If you don’t understand what is meant by an analogy, look it up.
No, it simply means that a cryptocurrency can never replace a national currency. Also note that the value of a bitcoin depends on its current exchange rate with legal tender, nothing else.
The bitcoin exchange rate is extremely unstable, so by your own argument bitcoin is an unsuccessful currency.
The misplaced snideness fails - the analogy to the cowry fails as the bit coin is fundamentally different in embedding as a fundamental aspect of its existence the entire history of transaction.
Or yes, you made a superficial analogy that brought not any added understanding but to illustrate the lack of understanding.
That is generally compltely false and continues your lack of understanding of the economics of currencies and false presumptions.
We have seen in real economic history non official currencies effectively replace legal currency in basically all transactions in economies.
so the bald assertion a cryptocurrency can never replace a nation currency is simply false on the historical facts. Alternative currencies have replaced national currencies without being formal legal tender.
It is an open question if a crypto currency can accrue the key features that would allow this over time.
The statement is… so poor in its understanding it is not even rising to being wrong, it is a banality.
The value of the bitcoin depends on the reletive demand, which is not insightful at all. The relative relationship to the other currencies and the other stores of the value, this is not something unique to bit coins and to observe this is pure banality (and/or pure misunderstanding).
the important feature is the fixed and the immutable supply relative to the varying demand, not that this is in relation to the other currencies (which again is a banality that is true trivially of all currencies that are not in a closed system).
That seems indeed likely that it is not in any way able to be a widely successful general currency, but has not one thing to do with my comments.
By the funny triumphal declaration “by your own argument” you seem to have the completely mistaken belief that if one is criticizing your incorrect understandings on currencies, that it is from the idea of supporting the bit coin as a successful currency (or even as a good idea). Both of those are completely absent from my statements.
I think the fact that I called it nonsense proves I understand it. It’s not an issue of what kind of math is being used, so the argument you keep making is pointless. No kind of math can instill value in a currency.
Again, I think my criticism makes it obvious I do understand it. There are real assets behind United States currency. The United States is a big country. It has land and resources. It has a population of over three hundred million people. It has armed forces and nuclear weapons. Those are all real assets. And they’re a list of things bitcoins do not have behind them.
No, it doesn’t. Bitcoins were invented eight years ago, which means they have no extended history of holding their value. As I pointed out above, they have no real assets to back them up. They fluctuate wildly in value. These are objective facts that show how unproven their ongoing value is. As I mentioned above, bitcoins are the equivalent of tulips. Sure, speculation can drive their price up for a while. But ultimately fundamental economic reality will reassert itself and people will realize that a bitcoin has less actual real value than a tulip bulb has.
I notice that as your arguments get weaker, you raise the level of personal attacks.
How many dollars does the cowrie collective have in its reserve? Do they have enough to pay out if everyone decided to convert their cowries to dollars?
Suppose I own a restaurant and I really love cowrie shells. So I announce that anyone can buy a meal in my restaurant for a dozen cowrie shells. I’ve created a demand for cowrie shells. You can walk along the beach and collect twelve shells and exchange them for a meal. Or you can get a guitar and play songs on the beach and ask people to give you cowrie shells in exchange for the entertainment. You then take the cowrie shells you receive each day and exchange them for meals at my restaurant (assuming you’re entertaining enough). So a cowrie shell based economy can exist and work. It just requires that some people have cowrie shells that they’re willing to exchange for other goods and some people have other good that they’re willing to exchange for cowrie shells.
But the linchpin of the cowrie shell economy is my restaurant. Cowrie shells may be passed around through dozen of hands before somebody gets hungry and decides to trade them in for a meal at my place. But that’s their ultimate destination. If I close my restaurant and retire, then the cowrie economy is going to collapse. It might not be immediate. People might still pass cowrie shells around for a while but pretty quickly everyone is going to realize there’s no point to it. If you’re playing your guitar and somebody throws some cowrie shells in your basket, it’s going to be no different than if they threw in some bottlecaps or a handful of sand. You’re going to be hungry at the end of the day and you don’t have anything that anyone is going to give you food for.
Can we agree that money is a funny concept, and several things about it that seem like common sense facts are just opinions?
