Monday, 4 December 2017

Some Doubts on the Bitcoin Mania

Summary of Mises.org article 2017-12-02 (Swedish summary available here). Apologies for talking about what everyone else is talking about these days  including random students, grandma and taxi-drivers (always a sure-fire indicator)

Update: Re-run also at SeekingAlpha.com

Part of my charm is my skeptical-10th-man-negative-nellie attitude. I enjoy telling people they are wrong; what the substantive dispute is matters less. In terms of the Bitcoin hype (revolution, rally, mania, bubble, whatever your term of preference is...) that means remaining skeptical and critical. Having a background in the field of economics that seriously concern itself (read: obsessed) about money, monetary thinking and the meaning of transactions makes it easier both to embrance and to reject Bitcoin; it allows you to see its potential and its beauty, and it makes it utterly clear what its current failures are.


In a long line of other writers (Howden, Bagus, NorthMengerSanchez etc) I emphasise a few commonly-mentioned characteristics that make a commodity a particularly good money. Money is simply, as Howden points out, the "present good par excellence", the most liquid asset and fulfills functions such as medium of exchange, store of value and unit of account (sometimes people also add unit of deferred payment, which is a special case of unit of account). I list some particular characteristics that money has historically required to become money:
  • Storage costs
  • Transportation/transfer costs
  • Ease of handling/Recognisable
  • Durability
  • Divisibility
  • High Number of Users (Network effect)
  • Non-monetary demand
  • Quantity of money
  • Stable Purchasing power
  • Relationship to financial system
  • Government intervention
Note that the relative value of these are always from the point of view of the consumer and so economists have identified these backward-looking by analysing what consumers have gradually selected as money and how it has come about (No, Graeber, the state didn't "invent money").

As you can see, the quantity of money is only one of its qualities and by no means the most important one. On most of the other accounts, Bitcoin fares much worse than do standard and commonly-used currencies (USD, GBD, EUR etc), especially in the areas of network, stable purchasing power and relation to financial system (Can there be fractional reserve banking in bitcoin?).

One thing I didn't highlight (or perhaps forgot to note) in the Mises.org article was the insane transaction fees bitcoin is currently seeing. Most of this allegedly has to do with politics among the programmers and miners and shouldn't last for very long. Indeed, one of the major selling-points for why Bitcoin is a superior currency to fiat money is supposed to be its ease, speed and low-cost of transfers  even international, out-of-hours transfers. 

The clear take-away from this is not that Bitcoin has to be a better money than some backward currency nobody cares about (see Zimbabwe a fairly easy task. Rather, in order to become what its enthusiasts are promising (Bitcoin's so-called "transformative fundamentals"), it needs to beat the cutting-edge technology and best practice of the most-used and most-liquid major currencies. Right now, it's far away from that. Most of the initial advantages Bitcoin had in terms of technology has already been adopted (or is quickly happening) by systems in those currencies (quick and cheap transfers, technological payment systems), quickly reducing Bitcoin's one claim-to-fame to its limited quantity. For most consumers, however, that is not enough: quantity is only one of money's quality, and we care about more than that in settling our everyday transactions.

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