Why Bitcoin Is Doomed To Fail, In One Economist's Eyes

Hugh Pickens DOT Com writes "Economist Edward Hadas writes in the NYT that developers of bitcoin are trying to show that money can be successfully privatized but money that is not issued by governments is always doomed to failure because money is inevitably a tool of the state. 'Bitcoin exemplifies some of the problems of private money,' says Hadas. 'Its value is uncertain, its legal status is unclear, and it could easily become valueless if users lose faith.' Besides, if bitcoin ever really started to take off, governments would either ban it or take over the system says Hadas. The authorities might be motivated by a genuine concern about the stability of a shadow monetary system or they might act out of self-preservation because tax evasion would be too easy in a parallel economy. 'Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity. Part is technological — this is a cool idea. And part is speculative — gamblers bet that bitcoin's value will increase,' concludes Hadas. 'Truly private money is an inferior alternative to the money that comes with the backing of a political authority. After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can raise taxes or pass laws to unwind monetary excesses.'" Could be there's something good about money that can't be manipulated by law. Some people at least think there's plenty of value in Bitcoin and similar currencies, despite the risks. And those risks at present probably aren't enough to comfort the unfortunate Welsh fellow who (HT to reader judgecorp) "has realised he threw out a hard drive containing 7500 bitcoins, worth £4 million at today's prices. It is now under four feet of garbage in a landfill site the size of a football pitch."

Nope

[Anonymous Coward]

He's just pissed he didn't mine bitcoins when it was still practical.

*erior

[J'raxis]

'Part of the interest in virtual currencies like bitcoin is that their anonymity can provide a convenient cloak for criminal activity. Part is technological â" this is a cool idea. And part is speculative â" gamblers bet that bitcoin's value will increase,' concludes Hadas. 'Truly private money is an inferior alternative to the money that comes with the backing of a political authority. After all, no bank or bitcoin-emitter can be as public-minded as a government, and no private power can raise taxes or pass laws to unwind monetary excesses.'

Everything described here is what makes bitcoin a superior form of money, not inferior.

Control

[fredprado]

Seems like this economist is too fond of governments to be really objective. The last quote in the summary was specially awful. No bank or financial institution will ever be able to do as much harm to a population as a bad government.

That said he has a point regarding government interests in taking virtual currencies down or controlling them. The thing is, technologies evolve, and albeit bitcoin may find its end in government interventions, sooner or later other alternatives that are even harder for governments to control will appear. It was the same with file sharing and it will be always like this. People resent control and given the means to avoid it most will.

He's right, but wrongly.

[caffiend666]

He's right, but in the wrong way. All currencies are doomed to fail. As long as people are willing to exchange something for something else, both have value. Most FIAT money has value because governments are willing to exchange it for taxes, so then it has value to almost everyone. When a government collapses, or people lose faith in it, it's currency becomes worthless. Seashells are no longer values as currency, but they once were. Gold/Silver have boom/bust cycles. BitCoin had value because of SilkRoad, and the silk-roaders were willing to accept it for... something. Frankly I'm surprised BitCoin still has value after SilkRoad's demise. If something significant replaces SilkRoad, BitCoin will remain valuable. Until then bitcoin's going on momentum. May crash soon, may not. Will crash eventually.

where?!

[Gravis Zero]

"has realised he threw out a hard drive containing 7500 bitcoins, worth £4 million at today's prices. it is now under four feet of garbage in a landfill site the size of a football pitch."

dude, i want to know where this landfill is! for £4 million, you can automate the searching process or pay idiots to do the work for you! sensitive metal detectors can sure cut down the searching process. plus, think of all the other hard drives you will find and could sell on ebay as "used". ;D

Re:*erior

[CastrTroy]

The only problem I have with BitCoin at the moment is that it isn't something you want to hold on to. Buy it, do your transaction immediately before the value changes. Somebody pays you in BitCoin, immediately cash out before the value goes down. With most currencies, you can put it in the bank, or under your mattress, and be reasonably sure that in a week it won't have lost half of its value. There are lots of people making sure that the value of the US dollar doesn't do that kind of stuff, because it would be terrible for the economy, to have money changing value so often.

Re:*erior

[Calavar]

I think you're missing the point. Numbers two and three, interest because of the technological wow-factor and interest due to speculation will fade away with time. At that point, all that will be left is interest in the anonymity that Bitcoin provides. And if governments think that this anonymity facilitates crime, they will do everything within their power to either shut Bitcoin down or take over the system, just as Hadas said.

Re:Nope

[ShanghaiBill]

The author doesn't seem to understand how Bitcoin works. He seems to think that some mysterious computer programmer is the "issuer" of the currency. He says that governments will "take control", without explaining any mechanism for them to do so. His grasp of economics is questionable as well. He says that governments have always controlled currency. But prior to the American Civil War, private currency circulated. His claim that governments are better at protecting us from "monetary excess" made me laugh. Bitcoin may fail, but not because of the reasons he gives. But he hedges in his last paragraph, and says bitcoin will thrive "until the authorities do better", which means it may be around forever.

