> Bitcoin, by contrast, has no intrinsic value at all.
This comes right after a paragraph describing how the US dollar has no intrinsic value other than the fact that it is the required currency for paying US taxes and that the Federal Reserve stabilizes it through the money supply (Modern Monetary Theory would argue these two points are effectively the same, but I digress).
Does this mean fiat currencies have intrinsic value? If so, how is this value more 'intrinsic' than the value a network gives a cryptocurrency?
Bitcoin's overextended and struggling network certainly makes it overvalued compared to the well-oiled machine that is the USD. But that's hardly a reason to write off cryptocurrencies in general.
Do not elide over the word 'required.' It is not a meaningless word. In my opinion it makes all the difference. In comparison, the 'intrinsic value' of the network is not intrinsic at all. Miners and hodlers and users are free to use any other cryptocurrency, or none.
> Does this mean fiat currencies have intrinsic value? If so, how is this value more 'intrinsic' than the value a network gives a cryptocurrency?
Because you are required to pay taxes.
> although Modern Monetary Theory would argue the two are effectively the same
Actually, if I understand correctly, MMT would argue that a central bank has very little control over money supply(other than in the rare case of acting as a "lender of last resort"). Instead, money is created through the act of deficit spending.
> The question is, “How do you turn litter into money?”
> So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay.
> All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I’m going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers.
> Then I add one more thing: Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.
> Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes.
Well, your quote seems to be writing off Bitcoin, not cryptocurrencies in general... but I don't understand this logic that keeps being put out.
The most powerful government in the world with long established laws and multiple powerful institutions guarantees USD as "legal tender for all debts, public charges, taxes, and dues."[0] and has been stable for decades, if not centuries.
The concept of cryptocurrencies didn't exist 10 years ago and bitcoin hasn't been stable for more than a few years, probably only months and is guaranteed by a computer network controlled primarily by machines running in China[1].
If a solar flare brings down the internet, all cryptocurrencies are immediately worthless, and that's assuming they'll ever be widely accepted for goods and services. So long as the US government is functional USD will be accepted for all goods in services.
That is the difference in "intrinsic value", as far as I see it.
If a solar flare brings down the internet (presumably you mean via EMP), the amount of USD wealth that would be lost would be equally if not more catastrophic, because most of it is not kept in physical bills, but in 1's and 0's on computer systems as well.
"In fact, economists estimate that only 8 percent of the world's currency exists as physical cash. The rest exists only on a computer hard drive, in electronic bank accounts around the world."
https://money.howstuffworks.com/currency6.htm
Edit: Looks like the percentage is a bit higher if you're talking just USD.
"All told, anyone looking for all of the U.S. dollars in the world in July 2013 could expect to find approximately $10.5 trillion in existence, using the M2 money supply definition. If you just want to count actual notes and coins, there are about U.S. $1.2 trillion floating around the globe."
I'm not actually talking about an EMP, I believe it's more of a CME[0]. Coronal mass ejections would have more of an impact on the long lines, so pretty much the core power and networking infrastructure.
But yes, this would affect the ability to take out cash from ATMs and banks wouldn't be able to check your account balance, though most have local generators or they would pretty quick, so local credit unions might still be operational. However, anyone with cash on hand would be able to utilize it to make purchases and the local/state/federal government would fly into emergency mode to protect the ability for hard currency to be used.
They would also make sure that financial institutions are the first ones back online in order to get the economy flowing again and the Fed would make sure that a dollar was worth the same after the lights came back on as it was before. Laws exist which ensure that manipulation of the currency and even opportunistic price gouging would be punished afterwards.
Not so for bitcoin or any other cryptocurrency... no government guarantees it and if the network went down unevenly who knows what sort of manipulations would be attempted on those networks that now had players with over 51%...
Since Chinese mining companies control well over 60% of the network, would the remaining miners be able to handle the load? Especially since many miners would just keep rolling in isolation and immediately start publishing simultaneous blocks when they reconnected with each other...
If intercontinental infrastructure weren't repaired for many months, would Europe, US and Asia all end up with their own branches of the blockchain? Has the bitcoin community even run a model of what to do in a similar disaster situation? I know that after 9/11 every bank has super rigorous disaster recovery plans and backup mechanisms, so they for sure have hardened backups and power generators at core locations.
I mean, this is ridiculous, bitcoin can't even be used to buy something and isn't accepted anywhere useful and probably never will. So if this scenario happened, the first thing that would happen is the price would collapse as everyone waited on Coinbase's doorstep to sell their coins to get cash so they can actually buy something useful.
> US dollar has no intrinsic value other than the fact that it is the required currency for paying US taxes
That's extrinsic value. A pretty simple test you can apply to figure this out: would the value still exist if you were all alone on a desert island? Food has intrinsic value, you'd still value food in this case because you still need to eat. Dollars do not, they're no good without another entity to give them to. Same for bitcoin. Mostly the same for gold although there are some uses of gold as a metal.
So bitcoin is a bubble, in that it has no intrinsic value, and the same is true of dollars. The important question is which of these bubbles is going to burst first.
This article can be summed up as "Bitcoin is analogous to Tulip Mania". How many years does bitcoin have to be around and used for that analogy to stop being the dominant?
The last time Krugman said this it was about the internet.