Could a cryptocurrency like Bitcoin someday become the de facto method for doing many or most transactions?
Sure, it could happen. But it doesn’t seem likely to happen. Bitcoin itself is much more successful than anyone could have predicted, but it also has some features that seem like built-in booby traps that will limit it’s use. The blockchain for instance, if you use Bitcoin you have to maintain a record of every Bitcoin transaction that has ever occurred. That’s going to get more and more cumbersome. And of course the limit of 21 million bitcoins, which means that if Bitcoin becomes commonly used it will be horribly deflationary. That deflation means hoarding, which leads to more scarcity, which leads to more deflation. Of course Bitcoins are arbitrarily divisible, so you can buy a hamburger for 200 nanobitcoins. But it becomes like trying to conduct transactions in gold, when there’s only a limited supply of gold in the world, eventually the price for a gram of gold has to be astronomical to cover all the needed transactions.
But that’s not so much of a problem unless Bitcoin actually becomes a commonly used money. And it’s only a problem for this particular implementation of a cryptocurrency, we could imagine another implementation that doesn’t have this feature. The opposite problem of inflation then rears it’s head. The point is, we want to keep the supply of money roughly equal to the demand for the money. When we’re using lumps of gold and silver as money increased demand means you crank up the gold mines. The supply isn’t quite fixed, and supply and demand reach some sort of equilibrium. But then you have disasters like the flood of gold and silver into Europe after the conquest of the New World. Or the constant outflow of precious metals from Europe to China and India as superior foreign goods crush domestic production.
Anyway, the well known problems with gold and silver money eventually resulted in the abandonment of even the pretense of backing paper money by precious metals.
So it seems to me that cryptocurrencies will run into the same problems, the inability to match the money supply to the money demand means either dramatic deflation or inflation. And the problem with replacing one failed cryptocurrency with another better designed one is that if Bitcoin fails then the demand for any other such cryptocurrency will be near zero. Since there are essentially unlimited such currencies, the marginal value of any particular new currency has to be zero.
Right, but back in the day when cowrie shells really were used as money, it wasn’t just one eccentric guy who created the demand. It was lots and lots of people. Cowrie shells were used to create jewelry, just like gold and silver, and so decorative value of the shells created the market for cowrie shells as a good, which lead to them being treated as a key good, which made them used as money.
Bitcoins aren’t being kept in demand by one eccentric restaurateur, they’re being kept in demand by a motley assortment of eccentric nerds/anarchists/criminals. So of course it can only be used as money because those eccentric people accept it as money, and if they stop being so eccentric for five minutes the whole thing fizzles. When is it going to fizzle? Tomorrow? Ten years from now? Who knows. Just saying, don’t take your retirement money and buy Bitcoins. Because Bitcoins really do work as money today, but might not tomorrow. Same thing with US dollars or Euros, only a lot more so.
Altho all this is true and I have pointed some of them out myself, BitCoin is not all the easy to bank either.
[QUOTE=Lemur866]
Bitcoins aren’t being kept in demand by one eccentric restaurateur, they’re being kept in demand by a motley assortment of eccentric nerds/anarchists/criminals.
[/QUOTE]
According to what I linked to earlier a large percentage are being kept by Chinese who are trying to get their money out of China or by the CCP who is trying to manipulate the currency for their own reasons. Neither of these groups would constitute ‘eccentric nerds/anarchists/criminals’ (well…ok, I think most of the CCP could be classified as criminals).
No, he went to jail for tax fraud, for not reporting income.
They cant send you to jail for not paying. Well, maybe, if you transfer your funds out in a fraudulent way to away having them seized.
The can seize your bank acct, your car, and even your house… in some cases.
Actually I think the primary thing that backs up the US currency is the fact that the US has a big army, a vast economy, power of taxation and rule of law all of which take an interest in making sure that the currency stays afloat. If the dollar starts hyper-inflating serious actions can and will be taken by the US government to prevent it. The same can’t be said for Bit coins. If for one reason or another they lose their allure, their value will go poof in an instant, with nothing and no one able to do anything about it.
As far as them being backed up by mathematics, I could just as easily declare my toe nail clippings to be currency securely backed up by biology. They would be in limited supply that can be authenticated with DNA testing. However that doesn’t actually make me the richest man in the world.
