Friday, November 8, 2013

A skeptical look at Bitcoin.



So, as an inhabitant of econ twitter, I have seen the conversation around bitcoin. 

I am intrigued, naturally, because it is so polarizing.  Either it is the future of trade, or it is something to be mocked.  I legitimately don’t know what he future will be, on this or any other topic.  I am pretty sure that I will have a beer soon, but that is just a highly probabilistic way of looking at it.  I digress.

I’m thinking about the new electronic currency as a currency, and I keep going back to the very textbook definition of what money is.  You have store of value, unit of account, or medium of exchange.  Here the bitcoin people seem like hard money people,  where the idea of the currency is most prominent in the people who want to hold onto it.  That is, they place higher value on the store of value aspect of the currency.  I believe that is what is driving the exchanges right now, people trading to buy into it and to hold on to it.  For me though, if that is your only liquidity, and you’re handing over dollars for bitcoin to sit on, then all you’re waiting on is the greater fool, somewhere along to buy it.  The price will keep going up until it doesn’t. 

An appreciating price of the currency precludes it, for me, from being s something you’d buy things with.  I see money not for a lump of something sitting there, but in terms of what it can buy for me (as well as the labor I performed in earning that money, what was bought from me).  I’m saving up money not to have money, but to buy a new guitar.  With bitcoin appreciating and depreciating, that complicates any purchasing decision, and if you see it going up, like these calls I’ve seen calling for five hundred dollars per bitcoin or more, then you don’t spend it.  You hoard it. 

And you hoard it, it doesn’t get spent.  This only seems to work if they exist as a supplement national currencies.  It has the problems of fiat currency that the gold people point out, that there’s nothing “backing” neither my federal reserve notes nor bitcoin.  The problem is that my taxes are paid in electronic equivalents of that federal reserve note, and that entity has an army and various civil criminal penalties to ensure that I pay that way.    

Basically then the question comes back to “Why bitcoin?”.  If I ask that, and I be honest with myself, it seems that there are two reasons you want it for exchange.  If there are more, let me know.  Either you are doing something you don’t want the state to see, or you think the state is going to fail.  (Though the state will fail, somehow the electronics infrastructure will remain in place.)  I really don’t get it.  Can someone show me the appeal?