tag:blogger.com,1999:blog-6704573462403312459.post2508465649440896413..comments2024-03-28T06:53:23.473-04:00Comments on Moneyness: Bitcoin (for monetary economists) - why bitcoin is great and why it's doomedJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-6704573462403312459.post-26875331336405813842018-05-28T22:33:35.845-04:002018-05-28T22:33:35.845-04:00Do you see things differently since?
Value is sub...Do you see things differently since?<br /><br />Value is subjective, Bitcoin is a digital commodity, no different to Gold. In many ways it is superior to Gold (as a monetary good). It's more scarce, more divisible, more portable, more transferable, more uninflatable, more unseizable. Gold's use-value is negligible, probably 10% and monetary premium 90%. Bitcoin is an asset where monetary premium is 100%.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-75448301725689555472013-04-03T17:48:41.506-04:002013-04-03T17:48:41.506-04:00Gold does have physical properties that make it a ...Gold does have physical properties that make it a superior metal to silver. Properties that make it desirable for use as jewelry, high luster makes it pretty, high malleability and ductility make it easy to form into a desired shape. Chemically it is stable and will not rust or degrade in quality. Excellent conduction of heat and electricity make it ideal for high performance electronics however these are secondary as jewelry accounts for 75% of global gold use. These are all things that silver can do well but not nearly at the same level as gold. <br /><br />The physical properties of gold are what make gold desirable in the first place and have created a continued culturally driven demand for the rare, beautiful metal that is perfect for making pretty shapes with. It is much easier to argue that gold has more "intrinsic value" than silver and is of comparable worth to other commodities with practical (though one can argue against the practical purpose of jewelry) physical uses. <br /><br />How Bitcoin carries an "intrinsic value" is a bit more ill-defined since it is not comparable to gold or another commodity in the way that a commodity possesses desirable physical qualities. What Bitcoin does have is desirable functional qualities. Bitcoin is, as of now, a cryptographically secure, anonymous, and quick method of transferring "value" using the best architectural features of the internet. The functional properties of Bitcoin are what give it a non-monetary value, a very different type of value than gold but one that is not something to dismiss. Anonymoushttps://www.blogger.com/profile/12553822760017063236noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-16126603327658060872013-04-03T10:26:23.247-04:002013-04-03T10:26:23.247-04:00I wouldn't say that there's no place to sp...I wouldn't say that there's no place to spend it on consumables - it's just not entirely legal. There's an entire network (detailed by Gawker in this post: http://gizmodo.com/5927379/the-secret-online-weapons-store-thatll-sell-anyone-anything) of illegal goods and services that are being sold via what has been branded by the media as the "darknet". <br /><br />All that said, I don't particularly disagree with you about the intrensic value of bitcoin (or the lack thereof) as it's a currency with value that is entirely predicated by its own transaction medium. <br /><br />The purchasing power is almost entirely driven by the fact that it exists outside of government regulation, which will ultimately be its failing when the proverbial shit hits the fan and something goes wrong. A currency's value should eventually graviate toward it's real long-term equilibrium. Thus, I have to assume in the absence of market forces, the equilibrium point of this currency is going to be zero.<br /><br />Additionally, when you consider that the currency is suffering from hyperdeflation, there's going to be a serious hoarding problem in the market soon - as things are cheaper to buy in the future if the purchasing power of the currency continues to rise. Ultimately, the bitcoin experiment is going to meet an untimely end sometime in the future. Econ Studentnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-28956890450760957482013-02-24T07:00:41.505-05:002013-02-24T07:00:41.505-05:00http://www.gwern.net/Bitcoin%20is%20Worse%20is%20B...http://www.gwern.net/Bitcoin%20is%20Worse%20is%20Better - good paper (2011) by economists and computer scientists on why BitCoin is doomed long term, and how to improve it now. The author, while misinformed about BitCoin values, is to be commended for explaining to laypeople how BitCoin money is authenticated in about 10 minutes without a 'central depository' of records.Ray