“The Internet’s impact on the economy has been no greater than the fax machine’s….ten years from now, the phrase “information economy” will sound silly. (1997)”
To be fair, this isn't the first time this quote been dredged up from the past to be used against him as it pertains to Bitcoin.[1]
So while it's fun to pile onto Krugman once in a while, since cryptocurrencies are more closely related to monetary and economic concepts, he clearly feels more confident about this particular assertion.
wow. He can't see the future. After working with blockchain smart contracts for 6 months I'm certain he's wrong. Even if it crash's this year cool things will come.
Wouldn't be an article about Bitcoins without "bubble" and "tulip." It's really getting old - you'd think 7 years in there'd be something new to write about.
You’d think that 9 years in there’d be plenty of examples of it solving problems for normal people, too. The bubble talk will go away as soon as that changes.
Garbage opinion piece regurgitating fears already known. I mean jesus, he even says that it's about as useless as a $100 bill.
Sounds like this guy is just butthurt that he missed the last jump in price. There were other historical spikes. This isn't the first it won't be the last.
We've heard about Bitcoin being a bubble and having no intrinsic value the entire duration of its existence -- so much so that Paul making these his main arguments feel like traveling back to ~2013 when it was "bubbling" then.
If people use Bitcoin and believe it has value, it _gives_ it value and credibility, in the same way that diamonds have value, even though they are no longer "rare".
When people stop using Bitcoin, or stop believing it has value or is worthy of value, any "bubble" state it has will burst.
My main question when reading this article was: when a major technological change or shift happened in the past few decades, did people realize at the time the potential, or did they make articles like this saying that the technology was a bubble? All it makes me think of is this famous Newsweek article: http://www.newsweek.com/clifford-stoll-why-web-wont-be-nirva...
I'm not saying that Cryptocurrencies will be the next internet (maybe it will be the next big .com crash), but entrepreneurs who become rich will be the ones that at least took the risk to believe (for better or worse).
You're right, but I don't think we've seen either of those skyrocket like Bitcoin. If one or the other was up 5800% perhaps we might call it a bubble....
> Bitcoin, by contrast, has no intrinsic value at all.
The idea of intrinsic value should die. It's fundamentally a complete misunderstanding of what value is based on.
FIAT currency and Bitcoin have value as long as people believe it has value.
Value isn't some objective criteria it's a highly subjective one, what one considers valuable another might not. depending on what we are talking about, you can then add some more solid criteria such as utility, scarcity, trust in the future and so on. Depending on what context value is to be understood in you get various fluctuations in price and then finally you have some exchange between two parties where the price is agreed.
> FIAT currency and Bitcoin have value as long as people believe it has value
This argument precludes any rational discussion of the price of Bitcoin. Bitcoin at $50,000? Correctly priced, because people feel like it! Bitcoin at 50¢? Correctly priced, because people feel like it!
Contrast that to national currencies, where fundamental relationships between rates, real GDP and other factors relating to the economy can be measured, forecasted and compared. Two informed people can have a reasonable debate about the price at which one should trade a U.S. dollar for Japanese yen or Canadian dollars. Two informed people cannot have a reasonable debate about the price at which one should trade a U.S. dollar for a Bitcoin.
In that sense, it's sort of like gold. Unlike gold, Bitcoin doesn't have millennia of heritage grandfathering in an informal consensus [1].
> In that sense, it's sort of like gold. Unlike gold, Bitcoin doesn't have millennia of heritage grandfathering in an informal consensus [1].
Yep. Exactly. Bitcoin doesn't have the history of other currencies and assets, by the simple fact that it has only existed for about ten years. Something that can't be changed because we don't have time machines to go back thousands of years and tell everyone how to build computers and create cryptocurrencies.
So instead of people saying that Bitcoin is inherently worthless all the time, maybe we can just agree that it's going to take a lot longer than ten years and a lot of swings both up and down in the price before we start creating enough of a "heritage" to come to an informal consensus on how much they are worth.
A lot of people come across as "This is something new and I don't want to spend any effort trying to understand it. Worthless! Everyone putting money into it are nothing but tulip heads!" and it'd be more annoying if my paying attention to it and taking small risks with it didn't just help me turn a small amount of USD into a downpayment on a house in 12 months, something I most likely wouldn't have been able to do putting that money literally anywhere else.
> So instead of people saying that Bitcoin is inherently worthless all the time, maybe we can just agree that it's going to take a lot longer than ten years and a lot of swings both up and down in the price before we start creating enough of a "heritage" to come to an informal consensus on how much they are worth
The history of non-fiat money (like gold) is that of candidates being knocked off, practically never added to, the list. Over time, new financial technologies (e.g. better refining, bimetallism, paper money, central banks, deposit insurance, et cetera) were demonstrated to be superior to gold (and its subsequents) in the context of a growing modern economy. People debated--extensively--each shift. Rational arguments were put forward, tested (and rejected), refined and, when fruitful, propagated.
Each of gold --> bimetallism, commodity money --> redeemable paper money, redeemable money --> "backed" money and backed money --> fiat had a rational argument (and demonstration) for their transition. Those arguments are one way; they don't work going backwards.
Gold remains as a legacy, a memory of where we came from. It's here, and has been replaced. (Analogous to old programming languages which remain in light use because of legacy code. You wouldn't clone their obsolete elements, justifying said clone with the legacy language's use.) There is no argument for "neue gold" because the same arguments that worked, cumulatively, over the centuries as society progressed, against gold work against the new thing. The comparison to gold is one of false equivalence; hence the fallback to "whatever we feel it's worth."
