BitCoin Under Fire(marginalrevolution.com)
marginalrevolution.com
BitCoin Under Fire
http://marginalrevolution.com/marginalrevolution/2011/04/jerry-brito-defends-bitcoin.html
10 comments
Aren't dollars just worthless pieces of paper?
Apparently not. Try spending dollars in a store (both in the U.S. and many places besides) and see if it works.
They are only worth something because people accept them as payment.
Including the U.S. government as payment for debt. If the most powerful government in the world says dollars have value, it's not so easy to lose all of that value, even without it being a backed currency.
Is he saying that dollars are the only solid currency in the world, and everybody should convert all their assets into dollars as fast as possible?
Most of the world uses non-backed fiat currency now, not just the U.S. People do convert their assets into and out of dollars (and other currencies) all the time.
Apparently not. Try spending dollars in a store (both in the U.S. and many places besides) and see if it works.
They are only worth something because people accept them as payment.
Including the U.S. government as payment for debt. If the most powerful government in the world says dollars have value, it's not so easy to lose all of that value, even without it being a backed currency.
Is he saying that dollars are the only solid currency in the world, and everybody should convert all their assets into dollars as fast as possible?
Most of the world uses non-backed fiat currency now, not just the U.S. People do convert their assets into and out of dollars (and other currencies) all the time.
"Including the U.S. government as payment for debt."
So what exactly can I get from the US government in exchange for dollars? (I am not a US citizen).
So what exactly can I get from the US government in exchange for dollars? (I am not a US citizen).
If you're not a US citizen dollars are not meant to be held as a store of value and trade (although some outside the US actually do use them this way).
However, to answer your question directly you can get interest from the US government in exchange for dollars by buying US Treasury bonds.
However, to answer your question directly you can get interest from the US government in exchange for dollars by buying US Treasury bonds.
Aren't dollars just worthless pieces of paper? They are only worth something because people accept them as payment.
Some of those people are the IRS, who will throw you in prison if you don't turn over a sufficient quantity of said paper. That guarantees a minimum level of demand for dollars.
Some of those people are the IRS, who will throw you in prison if you don't turn over a sufficient quantity of said paper. That guarantees a minimum level of demand for dollars.
I suppose they only charge you taxes if you actually earn dollars, so if you wouldn't earn anything, you wouldn't have to pay taxes? What I mean: you pay taxes with the dollars you earned, you don't have to buy dollars on some market to pay taxes.
IANATL, but my understanding is that you owe taxes whether your earnings are in dollars or euros or bitcoins.
From the Russ Roberts podcast (goo.gl/mNcQW), they discuss the tax issue. Apparently you're not taxed on bitcoins.
Not right now, but that is simply because the volume isn't large enough to have attracted government attention yet.
There was a case some years ago in Germany where something similar happened. A local initiative introduced a local fiat currency, and initially people did not pay taxes on sales etc. in that currency. At some point, this got the government's attention, and soon after that, the tax advantage was gone. People had to pay their taxes in Euros.
Something similar will happen to BitCoin if it takes off. It may be somewhat harder to enforce for the government, but then again, paper cash transactions are anonymous, too. You still pay sales tax when you purchase something with paper money. There is no truly fundamental difference here to how BitCoin works.
There was a case some years ago in Germany where something similar happened. A local initiative introduced a local fiat currency, and initially people did not pay taxes on sales etc. in that currency. At some point, this got the government's attention, and soon after that, the tax advantage was gone. People had to pay their taxes in Euros.
Something similar will happen to BitCoin if it takes off. It may be somewhat harder to enforce for the government, but then again, paper cash transactions are anonymous, too. You still pay sales tax when you purchase something with paper money. There is no truly fundamental difference here to how BitCoin works.
I think the same happened to Linden Dollars (Second Life). However, I don't see a problem, as presumably they can only tax you on the corresponding dollar value of the currency. Like if you earn 1000 BTC and they are worth 1000$ at current rates, you are taxed for 1000$, if they are worth 0$, you are taxed for 0$.
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I'm having trouble seeing how his argument doesn't apply to every other currency that exists, and feel like he's ignoring that if you want to pull money out of the cayman islands to spend locally, there is likely to be some hassle, delay, or loss of anonymity involved. Surely an economist understands opportunity cost? Is there more to his argument that I'm not seeing?
It's not the best-written criticism (incidentally, why was the title changed for submission?) but it has a point. Right now, Bitcoins ain't worth jack-shit as a currency in any denomination larger than "a few".
If I have a hundred thousand dollars, I can buy a Porsche. If I have a hundred thousand bitcoins, I can't buy anything, because I doubt I'll find a buyer for a hundred thousand bitcoins.
I'd be interested to know: what's the largest bitcoin-to-dollar (or bitcoin-to-real-goods) transaction that has ever taken place?
If I have a hundred thousand dollars, I can buy a Porsche. If I have a hundred thousand bitcoins, I can't buy anything, because I doubt I'll find a buyer for a hundred thousand bitcoins.
I'd be interested to know: what's the largest bitcoin-to-dollar (or bitcoin-to-real-goods) transaction that has ever taken place?