Lopezhttps://www.blogger.com/profile/11134761834999705305noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-21988904574254378492013-02-22T20:56:42.064-05:002013-02-22T20:56:42.064-05:00JP, have you read Peter Surda's paper since it...JP, have you read Peter Surda's paper since it has been released? Also, I think Trace Mayer's explanation of why bitcoin is tangible helps to explain why people value it: http://www.runtogold.com/2012/11/why-bitcoin-is-tangible-digging-into-the-guts-of-bitcoin/<br /><br />Also, the blockchain does have other uses besides as a ledger: smart contracts, signatures, etc, so one can argue that it meets the requirements for non-monetary use -- although I do not believe that is necessary for something to have monetary value to people.Mashurihttps://www.blogger.com/profile/06054952675213242705noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-79985297798474928022012-12-02T10:59:29.459-05:002012-12-02T10:59:29.459-05:00We've got some bitcoin-related discussion goin...We've got some bitcoin-related discussion going on in a new thread <a href="http://jpkoning.blogspot.ca/2012/12/shades-of-liquidity-premium-peaking.html" rel="nofollow">here</a>. Come join us if you're interested.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-35110799414104421252012-12-02T03:00:12.246-05:002012-12-02T03:00:12.246-05:00The usage of gold today doesn't mean that it w...The usage of gold today doesn't mean that it will be used tomorrow - it's replaceable and it could crash just as fast as bitcoin. If gold crashes to $10 and silver remains stable you'll probably buy a ring made of silver.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-27166755146348257482012-12-02T00:47:22.500-05:002012-12-02T00:47:22.500-05:00Hi new anon.
Figuring out the size of a liquidity...Hi new anon.<br /><br />Figuring out the size of a liquidity premium is difficult. We're really just making educated guesses. But if gold was no longer useful for its monetary properties (ie. you couldn't easily exchange it anymore), it would still be valued for its...<br /><br />1. industrial purposes, electronics + dental + whatever else<br />2. jewelery<br />3. religious/ceremonial<br /><br />Bitcoin? About all I'd put on that list is its use as a curio.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-61951355474952918622012-12-01T13:44:52.771-05:002012-12-01T13:44:52.771-05:00"it certainly has a non-monetary value"
..."it certainly has a non-monetary value"<br /><br />Not really. People are only using gold, BECAUSE gold has value to many people, but nobody would use it for products if the price of gold would drop to $5 per oz., so it's not like the "usefulness" protects gold from a massive crash. Oxygen and water has non-monetary value, because we actually need it to live and cannot replace it.<br /><br />btw.: I didn't post here so far.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-47276507427401125962012-11-20T20:48:13.287-05:002012-11-20T20:48:13.287-05:00Peter,
Your point on Esperanto is one I've he...Peter,<br /><br />Your point on Esperanto is one I've heard before. It's the "language theory of money". I'm not too keen on it. A medium of exchange is an asset that gets traded and priced. Words are not. So it's tough to draw a comparison between mediums of exchange and language. Maybe I'll write a post on it in the future. Part of my reasoning can be seen in <a href="http://jpkoning.blogspot.ca/2012/10/the-social-contrivance-of-money-bit.html" rel="nofollow">this post</a> on the social contrivance of money.<br /><br />Your point on transaction costs makes sense except that people don't really use bitcoin for transactions. It seems mainly to be used for speculation and gambling (Satoshi Dice). I've had problems finding places to spend my bitcoin, at least for consumables. I wouldn't say its saved me on transaction fees.<br /><br />In any case, as Gavin Anderson always points out, bitcoin is an experiment. If it works out, we'll need new monetary theories too.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42831206641089070422012-11-20T12:24:40.408-05:002012-11-20T12:24:40.408-05:00Hi JP,