> Contrast that to national currencies, where fundamental relationships between rates, real GDP and other factors relating to the economy can be measured, forecasted and compared.
You can measure the exact same indicators for Bitcoin, with roughly the same amount of usefulness. In fact, if you go measure Bitcoin velocity you'll see it's basically zero, what means it's mostly not a currency, but something people are speculating on.
Gold had little value in the beginning. Diamonds only recently started to get value. Van Goghs paintings had no value until his death. Thats how value work. Its messy and thats ok, long term will prove individual assets valuable or not.
I think the world should just start using board games as a currency. They have a lot of value to me, and I'd be rich under this new paradigm. Also, some of those board games are really hard to get ahold of, and they last a really long time (I own games that are 60+ years old, much older than most dollars in circulation last).
BTW, I agree with you. I'm just trying to convince the masses that this is a good idea.
This argument did not exist with BTC at two- and three-digit price levels. Instead BTC was advertised as useful for (a) microtransactions on the Web, such as paying Web publishers or e-mail recipients (21.co second business model), (b) buying a drink at the trendy neighborhood coffee shop that accepted BTC, (c) transacting with strangers on sites like Silk Road, (d) buying stuff from Newegg, Overstock and ever-expanding universe of e-commerce shops accepting BTC, (e) international money transfers and remittances, where fees historically have been quite high.
All of that activity has died down due to better ROI on hoarding (whoever spent 2,739 BTC on this house must have quite a buyer’s remorse by now https://www.wsj.com/articles/lake-tahoe-property-sells-for-1...) and high transaction fees. The only argument one reads nowadays online is based on the bigger fool theory - buy now, sell later, pocket the profit.
You’re right that fiat currency has little of intrinsic value, but nobody with large enough wealth treats it as such. People might have 1-, 3-, 6-, 12-month cash cushions but (outside of people on ForEx forums) nobody is entertaining an idea of selling everything and investing in a large bag of GBP or CAD. Or telling their friends to buy NZD because it’s bound to go big.
Fiat currency is a plain transaction medium that people are quick to diversify from once they have accummulated decent amount of it to cover the everyday stuff. And those other investment mechanisms generally do have intrinsic, or backstop, value.
Gold wasn't originally a store of value nor used in technology. The world is filled with companies that started as one thing and ended up completely different.
In reality, it's not an argument, there isn't some supreme court of judges sitting there valuing the intent vs. the outcome.
You are creating your own arbitrary rules for judging BTC. That's fine but it's not an argument.
Let’s say the BTC network moves towards store of value instead of “Peer-to-Peer Electronic Cash System“.
Fewer transactions result in fewer blocks. Fewer blocks result in fewer miner rewards. Decreased profitability of block creation will have to be compensated by increased transaction fees. Increased transaction fees will lead to fewer transactions. What’s the incentive for miners to stick around in a store of value environment?
Goods have intrinsic value...currencies don't. They are just trusted (and backed by a public trusted entity, usually government, but need not be) stores to 'hold' transferred 'value' that lubricates an otherwise raw barter exchange economy.
Raw barter economy:
I provide service to someone in exchange for food/clothes
Currency lubricated economy:
I provide service to someone. They give me 'token(s)' equivalent to value of my service. I use the token(s) to buy what I want from someone else.
The token(s) need to be trustable, not-easily-duplicatable, should be equal to the total sum of values of all services + goods that exist in the society/economy. The token(s) needn't have any intrinsic value themselves other than the properties mentioned (probably more than the listed ones, but I listed basic ones)
1) "Bitcoin turns out to be a clunky, slow, costly means of payment". This is missing the phrase "right now". There is nothing inherent/unfixable in Bitcoin or competing cryptocurrencies that make them bad for payments in a technical sense (maybe in a exchange rate risk sense but that's not the claim being made). Yes Scaling, Speed, Security, and UX are issues, no those aren't insurmountable. One could easily say "dial up internet is a clunky way to watch videos"; yes and the technology will evolve.
2) No intrinsic values. I'm not sure that you need intrinsic value in a currency, only buy-in, and there are a lot of compelling reasons to buy-in.
3) It's a bubble. Provide your valuation model. I don't claim to know what the correct valuation is, but I'm not making a hard claim of bubble vs no bubble.
4) North Korea is potentially manipulating the market. Time to break out the boogymen! I don't doubt that NK is trying all measures of cyberscams / hacking / etc, but I really doubt that they have the capital or skill to meaningfully effect these high volume markets.
Don't get me wrong. There are massive problems and criticisms that can be leveled against Bitcoin et al, but this reads more as an "old man yells at clouds" kind of story.
>There is nothing inherent/unfixable in Bitcoin ... bad for payments in a technical sense
I would agree, but the point seems to be more about the current state of Bitcoin. Without technical changes that incorporate lessons from other currencies, Bitcoin is indeed terrible for transactional payments.
I only follow this stuff casually (never had any Bitcoin), but it seems that Bitcoin maintainers have heavily resisted changes that would allow Bitcoin to become transactional. And discussions about implementing technical changes leads to some of the more political fighting I've seen on HN.
Therefore, Bitcoin may not have technical limitations, but there are political limitations on what is technically possible with Bitcoin.
