I have immense respect for Shiller, but I think he got a few things wrong in this piece.
The Bitcoin phenomenon seems to fit the basic definition of a speculative
bubble — that is, a special kind of fad, a mania for holding an asset
in expectation of its appreciation.
Shiller correctly identified the housing bubble long before others did, so he has a lot of credibility here. But doesn't truly disruptive innovation exhibit a similar pattern? Whether it's Google, or Tesla, or Netflix, the "mania" to hold the asset proves to be justified as entire industries are transformed.
The central problem with Bitcoin in its present form, though,
is that it doesn’t really solve any sensible economic problem.
The current monetary system is unfree, just like communication systems before the internet were unfree. I cannot transmit value over space and time, across borders, to anyone, for arbitrarily small or large amounts, at nearly zero cost. That seems like a "sensible economic problem" that needs a solution.
Despite its flaws, Bitcoin does a pretty good job solving these problems today, and future generations of cryptocurrency will only get better.
I don't argue that cryptocurrencies can or should replace government currencies, but they clearly accomplish something valuable.
After all, if cryptocurrencies had zero utility, why would so much talent be devoted to stealing them?
> I don't argue that cryptocurrencies can or should replace government currencies, but they clearly accomplish something valuable.
They might, but I wouldn't say it's "clear" just yet. The only clearly valuable thing Bitcoin accomplishes now is the facilitation of illegal trade online. Valuable – certainly, but a new technology whose crowning achievement so far is facilitating crime has a big PR problem. And that's not Bitcoin's only PR problem. Its association with wingnut (hacker-)libertarianism is another ball and chain, which gives Bitcoin the good old Glen Beck treatment.
I think Bitcoin adopters should market it as a terrific way to spend small amounts of cash online. Unfortunately, Bitcoin's volatility doesn't help to make this case, so that is probably the first thing that should be addressed. Bitcoin supporters should understand one thing: uncontrolled volatility, even when it's pointing up, perhaps especially when it's pointing up, isn't a good sign. Every currency is based on one thing – trust – and if Bitcoin is ever to become a currency, it should loudly declare that it's in the hands of responsible people; not criminals, speculators and wingnuts.
> The only clearly valuable thing Bitcoin accomplishes now is the facilitation of illegal trade online.
How do you figure? Being able to send money across the world for next to nothing (compare to credit card fees, not to mention the higher prices of Western Union or hawala) has immense value. Charitable organizations have already raised large sums using crypto-coins.
You are correct about volatility. It makes more sense right now to treat as a highly fungible asset than a currency; it will be interesting to see if it can self-stabilize without any central organization.
Bitcoin's role as a large-sum money-transfer mechanism for legitimate purposes hinges on availability of immediate exchange at each end of the transaction (immediate because of the volatility). Bitcoin exchanges aren't getting the best PR lately, either. I don't think responsible organizations would allow the use of Bitcoin as a transfer medium in the current chaos just to save some money. So this utility, I claim, is more theoretical at this moment. In any event, the volume of such transactions by established, lawful, and respected organizations is probably too limited to be categorized as clear value just yet.
"Being able to send money across the world for next to nothing (compare to credit card fees, not to mention the higher prices of Western Union or hawala) has immense value."
This is likely to end as Bitcoin exchanges discover the cost of compliance.
The cost of compliance is a serious issue, true. I would hope that at least some states recognize the value in letting the experiment play out without interference, as with the early days of the internet, but with real money on the line it's harder to dismiss as a mere toy.
However, I wouldn't neglect the "gray market" use cases of Bitcoin: things that happen outside the law, but are not as nefarious or blatantly illegal as Silk Road. Immigrants sending money home to their families, secondary savings accounts for those in countries with unstable currencies, etc.
The real cost of money transfer isn't really "next to nothing" when it depends on an asset so volatile it might lose 20% of its value before the party at the other end realizes they've been paid, and counterparties involved in the transaction are people that really shouldn't be running financial institutions.
When you look at the proportion of Bitcoins in existence whose owners are known to have lost them to incompetence/malice, suddenly those 2% conventional currency transfer fees with banks' associated guarantees look very cheap indeed.
If you want a "disruptive" money transfer system with low fees then there are a whole lot of p2p-based FX firms which offer very competitive rates that are run by relatively competent people and don't rely on a volatile asset in the middle of the transaction.
Obviously, if you want a speculative investment vehicle, to stick a middle finger to fiat currency or to facilitate money laundering then Bitcoin has other appeal.
> The only clearly valuable thing Bitcoin accomplishes now is the facilitation of illegal trade online.
Shiller argued that Bitcoin doesn't solve a "sensible economic problem". His argument had nothing to do with legality or legitimacy, which are much more slippery concepts.