Yes, but we have plenty of examples of governments that supposedly had an interest in keeping their currency stable nevertheless created hyperinflation. And that’s because it’s often just easier to create new money rather than try to collect taxes.
Currently the US and Europe and Japan are managing to avoid inflation. But that doesn’t mean that’s a law of nature, it just means governments are making an effort to not cause inflation. That could change if we, you know, elect criminally incompetent idiots to run our country.
Oops!
The US dollar is backed by the same thing as any other currency: The fact that there is a large number of people and organizations who have a large amount of trust in it. These people and organizations have so much trust in the dollar that they’ve made it known that they will accept dollars, in particular amounts, in exchange for particular goods and services. Now, it’s nice that one such organization expressing faith in the dollar is very large and powerful, but that’s neither necessary nor sufficient.
Bitcoin also has a fairly large set of people who trust it, but the set isn’t nearly as large, nor the trust as great, as for the US dollar. So the bitcoin isn’t as good a currency as the US dollar. At least, right now: It’s possible that trust in the dollar could decrease, or that trust in bitcoin could increase. But it’s also possible that it’ll go the other way around.
This is a pretty important distinction. Al Capone certainly could have paid the taxes he owed because he was filthy rich. He ran a vast criminal empire after all.
But he couldn’t report his income because his income was illegal. If he was honest about his income then he’d be confessing to the crimes that brought that income. And lying about the income was itself a crime. That’s how they finally got him. His lawyer tried to argue that being forced to explain the source of his income was a 5th Amendment violation (protection against self-incrimination) but the courts disagreed. He tried to pay what he owed as part of a plea deal but the very act of offering the money was used as evidence that he’d previously evaded payment.
So in the end, it wasn’t the failure to pay his debt or unwillingness to pay that put him in prison (he was both able and willing to pay) but the fact that he had previously evaded paying when he was supposed to. That’s the difference between going to prison for a debt, and going to prison for fraud and/or tax evasion.
Bolding mine.
That’s a nice explanation of an economically illiterate idea. Obviously Mr. “Nakamoto” never took Econ 101. Or failed to listen in class
The “value” of a currency unit is what it buys. in other words take the total output of the relevant economy’s goods and services and divide it by the number of currency units. That’s how much one unit is worth. If the real economy doubles in size, the currency deflates by a factor of 2.
In order to have a stable value over time, the number of currency units must grow or shrink in lock-steps with the actual volume of goods and services produced. Modulo their shifting relative importance as e.g. more people want iPhones more than they want buggy whips.
To be sure, over time many governments for reasons fair, foul, and clueless, have failed to manage currency in lockstep. Resulting in deflation, inflation, or even hyper inflation. But the problem is in the reasons fair, foul, or cluelessness, and can’t be corrected by permanently fixing the number of currency units.
We left the gold standard precisely because the total supply and distribution of reserve gold could not change at the rate required to keep up with the rapidly changing world economy.
A lot of people are using the term “backing” as in “backing the currency” in conflicting and sloppy ways. Its unsurprising you’re all talking past one another.
It might be worth setting that cliché word aside and instead talk about what attributes are helpful as to counter-counterfeiting, traceability / anonymity, long life, stable value, convertibility, wide acceptance, transaction costs, resistance to criminal manipulation, resistance to governmental manipulation, resilience under speculative attack, and a host of other desiderata of any currency from cowries to dollars to Bitcoin to quatloos.
Subsuming all those things under “backing” using your personal weighting of importance of each of those is unlikely to persuade anyone whose personal weighting of those factors is different.
Or so it seems to me.
Anyone can shout NONSENSE, for good reason or for bad.
You could be calling something nonsense for bad reasons, instead of good.
I understand that you, personally, believe that your reasons are good.
But calling something nonsense does not “prove” anything.
Do you understand that there is a difference between calling something nonsense, and actually providing decent arguments that it is nonsense? Do you understand that someone can personally believe that they are providing decent arguments, while everyone else thinks their logic is less than solid?
And yet Bitcoins are valuable.
Objectively, we can see that they are valuable.
People trade Bitcoins for other items they deem valuable, and they do this every day.
The question, then, becomes WHY Bitcoins are valuable.