I entirely agree with you, other than your interpretation of what Krugman was getting at. He never brings up this as a political/leadership problem, and the great discussions that this would bring. He also is making a general argument against cryptocurrencies elsewhere, which makes it appear that he thinks that this is a property not a state.
If I were to write an article criticizing the cryptocurrency space, I'd talk about politics, regulations/lack there-of, currency risks/lack of cheap risk mitigating instruments, and how bearer instruments are crazy risky. He addresses the issues that I'd expect someone who hasn't observed the space enough to address.
> This is missing the phrase "right now". There is nothing inherent/unfixable in Bitcoin or competing cryptocurrencies that make them bad for payments in a technical sense
It’s been a decade and Bitcoin has never delivered on that promise despite heavy marketing pushes and huge amounts of capital. At some point it’s not reasonable to give the benefit of the doubt until something ships.
With less traffic on the network circa a year ago and before, it was plenty fast and cheap. I think it's in need of an upgrade so it can make bitcoin great again.
Having to verify 'n' times is a core part of why Bitcoin is time consuming to process transactions and also why it's hard to fix.
It's not also sufficient for a technology to say 'maybe something awesome will be invented to make this useful' in order for us to consider the base tech useful.
Maybe in the future we will discover a fantastic use for mud that allows us to travel faster than the speed of light. Until then, telling people how awesome mud is and that everyone should mine some mud, is just absurd.
Bitcoin is modern day mud. Maybe in the future Lightning or some tech will solve the problems it has. But right now it's useless.
Serious question, how is Bitcoin fundamentally different from gold? Based on a "tether to reality", gold is massively overvalued if you consider its industrial or practical utility.
Furthermore, gold is heavy and thus impractical to use in day to day transactions, just like Bitcoin.
There are altcoins, but then there are also alt-metals (granted a lot fewer of them) such as silver, platinum, palladium, etc.
The way I see it, bitcoin is just like gold except you can also trade it online.
One thing that maybe differentiates it in the way you’re defining it: you can really see it.
Gold jewelry, trinkets have social significance, and have for quite a long time. Crowns, regal adornments, religious altars, etc. are all ostentatious displays of gold, and whatever power structure exists to show it off.
The counterpoint to this Is maybe that all of the US gold is housed in secret? Most nations don’t actually display gold wealth in the ‘traditional’ way? These aren’t rhetorical questions, I’m genuinely curious if I’m seeing this from a sound point-of-view.
Nobody’s wearing bitcoin crowns or sitting on bitcoin thrones. Is there an equivalent? Does it even matter?
Actually, considering more than 70% of gold being bought is NOT for monetary purposes[1], I'd say it is not overvalued. It is valued exactly at its market value: for jewelry, for industry, for dentistry, etc.
Gold is pretty light for its value. A gram of gold is worth about $50, whereas a US dollar bill (of any denomination) also weighs 1 gram. So gold is 2.5x denser than $20s.
The main flaw with gold as a currency is that it's tempting to shave little bits off each coin so you can melt the shavings into some new coins. Or recast them with 20% lead. Paying in gold coins involved the buyer searching through his pockets for the lightest coins he could foist on the seller, and the seller skeptically hefting and biting them.
> Serious question, how is Bitcoin fundamentally different from gold?
So there are a handful of assets (gold, silver, jewels; generally stuff you'd expect to find in your average pulp fantasy treasure chest) that are essentially ancient speculation bubbles that never popped. They're valuable because there valuable. The optimist view of Bitcoin is that it's going to be the newest member of that august club.
The bad news is that most of the list predates money as we understand it. It's not entirely clear if new gold-class assets even can be created anymore.
The worse news is that the list is getting shorter. Aluminum used to be the stuff of kings, now we make candy bar wrappers out of it. Indigo, spices, pearls, turquoise. They all spent centuries as treasures until they weren't. Diamonds are starting to fall off, although it'll probably take a few decades.
All of these were once extremely scarce and became a lot more common for one reason or another. And Bitcoin itself is limited, but any idiot can fork off their own altcoin.
It's possible that in a few hundred years a Bitcoin will be just as much "treasure" as a bar of gold, but that's still far from a certain thing.
I realize this is an op-ed, but a good op-ed will still be based on well researched facts, otherwise the opinion is naive and useless. This reads like Krugman read a shitty blog from some 12 year old who doesn't know how to do independant research and simply copied some terribly uninformed social media arguments.
For example, the US Dollar is valuable not because that's the only accepted currency for paying taxes but because it's the only currency that nearly every retailer in the country accepts.
> much actual Bitcoin use seems to involve drugs, sex and other black-market goods
There's a big difference between bitcoin use in general and bitcoin use on the dark web. You can't cite an article about bitcoin use on the dark web as a source for how all bitcoin is used. That's like saying hot dogs are only sold at baseball stadiums when your source is just about hot dog sales at baseball stadiums.
I could go on but I think it's fair to say there is no need -- Krugman has gone full retard.
Why do they accept it though? Because they pay taxes in it.
UK retailers mostly don't accept USD even though it's the global reserve currency? Why. Because they'd have to change it back into GBP to pay tax on the profit they just made.
> There's a big difference between bitcoin use in general and bitcoin use on the dark web
At a time when multiple retailers are switching away from BTC, it seems more reasonable. In any case there's no study saying most of it isn't the dark web stuff.
