bitcoins suffer from a number of technical issues that make them unsuitable for normal currency transactions, but that has nothing at all to do with being backed by something or intrinsically worth anything. Those are economic issues and not directly related to the technical faults.
The two most glaring problems are that the maximum number of transactions per second is severely limited compared to anything like Visa, Paypal, SWIFT, etc. In theory one might be able to work around this, but it was not in the original specification. Secondly, it literally is designed to waste energy, using the same kind of Hashcash system that was designed to combat e-mail spam.
ETA also, bitcoin transactions cost you a fee, rather than facilitating free microtransactions.
IMO read the white paper if you are interested, but do not invest your life savings or something like that when you could have so much more fun pissing money away trading exotic derivatives on the options market.
I don’t see what it means other than taxes. But that’s no small thing. The dollar is backed by an economy that generates $20 trillion of output per year, that is something very real. And the U.S. government has the power to tax that output.
I read something which said Bitcoin is really more of a cryptoasset rather than a cryptocurrency. Many people invest in Bitcoin for the same reason they invest in gold–they think the price will rise. The only transactions they do are dollars->Bitcoin->dollars rather than Bitcoin for goods and services.
One problem with using Bitcoin as a currency is the high transaction fee. The charge to perform the computational effort for the transfer costs about $20 and can take some time to complete. That is going to put a damper on using it for everyday purchases.
Take the word taxes out of it. Call if a service fee (albeit a mandatory one).
The United States government and all its subsidiary governments provide a variety of public services; they deliver mail, enforce laws, provide national defense, build and maintain highways and bridges, run some parks and museums, provide public education, predict the weather, pay old age pensions, invade Mars with robots, etc.
The American people pay fees for these services. And we pay in dollars. So dollars have value because the American people want the services that are being provided by the United States government.
The United States is backing up dollars by providing wanted services in exchange for dollars. It’s the same as Pizza Hut honoring a Pizza Hut gift card; you give them the gift card and they give you a pizza. As long as people want pizzas and Pizza Hut is able to provide pizzas, Pizza Hut gift cards have value.
I’m bearish on bitcoin for a couple of reasons: One is that it seems to be two things at the same time: a store of wealth like money, and a speculative investment vehicle. Those two things are not compatible.
The other is that the minute any cryptocurrency gets large enough to threaten central banks’ control of the money supply, the government will come down on cryptocurrency with both boots.
Bitcoin has been soaring in value for a couple of reasons, imo: First, a lot of big money players are getting scared about the stability of the dollar. Endless rounds of QE and low interest rates spell inflation if the velocity of money is restored. Inflation worries drive money into crypto. Second, a lot of people are ‘investing’ in it because they think the value will continue to skyrocket and they can cash out at a big profit.
Do not store all your cash in a speculative vehicle like cryptocurrency. Putting a small amount in it as a hedge might not be a bad idea.
There’s been a continuing series of articles over the last few months noting that most bitcoin purchases are being made by institutional investors. (One example.) IOW, billionaires are sinking billions into bitcoin.
It should be immediately obvious that they aren’t doing this to buy bread at the corner store. These are pure speculative investments, premised solely on the assumption that bitcoins will become more expensive and they can sell them at a profit. Mere paper transactions that have nothing to do with the economy.
Bitcoin is the new gold. It’s utterly worthless, except in a small technical sense, but people fervently believe in a future world where ordinary money becomes worthless and gold/bitcoin will keep its value. This has all the truth value of pizzagate but believers will be believers. The rich will make money in the short run and everybody else will look foolish.
BTW, anybody who believes that the tulip bubble had anything to do with flower petals needs to read some history.
If they are hedging against government’s increasingly printing money and devaluing the money supply, it has everything to do with the economy. We don’t know what happens when you have hyperinflation in a world where there is a stable, alternate currency. Actually, we do: The US dollar has often played the role of bitcoin in hyperinflatiinary economies as people abandon their own currency and move to the U.S. dollar.
If the U.S. dollar itself starts to inflate heavily, it may take cryptocurrencies to keep the economy functioning at all.
The financial system is a complex ecosystem. If you saw a strange animal in the wild, your first instinct would not be to say, “That animal is stupid, and therefore evolution doesn’t work.” Instead, you’d ask “Why did the system evolve that? What purpose does it serve?” The assumption is that things have evolved the way they have for valid reasons. You should do the same with a role in the economy you don’t understand. Null hypothesis is that it’s there for a reason, even if people are exploiting it heavily.
The surface-level view I got from observing the Bitcoin/cryptocurrency mania several years ago was that it was useful for buying black market goods anonymously (especially when used with mixers), and for capital flight from authoritarian countries, which differentiates it from beanie babies or tulip bulbs where there are hardly any intrinsic value at all.
Has any major developments happened since then, that challenges this view?