The mathematics is part of the reason – a necessary condition – for their value.
It is not the only reason.
But I never said it was the only reason.
And is it your belief that access to useful computer code is somehow not a “real asset”?
Do you realize that companies in the US pay good valuable dollars to programmers in order to create good code?
Do not realize that customers in the US are willing to pay good money in order to have access to programs that suit their needs?
If good computer code, which businesses are willing to pay to create and customers are willing to pay to buy, is not an example of “real assets”, then what exactly is it? Should companies list code that they own as a “liability” instead of as an “asset” on their balance sheet, or what?
You are now quibbling about the definition of “extended history”.
But eight years and running is actually a pretty good track record.
In fact, I would even go so far as to say that eight years has proven quite decisively the value of crypto-currency in general, if not Bitcoin in particular.
I am willing to bet cold hard cash, of the governmental variety, that on any timeframe you specify, at least one cryptocurrency will have a market capitalization in excess of one million USD. I am willing to donate to the charity of your choice on this, or a personal bet, if you’d prefer.
I am also willing to give you favorable odds on this, so that more is at stake on my end than on your end.
Absolutely nobody in this thread is arguing that the “ongoing value” of Bitcoin has been proven.
The issue is that for the last eight years, they have had quite a bit of value. Recently, a ridiculous amount.
The question of the thread (one of the questions of the thread) is WHY they have this value.
Tulips make no particular sense as a store of value.
However, crypto-currency does make a certain bit of sense as a store of value, at least for anyone who has faith in the mathematical security of the algorithms.
As I said above, I’m willing to bet on any timeframe you’d prefer.
If you believe my post consisted of personal attacks, you are free to report it. This is GQ, after all.
I think you might’ve missed my other post in this thread where I discussed an exactly analogous case.
I’m not sure that’s quite correct.
This discussion is happening on multiple levels. On the deeper level, I think some people have already been persuaded by other people’s definitions of backing, at least to the extent that they think those other viewpoints are reasonable. On the shallower level, that hasn’t happened and will continue not to happen, but I don’t think the conversation as a whole should be judged by the narrowest understanding.
Some understanding of the history of money would not go astray here.
Money has not been the thing we understand now for its entire history. It has gone through a number of major changes, many of them brought about by economic collapse and disaster. Also, money as we know it has attributes that allow an economy to operate and grow.
In his book “Money, whence it came and where it went.” John Kenneth Galbraith opens with the question of what money is. He has a simple, if obtuse, answer. It exactly what you think it is. No more and no less.
Now first up, currency isn’t the same as money. A currency is simply one of many ways of representing money. We already have a great number of currencies in the world. Most of them are used as units of money. We talk of electronic money. The vast majority of everyday money is already electronic. Completely independent of any discussion of crypotcurrencies there is serious work towards moving to a cashless society in modern society. Right now I could probably go for weeks without ever touching a banknote or coin. Heck there are coffee places that only takes cards. They have no facility for cash at all, as it slows them down.
There is some talk about adopting blockchain technology to effect security in transactions involving existing conventional currencies. So Bitcoin and their ilk don’t have anything special going on here either.
Bitcoin is designed so that there is a limited number possible. This is a feature of Bitcoin’s design, it need not be intrinsic to cryptocurrencies. But it underlines the difference between Bitcoin and a government backed currency. Dollars, Euros, Yen, etc come into existence by the action of governments. They can also (in principle) vanish out of existence. (Printing money is a sideline, almost the entire wealth of money in existence is electronic, printed and minted money is in the noise.) Control of the amount of money in existence is critical to maintaining its utility. If we had a cowrie shell economy and someone discovered a huge mound of cowrie shells on a secluded beach, the economy would collapse.
So Bitcoin has away of controlling the amount of money, and provides a reward for generating currency. The value of a Bitcoin is currently mostly tied to the investment needed to create a new one. Which is the core problem with it. Once it is not possible to mine any more, what happens to the Bitcoin value? There will be vast numbers of computer facilities that in principle are now supposed to make money by providing services to the Bitcoin economy. But right now the economy is built on the ability of miners to create new money. The exchange rate for US dollars reflects the cost of making a new Bitcoin. So if I wish to purchase one, I am essentially paying for compute power. When mining becomes exhausted, or it becomes essentially impossible to compute new ones, the economy of mining will cease. Now it becomes essentially impossible to directly place a dollar value on a Bitcoin. You can come up with a secondary value - how much compute is needed to validate a transaction, and thus if you take a percentage of the transaction value, you can get a loose proxy for its value. But this depends upon the activity of the Bitcoin economy. To work it needs to have an active economy. And that economy has to be able to work with no internal industry driving it in the manner that mining currently does.