> I could go on but I think it's fair to say there is no need
> For example, the US Dollar is valuable not because that's the only accepted currency for paying taxes but because it's the only currency that nearly every retailer in the country accepts.
The former is a significant part of the reason for the latter.
> There's a big difference between bitcoin use in general and bitcoin use on the dark web.
There's clearly a difference, but if a large share of the non-speculative trade is on the dark web, Krugman’s statement you criticize remains correct.
> I could go on but I think it's fair to say there is no need -- Krugman has gone full retard.
> The former is a significant part of the reason for the latter.
Obviously there's a feedback loop where people are paid in a currency and then people have that currency so retailers accept that currency and then they pay their employees with that currency, etc. But I don't think anyone has recently sat down to think about which currency they're going to use on a daily basis and selected that currency because it's the currency they have to pay their taxes in once a year. People use it because they have it, businesses accept it because that's what people have. Why? It's not because of taxes...
It's because nearly every modern country has a central bank or a "pseudo-central bank" (like the federal reserve) that issues the trade currency for that country. That central bank issues that currency because they want to control the economy (as Krugman mentions). It's not because they want to receive that currency to pay taxes -- accepting it as the payment method for taxes is a consequence of issuing that currency, not the reason for it.
> but if a large share of the non-speculative trade is on the dark web, Krugman’s statement you criticize remains correct.
Well sure, but there's no evidence of that and an article about usage of bitcoin on the dark web is not a useful source for such an argument -- in fact, using it in that manner discrets the author entirely.
> That central bank issues that currency because they want to control the economy (as Krugman mentions).
No, they issue it because that's what the government charters them to do. They enact particular monetary policy to control the economy, which only works because the currency is dominant in trade, which it is because the government systematically favors it (it's true that taxation isn't the whole story here, though, there's also legal tender status, the government issuing public benefits in the currency, minimum wage laws and other laws that are keyed off official currency and which are much harder to comply with if you use some other currency that floats against it, etc., etc., etc.)
Maybe I heard it on "Marketplace" recently — but the gist of it was (and I think it was focusing on young South Koreans) people were buying Bitcoin because all other options for getting rich quick seemed out of reach.
It was a sobering portrayal of Bitcoin as little better than a desperate lottery or roulette spin for a generation that feels left behind by the growing financial inequity (inequality).
61 comments
[ 2.4 ms ] story [ 117 ms ] threadThis comes right after a paragraph describing how the US dollar has no intrinsic value other than the fact that it is the required currency for paying US taxes and that the Federal Reserve stabilizes it through the money supply (Modern Monetary Theory would argue these two points are effectively the same, but I digress).
Does this mean fiat currencies have intrinsic value? If so, how is this value more 'intrinsic' than the value a network gives a cryptocurrency?
Bitcoin's overextended and struggling network certainly makes it overvalued compared to the well-oiled machine that is the USD. But that's hardly a reason to write off cryptocurrencies in general.
Because you are required to pay taxes.
> although Modern Monetary Theory would argue the two are effectively the same
Actually, if I understand correctly, MMT would argue that a central bank has very little control over money supply(other than in the rare case of acting as a "lender of last resort"). Instead, money is created through the act of deficit spending.
http://bilbo.economicoutlook.net/blog/?p=1623
A helpful illustriation by MMT'er Warren Mosler
> The question is, “How do you turn litter into money?”
> So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay.
> All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I’m going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers.
> Then I add one more thing: Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.
> Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes.
A slight quibble:
All federal government spending is money creation. All federal government taxation or fees is money destruction.
If you ignore debt (not a very MMT thing to do), you could say that net money creation is deficit spending.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
The most powerful government in the world with long established laws and multiple powerful institutions guarantees USD as "legal tender for all debts, public charges, taxes, and dues."[0] and has been stable for decades, if not centuries.
The concept of cryptocurrencies didn't exist 10 years ago and bitcoin hasn't been stable for more than a few years, probably only months and is guaranteed by a computer network controlled primarily by machines running in China[1].
If a solar flare brings down the internet, all cryptocurrencies are immediately worthless, and that's assuming they'll ever be widely accepted for goods and services. So long as the US government is functional USD will be accepted for all goods in services.
That is the difference in "intrinsic value", as far as I see it.
[0] https://www.law.cornell.edu/uscode/text/31/5103
[1] https://blockchain.info/pools
"In fact, economists estimate that only 8 percent of the world's currency exists as physical cash. The rest exists only on a computer hard drive, in electronic bank accounts around the world." https://money.howstuffworks.com/currency6.htm
Edit: Looks like the percentage is a bit higher if you're talking just USD.
"All told, anyone looking for all of the U.S. dollars in the world in July 2013 could expect to find approximately $10.5 trillion in existence, using the M2 money supply definition. If you just want to count actual notes and coins, there are about U.S. $1.2 trillion floating around the globe."
https://money.howstuffworks.com/how-much-money-is-in-the-wor...
But yes, this would affect the ability to take out cash from ATMs and banks wouldn't be able to check your account balance, though most have local generators or they would pretty quick, so local credit unions might still be operational. However, anyone with cash on hand would be able to utilize it to make purchases and the local/state/federal government would fly into emergency mode to protect the ability for hard currency to be used.
