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Why Bitcoin Is Doomed To Fail, In One Economist's Eyes
Hugh Pickens DOT Com writes "Economist Edward Hadas writes in the NYT that developers of bitcoin are trying to show that money can be successfully privatized but money that is not issued by governments is always doomed to failure because money is inevitably a tool of the state. 'Bitcoin exemplifies some of the problems of private money,' says Hadas. 'Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith.' Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system says Hadas. The authorities might be motivated by a genuine concern about the stability of a shadow monetary system or they might act out of self-preservation because tax evasion would be too easy in a parallel economy. 'Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity. Part is technological — this is a cool idea. And part is speculative — gamblers bet that bitcoin's value will increase,' concludes Hadas. 'Truly private money is an inferior alternative to the money that comes with the backing of a political authority. After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can raise taxes or pass laws to unwind monetary excesses.'" Could be there's something good about money that can't be manipulated by law. Some people at least think there's plenty of value in Bitcoin and similar currencies, despite the risks. And those risks at present probably aren't enough to comfort the unfortunate Welsh fellow who (HT to reader judgecorp) "has realised he threw out a hard drive containing 7500 bitcoins, worth £4 million at today's prices. It is now under four feet of garbage in a landfill site the size of a football pitch."
He's just pissed he didn't mine bitcoins when it was still practical.
We've played this game before.
I look forward to the first Bitcoin Panic, it should be interesting to see what happens...
Everything described here is what makes bitcoin a superior form of money, not inferior.
Liberty in your lifetime
Seems like this economist is too fond of governments to be really objective. The last quote in the summary was specially awful. No bank or financial institution will ever be able to do as much harm to a population as a bad government.
That said he has a point regarding government interests in taking virtual currencies down or controlling them. The thing is, technologies evolve, and albeit bitcoin may find its end in government interventions, sooner or later other alternatives that are even harder for governments to control will appear. It was the same with file sharing and it will be always like this. People resent control and given the means to avoid it most will.
He's right, but in the wrong way. All currencies are doomed to fail. As long as people are willing to exchange something for something else, both have value. Most FIAT money has value because governments are willing to exchange it for taxes, so then it has value to almost everyone. When a government collapses, or people lose faith in it, it's currency becomes worthless. Seashells are no longer values as currency, but they once were. Gold/Silver have boom/bust cycles. BitCoin had value because of SilkRoad, and the silk-roaders were willing to accept it for... something. Frankly I'm surprised BitCoin still has value after SilkRoad's demise. If something significant replaces SilkRoad, BitCoin will remain valuable. Until then bitcoin's going on momentum. May crash soon, may not. Will crash eventually.
Here's to losing my Karma Bonus again....
This is utter crap. With very, very few exceptions, money has always been issued by government. Governments have always imposed currency by requiring that taxes are paid in using it. Governments have always set standards for the production of money. Governments have always punished those who attempt to interfere with money.
Gold and silver standards were exactly a system of money imposed by governments, effectively legislating the price of the underlying metal. Such standards caused problems exactly because it was a government attempting to impose money at a fixed price to a commodity where the market (ie the people) tried to push to a different price for that commodity.
I guess you're thinking of 19th century banknotes, issued by private banks, but they are not money as such, just a promissory note which the bank would exchange for a fixed number of coins which were the state-imposed money. Once they became government-backed legal tender they were subsumed into the existing money system (although you might argue that eg UK bank notes are still only promissory notes redeemable for coins, at least in theory). They were never an independent, floating-exchange currency like bitcoin is.
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I'm just waiting for the first tax audits of BitCoin users who get dinged for not having paid capital gains tax. I give it a few years.
'Bitcoin exemplifies some of the problems of private money,' says Hadas. 'Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith.
Cash's value is uncertain, its legal status is ... well, not unclear, but situationally dependent in a pretty bad way[1], and like anything, it becomes valueless if nobody wants it.