Which brings us to the overwhelming difference between Bitcoin and ordinary money. Money as we use it today enables the economy. It isn’t just the unit of conversion of goods and services, the structure of money allows the economy to grow. And of course it does this via financial services. I can make money with money. Banks lend money, and the ability to borrow underpins the ability of the economy to work. This brings us to fractional reserve banking. This is how most money comes into existence. Control of this is the key point of how governments “back” their currency. Each currency has some central clearing mechanism that moves the real money about between banks. And the banks that subscribe to this are heavily regulated to ensure that confidence in the system is maintained. Ultimately this confidence is rooted in the most basic of assurances. No matter what, even if every client of a bank demands that they get their money today, the bank will be able to do so. Even if this means the backing government has to step in. It is this assurance that creates stability in the economy and allows it to function.
Bitcoin has no such backing. There is no reason anyone could not establish a lending bank for Bitcoin. No reason they could not indulge in fractional reserve banking. But absolutely no mechanism to ensure that if there is a run on the bank that there will be any money in there. This is the money of a couple of hundred years ago.
When Bitcoin first came out there was a FAQ section on their Website. In it the question of a run on Bitcoin happening and what would happen was discussed. They answer was simple. By then the Bitcoin economy would be so important that it would be “to big to fail” and the US government would find it politically impossible not to bail a failing bank out. Needless to say this page is now long gone.
But the underlying question of the difference between Bitcoin and a government backed currency is clear. The central banks in countries all around the world have a deal with their governments, a deal that has underpinned the stability of modern economies. The governments guarantee the banks, and in return the banks agree to abide by a range of regulations that control how they operate. In particular these regulations impose a minimum fractional reserve that a bank must hold, and impose rules on the range of investments (ie loans) that a bank may undertake. For instance highly leveraged speculation on the stock market is often frowned upon. The Fannie May and Freddy Mac failures in the US underpinned the difference in banks here. They were not as regulated, and they did fail. The government did bail them out, even though it did not actually have to. But post bailout those banks no longer have the freedom to operate as they did.
Economies need unregulated riskier banks. But if you bank with them you understand that you are taking a risk that may see you loose the lot. If you are a start-up company or need fast money to cover cashflow you will be talking to these banks for loans. Similarly, if you have a lot of money, and want to get a better return on it, and are willing to take the risks, you invest in these banks.
IMHO there is scant chance Bitcoin will ever underpin an economy of such vibrancy that failure of a bank will attract a bailout from any government. Most likely, post mine-out the Bitcon economy will collapse. It may struggle on, probably with a greatly diminished exchange rate for a while. If there are failures, or more large scale frauds, nobody will care except those that lost their Bitcoins.
Nobody has yet mentioned that the Japanese Government has now recognized Bitcoin as legal tender - with severe Government regulations.
Bitcoin dealers must apply for a license costing about $300,000.
They must additionally deposit about $100,000 in contingency funds to a government account.
They must prove that they have a sufficient IT infrastructure.
They must have an approved training program for employees.
All customers must provide Government-approved identity documents.
There is a process in place for verification of physical addresses of customers.
Customers must provide full personal information, including profession and reason for Bitcoin transactions.
Dealers must keep records of all customers.
Dealers must keep records of all transactions.
These records must be available to the Japanese Government.
Bitcoin holdings are subject to capital gains tax.
Subject to these restrictions, Bitcoin transactions with registered dealers are now legal tender in Japan.
The Japanese Government is closely monitoring the situation, and may modify these regulations as necessary.
Sounds more like they are treating Bitcoins as a traded commodity. Which is fine. If I am a Japanese citizen am I legally required to accept Bitcoin as payment instead of Yen? Does the government accept Bitcoin as payment of taxes? If not, it isn’t legal tender.