About 25k BTC trade daily on MtGox, and that is thought to represent roughly 1/3 of USD-BTC FX transactions daily.
Keep in mind thats BTC-USD trades, not "notional value spent".
Apparent largest transaction was 400k bitcoins: http://www.bitcoin.org/smf/index.php?topic=1346.0
It would be difficult to transact 100k BTC with one counterparty, but could be reasonably accomplished in a few days via electronic exchanges (mtgox).
Keep in mind thats BTC-USD trades, not "notional value spent".
Apparent largest transaction was 400k bitcoins: http://www.bitcoin.org/smf/index.php?topic=1346.0
It would be difficult to transact 100k BTC with one counterparty, but could be reasonably accomplished in a few days via electronic exchanges (mtgox).
It would be interesting to know how much of this 25k/day trade is simply a kind of steady-state speculation, including attempts to exploit arbitrage. If somebody really wanted to change 100k BTC to $, it would likely have a disastrous impact on exchange rates.
The trade of US$ in the currency markets is on the order of several trillions per day. Now imagine what would happen if somebody truly wanted to exchange a few trillion US$ for Euros, and keep those Euros...
The trade of US$ in the currency markets is on the order of several trillions per day. Now imagine what would happen if somebody truly wanted to exchange a few trillion US$ for Euros, and keep those Euros...
The global currency post market turnover is ~1.4 trillion according to the BIS, note this includes many currency pairs that dont involve USD; a trillon a day is an upper bound on the daily USD market.
China effectively traded around 0.2 trillion USD for yuan and kept the USD last quarter, the impact is not that big.
More generally looking at the volume transacted does not tell you much about the depth of the market; you need to look at the order book for that. Looking at the bitcoin market there are several lots of over 25k sitting within 20 cents on each side of the bid-ask, this means it is extremely likely one could carry out a directional 100k trade with relatively small market impact if spread out over a few days.
China effectively traded around 0.2 trillion USD for yuan and kept the USD last quarter, the impact is not that big.
More generally looking at the volume transacted does not tell you much about the depth of the market; you need to look at the order book for that. Looking at the bitcoin market there are several lots of over 25k sitting within 20 cents on each side of the bid-ask, this means it is extremely likely one could carry out a directional 100k trade with relatively small market impact if spread out over a few days.
Thank you for the data on the Bitcoin market, that is indeed informative.
As for China though, I would like to point out that those trades must be seen in relation to the massive net flow of goods from China to the US (and other parts of the world). The trade you claimed is actually bigger than Chinese net exports for that quarter (which I find somewhat surprising, I have to admit, but probably that just balances out with what was happening in the past), but it's in the same order of magnitude.
If China did not do such trades regularly, the Yuan would be expected to appreciate in a noticeable way, making current trade arrangements more difficult to maintain. Essentially, if China did not make such trades, it would be forced to restructure its economy towards domestic consumption, and it would force the rest of the world to start producing more of their own stuff again, or swallow the price increases.
So to claim that the impact of those trades is not big is problematic.
As for China though, I would like to point out that those trades must be seen in relation to the massive net flow of goods from China to the US (and other parts of the world). The trade you claimed is actually bigger than Chinese net exports for that quarter (which I find somewhat surprising, I have to admit, but probably that just balances out with what was happening in the past), but it's in the same order of magnitude.
If China did not do such trades regularly, the Yuan would be expected to appreciate in a noticeable way, making current trade arrangements more difficult to maintain. Essentially, if China did not make such trades, it would be forced to restructure its economy towards domestic consumption, and it would force the rest of the world to start producing more of their own stuff again, or swallow the price increases.
So to claim that the impact of those trades is not big is problematic.
Bitcoins are attractive because they are intrinsically stable. Diamonds will become worthless if we find a way to make them cheaply, the Picasso may turn out to be a fake, and the Cayman islands might suddenly decide to print a few trillion dollars. All of which means your net worth is subject to the availability, accuracy, and governmental decisions of whatever your storage medium is.
Bitcoin doesn't have this vulnerability, unless the majority decides it does. There cannot be rapid inflation due to "printing" bitcoins, unless the majority decides to allow it. The system cannot declare bankruptcy, because it's not backed by anything which can determine its intrinsic value.
It's a foreign currency that no single anything controls. It can wax and wane in value compared to other currencies, as any value-exchange system can, but if it becomes "the" currency, it'll be the first stable, totally-trustable currency ever, because transactions and amounts cannot be faked. Assuming quantum computers can't be made cheap enough to allow attacking the system to be valuable, as it relies on public key cryptography and difficult hashing functions (not sure how quantum computing effects hashing functions).
Bitcoin doesn't have this vulnerability, unless the majority decides it does. There cannot be rapid inflation due to "printing" bitcoins, unless the majority decides to allow it. The system cannot declare bankruptcy, because it's not backed by anything which can determine its intrinsic value.
It's a foreign currency that no single anything controls. It can wax and wane in value compared to other currencies, as any value-exchange system can, but if it becomes "the" currency, it'll be the first stable, totally-trustable currency ever, because transactions and amounts cannot be faked. Assuming quantum computers can't be made cheap enough to allow attacking the system to be valuable, as it relies on public key cryptography and difficult hashing functions (not sure how quantum computing effects hashing functions).