Tax

[michaelmalak]

I'm just waiting for the first tax audits of BitCoin users who get dinged for not having paid capital gains tax. I give it a few years.

Re:Tulips

[xate]

Tulips

http://en.wikipedia.org/wiki/Tulip_mania [wikipedia.org]
Thanks for that AC

Re:Explain "Private"

[jbmartin6]

There is a bit of a tautology here. If a government issues it, it is defined as "money" if some other entity issues it, it is a "coupon" or whatever. What TFA misses, I think, is that anything can be used as a basis of exchange. I can buy and sell things by denominating the exchange in widgets, well there you go. If I later convert the widgets to US dollars, well that's no difference. May as well say 'world of warcraft gold' for widgets, or whatever you like, in that example. It is an excellent point that since government require protection money to be paid in their own preferred currency, there is a huge advantage in terms of acceptance in the marketplace. This does not mean, however, that other mediums of exchange cannot exist. My main point is that the word "money" is an arbitrary one unless one includes 'issued by governments for payment of protection money' in the definition. Otherwise, me trading babysitting stints with my neighbors also counts as money.

Re:*erior

[jonbryce]

If it can go from $1 to $1000 in the space of a year, it can go from $10,000 to $0 in the space of a few miliseconds.

Re:Nope

[magic maverick]

Moreover, even if bitcoin fails as a currency, it still works very very well as a means of money transfer. Which is one of the reasons I support it. Paypal takes a large chunk of any money transfered, Visa and Mastecard take a large chunk, etc. All can (and have) cut off payments to undesirables. Etc. There are so many issues with centralized payment processors.

Bitcoin though, is brilliant. Being decentralized, it is strongly resistant to attempts to prevent donations going to "undesirables". The fee charged is a small percentage of that the major companies charge (and is not even required at the moment, as most miners will still process transactions without a fee). Etc.

And, if you don't keep your money in bitcoin (which does mean you have to trust a thirdparty "exchange"), you don't have to worry about exchange rates either. Just have the bitcoin changed directly to the currency of your choice, and withdrawn immediately from the exchange.

Also, obviously this economist doesn't know enough about bitcoin to pass judgement. It is not an anonymous currency, at most it is pseudonymous. And, just as obviously, this economist doesn't know about history. As an AC has already said, private currencies were very popular before the 20thC. Around the world.

Re:Nope

[0123456]

Economists who don't tell banks and governments what they want to hear don't have jobs for long. So, obviously, most of what they publically spout is complete nonsense.

Re:Nope

[roman_mir]

Worse, the author doesn't understand what money is in the first place. Money is a claim on future consumption, it's a store of value, unit of account and means of exchange. But money is actually meaningless without ability to use it to buy something, so what is important to consider is whether there will be any productive output in the future that somebody with money can claim a portion of.

Given this, it is clear that any private issuer to emit money or currency that is backed by money. It is not government, that allows money to have value, it is private enterprise that produces something that gives money any meaning at all. Government cannot ever issue money, all money is supposed to be backed by productive output and productive output is not what governments do.

Government can issue currency, either it is backed by real money (gold) or it is not (fiat). Real money does not come into existence by the desire of either government or any private entity, that's why Bitcoin is 'doomed to failure', because it is not actually backed by any productive capacity. It is doomed to failure for the exact reasons that any fiat currency is doomed to failure and it doesn't matter who issues fiat, a government or a Bitcoin miner.

Now, I am not implying that Bitcoins will go down in price to 0 and not rise back up, I am not making any claim on the future price of Bitcoins. For all I know it is absolutely possible that 1BTC will = 1,000,000,000 USD in 2 years time, I don't know.

What I do know is that Bitcoin is a fiat currency that has no backing by any real money and it is indistinguishable from any other future (or current) version of electronic fiat currency and it is a tool of speculation. You will probably grow your savings if you buy Bitcoin even today and sell it at some future date.

If you fail to sell it at the right moment in time, you will probably lose your savings. That much is certain - eventually it will crash and not come up again, but when that will be I believe nobody can predict.

What I can say about this 'economist' though is that he does not know what money is, he does not know what currency is, he does not know what gives money or currency value and he is wrong about money being a 'tool of the state', that's a completely nonsensical statement. Money existed long before any states existed and it will exist long after any one of those states is gone.

Re:He's right, but wrongly.

[TeknoHog]

BitCoin had value because of SilkRoad, and the silk-roaders were willing to accept it for... something. Frankly I'm surprised BitCoin still has value after SilkRoad's demise. If something significant replaces SilkRoad, BitCoin will remain valuable. Until then bitcoin's going on momentum. May crash soon, may not. Will crash eventually.

The Silk Road bust put an end to underground drug trade, just like the Suprnova takedown put an end to copyright infringement online.

Also, there's a metric shitload of things you can legally buy with Bitcoins.

Translation: Can't make money yet

[tlhIngan]

Bitcoin is just alternative currency. There are plenty of that around - most of them are pegged to some other currency though, but they are, for the most part alternative currency.

