Electric power generation creates many jobs.
Posted on 02/27/2021 8:21:34 AM PST by amorphous
Bitcoin and other cryptocurrencies are all the rage right now.
Of course, the rise of non-government, decentralized, encrypted electronic currencies like bitcoin has been going on for years. But in recent months it has surged to the forefront of the national conversation as major figures like Elon Musk have bought in and bitcoin has hit record valuation levels.
Many Americans may not have followed the trend closely, and are seeking to understand it. So, to help readers better understand the novel technological trend, FEE interviewed Will Luther, an economics professor, director of the American Institute for Economic Research’s Sound Money Project, and an adjunct scholar with the Cato Institute’s Center for Monetary and Financial Alternatives.
What Makes Bitcoin Different From the US Dollar? One easy way to understand bitcoin is to compare it to the US dollar.
“Bitcoin is similar to the dollar in many respects,” Luther explained. “Both are intrinsically worthless, meaning they have no use apart from their role as a medium of exchange. Both are irredeemable, meaning they are not backed by some underlying asset. And both are digital base monies. (Bitcoin is fully digital, while the dollar is only 99.96% digital—close enough.)”
However, the two differ in important ways.
For one, the US government has centralized control over the dollar and its supply. Bitcoin is decentralized, meaning there’s no central authority controlling it.
“Bitcoin’s supply is preprogrammed,” Luther said. “There will never be more than 21 million bitcoin in circulation and the supply will follow a predetermined trajectory until it reaches the maximum. The supply of dollars, in contrast, depends on the discretion of the Federal Reserve.”
One consequence of this difference is that the government can inflate the US dollar if it wishes, by printing money. No one can inflate bitcoin because the supply of the currency is not centrally controlled or subject to manipulation.
One other key difference, Luther says, is that “bitcoin tends to provide more financial privacy in digital transactions.”
While exchanges using the dollar can be very private if done in-person with cash, digital exchanges using the dollar that are not done in person must involve a trusted third-party that records the transaction—like Venmo or your bank. (This opens up an opportunity for privacy violations).
However, “since bitcoin can be transferred without relying on a trusted third party, it tends to offer more financial privacy than traditional digital payment mechanisms,” Luther explains.
Is Bitcoin a ‘Currency’ or an ‘Asset’? Much of the news around bitcoin involves people making (or losing) money by purchasing it and then selling it when its highly-volatile price shifts. At first glance, it seems more similar to an asset like a stock one buys on the stock market than a currency, defined as a medium of exchange.
But it’s both, Luther explains.
“Bitcoin is, first and foremost, a currency (or, potential currency),” the economist says.
However, “all currencies are assets,” Luther offers. “And some assets appreciate. For this reason, some people think of bitcoin as an investment. But that is secondary. Indeed, bitcoin’s price will only rise if (1) it becomes more useful as a currency today or (2) is expected to be more widely used as a currency in the future. Hence, even those interested in bitcoin as an investment should understand its role as a currency.”
Why Is Bitcoin’s Price So Volatile? Bitcoin is infamous for its volatility, meaning that its valuation, or price, often swings drastically up and down over relatively short periods of time. This is what makes it an attractive speculative asset for some, but also is a barrier to its adoption as a widespread currency used for exchange.
Why is it so volatile?
“Since bitcoin’s supply is essentially fixed, its price fluctuates due to changes in demand,” Luther says. “Bitcoin is more volatile than many other assets because it is a medium of exchange. It is more volatile than other media of exchange because it lacks a core, reliable source of demand.”
“Media of exchange are subject to what economists call network effects,” he explained. “No one wants to use a [form of] money that no one else is using. Everyone wants to use the same money that their trading partners are using.”
“Therefore, my decision to accept bitcoin makes it more desirable to you, and vice versa,” Luther continued. “The network effect means that small shocks to demand are amplified, since anything making bitcoin more attractive to me also makes it more attractive to you and everyone else by virtue of the fact that it is more attractive to me. The same process works in the opposite direction for anything making it less attractive to me.”
Again, comparing bitcoin to the dollar can help us understand this phenomenon.
“With other monies, there is some core group of users that everyone can count on with near certainty to accept it,” Luther said. “The U.S. government, for example, stands ready to accept dollars in payment of taxes and fees. It seems very, very unlikely that it will stop doing so. That core group of users provides a lower bound to the demand for dollars… as a result, demand tends to be fairly stable.”
“That’s not the case with bitcoin,” the economist continued. “It’s not unreasonable to think its demand could fall to zero. So we are constantly on guard against that prospect. Relatively small disturbances lead some to reevaluate their positions. And bitcoin’s price fluctuates as a result.”