Do institutional investors honestly believe in hyperinflation? I thought that was the province of goldbugs and other crackpots. The possibility that cryptocurrencies will keep the economy functioning after hyperinflation is congruent with the possibility that all the water in a kettle will jump one foot sideways simultaneously. It’s another example of what I said earlier. Rational investors do not sink billions into fallout shelters for the coming holocaust, nor do they do so for hyperinflation in the U.S. Irrational investors might, but they seldom have billions under their couch pillows.
The dollar is backed by the set of all entities who have or want dollars. Bitcoin is backed by the set of all entities who have or want bitcoins.
Now, the US Government is in fact one of the entities who have/want dollars, so you can say that “dollars are backed by the US government”. But the government is a fairly small share of the set of all such entities, and thus a small share of the backing.
And yes, it’s true that the set of entities interested in bitcoin is much smaller than the set interested in dollars, and so bitcoin is much less backed, and hence much less stable.
But ultimately, that’s a quantitative difference, not a qualitative one.
It’s absolutely terrible for that, as it’s inherently the most traceable currency in history. So much so, that it’s my hypothesis that it was actually created by the FBI or some other such government agency,
specifically to make it easier to track underground transactions.
It doesn’t have to be hyperinflation. It could be persistent inflation of 5-10% per year, decimating wealth stored in dollars every year. No we haven’s seen huge inflation since the 70’s. But before that we hadn’t seen it either, leading Keynesian economists to claim that ‘stagflation’’ was impossible.
You should be worried about inflation. Interest rates, the traditional tool for fighting inflation, are nearly impossible to raise by a significant amount because that would bankrupt everybody. The MMT theorists say we’ll just replace it by slowing down the economy by taxing the rich. That is, on even numbered days when they aren’t telling people you can raise taxes without hurting the economy. Apparently they didn’t learn that stagflation can be a thing.
This prolonged regime of near-zero interest rates is causing huge distortions as people spend money willy-nilly because it’s so ‘cheap’. That 1.9 trillion dollar ‘stimulus’ plan would cost the government $190 billion every year if they had to refinance the debt at 10%.
U.S. debt is currently 27 trillion dollars. A 1% increase in interest rates would add $270 billion dollars per year to the budget for debt service. Similar problems would befall states, cities, corporations and individuals who are holding record debt levels and surviving it only due to the lack of interest.
If we hold interest at zero and inflation starts to spike, the only choices we’ll have are all really bad ones. Hedging some part of your wealth against that possibility is smart. Having people hedge some of their wealth against failures is also good for the economy and society.
The thing is though, while people may TALK about being worried about inflaction, they clearly aren’t ACTUALLY worried about it. Look at what market prices are saying. The U.S. 10yr yields 1.4%; Japan yields zero, Germany is negative. Even the U.S. 30yr yields under 2%. The yield curve still shows more concern about deflation than inflation.
Anyone who buys Bitcoin because they are worried about inflation is not acting rationally, when you compare the risk-reward of shorting long-dated government bonds.
The “bitcoin as money” appeal lies in the blockchain. It makes it possible to have anonymous, but verifiable, transactions. That’s where it got the “dark web transactions” rep, and the “yay, governments can’t regulation it” rep.
But since mining bitcoin isn’t only required to increase the money supply, but also to register your transactions on the chain your average Joe trading bitcoin these days aren’t doing blockchain registered transactions, a bitcoin exchange is holding the coins and just makes old fashioned ledger records of who “owns” each coin. So instead of trusting a mathematically verifiable system they are trusting some company, same as for any other type of transaction and investment.
As money instead of 21st century tulip bulbs it doesn’t scale unless you give up the anonymous and indepentendly-verifiable aspect. And the expense that keeps “someone” from just flooding the market with new coins is that mining is energy intensive, which is fundamentally problematic in the age of climate change.
I can’t imagine any scenario where conventional currencies like dollars and euros lose all value but we still have enough of a functioning economy that you can trade in bitcoins.
Maybe so. But it didn’t take much to stop financial transfers in 2008. Remember all those ships that couldn’t unload because people didn’t know jow to get paid?
One of the reasons financial crises are unpredictable is because they tend to happen after people have convinced themselves that such a crisis is impossible. Remember when stagflation was said to be impossible? No one predicted the 2008 financial crisis either. This is the nature of complex systems. It’s like droppjng sand on a pile. You know that at some point the pile will collapse, but it’s impossible to know when. And the longer you keep droppjng grains of sand, the easier it is to convince yourself that the next one will be fine too. And you’re always right - until suddenly you aren’t.
So I wouldn’t make any predictions about the result if the world’s reserve currency starts being heavily devalued. It’s never happened, but we’ve never been in this kind of cumulative debt before, and no one seems to care about slowing down. Certainly not the governments of Canada and the U.S., who are both busy trying to put together the largest spending programs in their histories, despite both having record debt levels. And the trend seems to be shifting towards just printing money instead of finding markets for all that debt. This will not end well.
But even under high but not hyper inflation, having some wealth hedged in another currency is a good thing.
It records which bitcoin wallet the payment was made from and which it was made to. If you make sure no one knows it’s your wallet, the transaction is anonymous.