Tuesday, March 26, 2013

Bitcoin - Currency? Bubble? Both? Neither?

Interesting post by Yves Smith over at Naked Capitalism today regarding the phenomenon of Bitcoin.  Smith's post is very long and I'm not going to take on all the points therein, but I did want to attempt a quick summary of my take on Bitcoin.

The title of Smith's post is "Bitcoin:  Bubble or New Virtual Currency?"

The first thing I notice about this headline is that it's a false dichotomy.  Of course it could be that Bitcoin is a genuine new virtual currency AND in a bubble.  I imagine this is mostly pithy headline writing as I trust Yves Smith understands this fact quite well, but I feel it's important to be clear about these things.

The second thing is that you can answer this question pretty easily.  A currency in the modern context requires two things - a monopoly issuer and a taxation authority.

Bitcoin has the first - there is a cryptography algorithm that issues Bitcoin, and that's the only source of net  Bitcoin.  So we're good there.  The problem is with the second part of the life cycle - the taxation authority.  Currently no entity exists that can levy Bitcoin-denominated taxes on real assets.

Now, according to circuitist theory this is OK, as long as you have a legally recognized banking system that trades in Bitcoin-denominated debts, Bitcoin can still have value as a currency because the banks can levy a claim on other assets if the Bitcoin-denominated liabilities are not fulfilled.

Unfortunately for Bitcoin triumphalists, that doesn't exist either.  So, long story short:  No, Bitcoin is not a currency.  It may have some intrinsic or extrinsic value that does not arise from its value as a currency, but to the degree that its owners' expectations of value are connected to its future as a currency, those expectations are not reasonable.

Which answers that first question about the bubble.  Bitcoins are in a bubble, and indeed the bubble must inevitably pop.  But remember always "inevitable" and "soon" are not synonyms.

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