Goverments have tried various ways to make information illegal, require licenses for printing presses[0], ban the dissemination of books and pamphlets, etc.
It's hard to argue today that the freedom to publish and consume information is a valuable thing, regardless of its legal status.
We see a very similar pattern with money, as governments try various ways to control who can send and receive value, to require licenses[1] for transmitting money, to ban broad classes of transactions, etc.
Cryptocurrencies liberate and democratize money in a very similar way that the internet liberated and democratized information.
Just as publishing laws have been liberalized to reflect the technological reality, financial regulation should also liberalize as it becomes clear that the cryptocurrency genie cannot be stuffed back in its bottle.
Contrary to Shiller's argument, that seems like a valuable thing, a solution to a "sensible economic problem".
Well, what you're describing is sensible to those who ascribe to a very specific political view. I'm sure you strongly believe that your opinions would improve the world, but you are probably aware that many people who value freedom no less than you, and who are just as intelligent and knowledgable, completely disagree with how to achieve it. Giving Bitcoin a political flavor does it a disservice.
Personally, I think that financial regulation is a great tool in the service of freedom. For example, before financial regulation in the US gained its teeth, most of the population was under the thumb of a small group of some very unscrupulous individuals (those who came to be called the Robber Barons). It was regulation that freed America from those people. Also, I think that human beings, by virtue of their biological and psychological construction, are prone to be subjugated to some substances as well as some ideas. What is freedom, then: allowing people to fall into slavery if they so wish it or preventing them?
I'm not saying my views are right and yours are wrong. But I just want you to understand that many people view the words "regulation", "oversight" and "government" not as obstacles to freedom, but as essential components that facilitate it.
Let's keep our focus on the argument and the logic of the situation. Trying to infer my political biases and then tearing down that strawman doesn't do much to advance our understanding.
For the record, my politics are pretty far from the libertarian image you might have.
My argument is that, contrary to Shiller's assertion, cryptocurrencies really do solve a "sensible economic problem". That problem is very similar to the information problem that the internet itself solved.
Just as governments and corporations tried to put the internet genie back in the bottle, so they're trying to bottle up cryptocurrencies. As with the internet and information, we'll see greater access to money and financial instruments that aren't controlled by the existing power structure.
We can see now that ARPANET, despite its flaws, had value since it was a precursor to the internet. Similarly, today's nacent cryptocurrencies have value despite their flaws.
But what you're describing isn't an economic problem but a political one. Dissemination of information is also a political issue, but I don't recall governments, at least in the West, fighting the internet as such. What you call "bottling up", others might call "protecting the innocent". There is no economic need for regulation-free currencies, unless you claim that regulation hinders the economy, which, again, is a political stance because the definition of what the economy is and what's good for it is subject to personal values.
Let's imagine that some cryptocurrency becomes so prevalent that it replaces the national currency. The government just lost a very powerful tool in directing the economy towards desirable political goals. Suppose the citizens of a country decide that they'd rather have more equality than a higher average standard of living. That's a very reasonable wish, I think. With a government-controlled currency, the government might decide to devalue the currency to reduce imports. With an unregulated currency, the government loses one of the most powerful tools of achieving its goals.
In the US, government is treated with levels of suspicion uncommon in the rest of the Western world. That's not necessarily bad, but it is a peculiarly American trait. In many countries, reducing the power of government can be seen as reducing the power of the population to make collective decisions for the benefit of the people. It puts the fate of the economy in the hands of an indifferent "market". I'm just trying to show that just as you see a need for cryptocurrencies, someone else could claim that there is a very strong need for cryptocurrencies to disappear, or, at least, become regulated.
Of course, there might well be a strong desire for regulation-free currencies, just as there's a strong desire for drugs and prostitution. But that doesn't mean there's a need for them (maybe there is, but it requires evidence).
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[ 5.0 ms ] story [ 26.6 ms ] threadDespite its flaws, Bitcoin does a pretty good job solving these problems today, and future generations of cryptocurrency will only get better.
I don't argue that cryptocurrencies can or should replace government currencies, but they clearly accomplish something valuable.
After all, if cryptocurrencies had zero utility, why would so much talent be devoted to stealing them?
They might, but I wouldn't say it's "clear" just yet. The only clearly valuable thing Bitcoin accomplishes now is the facilitation of illegal trade online. Valuable – certainly, but a new technology whose crowning achievement so far is facilitating crime has a big PR problem. And that's not Bitcoin's only PR problem. Its association with wingnut (hacker-)libertarianism is another ball and chain, which gives Bitcoin the good old Glen Beck treatment.