They would also make sure that financial institutions are the first ones back online in order to get the economy flowing again and the Fed would make sure that a dollar was worth the same after the lights came back on as it was before. Laws exist which ensure that manipulation of the currency and even opportunistic price gouging would be punished afterwards.
Not so for bitcoin or any other cryptocurrency... no government guarantees it and if the network went down unevenly who knows what sort of manipulations would be attempted on those networks that now had players with over 51%...
Since Chinese mining companies control well over 60% of the network, would the remaining miners be able to handle the load? Especially since many miners would just keep rolling in isolation and immediately start publishing simultaneous blocks when they reconnected with each other...
If intercontinental infrastructure weren't repaired for many months, would Europe, US and Asia all end up with their own branches of the blockchain? Has the bitcoin community even run a model of what to do in a similar disaster situation? I know that after 9/11 every bank has super rigorous disaster recovery plans and backup mechanisms, so they for sure have hardened backups and power generators at core locations.
I mean, this is ridiculous, bitcoin can't even be used to buy something and isn't accepted anywhere useful and probably never will. So if this scenario happened, the first thing that would happen is the price would collapse as everyone waited on Coinbase's doorstep to sell their coins to get cash so they can actually buy something useful.
[0] https://sciencing.com/effects-solar-flares-technology-20402....
That's extrinsic value. A pretty simple test you can apply to figure this out: would the value still exist if you were all alone on a desert island? Food has intrinsic value, you'd still value food in this case because you still need to eat. Dollars do not, they're no good without another entity to give them to. Same for bitcoin. Mostly the same for gold although there are some uses of gold as a metal.
So bitcoin is a bubble, in that it has no intrinsic value, and the same is true of dollars. The important question is which of these bubbles is going to burst first.
The last time Krugman said this it was about the internet.
“The Internet’s impact on the economy has been no greater than the fax machine’s….ten years from now, the phrase “information economy” will sound silly. (1997)”
So while it's fun to pile onto Krugman once in a while, since cryptocurrencies are more closely related to monetary and economic concepts, he clearly feels more confident about this particular assertion.
Whether he's right remains to be seen.
[1] http://www.businessinsider.com/paul-krugman-responds-to-inte...
Is Apple part of the "information economy"? Is Google? Is Tesla?
I'm asking, I'm not suggesting one way or another.
To answer my own questions though Apple would seem to be in the smart phone business (and of course the internet is the reason we have smart phones).
And Google would seem to be in the advertising business (among others). Their ads do play on the internet though.
So, I don't know — information economy? Internet economy? Internet-related economy?
Sounds like this guy is just butthurt that he missed the last jump in price. There were other historical spikes. This isn't the first it won't be the last.
If people use Bitcoin and believe it has value, it _gives_ it value and credibility, in the same way that diamonds have value, even though they are no longer "rare".
When people stop using Bitcoin, or stop believing it has value or is worthy of value, any "bubble" state it has will burst.
My main question when reading this article was: when a major technological change or shift happened in the past few decades, did people realize at the time the potential, or did they make articles like this saying that the technology was a bubble? All it makes me think of is this famous Newsweek article: http://www.newsweek.com/clifford-stoll-why-web-wont-be-nirva...
I'm not saying that Cryptocurrencies will be the next internet (maybe it will be the next big .com crash), but entrepreneurs who become rich will be the ones that at least took the risk to believe (for better or worse).
Unless what is driving up the price is speculation.
I mean, do most of these new-to-bitcoin users actually "use" Bitcoin? Purchase with it? Or are they holding, waiting to dump?
Quantitative easing has inflated asset prices across the board.
The idea of intrinsic value should die. It's fundamentally a complete misunderstanding of what value is based on. FIAT currency and Bitcoin have value as long as people believe it has value.
Value isn't some objective criteria it's a highly subjective one, what one considers valuable another might not. depending on what we are talking about, you can then add some more solid criteria such as utility, scarcity, trust in the future and so on. Depending on what context value is to be understood in you get various fluctuations in price and then finally you have some exchange between two parties where the price is agreed.
This argument precludes any rational discussion of the price of Bitcoin. Bitcoin at $50,000? Correctly priced, because people feel like it! Bitcoin at 50¢? Correctly priced, because people feel like it!
Contrast that to national currencies, where fundamental relationships between rates, real GDP and other factors relating to the economy can be measured, forecasted and compared. Two informed people can have a reasonable debate about the price at which one should trade a U.S. dollar for Japanese yen or Canadian dollars. Two informed people cannot have a reasonable debate about the price at which one should trade a U.S. dollar for a Bitcoin.
In that sense, it's sort of like gold. Unlike gold, Bitcoin doesn't have millennia of heritage grandfathering in an informal consensus [1].
[1] http://www.mining.com/what-a-roman-centurions-pay-says-about...
Yep. Exactly. Bitcoin doesn't have the history of other currencies and assets, by the simple fact that it has only existed for about ten years. Something that can't be changed because we don't have time machines to go back thousands of years and tell everyone how to build computers and create cryptocurrencies.
So instead of people saying that Bitcoin is inherently worthless all the time, maybe we can just agree that it's going to take a lot longer than ten years and a lot of swings both up and down in the price before we start creating enough of a "heritage" to come to an informal consensus on how much they are worth.