I've been posting about Bitcoin in ran...Hi JP,<br /><br />I've been posting about Bitcoin in random places for about 1.5 years, one of the places was on Glasner's blog if memory serves right, so that's possible.<br /><br />The point is, you can host websites on an IP(v4), but if noone else uses an IPv4 to view websites (e.g. because they moved to IPv6), then it's useless for you to have one. Or human languages, they also can die out. It's like asking why you should learn Esperanto, because people can lose interest in Esperanto and they you have sunk costs and no way to recover them. These are other examples of pure abstract network goods: the only way to use them is within a context of social interaction.<br /><br />First of all, you can recover the costs (maybe) before the time the public's interest runs out. For example, on the saved transaction fees. If you maintain a balance of, say, 100 bitcoins, and use them in your trades, assuming Bitcoin lowers your costs by 1% compared to other solutions, then at a total transaction volume of 10.000 you break even. There are types of businesses that have a high turnover compared to their cash balances, and other types of businesses that are either highly sensitive to transaction costs or that face a more significant transaction cost reduction through the use of Bitcoin, so the risks of these are lower.<br /><br />Second of all, Bitcoin is a medium of exchange. If it was to collapse, it requires that people who use it switch to something else instead. Like they need to switch from IPv4 to IPv6, or from Esperanto to English, for example. They wouldn't switch from computer networks to letters, or from language communication to non-verbal communication, that's extremely unlikely.<br /><br />What would the people abandoning Bitcoin switch to? Other cryptocurrencies have lower liquidity (as you yourself demonstrated very well on the chart with market capitalisation), and fiat money and/or commodity monies have higher transaction costs. So something would need to change in one of these two areas to motivate the switch. That's not impossible (indeed, I tried to explain at my presentation how it can happen), but it would have to be something pretty significant.<br /><br />So I wouldn't worry about it too much. And even if it happens, there probably would be leading indicators showing that the risk increased. I'll let you know once there's something published in a more proper way by me (I'm actually working on launching a Bitcoin economics blog and I plan to post my stuff there).Peter Šurdahttps://www.blogger.com/profile/17346161576941109337noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-53294467187359213922012-11-18T22:39:05.154-05:002012-11-18T22:39:05.154-05:00right now its backed by illegal drugs. It will be ...right now its backed by illegal drugs. It will be backed by whatever goods and services the government deems illegal. <br /><br />awesome blog <br />thirdchance57noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-78913519719041773452012-11-18T15:30:45.114-05:002012-11-18T15:30:45.114-05:00Hi Peter, thanks!
I look forward to reading your ...Hi Peter, thanks!<br /><br />I look forward to reading your presentation. I've seen your name before, maybe David Glasner's blog?<br /><br />I'm not sure I agree with your comparison of bitcoin to IP addresses. Say that an IP address you own can never be traded again. What can you do with it? Well, you can use it to host websites. Now say that a bitcoin you own can never be traded again. What can you do with it? As far as I can, nothing. Btc is unique because it has neither financial backing, nor does it have a non-monetary commodity/consumption value. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-43425439330115668382012-11-18T13:52:13.679-05:002012-11-18T13:52:13.679-05:00Bitcoin decreases transaction costs. Media of exch...Bitcoin decreases transaction costs. Media of exchange that have higher liquidity than Bitcoin (e.g. fiat currencies or commodity currencies) cannot compete with Bitcoin on transaction costs, and altcoins do not have comparable liquidity to Bitcoin. So Bitcoin has value primarily due to exogenous factors, i.e. the state of its existing and hypothetical competitors and the comparative advantage it has over them.<br /><br />If there was an underlying backing to Bitcoin, that would, counter to what intuition says, increase its transaction costs (due to redeemability). Then the exchanges would collapse (as the value of Bitcoin would be generated by the backing, so there would be no need to have a separate bid-ask spread). This would extinguish practically all liquidity and lead to Bitcoin's collapse.<br /><br />Bitcoin will have value as long as there is no better alternative, similarly as other pure network goods, e.g. the IPv4 protocol (which bears a lot of economic similarities to Bitcoin). IPv4 addresses are also purely virtual, irredeemable and unconsumable, yet they do have a non-zero price and noone is worried about them collapsing.<br /><br />At my presentation at the Bitcoin conference in London, I presented a 2x2 matrix of possible reasons for Bitcoin's collapse. I plan to have it published very soon.<br /><br />BTW I just found your blog and it's really good.Peter Šurdahttps://www.blogger.com/profile/17346161576941109337noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-37710646449772176472012-11-18T10:11:00.630-05:002012-11-18T10:11:00.630-05:00Same anon?
