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That’s the latest rationalization for bitcoin having non monetary value. Bitcoin has non monetary value as a means of transporting money. The folks at Mises.org have even fallen for this one. I’ve written about it before, but I just had a new idea.
Costello: Hey, Abbot, get this. A new Armored Truck company has opened for business. They will transport your money securely anywhere, plus there is a roulette wheel installed in the truck. As the truck speeds your money to its destination, it is automatically bet on any number you choose, from 0 to 00 to 36.
Abbot: What if I don’t want to bet on any number, just keep my money as is? All I want is for the Armored truck to deliver my money to its destination.
Costello: That’s no fun.
Abbot: No, that’s bitcoin. As a means of transporting money, it includes a gamble its price may drop and you lose big time. What kind of way is that to transport money?
Costello: Come on, Abbot, if you work fast, buy the bitcoin right away, then instantly transport it, the odds of losing anything are miniscule.
Abbot: But what about the recipient? Why should he accept payment in something that may drop in price?
Costello: He will have to unload it right away, too.
Abbot: So we are talking about a means of transporting money that involves both the sender and the recipient not holding onto the money for more than a few seconds, and this is baked into the transportation system.
Costello: Yep, and that’s how Microsoft and all them others are using bitcoin. Isn’t it wonderful?
Abbot: Of course, Microsoft pays a nice fee to some third party willing to take the bitcoins off their hands and assume the risk.
Costello: And that third party will always be there. Like the Roman Empire. I guarantee it.
Abbot: So bitcoin is a means of transportation that has baked into it a serious risk of losing big chunks of the money sent, but there are people out there willing, for a fee, to take the risk.
Costello: Sound viable to me. That’s exactly the kind of thing Mises was talking about when he said a money has to start off with intrinsic value. Risky, but someone out there is, for now, willing to insure you against the losses. Can’t get more intrinsic than that. What’s not to like? Microsoft thinks it’s OK, so why are you worried about it?
Abbot: To Microsoft, the whole thing is just another advertising expense. The companies interviewed about why they accept bitcoin all said it’s an advertising gimmick, and a cheap one at that, must cheaper than a television commercial. But Mr Average person would never agree to transporting money that way, or accepting money transported to him that way, with his money constantly gambled with whether he likes it or not.
Costello: Unless he’s buying drugs or something, which is a transaction involving other risks. So he figures the risk of losing on the roulette wheel is less than that of being arrested if he uses real money.
Abbot: Bottom line, bitcoin is not transporting money. It is transporting a lottery ticket with an unknown expiration date.
Costello: So it’s like a delivery truck that can only deliver rotten eggs.
Bob Murphy correctly described a bubble:
Note that all prices are driven by supply and demand. But when we say that an asset is in a bubble, what that means is that the demanders (i.e., new buyers) aren’t buying because of “fundamental” reasons, but rather for speculative reasons. In other words, they are only buying because they think the price will go up.
Why do bubbles burst? Because sooner or later, due to general economic conditions, people start needing cash. The time has come to sell my Thing X, and reap all the huge profits. But lo and behold, everyone is thinking this. The market is flooded with X. Better sell for the pittance I can still get for it, before it drops even more.
Devils’ Advocate: So, Dave, you are saying people are only buying bitcoins to speculate with? But what about all the people who actually are buying pizzas with it?
SD: You mean the 3% that aren’t hoarding it? We’ll talk about them. But I hope you realize that in any bubble not everyone is gambling with thing X. During the housing bubble, plenty of people bought houses to actually live in. But plenty more were buying them as a gamble, enough to influence the price of houses and give them a bubble price.
DA: So how do you know that the 97% who have never spent a bitcoin are just buying them as speculations? Maybe they intend to use them soon, but haven’t gotten around to it. I mean, you aren’t a mind reader, Dave.
SD: I’m not reading anyone’s mind, and I am not saying all 97% are just speculating. I am saying something more subtle, that the price of bitcoin is not influenced by the ones who plan to spend it, but only by the speculators.
