Saturday, November 30, 2013

Bitcoin: My Two Bits

My view in a nutshell: I support a free market in money, credit, currency and banking.  If you think I write something counter to that in this post, you are mistaken; re-read the first sentence.

I will use an opinion piece by Edward Hadas to walk through some of my views on bitcoin; I will also use his post to put a spear in some of his views.

The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure.

Money issued by governments is also doomed to failure – and has always failed.  We already know all of the historic failures.  What of the money (or currencies) of today?  There is no currency issued today, to my knowledge, which can be deemed a success.  Significant loss of purchasing power and default on commodity backing are two reasons to come to this conclusion.  Why hold private money to a higher standard?

Money is inevitably a tool of the state.

Here, Hadas introduces an important concept (or makes a significant admission).  In terms of realpolitik, Hadas is quite correct – and this statement has significant implications regarding bitcoin as a private and anonymous currency.

Hadas pooh-poohs the traditional view:

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

But it is not “inherently part of the apparatus of government,” or need not necessarily be such.  Currencies / money are just another good, to be traded in the marketplace.  Unless one views money as a tool of the state.

Friedrich Hayek…proposed replacing the state’s monopoly on legal tender with competing currencies offered by rival banks.

This certainly has happened in the past – there is no reason it could not happen again.  If Hadas had any real belief in his views, he would advocate competition without fear – after all, isn’t he confident that government money would win?

…Hayek might well have dreamt of bitcoins becoming a global currency for wages, prices and loans. He would, though, have hoped for a more stable value, not the increase from $13 to $900 per bitcoin in less than a year.

It is interesting that one criticism of bitcoin as money is the wild swings in valuation.  This, of course, is a valid criticism.  However, this says nothing about how bitcoin might evolve – it is not only a new “coin,” it is an entirely new concept; what history is there from which to derive a current value?  Left to the market, might not bitcoin gain enough acceptance to better develop a mature price signature?

…truly private money is an inferior alternative to the money that comes with the backing of a political authority.

Why?  On what basis?  Would I feel the same about a car?  Sending an overnight package?  A visit to the hospital?  Just look at bottled water for your answer.

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.

I am waiting to read of the first example where a government successfully unwound monetary excesses.  In the meantime, a private issuer will get unwound pretty efficiently – bankruptcy.  No “too big to fail” or any other such nonsense to get in the way of a market providing proper discipline. 

Bitcoin exemplifies some of the problems of private money. Its value is uncertain, its legal status is unclear and it could easily become valueless if users lose faith.

Users of government money have lost faith countless times in recorded history – there is nothing unique to private money in this.  Users have lost faith in virtually every good ever invented, if one judges this based on current use.  Have you used any papyrus lately?  A buggy whip?  The market has its ways of channeling resources to goods deemed desirable.  There is no reason to wish or expect from currency something that has not been possible for any other market-provided good.

As to its value being uncertain – welcome to the real world, Hadas; all value is subjective, hence uncertain.  In the meantime, it is only government standing in the way of the other objection – the legal status of bitcoin. 

Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity.

Why is it assumed that anonymity is only a benefit for criminals?  Does Hadas want a camera in his bedroom?  Why not?  Criminal activity, perhaps?

Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system. 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.

This is the fundamental risk to bitcoin – not the market, but the state.  Hadas is not shy in pointing out that it is only government force that truly threatens private money.

My two bits, in summary? 

  • I am all for a free market in money – and all systems that support money; I have no reason to criticize bitcoin in this regard.
  • It is too early to make a call on the future of bitcoin or other virtual currencies.  But I have every reason to hope for success – there must be a replacement offered before the current can be replaced.
  • Money is far less complicated than many other economic goods that the market provides. The market can provide money (and has done so in the past).
  • The biggest risk to bitcoin is the government, not the market.  Bitcoin threatens one of the government’s most important franchises – control over money.  The government will take every action necessary to maintain this franchise.

As for Hadas?  If he was so certain of his position, he would advocate for competing money, credit, currencies and banking.  But level the playing field – no legal tender laws, similar tax treatment for all currencies, and most importantly, taxes can be paid in any currency.

Come on, Hadas – use your keyboard to pound out this message.

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