Can someone explain the velocity of money argument to me?
The blog post seems to be: 1. If btc are liquid, everyone will want to move btc wealth out to some other store of wealth and btc will fail. 2. If btc are illiquid, then it fails by definition. Currently btc are at this stage.
Here's why I don't get it: 1. If they ARE liquid and its easy to convert btc value to other value, why would everyone want to move value out of btc? seems like people would want to move value IN to btc because of the other benefits (anonymity, instantaneous transaction). Regardless, it doesn't follow that easy value conversion predicates value drain. 2. "Bitcoin seems to be at this stage [of being unable to convert Bitcoin assets into other, non-Bitcoin assets easily now]" -- this seems to be false. There's a highly liquid market for BTC-USD (21k btc have traded so far today). Yes, its not easy to transact 500k, but thats true for most new assets including exchange listed backed equities.
The blog post seems to be: 1. If btc are liquid, everyone will want to move btc wealth out to some other store of wealth and btc will fail. 2. If btc are illiquid, then it fails by definition. Currently btc are at this stage.
Here's why I don't get it: 1. If they ARE liquid and its easy to convert btc value to other value, why would everyone want to move value out of btc? seems like people would want to move value IN to btc because of the other benefits (anonymity, instantaneous transaction). Regardless, it doesn't follow that easy value conversion predicates value drain. 2. "Bitcoin seems to be at this stage [of being unable to convert Bitcoin assets into other, non-Bitcoin assets easily now]" -- this seems to be false. There's a highly liquid market for BTC-USD (21k btc have traded so far today). Yes, its not easy to transact 500k, but thats true for most new assets including exchange listed backed equities.
sorry, I wasn't clear. I wasn't asking WHAT velocity of money is, I was asking someone to explain the author's velocity of money argument. i.e. transfering wealth out of btc accelerates the velocity.
q, m, v, and p remain relatively constant in that transaction unless the liquidity event causes a persistent decrease in the price level (no evidence that the current BTC market could support it, but also c.f. above my comments about immature markets and liquidity).
q, m, v, and p remain relatively constant in that transaction unless the liquidity event causes a persistent decrease in the price level (no evidence that the current BTC market could support it, but also c.f. above my comments about immature markets and liquidity).
My reading of his argument is that bitcoins primary function will be as a medium of exchange, not as a store of value. Thus when any indiviudal has a significant amount of bitcoins, he will convert them to an asset class that does store value.
Okay, if I'm understanding how transactions work, all transactions are public, as they need to be validated by the P2P network.
This seems to be a significant disadvantage, to say dollars, where no record of a transaction exists.
Am I missing something (that's what I'm assuming)? Or is having a list of all transactions viewed as a strength?
This seems to be a significant disadvantage, to say dollars, where no record of a transaction exists.
Am I missing something (that's what I'm assuming)? Or is having a list of all transactions viewed as a strength?
If you can hide your IP address (a big if if you ask me), you can still remain anonymous. The transactions are public with their public keys, nobody needs to know your private keys and hence what transactions belong to you.
Bitcoin wiki article on aonymity: http://en.bitcoin.it/wiki/Anonymity
As I understand it bitcoin has no seignorage. The issuers of bitcoin do not gain anything the way governments do.
Seignorage is the difference between the cost of production - for paper money it's very low - and the value that is bought with the money.
In the case of bitcoin, they are about the same and any difference doesn't go to the designers or to the issuing network. The network is "paid" in cpu cycles (electricity) and spits out roughly the same value in bitcoins. But giving more power to the network doesn't make them come out any faster. In short, unlike governments who use inflation of fiat money as a very regressive wealth tax of last resort, the runners of bitcoin aren't getting rich off this.
Seignorage is the difference between the cost of production - for paper money it's very low - and the value that is bought with the money.
In the case of bitcoin, they are about the same and any difference doesn't go to the designers or to the issuing network. The network is "paid" in cpu cycles (electricity) and spits out roughly the same value in bitcoins. But giving more power to the network doesn't make them come out any faster. In short, unlike governments who use inflation of fiat money as a very regressive wealth tax of last resort, the runners of bitcoin aren't getting rich off this.
Cohen's GMU colleague Russ Roberts interviewed BitCoin's Andresen a few weeks back. Roberts, normally hyper-critical, was ecstatic over it. A great podcast: http://goo.gl/mNcQW
Gavin didn't do a very good job explaining things in that one, unfortunately. I recently found the Omega Tau podcast covering Bitcoin, and he does much, much better: http://omegataupodcast.net/2011/03/59-bitcoin-a-digital-dece...
Excellent. Agreed, he seemed to want to cater to Roberts' economics strengths, though if I recall, Roberts was trying to tease out some of the technical issues.
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BitCoin has been criticized for its built-in deflation, but that does give a reason to use it as a store of value.
If he converts everything into dollars and dollars are being devalued, he loses. Is he saying that dollars are the only solid currency in the world, and everybody should convert all their assets into dollars as fast as possible?