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.
The US dollar isn’t “real” either. The green paper rectangles are used as a means of exchange. Their only value is in the fact that we all agree it has value, and one can reliably exchange it for something of that approximate value. We could just as easily use blue seashells, plastic noodles, or electronic records.
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Is the paper issued by the Federal Reserve then REAL MONEY.... A good paradox. It´s where people want to put their trust. People give it value.
That's up there with Madoff!
We need an article from Larry Kudlow to tell us this?
I guess two out of three ain't bad... IMO though, the regulator is broke!
Will “they” be able to track down the bitcoins that “disappeared” from Mt. Gox?
It’s as real as any electronic bank account balance on anyone’s phone or computer. The powers that be are just mad at Bitcoin’s decentralized architecture.
At any given time, approximately 3% of money issued by the Fed is in the form of paper currency. The rest floats around in the form of digital bits. The source of this statistic is G. Edward Griffin, author of The Creature from Jekyll Island, and also known for interviewing Soviet defector Yuri Bezmenov.
Gee, ya don’t say?
If “they” can identity which ones and if those who took them try to use them, then it’s possible. Mt. Gox is also missing millions of fiat. So there is more to this than is being reported, IMO.
If Kudlow investigated a little further he'd learn that bitcoin's volatility has actually been on the decline as adoption spreads.
It has no central-bank regulation,
One would think Mr. Kudlow could understand that this means there is no central bank that can manipulate the total supply of bitcoins. That is by design.
network operations,
The entire currency is a decentralized network of transaction verification nodes. Why doesn't he at least investigate the basics of the system he is attempting to criticize?
or even centralized issuance.
Issuance is decentralized to encourage the creation and maintenance of the verification nodes that are the bitcoin network. Issuance is regulated and ultimately fixed by the protocol itself. The protocol itself is the 'central bank authority' he wants. This is further proof no one has explained to him how bitcoin works, and he hasn't found out himself. He just has an inkling of who doesn't control it - does he speak on their behalf?
And because of its wild price fluctuations, bitcoin can never be a reliable payment system.
"Bitcoin is still about ten times more volatile than, say, the Euro priced in US dollars. But if Bitcoin’s volatility kept falling in half every three and a half years, it would be as stable as the Euro in less than 15 years." link
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.
Mr. Kudlow's initial observation has nothing to do with the failure of MtGox. Bitcoin is a way to make transactions across borders without third parties. But MtGox is not bitcoin. MtGox was an exchange that you could register an account with. If you registered an account with MF Global and Jon Corzine took you money out of your account and gambled it on Euro bonds - is that proof that dollars are a failure? Or is it proof that MF Global was mismanaged?
People are pouncing on the MtGox story and using it to spread FUD about something they obviously haven't taken 30 minutes to investigate. If you want to see a brief video explaining what bitcoin is, how the network functions, and how it manages transfers this youtube is a good intro.
That's why I choose to bank in the real world. We can argue about if paper money is real, sure, but it does have an agreed-upon value that makes it so. I can walk into the local bank, write a check, and they will give me cash.
That's a big difference. Money has a real-world manisfestation. Bitcoins do not, unless you find someone who will trade a bitcoin entry for real goods.
At least with the tulip ponzi scheme of old, when it collapsed, some people had very pretty flowers.
Open Source software works because people ultimately use or don't use the software. It either works or it doesn't. It is found to have flaws or viruses in it, or not. Over time good Open Source software succeeds and bad Open Source software fails.
Bitcoin is like an Open Source currency. There is no Central Bank or nation regulating it. But Bitcoin, like all currencies today, doesn't have any intrinsic value. The only thing Bitcoin has that distinguishes it from other currencies is some algorithm defining how much new Bit coinage can be brought into existence. Let's say a bunch of different groups created computer currencies and competed to create the "best" to attract people to use their currency over other people's currencies. What would they do to make theirs better?
The only thing that would make me prefer one currency over another is if a specific group of people stood up and said we guarantee the value of this currency. We will protect this currency. Why would I give my trust to a currency created by someone with an alias and that's being held up by a group of rather shady organizations with little transparency?
However pathetic the US is today, we do have millions of people going to work every day and creating wealth, paying taxes, etc. This suggests that over time the dollar will still have some value. However non-transparent the workings of the Fed are, they do have to report to Congress on a regular basis, they publish their findings, they make public pronouncements, etc.
How far did the Open Source Occupy movement go? Not far because no one wanted there to be any leaders.
How successful has the Tea Party been? A bit more successful, but only because there are some Tea Party members who have stood up and become leaders such as Cruz.
If the Tea Party had gotten no one into elective office and was just a bunch of people gathering regularly to wave signs at politicians then what little it has achieved wouldn't have gotten accomplished either.
With all do respect, years of continuous Freeping in front of the White House didn't get Clinton out of office any earlier and certainly didn't taint his brand in the eyes of the world.
Sometimes you have to fight fire with fire. Currency backed by real people with currency backed by real people. Politicians with politicians.
Bitcoin is tulip bulbs. Bitcoin is a scam. The scammers made their money. There are suckers out there that don't want to be the last suckers. They are trying desperately to unload bitcoins to the last suckers.
“I have been tweeting and broadcasting that bitcoin is not real money”
More than a thousand retail locations would disagree...
It is an exchange of value that is outside government control (largely).
The stuff found in rusty tins by a California couple recently was real money.
What makes money viable is the controlled creation thereof. Sure the Fed prints more money, but does so at a predictable rate balanced with economic & population growth, and with just one reliable issuer and difficulty (and active severe prosecution) of counterfeiting. Gold works as money because, while anyone can go mine gold, the process & difficulty & rate tends to parallel the needs of a stable currency, and the material is easily verified.
Bitcoin is similar to gold, in that computing valid new “coins” takes considerable computing power and (between Moore’s law and available resources) tends to parallel needs of a stable currency. The coordination of exchanges establishes an equivalent to sovereign control, assuring no undue behaviors.
Insofar as there are problems, I’m sure digital, paper, and coin currencies went thru similar problems early on (and still do at times).
While it's true that a currency like the U.S. dollar has lost its value considerably over time, it's also true that there is some level of predictability in this over long periods, and that short-term fluctuations actually work to the detriment or the benefit of an American citizen (think of someone paying off a 30-year fixed rate mortgage at 5% if inflation is at 8%).
For anyone who really thinks Bitcoins are a legitimate currency, I'd ask a simple question: Would you ever take a job with an employer who paid you in Bitcoins?
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