1. In the US, at least, while it's legal to use arbitrarily large amounts of cash in any legal transaction, it's not legal to use it for drug deals, money laundering, etc.. Sounds reasonable so far, but there's a whole boatload of policy and precedent to the effect that having large amounts of cash constitutes evidence that you were using it for drug deals, money laundering, etc., which combined with civil forfeiture, means that having large amounts of cash permits the state to seize that cash, unless you can prove that you were doing something good with it. Short of being an employee of a bank, vending machine company, etc., that's pretty hard.
Absolutely. The compex nature of money should be left to people who know more about it than economists.
Like... err...
Maybe Astrologists aren't such a bad idea...
There is a bit of a tautology here. If a government issues it, it is defined as "money" if some other entity issues it, it is a "coupon" or whatever. What TFA misses, I think, is that anything can be used as a basis of exchange. I can buy and sell things by denominating the exchange in widgets, well there you go. If I later convert the widgets to US dollars, well that's no difference. May as well say 'world of warcraft gold' for widgets, or whatever you like, in that example. It is an excellent point that since government require protection money to be paid in their own preferred currency, there is a huge advantage in terms of acceptance in the marketplace. This does not mean, however, that other mediums of exchange cannot exist. My main point is that the word "money" is an arbitrary one unless one includes 'issued by governments for payment of protection money' in the definition. Otherwise, me trading babysitting stints with my neighbors also counts as money.
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Bitcoin is just alternative currency. There are plenty of that around - most of them are pegged to some other currency though, but they are, for the most part alternative currency.
Think: Gift Cards (Amazon/Apple/Steam/Google/etc), alternative store currency (Canadian Tire Money), etc. Then there's non-traditional currency, like WoW Gold.
If anyone says Bitcoin isn't a "money" they're plain old lying. It can be used to facilitate trade (which is the purpose of currency).
Of course, there are a few fundamental problems with Bitcoin, but there are problems with all currencies.
When any economist, banker, etc., says Bitcoin is doomed, the real reason is them saying is "we haven't figured out a way to make money on it yet". No currency is invulnerable to making money by doing things of little value, Bitcoin included. It just means the quants haven't sat down to figure out schemes to exploit to get bitcoins for little effort. Either it's because the entire bitcoin market is too small so the benefits of skimming 1/1,000,000th of a Bitcoin from every transaction is barely worth the effort, or other reason.
That's the real message.
You might need to look at this as a systemic issue. If losing the data on a hard drive (and related backups) can render bitcoins unusable, then over time bitcoins will be lost. I think that means the theory that underpins bitcoin is wrong because it can't be a stable monetary supply if it has a finite number of coins each of which can be destroyed or lost.
Fanatically anti-fanatical
Many years ago I compared the general economic forecasts of economists to those of the astrologers in what when then American Astrology magazine, a semi-scholarly attempt at presenting astrology as a legitimate field of scientific inquiry. I followed each of their predictions form five years. The results revealed that economists were right less than 1% of the time while astrologers were right about 10% of the time. Since we all know that astrology is bogus the results say a lot about economists. Maybe it's time to do the study again.
Implicit taxation through inflation? First, inflation is extremely low on the entire western world. Second, inflation only eats away at you if you are sitting on currency as assets, which is a terrible thing to do. If most of your wealth is being productive somewhere, changes in the medium of account shouldn't matter a bit.
Now, having zero inflation, or all the way into deflation, is not a good thing for an economy. We have this fundamental problem called Money Illusion. It's been measured in a whole lot of studies, just look it up. As long as there's money illusion, in practice, economies work better when economies grow in a predictable manner, which implies some mild inflation. Without said inflation, velocity drops, and with it economic activity. We really, really, don't want a shrinking GDP. A central bank is a compromise to make sure that someone, in some way, is actually altering the money supply to achieve that objective. What we need though is a way to make sure central banks are making less decisions that look like reading entrails, and more that are empirically testable and forward looking.
Bitcoins are limited in number forever.
Bitcoins are infinitely divisible.