I think Bitcoin adopters should market it as a terrific way to spend small amounts of cash online. Unfortunately, Bitcoin's volatility doesn't help to make this case, so that is probably the first thing that should be addressed. Bitcoin supporters should understand one thing: uncontrolled volatility, even when it's pointing up, perhaps especially when it's pointing up, isn't a good sign. Every currency is based on one thing – trust – and if Bitcoin is ever to become a currency, it should loudly declare that it's in the hands of responsible people; not criminals, speculators and wingnuts.
How do you figure? Being able to send money across the world for next to nothing (compare to credit card fees, not to mention the higher prices of Western Union or hawala) has immense value. Charitable organizations have already raised large sums using crypto-coins.
You are correct about volatility. It makes more sense right now to treat as a highly fungible asset than a currency; it will be interesting to see if it can self-stabilize without any central organization.
This is likely to end as Bitcoin exchanges discover the cost of compliance.
However, I wouldn't neglect the "gray market" use cases of Bitcoin: things that happen outside the law, but are not as nefarious or blatantly illegal as Silk Road. Immigrants sending money home to their families, secondary savings accounts for those in countries with unstable currencies, etc.
When you look at the proportion of Bitcoins in existence whose owners are known to have lost them to incompetence/malice, suddenly those 2% conventional currency transfer fees with banks' associated guarantees look very cheap indeed.
If you want a "disruptive" money transfer system with low fees then there are a whole lot of p2p-based FX firms which offer very competitive rates that are run by relatively competent people and don't rely on a volatile asset in the middle of the transaction.
Obviously, if you want a speculative investment vehicle, to stick a middle finger to fiat currency or to facilitate money laundering then Bitcoin has other appeal.
Shiller argued that Bitcoin doesn't solve a "sensible economic problem". His argument had nothing to do with legality or legitimacy, which are much more slippery concepts.
Goverments have tried various ways to make information illegal, require licenses for printing presses[0], ban the dissemination of books and pamphlets, etc.
It's hard to argue today that the freedom to publish and consume information is a valuable thing, regardless of its legal status.
We see a very similar pattern with money, as governments try various ways to control who can send and receive value, to require licenses[1] for transmitting money, to ban broad classes of transactions, etc.
Cryptocurrencies liberate and democratize money in a very similar way that the internet liberated and democratized information.
Just as publishing laws have been liberalized to reflect the technological reality, financial regulation should also liberalize as it becomes clear that the cryptocurrency genie cannot be stuffed back in its bottle.
Contrary to Shiller's argument, that seems like a valuable thing, a solution to a "sensible economic problem".
[0] https://en.wikipedia.org/wiki/Licensing_of_the_Press_Act_166...
[1] http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....
Personally, I think that financial regulation is a great tool in the service of freedom. For example, before financial regulation in the US gained its teeth, most of the population was under the thumb of a small group of some very unscrupulous individuals (those who came to be called the Robber Barons). It was regulation that freed America from those people. Also, I think that human beings, by virtue of their biological and psychological construction, are prone to be subjugated to some substances as well as some ideas. What is freedom, then: allowing people to fall into slavery if they so wish it or preventing them?
I'm not saying my views are right and yours are wrong. But I just want you to understand that many people view the words "regulation", "oversight" and "government" not as obstacles to freedom, but as essential components that facilitate it.
For the record, my politics are pretty far from the libertarian image you might have.
My argument is that, contrary to Shiller's assertion, cryptocurrencies really do solve a "sensible economic problem". That problem is very similar to the information problem that the internet itself solved.
Just as governments and corporations tried to put the internet genie back in the bottle, so they're trying to bottle up cryptocurrencies. As with the internet and information, we'll see greater access to money and financial instruments that aren't controlled by the existing power structure.
We can see now that ARPANET, despite its flaws, had value since it was a precursor to the internet. Similarly, today's nacent cryptocurrencies have value despite their flaws.
Let's imagine that some cryptocurrency becomes so prevalent that it replaces the national currency. The government just lost a very powerful tool in directing the economy towards desirable political goals. Suppose the citizens of a country decide that they'd rather have more equality than a higher average standard of living. That's a very reasonable wish, I think. With a government-controlled currency, the government might decide to devalue the currency to reduce imports. With an unregulated currency, the government loses one of the most powerful tools of achieving its goals.
In the US, government is treated with levels of suspicion uncommon in the rest of the Western world. That's not necessarily bad, but it is a peculiarly American trait. In many countries, reducing the power of government can be seen as reducing the power of the population to make collective decisions for the benefit of the people. It puts the fate of the economy in the hands of an indifferent "market". I'm just trying to show that just as you see a need for cryptocurrencies, someone else could claim that there is a very strong need for cryptocurrencies to disappear, or, at least, become regulated.
Of course, there might well be a strong desire for regulation-free currencies, just as there's a strong desire for drugs and prostitution. But that doesn't mean there's a need for them (maybe there is, but it requires evidence).