DA: Dave, have you forgotten the laws of supply and demand? No matter what the reason someone has for wanting something, he is part of the demand which determines the price.
SD: Let me explain. Unlike any other money in the world, the price of nothing is fixed in bitcoins. A Swiss watch has a price fixed in Swiss Francs. The price of that watch in Switzerland does not go up and down depending on the relation of the franc to the dollar, or to any other currency. Certainly not from day to day or minute to minute.
But that same watch, or anything else, when it’s offered for sale on a website in bitcoins, will change its bitcoin price constantly. Since bitcoin is so volatile, going up and down like waves in a choppy ocean, no one can stay in business if he fixes his prices in bitcoin. When it drops from $266 to $90 in a few minutes, he can’t sell his Swiss watch at a discount of 65%, he’ll go broke.
DA: And if bitcoin goes up in price ten percent compared to other monies, he can’t sell his watch for that 10% higher, because his customers will flee to amazon.com and buy it in francs or dollars. I get that. Just today, bitcoin moved between $175 and $233, currently at $209 for the moment. So yes, it’s plenty volatile.
But what does that have to do with your claim that only speculators set the price of bitcoin, not normal people buying Swiss watches or what have you?
SD: Very simple. Since Swiss watches are priced in other monies, but never in bitcoin, then the fellow buying that Swiss watch could not care less what the price of bitcoin is.
DA: I’m just an imaginary being, Dave. I need you to give me an example.
SD: Sure. Say the watch costs $100. Let X be the current dollar price of a bitcoin on mtgox.com.
If X=$50 for one bitcoin, the guy buys 2 bitcoins, and uses them to get his watch. Cost of watch, $100.
If X=$100, he buys one bitcoin, and buys the watch with it. Cost of watch, $100.
If X=$200, he buys half a bitcoin….
DA: OK, OK I get it. So the buyers of bitcoins don’t care about the price. They spend a hundred bucks on that Swiss watch no matter what the selling price of bitcoin. I Get that. But the sellers of bitcoin care. They want to set the price so that they sell as many bitcoins as possible, don’t they? I mean it’s like apples. If the price of apples is too high, not enough people will buy them for the seller to make money.
SD: Nopers. Because the sellers of bitcoins can set the price as high as they want, and they buyers will buy the exact same dollar amount of bitcoins. If X= $50…etc. So that the sellers can set the price as high or as low as they want, and nothing will change, as far as people buying bitcoins to buy Swiss watches are concerned. The difference is that at a high price, the sellers get to keep more bitcoins hoarded away. So if we are looking only at the use of bitcoin as a medium of exchange [=to buy Swiss watches], its price will tend to go up and up, up to infinity.
DA: What about people who are buying it to speculate?
SD: Same thing, really. If they think it will go up, they don’t care what the price is. if they have $100 to gamble with and X=$50, etc.
DA: So why is the price what it is? Why did the price dip up and down today between $175 and $233?
SD: The price depends on the cash needs of the sellers at the moment, and on any bad news causing a panic among the speculators, such as mtgox going bankrupt, say.
DA: So what will happen?
SD: Same as with every bubble. Sooner or later, due to general economic conditions, people start needing cash. The time has come to sell my bitcoins, and reap all the huge profits. But lo and behold, everyone is thinking this. The market is flooded with bitcoins. Better sell for the pittance I can still get for it, before it drops even more.
DA: So not only is bitcoin doomed because it is a phony money like the Ithaca Hour and others, as you wrote about in the past, and because of Gresham’s Law, as you explained recently, but because it is something unseen until now, something whose price is determined by pure bubble reasons.
SD: Don’t forget to check my article Bitcoin All in One Place, for further analysis of that sad, sad bitcoin.
[SIX MONTHS LATER]
Turns out the above analysis has a mistake in it. It assumes there are actually people out there besides hoarders, buying things with bitcoins. It also assumes confidence among the hoarders that everything will be fine.
