*2, or $480, and the 20-year-experience guy is the cheapest, even though he gets paid the most.
As a child, my brother and I took a job one time digging up a pipe in a guy’s front yard, because the professional wanted $1500. The two of us took 3 full days, and got paid next to nothing, so the friend of the family came out way ahead, and my brother and I made good money.
When I ran my own pipes in my house years later, i rented the trencher, but then my neighbor wanted to play with it so I let him drive it. He was pretty experienced, so it took him almost no time, and charged me nothing, and I got a 150-foot pipe laid for the $300 rental price. And he dug me a couple of trenches to drain the water from my downspouts.
Next time I list all the jobs I did in my life, I’ll have to remember the infamous ditch-digging. On the end of the 3rd day, we were just cleaning up the last part of the hole, I took a big swing with the pick-axe, and put a hole in the supply line, which the “miss utility” people had mismarked as being 10 feet away. On the other hand, the pipe was easy to fix because the water coming cleaned out all the dirt around the pipe. And even with the plumber cost, the homeowner came out way ahead hiring us.
Oh?
Why?
They BOTH remove the same amount of dirt.
Unless there is a time clause in the contract; it would make no difference if one man used a spoon.
Tell me about it!
Last summer I trenched from the house to the barn, about 90'.
I had overhead wires to the barn and no water, and I wanted water and no overhead.
My yard has lots of trees, and the roots REALLY messed me up; both timewise and direct route diversions.
No rain for weeks, so the ground was not mucky clay.
It took me so long, that the placement of the plumbing and the wire (in plastic conduit for extra protection) was postponed 'til the next day.
Yup, it started raining before I got the stuff in the ground and a lot of the dirt got back in the trench, making it too shallow for the plumbing to be freeze proof.
It took to more weeks of jacking around with a homemade plow device to scoop the glommy mess out of the bottom and FINALLY get the job done.
(Next time the wife says, "You SURE you can do that by yourself?", she'll get a different answer!)
I had rain after I had laid the pipe. Unfortunately, there was no water in the pipe, and I hadn’t pushed the dirt back in yet because I needed inspection. That was a bit of a mess, but it was mucky enough I was able to push the pipe down under the muck without having to re-dig anything.
Those were the days.
Then please address them specifically and I can try to help your understanding.
because bitcoin value relative to commodities fluctuates wildly, making it useless as an exchange medium between my work and my compensation.
I simply pointed out that the volatility in bitcoin is diminishing as adoption spreads (as one would expect), and that at the current rate that volatility is declining it will have volatility on par with the Euro in a few years time.
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.
No one disputes this. I'm not sure why you wrote it.
And while the dollar changes value, it is by such a small percentage of the price I am going to pay
How small that percentage is depends on the time that elapses. USD are being continually devalued. This is a process that will not stop. Bitcoins, as a hard currency, do not entail third party risk of a profligate government or poorly run central bank.
So, I decided to look at bitcoin price. And learned that you can’t even figure out what a bitcoin is actually worth.
Sure you can, there are many exchanges, and exchanges can even be conducted in person.
They are worth what everything is worth, and that is exactly what someone will pay for them at a given time.
Is it currently worth $580 dollars, or $620 dollars? What will it be worth in another hour? In another day?
I could sell my car in 2 minutes if I asked $100.
I could sell my car in 2 hours if I asked $10,000.
I could sell my car in 2 months if I asked $15,000.
What is my car worth? What someone will trade me for it, when I make the trade.
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,
Bitcoinstore does sell TVs, I just typed television in the search box and it listed the TVs they sell.
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.
Like you, the host was learning how bitcoin works. He showed both the public address and private key. The public address is the wallet ID that people can use so they know where the money is being sent. The private key is akin to your PIN for an ATM card. If you give people the account number and the PIN, you're giving them everything they need to get into your account. The person in this case who did so was someone that contacted the host and explained his error, and transferred the bitcoin back.
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.
As I noted, and linked above, it does. I will suggest that if you're someone that finds the internet 'hard', bitcoin isn't for you.
Then I find out that most places that sell you things in bitcoin have a no-return policy.
This is the purpose of bitcoin - irreversible transactions, like cash. There is no third party like VISA, etc. on the watch for fraud, but adding literally billions of dollars to the costs of goods for the transactions they handle. Bitcoin allows peer to peer transactions.
If a company wanted to allow refunds that isn't a subject of the protocol, but a business decision by the seller.
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.
If you're concerned by market volatility there are services like bitpay.com that can make daily deposits via ACH in your local currency on an exchange weighted basis. Your concern highlights the nature of fiat currencies that are consistently debased.
Thanks for the search info, I looked for “TV”, the search seems to work on word matching in a more fundamental way.
And I also see that at this moment, bitcoin is worth $675, so if I had actually BOUGHT a TV when I searched before, I’d be pretty pissed off now, since my bitcoin is worth a lot more today.
Which means that the bitcoin economy has experienced a horrible deflationary period over the past two days. Ouch.
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.
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 want to argue that bitcoin is like an online bank account, again I might not argue with you — but a bank ACCOUNT is not money.
I don’t find the internet hard, although I clearly didn’t think through the search thing in the 30 seconds I spent searching. on the other hand, money does not require any intelligence, much less training in a specific type of technology.
I don’t know why you think that a cash transaction is irreversible. Except in 3rd-world countries with high levels of inflation or deflation, a money transaction is pretty easily reversible. Two parties agreed on a common value; so if a day later one party needed to reverse the transaction, the second party can do so without experiencing a loss, other than having to find another person to do the same transaction.
In a perfect economy, transactions would be fully symmetric, but no economy is perfect.
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. 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.
But if bitcoin was functioning as “money”, there would be no need to convert it to real money to achieve the goal of money.
Lastly, this is exactly why I included the definition which you agreed with but wondered why I included — because considering the purpose of money, bitcoin does not meet the definition.
Which is really the point. It may be that at some time in the future bitcoin will achieve the stability necessary to be useful as money. But 20% swings in value in 1 day is hardly “stable”. ($571 to $675 is an 18.2% increase). And therefore, at this time bitcoin does not serve as a stable medium to transfer work performed into later value received.
Oh, and Fu@k ya'all too. [Sidebar: I lost no money]
Oh, and have ya' all made any progress yet in killing Snowden?
Putin laughs as the Bear takes the Crimea.
5.56mm
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