A lot of people come across as "This is something new and I don't want to spend any effort trying to understand it. Worthless! Everyone putting money into it are nothing but tulip heads!" and it'd be more annoying if my paying attention to it and taking small risks with it didn't just help me turn a small amount of USD into a downpayment on a house in 12 months, something I most likely wouldn't have been able to do putting that money literally anywhere else.
The history of non-fiat money (like gold) is that of candidates being knocked off, practically never added to, the list. Over time, new financial technologies (e.g. better refining, bimetallism, paper money, central banks, deposit insurance, et cetera) were demonstrated to be superior to gold (and its subsequents) in the context of a growing modern economy. People debated--extensively--each shift. Rational arguments were put forward, tested (and rejected), refined and, when fruitful, propagated.
Each of gold --> bimetallism, commodity money --> redeemable paper money, redeemable money --> "backed" money and backed money --> fiat had a rational argument (and demonstration) for their transition. Those arguments are one way; they don't work going backwards.
Gold remains as a legacy, a memory of where we came from. It's here, and has been replaced. (Analogous to old programming languages which remain in light use because of legacy code. You wouldn't clone their obsolete elements, justifying said clone with the legacy language's use.) There is no argument for "neue gold" because the same arguments that worked, cumulatively, over the centuries as society progressed, against gold work against the new thing. The comparison to gold is one of false equivalence; hence the fallback to "whatever we feel it's worth."
You can measure the exact same indicators for Bitcoin, with roughly the same amount of usefulness. In fact, if you go measure Bitcoin velocity you'll see it's basically zero, what means it's mostly not a currency, but something people are speculating on.
BTW, I agree with you. I'm just trying to convince the masses that this is a good idea.
All of that activity has died down due to better ROI on hoarding (whoever spent 2,739 BTC on this house must have quite a buyer’s remorse by now https://www.wsj.com/articles/lake-tahoe-property-sells-for-1...) and high transaction fees. The only argument one reads nowadays online is based on the bigger fool theory - buy now, sell later, pocket the profit.
You’re right that fiat currency has little of intrinsic value, but nobody with large enough wealth treats it as such. People might have 1-, 3-, 6-, 12-month cash cushions but (outside of people on ForEx forums) nobody is entertaining an idea of selling everything and investing in a large bag of GBP or CAD. Or telling their friends to buy NZD because it’s bound to go big.
Fiat currency is a plain transaction medium that people are quick to diversify from once they have accummulated decent amount of it to cover the everyday stuff. And those other investment mechanisms generally do have intrinsic, or backstop, value.
In reality, it's not an argument, there isn't some supreme court of judges sitting there valuing the intent vs. the outcome.
You are creating your own arbitrary rules for judging BTC. That's fine but it's not an argument.
Fewer transactions result in fewer blocks. Fewer blocks result in fewer miner rewards. Decreased profitability of block creation will have to be compensated by increased transaction fees. Increased transaction fees will lead to fewer transactions. What’s the incentive for miners to stick around in a store of value environment?
Raw barter economy: I provide service to someone in exchange for food/clothes
Currency lubricated economy: I provide service to someone. They give me 'token(s)' equivalent to value of my service. I use the token(s) to buy what I want from someone else.
The token(s) need to be trustable, not-easily-duplicatable, should be equal to the total sum of values of all services + goods that exist in the society/economy. The token(s) needn't have any intrinsic value themselves other than the properties mentioned (probably more than the listed ones, but I listed basic ones)
1) "Bitcoin turns out to be a clunky, slow, costly means of payment". This is missing the phrase "right now". There is nothing inherent/unfixable in Bitcoin or competing cryptocurrencies that make them bad for payments in a technical sense (maybe in a exchange rate risk sense but that's not the claim being made). Yes Scaling, Speed, Security, and UX are issues, no those aren't insurmountable. One could easily say "dial up internet is a clunky way to watch videos"; yes and the technology will evolve.
2) No intrinsic values. I'm not sure that you need intrinsic value in a currency, only buy-in, and there are a lot of compelling reasons to buy-in.
3) It's a bubble. Provide your valuation model. I don't claim to know what the correct valuation is, but I'm not making a hard claim of bubble vs no bubble.
4) North Korea is potentially manipulating the market. Time to break out the boogymen! I don't doubt that NK is trying all measures of cyberscams / hacking / etc, but I really doubt that they have the capital or skill to meaningfully effect these high volume markets.
Don't get me wrong. There are massive problems and criticisms that can be leveled against Bitcoin et al, but this reads more as an "old man yells at clouds" kind of story.
I would agree, but the point seems to be more about the current state of Bitcoin. Without technical changes that incorporate lessons from other currencies, Bitcoin is indeed terrible for transactional payments.
I only follow this stuff casually (never had any Bitcoin), but it seems that Bitcoin maintainers have heavily resisted changes that would allow Bitcoin to become transactional. And discussions about implementing technical changes leads to some of the more political fighting I've seen on HN.
Therefore, Bitcoin may not have technical limitations, but there are political limitations on what is technically possible with Bitcoin.
If I were to write an article criticizing the cryptocurrency space, I'd talk about politics, regulations/lack there-of, currency risks/lack of cheap risk mitigating instruments, and how bearer instruments are crazy risky. He addresses the issues that I'd expect someone who hasn't observed the space enough to address.
It’s been a decade and Bitcoin has never delivered on that promise despite heavy marketing pushes and huge amounts of capital. At some point it’s not reasonable to give the benefit of the doubt until something ships.