Both those assumptions, it turns out, are no longer true. Which is why bitcoin has been dropping like a stone since December 2013. See my humble article here.
Pete, who has commented here once in a while, and quite often over at the mises.org forum, issued a challenge to me. And yes, it’s about those stupid bitcoins again. Why, oh why, am I the go-to guy about this topic?
Truth be told, if it involved being praised to the skies and offered medals and cash rewards, I would never get tired of it. But just the opposite. Humble Smiling Dave is besmirched and ridiculed.
Pete concludes his article with a request from me of the following:
- Explaining why a trade between two non-consumption goods is not indirect exchange, and provide a method for classifying such trades (as according to Mises, the only two options are direct and indirect exchange)
- Providing a clear distinction between a non-money medium of exchange and money, and providing examples of such non-money media of exchange (preferably ones that he considers sustainable)
- Explaining how Bitcoin is to be classified (as according to Mises, the only three options are consumer good, producer good and medium of exchange)
- And last but not least, as a bonus, he can try to describe the process by which Bitcoin will collapse
OK, sure. One at a time.
1. It’s a direct exchange of a peso for a bitcoin [or for a dollar]. It’s not indirect exchange, because the peso was directly exchanged for the bitcoin [or the dollar], with no intermediary.
2. Non money medium of exchange: cigarettes in a prison. You can get pretty much everything the prison community has to offer for cigarettes. If we posit a small group of “cigarette haters”, which we define to mean people who will refuse to accept cigarettes in exchange for anything, then cigarettes are not yet a money in the prison. It’s not yet universally accepted.
Now if we are talking about a prison of a million inmates, and only one cigarette hater, he obviously doesn’t count. If 30% of the inmates are cigarette haters, then cigarettes are not yet money. What exact number is the make or break magic number of haters for cigarettes to be or not to be money? Mises says it’s not clear, meaning not known, meaning debatable.
Now just as there is a dividing line between a medium of exchange and of money, which Mises talked about explicitly, so too there is a dividing line between not being a medium of exchange at all and being a medium of exchange. If one person only in a prison population of a million accepts cigarettes, cigarettes are nothing. If so many people accept them that cigarettes are close to the no man’s land Mises talked about as maybe being money, they certainly are media of exchange. Where is that dividing line between media and non media of exchange? As with the other magic number, it’s not clear. But i have given some guidelines in my various articles.
3. There is a fourth class Mises didn’t bother to mention, because it usually has no influence on an economy. I call this class “Stuff Only Fools and Idiots will Bother With.” No offense. Bitcoin is right in there, at the head of the class.
To make perfectly clear what I mean, I will challenge Pete to answer this question. How would he classify the invisible non existent clothing the Emperor paid good money for in the classic story “The Emperor’s new Clothes”, by H. C. Anderson? Wherever he puts those, bitcoin goes right with them.
[Update 5/5/14: Just saw this in Reisman’s book Capitalism:
Just as the beneficial properties of things can fail to be recognized, it sometimes happens that beneficial properties are ascribed to things which do not in fact possess them, such as the beneficial properties some people ascribe to rabbit’s feet, tarot cards, and so on. We can join with Menger in characterizing such things as “imaginary goods.” It is not necessary, however, for economics to devote any special consideration to such goods beyond acknowledging the fact of their existence. This is both because they constitute unimportant exceptions and because the economic principles that apply to such goods, such as the laws of price determination, are the same as that apply to genuine goods.
So there you have it. Bitcoins are rabbit’s feet and tarot cards and “imaginary goods”. Menger and Reisman were one step ahead of you, Pete.]
4. Bitcoin will collapse the same way the Ithaca Hour and all the other phony moneys through the years collapsed.
Guys, I’m tired of bitcoin. Pete’s other questions will have to find someone else to answer them. I’ve spent too much time on it. I have bigger fish to fry. Marx, Keynes, MMT, the Monetary Disequilibrium crowd, defending Say’s Law, educating myself.