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.”
I can do a Zelle transfer instantly with no fee. There are other options like that.
And you are smoking crack if you think central banks and governments will allow them to get muscled out. They can with simple laws outlaw crypto use overnight. Of you could could still try to be sneaky like using a secret Cayman Islands bank account but if you get caught, it’s prison time. Ever hear of money laundering laws?
That seems to be the play you left. Since, I've seen the salary/home/stock argument many times used by the money changers in defense of the money "they" control/create.
Why are you guys so afraid of cryptocurrency?
The US Congress just necessitated the increase of dollars by twofold over the bitcoin cap of 1T. NO worries there, it would seem.
And why no concern about assets like Collateralized Debt Obligations (CDOs), estimated to be north of a quadrillion dollars?
Could it be your REAL concern is WHO controls the "money" supply?
Heaven forbid that "the people" wrestle control of money away from the "money changers."
What a disaster that would be for the oligarchs, their paid for politicians, and big bankers!
Then what would their "influencers", like you, do for a sideline, Newbly...?
Fair point about bank losses. They have insurance so they are covered. Likewise, many exchanges now are getting insured. In other cases the losses were eaten by the exchange in some fashion so customers were protected.
The pattern among the exchange hacks you mention shows that they largely happened among “1st generation” exchanges, that is, startups or one-person operations with limited or non-existent security competency. Mt. Gox clearly fit that model as the first BTC exchange, as did Bitgrail in supporting Nano in its early days. People used them because there were literally no alternatives (often such a fringe exchange is where new coins start life, as they need to be tradeable to gain traction at all, and the big exchanges don’t waste time on unproven coins).
For people just starting out, such higher risk exchanges are receding as an issue. People just buying BTC or ETH or other top-100 coins are going to get them at the larger, professional exchanges now. It’s buyer-beware if you go hunting bargains in the crypto micro-caps at some unknown startup. But that should be obvious even to inexperienced folks.
You dodge again and again how DECEITFUL you are with your 1913 FED dollar chart garbage. NO ONE gets paid $2/week as in 1913. NO ONE sells their house for $1000 1913 US dollars.
The very fact that you post that without any meaningful =statistic shows you are clueless about finance and/or economics are intentionally trying to deceive.
Like posting a chart showing a company’s expenses but not one of income, and then making some grand statement on the financial condition of the company. Either dumb or intentionally deceitful.
Why NO concerns about these "invented" assets?
I gave you multiple opportunities to post a money supply chart, yourself.
My brother buys his wife gold jewelry. He does this frequently, thousands of dollars per year. They’ve been married over 40 years. She has quite a deal of jewelry from which to choose when going out for the evening.
But he also buys it as a store of value against an inflated dollar.
I suspect that many will buy bitcoin for the same purpose.
And jewelry has been used for trade during difficult times (e.g., extensively during WWII in Europe), often for safe passage, food, etc.
So I'm still trying to grasp the bitcoin mining thing, I understand that there can only be 21 million bitcoins that can exist. So does that mean that when 21 million bitcoins are mined, that is the end of it? Or can somebody figure out a way to go beyond the 21 million limit?
I expect bitcoin to be basically irrelevant and a dinosaur in a year or two. Sato’s nerd experiment was never designed for wide scale, real world use.
Because these currencies represent an "assigned" "unit of value" able to be exchanged for some other "thing of value" at the time of the transaction, replacing a journal entry, or IOU, or a trade, or other valuable (e.g, gold, silver, beads, diamonds, etc.) if you will.
You can go research the history and reason for money for yourself, newbly.
You need to go get smart in English and finance. Words have precise meanings. These words do not match your confused garbled mess that no one in real world finance would use.
“securely record” transactions
You cut and past “”securely record transactions” from some crypto web page, something that does place for a cryptocurrency, and then apply that to non-crypto currencies in error, showing you are just a end-user who clicks buttons on an crypto app.
Sure, it would work the same as the Mexican peso going from 3000 to 3, whats known as a lop. Instead of 21 million bitcoins there would be 21 billion.
I intentionally try to keep the discussion understandable by those outside your "world" who live in the "real" world.
WHY even bring it up? Do you feel you're losing the argument?
I'm only arguing with you so that others may become more enlightened about how they're being screwed over by you money changers.
And, perhaps, how cryptocurrency may allow regular people to regain control over "money."
I don’t think that’s how Bitcoin works. And if that’s possible then it would deserve to be abandoned immediately.
Lying and deceit are his MO. Check his signup date...
Do you, or have you ever owned or used any cryptocurrency?
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