It's not also sufficient for a technology to say 'maybe something awesome will be invented to make this useful' in order for us to consider the base tech useful.
Maybe in the future we will discover a fantastic use for mud that allows us to travel faster than the speed of light. Until then, telling people how awesome mud is and that everyone should mine some mud, is just absurd.
Bitcoin is modern day mud. Maybe in the future Lightning or some tech will solve the problems it has. But right now it's useless.
Furthermore, gold is heavy and thus impractical to use in day to day transactions, just like Bitcoin.
There are altcoins, but then there are also alt-metals (granted a lot fewer of them) such as silver, platinum, palladium, etc.
The way I see it, bitcoin is just like gold except you can also trade it online.
Gold jewelry, trinkets have social significance, and have for quite a long time. Crowns, regal adornments, religious altars, etc. are all ostentatious displays of gold, and whatever power structure exists to show it off.
The counterpoint to this Is maybe that all of the US gold is housed in secret? Most nations don’t actually display gold wealth in the ‘traditional’ way? These aren’t rhetorical questions, I’m genuinely curious if I’m seeing this from a sound point-of-view.
Nobody’s wearing bitcoin crowns or sitting on bitcoin thrones. Is there an equivalent? Does it even matter?
[1] https://www.statista.com/statistics/299609/gold-demand-by-in...
The main flaw with gold as a currency is that it's tempting to shave little bits off each coin so you can melt the shavings into some new coins. Or recast them with 20% lead. Paying in gold coins involved the buyer searching through his pockets for the lightest coins he could foist on the seller, and the seller skeptically hefting and biting them.
So there are a handful of assets (gold, silver, jewels; generally stuff you'd expect to find in your average pulp fantasy treasure chest) that are essentially ancient speculation bubbles that never popped. They're valuable because there valuable. The optimist view of Bitcoin is that it's going to be the newest member of that august club.
The bad news is that most of the list predates money as we understand it. It's not entirely clear if new gold-class assets even can be created anymore.
The worse news is that the list is getting shorter. Aluminum used to be the stuff of kings, now we make candy bar wrappers out of it. Indigo, spices, pearls, turquoise. They all spent centuries as treasures until they weren't. Diamonds are starting to fall off, although it'll probably take a few decades.
All of these were once extremely scarce and became a lot more common for one reason or another. And Bitcoin itself is limited, but any idiot can fork off their own altcoin.
It's possible that in a few hundred years a Bitcoin will be just as much "treasure" as a bar of gold, but that's still far from a certain thing.
For example, the US Dollar is valuable not because that's the only accepted currency for paying taxes but because it's the only currency that nearly every retailer in the country accepts.
> much actual Bitcoin use seems to involve drugs, sex and other black-market goods
There's a big difference between bitcoin use in general and bitcoin use on the dark web. You can't cite an article about bitcoin use on the dark web as a source for how all bitcoin is used. That's like saying hot dogs are only sold at baseball stadiums when your source is just about hot dog sales at baseball stadiums.
I could go on but I think it's fair to say there is no need -- Krugman has gone full retard.
UK retailers mostly don't accept USD even though it's the global reserve currency? Why. Because they'd have to change it back into GBP to pay tax on the profit they just made.
> There's a big difference between bitcoin use in general and bitcoin use on the dark web
At a time when multiple retailers are switching away from BTC, it seems more reasonable. In any case there's no study saying most of it isn't the dark web stuff.
> I could go on but I think it's fair to say there is no need
I disagree, most of your points are poor.
The former is a significant part of the reason for the latter.
> There's a big difference between bitcoin use in general and bitcoin use on the dark web.
There's clearly a difference, but if a large share of the non-speculative trade is on the dark web, Krugman’s statement you criticize remains correct.
> I could go on but I think it's fair to say there is no need -- Krugman has gone full retard.
You have decidedly failed to make that case.
Obviously there's a feedback loop where people are paid in a currency and then people have that currency so retailers accept that currency and then they pay their employees with that currency, etc. But I don't think anyone has recently sat down to think about which currency they're going to use on a daily basis and selected that currency because it's the currency they have to pay their taxes in once a year. People use it because they have it, businesses accept it because that's what people have. Why? It's not because of taxes...
It's because nearly every modern country has a central bank or a "pseudo-central bank" (like the federal reserve) that issues the trade currency for that country. That central bank issues that currency because they want to control the economy (as Krugman mentions). It's not because they want to receive that currency to pay taxes -- accepting it as the payment method for taxes is a consequence of issuing that currency, not the reason for it.
> but if a large share of the non-speculative trade is on the dark web, Krugman’s statement you criticize remains correct.
Well sure, but there's no evidence of that and an article about usage of bitcoin on the dark web is not a useful source for such an argument -- in fact, using it in that manner discrets the author entirely.
No, they issue it because that's what the government charters them to do. They enact particular monetary policy to control the economy, which only works because the currency is dominant in trade, which it is because the government systematically favors it (it's true that taxation isn't the whole story here, though, there's also legal tender status, the government issuing public benefits in the currency, minimum wage laws and other laws that are keyed off official currency and which are much harder to comply with if you use some other currency that floats against it, etc., etc., etc.)
It was a sobering portrayal of Bitcoin as little better than a desperate lottery or roulette spin for a generation that feels left behind by the growing financial inequity (inequality).