No, it shows that cryptocurrency owners and developers are economics ignoramuses. So many people who think Bitcoin or other cryptocurrencies have any real value just don't understand how money actually works.
«A financial product with a purely arbitrary value has been successfully introduced in the world’s most sophisticated financial markets»
The author, an economist to top it all, completely glosses over fiat currencies (eg. currencies no longer convertible to gold.) "Fiat" literally means "currency without intrinsic value", ie. "arbitrary value."
I was under the impression the intrinsic value of fiat currencies is the ability to pay taxes with them and thereby avoid negative attention from the folks with a monopoly on the use of force. Is my understanding incorrect?
In the same way that ex. Bitcoin has intrinsic value as means to write data to an immutable public ledger, both of these applications are insufficient to justify the value each of these things hold.
The fact of the matter is that intrinsic value is not a real thing, and as a model it makes bad predictions for assets primarily intended as mediums for exchange and value storing.
Value is a view on a thing and not an intrinsic property of that thing. The value of currency is that you can buy things with it, now or at some time in the future; the value of the things you buy is subjective to you.
Gold price depends very little on its real-world use. Only 10% of the yearly production is used for industrial purposes. The remaining 90% is stored in vaults or used for jewelry (which arguably is popular only because it is expensive; many other metals offer similar or better properties but aren't favored because they are "cheap".)
I always find it hilarious when I see comments like these popping up on threads about bitcoin/crypto. The libertarian conspiracy theorist's first straw to grasp is this bizarre idea that "fiat" is inherently valueless. I'll grant that this idea is extremely attractive to laypersons because fiat is indeed made of paper, which grows on trees, which is not naturally scarce, which can be printed (or to use the libertarian nomenclature, manipulated) by the federal reserve.
Sorry to burst your bubble, but the intrinsic value of a currency is not based solely on naturally occurring scarcity, but on a marketplace's faith in its stability as a means of transaction.
Gold was, once upon a time, THE standard, this is true. But the problem with gold is that its supply bears no relation to the needs of the economy. The supply of gold depends on what can be mined.
In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold - and therefore an enormous increase in the price of everything else.
Since then, the problem has typically been the opposite - the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.
The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price.
Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently.
This is hardly the behaviour of a stable store of value.
Nation-states still maintain gold reserves and transact in bars of the barbarous relic stored in the basement[0] of the New York Fed. An unwashed layperson might see this and suspect that they know better than to trust each other’s digits in computers and pieces of paper.
Physics-envyists engage in scientism, having the superficial appearance of science by way of high-minded terms liquidity, velocity, circular flow, price level, and quantity needing to grow with the economy, but it is utterly hollow. If supply is not rooted in genuine demand, pouring on more and more money (“reflating”) will not fix the root problem.
Consider that if currency inflation (printing more money) produced an instant uniform increase in all prices, then the effects on purchasing power and prices would cancel each other out — leading to no net effect. The market does adjust to changes in the supply of money as you noted, but these changes take time and cause prices in some sectors to rise more than others. Here again the easily swayed layperson might make these observations and wonder why bother about it.
> Gold was, once upon a time, THE standard, this is true. But the problem with gold is that its supply bears no relation to the needs of the economy. The supply of gold depends on what can be mined.
Whereas fiat currencies the supply bears only a relation to the needs of the government's spending.
On occasion, of course, this is the same as "the needs of the economy". But that happens too with the gold supply.
Thing is, fiat currencies keep their value, on average, for something like 70 years (discounting inflation, I mean the average time it takes from money getting issued to when it is no longer accepted anywhere, like happened to quite a few currencies in WWII). Gold, even in modern times, has outperformed them on that (though, yes, it certainly does not have 7000 years of acceptance like some claim, but it easily gets into centuries)
A dollar is backed by the fact that there are many people who need to use it in order to pay their debts. Money enters the system when we make loans. This is why mortgage interest rates go up-and-down based on the current state of the economy.
A bitcoin has value because bitcoins are in demand. Same thing.
Economically speaking it doesn't matter why people demand them (eg. to pay a merchant or to pay taxes). The demand in and of itself is what gives them value. I would then argue that technically Bitcoin is fiat currency.
I don't think you understand currencies? There will always be some level of currency-to-currency trading, but the hope is that it will be minor compared to the major purpose of a currency--- using it as a easy way to exchange value. (Which I imagine is what you were referencing when you said "original purpose".)
This is what I was referencing. Nobody will ever use bitcoin as a means of exchange if the price of a car today is 30% less than it is tomorrow.
The most important thing with a means of transaction is the stability of its value. Bitcoin will never be stable so long as it is used as a vehicle for investment (aka a commodity).
"Nobody will ever use bitcoin as a means of exchange if the price of a car today is 30% less than it is tomorrow."
Yeah, that's not how it works. Most holders just spend and replenish with fiat.
"The most important thing with a means of transaction is the stability of its value. Bitcoin will never be stable so long as it is used as a vehicle for investment (aka a commodity)."
> For a while, Bitcoin was used for transactions that people wanted to keep secret from government authorities, like drug deals. It soon became apparent, however, that if authorities wanted to track these transactions, they could. For instance, Silk Road, the first major online drug market, which made use of Bitcoin, was shut down by the F.B.I. in 2013.
This is pretty weak reasoning from one of the "top 5% economists in the world". The Silk Road shutdown was (reportedly) the result of poor OPSEC on the part of Ulbricht and has nothing to do with the anonymity characteristics of Bitcoin.
The only thing that tumbling does is prevent a direct link between 2 possibly illicit transactions.
Unless the tumblers are use for mostly legitimate transactions they are useless and being linked to to one will raise a flag if you are under investigation.