Will Bitcoin Ever Catch on For Widespread Use in Everyday Exchange? Whether bitcoin is just a fad or could catch on for widespread use in everyday exchanges is a subject of much debate. Luther, for his part, points out that it already can be used in many exchanges.
“You can buy a new couch on Overstock.com,” he says. “You can pay your AT&T wireless bill. Tell me what you are looking for and there is a good chance someone is out there ready to sell it for bitcoin. That it is not more commonly used, despite many retailers willing to accept it, suggests that it is not well suited for many transactions.”
“Bitcoin is very well suited for making cross-border payments,” Luther continued. “It is well suited for making private transactions. But few of the transactions I make in the course of a month involve cross border payments or require more privacy than is afforded by my bank. So I don’t spend bitcoin very often. I suspect other people make a similar calculation. That’s not a knock on bitcoin. It is just to acknowledge that it tends to function as a niche money at present, and seems likely to do so into the foreseeable future.”
“Therefore, my decision to accept bitcoin makes it more desirable to you, and vice versa,” Luther continued. “The network effect means that small shocks to demand are amplified, since anything making bitcoin more attractive to me also makes it more attractive to you and everyone else by virtue of the fact that it is more attractive to me. The same process works in the opposite direction for anything making it less attractive to me.”
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Or perhaps it is more the madness of crowds. A 21st Century Tulip Mania. How does one value Bitcoin? It’s neither a good nor a service. Its a finite supply of a non-tangible asset. A piece of code.
The deep state, aka deep banking industry hates bitcoin. btc allows individuals to bypass credit cards and the fees for btc are 10 times lower than that of credit cards, banking standards.
I work for dollars.
A computer program solves math problems for Bitcoins.
The first effort generates worth to my employer.
The latter benefits no one.
I don’t understand some things about bitcoin. I understand the idea that many are investing in bitcoin. But I don’t understand how bitcoin can become an alternative currency. Bitcoin values fluctuate in relation to the dollar and other national currencies. I understand it as an investment but also know the value is always going to fluctuate based on supply and demand, for bitcoin.
Cryptocurrency exchanges value them, 24/7. Which is a major reason I like trading crypto over futures or stocks. The fees are very reasonable for doing so.
Bitcoin has a yoyo worth never the same for long worthless.
Ping; If want to add your links
Electric power generation creates many jobs.
Bitcoin is infamous for its volatility, meaning that its valuation, or price, often swings drastically up and down over relatively short periods of time. This is what makes it an attractive speculative asset for some, but also is a barrier to its adoption as a widespread currency used for exchange.
I believe that the is one more difference that is important. Bitcoin has a structural limit on the number of bitcoins that can be produced (mined). There is no inherent limit on the number of dollars that can be produced by the Federal Reserve.
“I’m from the government and I’m here to help.”
“All your bitcoin are belong to us.”
Points gun.
Yep. Remember tho, “bad money (fiat) drives out good money.” Which is a way of saying people will spend money they feel is going to go down in value over money which they feel will retain value.
“But I don’t understand how bitcoin can become an alternative currency”
What is a currency? Does that mean anything, perhaps even pebbles, that are accepted by multiple parties as payment for something? Does it mean accepted by governments?
I don’t understand where a bitcoin comes from and why the source (a computer algorithm?), couldn’t be improved to produce bitcoins at a faster rate which would make their value decline.
But the privacy aspect of bitcoin transactions makes me keep them in the corner of my eye.
Maybe bitcoin is very similar to gold.
i’ve printed some out and put it under my mattress in case the internet and/or power fails ... that way i can spend it in an emergency ...
Which is another important feature of bitcoin, and all other cryptocurrency (there are over 1,000 now). It's easy to secure them. Without the private key, it's practically impossible to access to them.
There are billions of dollars in those blockchain freely accessible at anytime via the internet for anyone with the private keys.
All currency has a common purpose, to securely record a transaction.
It can be a trusted set of books or some item of value used in exchange. Many cryptocurrencies do both.
But the privacy aspect of bitcoin transactions makes me keep them in the corner of my eye.
Privacy is one area which isn't that great. Most cryptocurrency allow anyone to review the transactions which have occurred, with the dates and times. These are numbered transactions, and with the right tools can be traced and assigned to those who've made them to a great degree.
Cash, gold, silver, diamonds, are all much better for privacy concerns but are harder to transport. You can get "caught" with those, have them confiscated, and so forth.
What is to prevent some clever hacker from counterfeiting bitcoins, since all they are is ones and zeros?
21st Century version of tulips.
You actually CAN print them out and store them under your mattress if you like. "Them" being the private key. And likewise, banking will also be affected with power failure.
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