Think: Gift Cards (Amazon/Apple/Steam/Google/etc), alternative store currency (Canadian Tire Money), etc. Then there's non-traditional currency, like WoW Gold.

If anyone says Bitcoin isn't a "money" they're plain old lying. It can be used to facilitate trade (which is the purpose of currency).

Of course, there are a few fundamental problems with Bitcoin, but there are problems with all currencies.

When any economist, banker, etc., says Bitcoin is doomed, the real reason is them saying is "we haven't figured out a way to make money on it yet". No currency is invulnerable to making money by doing things of little value, Bitcoin included. It just means the quants haven't sat down to figure out schemes to exploit to get bitcoins for little effort. Either it's because the entire bitcoin market is too small so the benefits of skimming 1/1,000,000th of a Bitcoin from every transaction is barely worth the effort, or other reason.

That's the real message.

Re:*erior

[fozzmeister]

True BitCoins are very volatile at the moment... But the only reason you think USD is stable is because you are inside the USA. All currencies are very volatile. The big point you are missing is that a currency is worth what people will sell for it as much as an item is worth what people will pay for it.

Re:WD et al.

[tbannist]

You might need to look at this as a systemic issue. If losing the data on a hard drive (and related backups) can render bitcoins unusable, then over time bitcoins will be lost. I think that means the theory that underpins bitcoin is wrong because it can't be a stable monetary supply if it has a finite number of coins each of which can be destroyed or lost.

Re:*erior

[Anonymous Coward]

All currencies are volatile, but typically only on the few-percent-per-year level; it's not common news to hear that, e.g., the Yen has changed value relative to the dollar by a factor of two over the past week. Just because all currencies are a little bit volatile doesn't mean that BTC's massive speculation-driven volatility isn't a big issue that sets it apart from currencies useful as currencies (rather than just gambling).

Re:Control

[Calavar]

Your original claim was that "no bank or financial institution will ever be able to do as much harm to a population as a bad government." Of course the Weimar Repulic screwed up, but I'm saying that private banks in the US were able to screw up just as badly. It's stupid to put private enterprise on a pedestal as if they are immune to making the same mistakes that big government does.

Re:Nope

[0123456]

What about the economists who are employed by universities?

How long will they be employed if they start claiming that government and business economists are spouting nonsense? How many will get tenture if they don't go along with the status quo?

Re:Nope

[Rockoon]

The wealth of people, of nations, and of the world is the goods and services that people enjoy. A currency is just a convenient means to exchange goods and services for other goods and services.

Arguments about inflation, deflation, changes in spot prices, deficits, debts, surpluses, and so on are a distraction because these things are not the problem; they are merely a measure that can indicate a systemic problem.

For instance, the problem in Zimbabwe isnt the hyperinflation, its that the government exists outside its means: they are using the inflation to rapidly transfer all the credits of accumulated goods and services (which is stored in "currency") to the government because it is not possible to transfer the amount needed any other way. You see that this does not mean that the problem only manifests when there is hyperinflation, nor is it only a problem when inflation exists at all. Accumulating large amounts of debt is another way to do it. The problem remains that the government exists outside its means. It generally only devolves into hyperinflation when the government can no longer issue enough debt, and that happens when it becomes obvious to enough people that its existing outside its means.

Bitcoin isn't flawed because of anything to do with "value" -- a bad argument the article (and many folks here) tries to make. Bitcoin is flawed because its an arbitrary choice. When the Germany switched to the Euro, the people of Germany happily continued to use Marks. It was not until Germany insisted that taxes be paid in Euros that the country rapidly switched to the new currency. The Euro was just an arbitrary choice that had no justification until the government demanded that taxes be paid in it, and then it instantly became a justified choice, and was rapidly adopted as the justification for the other choice disappeared.

So why Bitcoin instead of some other virtual currency? While you can find reasons not to use other specific virtual currencies, its still arbitrary to choose Bitcoin over SameAsBitcoinWithAnotherNameAndBlockchain.

Re:Funny, you don't *look* like Uncle Sam's intern

[hibiki_r]

Implicit taxation through inflation? First, inflation is extremely low on the entire western world. Second, inflation only eats away at you if you are sitting on currency as assets, which is a terrible thing to do. If most of your wealth is being productive somewhere, changes in the medium of account shouldn't matter a bit.

Now, having zero inflation, or all the way into deflation, is not a good thing for an economy. We have this fundamental problem called Money Illusion. It's been measured in a whole lot of studies, just look it up. As long as there's money illusion, in practice, economies work better when economies grow in a predictable manner, which implies some mild inflation. Without said inflation, velocity drops, and with it economic activity. We really, really, don't want a shrinking GDP. A central bank is a compromise to make sure that someone, in some way, is actually altering the money supply to achieve that objective. What we need though is a way to make sure central banks are making less decisions that look like reading entrails, and more that are empirically testable and forward looking.

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[account_deleted]

Comment removed based on user account deletion

Re:WD et al.

[ArbitraryName]

Bitcoins are limited in number forever.

Bitcoins are infinitely divisible.