One of the top 5% economists? LOL
Market efficiency is not about prices reflecting "intrinsic value". First lesson of economy is that there's no such a thing. An efficient market allocates resources according to people's preferences.
What's the "intrinsic value" of collectible baseball cards? Yet they have a non-zero price in a mostly unregulated market. No economist before has ever bothered to write an article about why ridiculous collectibles disprove market efficiency... maybe because this doesn't make sense?
Also, pretty much nobody believes in markets that are maximally efficient in every case. People just understand that markets not being perfect doesn't mean those trying to regulate it are automatically perfectly enlightened.
The article conjures a bunch of fallacies in order to attack a straw man.
Agreed. It's not hard to see that the fear of regulation/bans has a direct relation with Bitcoin's price, which means it's not a completely unregulated free market and thus hardly proof that free markets don't work.
He also seems to disregard other cryptos which can easily be used for regular transactions with low fees.
Just a bad article really.
EDIT: Just realized this was submitted by "Bitcoin_McPonzi", so I doubt they would care about the article's accurate depiction of Bitcoin.
My favorite bit about the EMH is that there's a proof that it implies that P = NP. Since that's incredibly unlikely to be the case it's really quite silly to assume the EMH.
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[ 3.0 ms ] story [ 79.6 ms ] threadhttps://news.ycombinator.com/newsguidelines.html
The author, an economist to top it all, completely glosses over fiat currencies (eg. currencies no longer convertible to gold.) "Fiat" literally means "currency without intrinsic value", ie. "arbitrary value."
The fact of the matter is that intrinsic value is not a real thing, and as a model it makes bad predictions for assets primarily intended as mediums for exchange and value storing.
Sorry to burst your bubble, but the intrinsic value of a currency is not based solely on naturally occurring scarcity, but on a marketplace's faith in its stability as a means of transaction.
Gold was, once upon a time, THE standard, this is true. But the problem with gold is that its supply bears no relation to the needs of the economy. The supply of gold depends on what can be mined.
In the 16th Century, the discovery of South America and its vast gold deposits led to an enormous fall in the value of gold - and therefore an enormous increase in the price of everything else.
Since then, the problem has typically been the opposite - the supply of gold has been too rigid. For example, many countries escaped the Great Depression in the 1930s by unhitching their currencies from the Gold Standard. Doing so freed them up to print more money and reflate their economies.
The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price.
Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently.
This is hardly the behaviour of a stable store of value.
Physics-envyists engage in scientism, having the superficial appearance of science by way of high-minded terms liquidity, velocity, circular flow, price level, and quantity needing to grow with the economy, but it is utterly hollow. If supply is not rooted in genuine demand, pouring on more and more money (“reflating”) will not fix the root problem.
Consider that if currency inflation (printing more money) produced an instant uniform increase in all prices, then the effects on purchasing power and prices would cancel each other out — leading to no net effect. The market does adjust to changes in the supply of money as you noted, but these changes take time and cause prices in some sectors to rise more than others. Here again the easily swayed layperson might make these observations and wonder why bother about it.
[0]: https://www.newyorkfed.org/aboutthefed/goldvault.html
Whereas fiat currencies the supply bears only a relation to the needs of the government's spending.
On occasion, of course, this is the same as "the needs of the economy". But that happens too with the gold supply.
Thing is, fiat currencies keep their value, on average, for something like 70 years (discounting inflation, I mean the average time it takes from money getting issued to when it is no longer accepted anywhere, like happened to quite a few currencies in WWII). Gold, even in modern times, has outperformed them on that (though, yes, it certainly does not have 7000 years of acceptance like some claim, but it easily gets into centuries)
A bitcoin has value because bitcoins are in demand. Same thing.
Economically speaking it doesn't matter why people demand them (eg. to pay a merchant or to pay taxes). The demand in and of itself is what gives them value. I would then argue that technically Bitcoin is fiat currency.
This is what I was referencing. Nobody will ever use bitcoin as a means of exchange if the price of a car today is 30% less than it is tomorrow.
The most important thing with a means of transaction is the stability of its value. Bitcoin will never be stable so long as it is used as a vehicle for investment (aka a commodity).
Yeah, that's not how it works. Most holders just spend and replenish with fiat.
"The most important thing with a means of transaction is the stability of its value. Bitcoin will never be stable so long as it is used as a vehicle for investment (aka a commodity)."
Volatility is expected to decrease over time. https://bitvol.info/index.html
This is pretty weak reasoning from one of the "top 5% economists in the world". The Silk Road shutdown was (reportedly) the result of poor OPSEC on the part of Ulbricht and has nothing to do with the anonymity characteristics of Bitcoin.
Can't I simply traverse the blockchain (which is essentially a linked list) to see which address transacted with which?
And you could also argue that if you took precautions you could setup an anonymous wallet that isn't directly linked to you.
Bitcoin that can never be converted to fiat or used in a transaction that cannot be anonymous such as land or property purchas is worthless.
Unless the tumblers are use for mostly legitimate transactions they are useless and being linked to to one will raise a flag if you are under investigation.
He also seems to disregard other cryptos which can easily be used for regular transactions with low fees.
Just a bad article really.
EDIT: Just realized this was submitted by "Bitcoin_McPonzi", so I doubt they would care about the article's accurate depiction of Bitcoin.
1) He thinks Bitcoin should be worth zero
2) People keep paying more than zero for Bitcoin
3) This discrepancy destroys the Efficient Market Hypothesis
4) If the EMH is bullshit then markets for other assets are bullshit since they also rely on the EMH
5) Therefore now the valuation of other assets is also bullshit
6) Regulators should curtail trading in Bitcoin futures since it shows the EMH is bullshit and that undermines all markets
Brilliant analysis.