If they aren't reported lost then how would they know if I didn't just put them under my mattress? If they have been reported lost, can they be reinstated later when they are found?
The value of Bitcoin fluctuate depending on demand/supply.
Currently the supply of bitcoin is low and only slowly increasing (only 25 BTC per mined block are shared across all the users of the mining pool which successfully validated the block, and the total number can be computer around 12 mio).
Currently the demand is expanding (bitcoins can be used as payment medium in an ever increasing number of shops. The days where Silk Road was the main place were you could buy/sell using BTC are long over [and in fact, during some time, Silk Road was down due to being seized by authorities. At that time the BTC market barely noticed]. Also BTC are in demand by traders [although again given the low impact of various pump-n-dump attempts, traders don't have as much an influence today as back then] ).
Hence currently the price is globally heading up (with more or less some small very localised perturbations).
But globally, BTC evolve according to demand/supply AND ONLY demande/supply. (Unlike fiat currencies which can be manipulated by printing more or less bills by the controlling state).
If some coins stop circulating (either because you destroyed the harddrive cointaining the private keys to spent them, or simply because you forgot about them, or because you're hiding them as a reserve for later) the total number of "coins currently available on the market" will get a bit lower (a bit under the current 12 mio). Because of that, simply following the demand/supply rule, the price of bitcoin will increase a little bit.
If suddenly you brought them back into circulation (you remembered that damn password, found the old laptop that you though was thrown away, or simply decide to use your reserve) the number of circulating coins increases, and because of the slightly increased supply, its price decreases a bit.
Now the "magic" of bitcoin is that its a decentralised currency.
- In a centralized currency, the issuer can massively print new money. Or destroy gigantic amount of bills. Such large scale variation of the supply can cause big changes in the value of the money, and thus the state can manipulate its own money. Create inflation or deflation depending on needs. Thus value of money is not only influenced by pure demand/supply rule in the market, but also very directly by government and politics.
- In a decentralized currency, *nobody* owns the system and nobody in particular decides, instead all agree. (Nobody will accept your mined block if you granted yourself 1000 BTC instead of the current 24+fees)
Also, most of the people only own a small part of the whole amount of bitcoins. So any "bitcoins pulled out of circulation" by 1 single individual will only concern a very small amount, a small fraction from the whole stash, and thus barely have any registrable effect (the theoretical effect of you not spending your 100 BTC on the value of the whole 12 mio will be smaller than the noise).
A single individual (or government body) can't influence much the value of bitcoins. (For influence to be successful, that would require massive coordination of a sizeable proportion of all bitcoin holder. Which would be near to impossible given how much the money is spread).
The only influence of bitcoin going in and out of market that can be sizeable is the total influence of all bitcoins getting lost.
If over the first 10 years of bitcoin lifetime 1 million total of coins get completely lost for ever, the overall price will jump up by 5-10% accordingly.
So it's a situation of "the market will heal itself".
"Sufficiently advanced satire is indistinguishable from reality." - [Tips: 1DrYakQDKCQ6y52z6QbnkxHXAocMZJE61o ]
The coins themselves are not lost, as they are not themselves stored on the drive. Rather, the drive contains the user's key and their respective addresses, to which they match themselves up to the network. This is why if the file wallet.dat is stolen, someone can easily open the Bitcoin client with the stolen copy, authorize the transmission of coins from that key to another address, and then just wait for the transmission to be validated.
There is, however, no mechanism for the recovery by the network for addresses and keys which have been lost or destroyed. I personally mined slightly more than 4 bitcoins out of curiosity back in 2011, then stopped as I ran the power cost to income calculations. I eventually rebuilt that system, but accidentally destroyed that wallet.dat. Although I know the public receive address, I don't have the key associated with it to claim those transactions in the network that indicate the 4BTC. The claim to the transactions which represent those coins collectively are essentially irrevocably lost, with no way of the network as a whole reclaiming them due to inactivity as the system currently stands. The transactions are still present in the Blockchain, just no one can claim them.