It needs to have a non-monetary value ...Same anon?<br /><br />It needs to have a non-monetary value because it doesn't have fundamental value (ie. it doesn't point to a set of underlying assets, as a bond or a stock does), not does the government force people to pay taxes with it.<br /><br />With none of these 3 characteristics, bitcoin is a theoretical anomaly. It could mean that we need new theories. It could mean bitcoin will fall to zero. I'm curious to see which. As a betting man, I'd lean towards the latter.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-77885807009858128062012-11-18T09:20:32.452-05:002012-11-18T09:20:32.452-05:00Why does bitcoin have to have a non- monetary valu...Why does bitcoin have to have a non- monetary value? I don't think it needs to even though it does. Bitcoin can be used in smart contracts and it is being used as a public title registry. <br /><br />As stated above, bitcoin is a new commodity created (invented) to serve market demand for a better medium of exchange. It doesn't have to have any other use or purpose. It is an "opt in" community currency that people can voluntarily accept or reject. I believe it has enduring qualities but everybody doesn't have to agree with me. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91910433124119032722012-11-17T21:28:20.231-05:002012-11-17T21:28:20.231-05:00I think they should :)I think they should :)JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-60405695820577707622012-11-17T21:28:01.330-05:002012-11-17T21:28:01.330-05:00Gold is not backed, but it certainly has a non-mon...Gold is not backed, but it certainly has a non-monetary value. Having non-monetary value is akin to having backing. Bitcoin has little to no non-monetary value.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-84387311285906286052012-11-17T21:25:35.957-05:002012-11-17T21:25:35.957-05:00Are you the same anon as above? See my above reply...Are you the same anon as above? See my above reply. I prefer that people don't comment anonymously, it makes it difficult to follow conversation. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-91850295921015432152012-11-17T21:12:22.125-05:002012-11-17T21:12:22.125-05:00Doomed? I wonder why the existing supply is valued...Doomed? I wonder why the existing supply is valued at over $100,000,000 by the marketplace... Maybe they should all read your blog post to discover the error of their ways... :)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-13549383360933492502012-11-17T21:00:11.379-05:002012-11-17T21:00:11.379-05:00Bitcoin is not "backed" by anything just...Bitcoin is not "backed" by anything just like gold is not backed by anything. Bitcoin is what it is. Gold is what it is. Both are commodities which are valued for what they are and what they enable one to do with them.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-66019560259542410972012-11-17T20:54:36.743-05:002012-11-17T20:54:36.743-05:00No thing has "intrinsic" value. Items ar...No thing has "intrinsic" value. Items are valued for their usefulness to the actor involved. Bitcoin is valued by many for the things it enables them to do. Bitcoin is a new commodity created to serve market demand for a better medium of exchange.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-24342921662451010012012-11-17T19:32:22.369-05:002012-11-17T19:32:22.369-05:00Hi anon,
Yes, value is subjective. But...
In fin...Hi anon,<br /><br />Yes, value is subjective. But...<br /><br />In financial markets, it is usually believed (by both practitioners and economists. Rare agreement!) that financial assets have fundamental values. In that sense, subjective value can be "wrong". If the market prices a financial asset above its fundamental value, this will eventually be corrected via arbitrage. Bitcoin has no fundamental value... unlike a stock or a bond, it doesn't point to a set of underlying assets. Despite the market's subjective valuation of BTC (=$12), arbitrage should send bitcoin down to its fundamental value, $0. <br /><br />Which leaves the possibility that bitcoin is a commodity like gold. Here I'm not on as firm a ground. You'll notice in <a href="http://jpkoning.blogspot.ca/2012/10/bitcoin-steps-on-toes-of-few-popular.html" rel="nofollow">this post</a> that I grant the possibility that bitcoin has some non-monetary value. But in a sociological sense (not an economic sense, because you are right that passing judgement on subjective valuations isn't the job of economists) bitcoin's 1s and 0s are not being consumed in any way. So that's why I say bitcoin has no intrinsic value.<br /><br />The USD is tied to its underlying assets: gold, bonds, MBS, and some other stuff. Doesn't have to be a commodity.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42960888960250057832012-11-17T17:49:00.447-05:002012-11-17T17:49:00.447-05:00It's unclear why you think 1's and 0's...It's unclear why you think 1's and 0's are worthless. It's unclear what you mean by 'intrinsic' value. Value is subjective. How could you possibly know how anyone else values them? Is the usd worthless because it's not tied to a physical commodity? Could a currency shed your label of 'worthless' if it were tied to a service?Anonymousnoreply@blogger.com