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Bitcoins: The Road to Investment Hell Is Paved With Good Intentions.
Recently, the Economic Policy Journal ran an article, "Is Bitcoin Money: What Economists Have to Say." The editor asked a dozen economists. Two said "yes, Bitcoins are money." Here is the answer of one of the "yes" economists.
Yes. Bitcoin is money because it is limited in amount by internal characteristics enforced by the laws of mathematics and thermodynamics that is not subject to counter-party risk or anyone's liability and it also functions as a currency because it acts as a medium of exchange.
I had never heard of the gentleman. I can say this: nothing in his defense of Bitcoins as money is even remotely Austrian. It ignores the market.
The other one defended her "yes" position with a statement about what money is, not what Bitcoins are.
Money becomes real when people have faith in it. Governments have no monopoly on that which is why they spend a lot of time putting many symbols of faith and trust on the currency from pictures of sovereigns like the Queen or the President to hidden symbols of power like pyramids and seals. They would not need to if it stood on its own. Faith can be earned and it can be lost. The problem with bitcoin is that people are afraid a power outage or a hacker or bad management could erode or destroy the value of a bit coin. But, then again, governments are doing their best to erode confidence in fiat money too.
Everyone else said "no."
There are public defenders of Bitcoins. Several are mostly libertarian programmers. They do not appeal to economics or to economic history. They appeal instead to the good intentions of the programmers who are using Bitcoins.
What I am waiting for is a detailed defense of Bitcoins from an Austrian school economist or economic historian. I want to see how the Bitcoins market corresponds with the Austrian school's thesis of the regression theorem: money as a market product that has come in response to the transition of a widely used commodity into money.
The defenders of Bitcoins must deny the Menger-Mises regression theorem. They must affirm what Hayek called constructivist rationalism: the imposition of a man-made plan to create a new social order. He associated this impulse with the state. But defenders of Bitcoins say a genius created a new money.
Here is this thesis, as stated by programmer Paul Rosenberg.
Gary begins by quoting old definitions of money. There is nothing particularly wrong with those definitions, but are they supposed to negate progress for all time? To freeze the world in place? Should they make any new adaptation evil? I hardly think that was their intent.
Here it is, in no uncertain terms. The Menger-Mises regression theorem was good for its day, but we live in a New World Order, a world of digits. Now we must abandon the old Menger-Mises theorem.
He quoted me:
Here is the central fact of money. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production, because it increases the size of the market for all goods and services.
He says that "Bitcoin is nothing but the operation of market forces -- there is zero coercion involved." True. But it is not money.
"Bitcoin is utterly decentralized -- there is no center at all." True, but it is not money.
"Bitcoin is utterly unplanned -- it involves a million people, all doing their own thing." True, but it is not money.
As for speed, the Bitcoin idea was created in the 1990s and has been implemented for almost five years. How slow is slow enough?
Think of this! Almost five years! But are Bitcoins money? No.
Bitcoin is not being used as money. It is being used as an investment asset. It is in the midst of a mania -- the desire to hold digits, in order to make money in dollars. Digits are the asset. The dollar is money. It is not the other way around.
He quotes me:
No one says, "I think I'll invent a new form of money."
Then he responds: "Yes, they do! That's precisely what the first person to use gold did!"
First, he is making this up. He has no idea what the first person who used gold as money did or thought. His version is based on constructivist rationalism. One lone genius thinks he will change the world by inventing money. He does it.
He did it, according to Menger and Mises, by using a commodity that was already in heavy demand by the free market.
Second, Rosenberg could as easily have begun with the person with no gold. He had something to sell, but he could not find a trading partner who had anything he wanted to buy . . . except gold. He said, "I will take gold in exchange." The other person agreed. We have no way of knowing which of them said, "I think I'll invent a new form of money." I think it is likely that neither of them did. They just worked out a deal.
Third, he adds this.
I'm sure some people will think of Bitcoin as an investment (which it is not) or that it is an arbitrage vehicle (which it is not) and will do stupid things. Some people always do stupid things. So what?
It is clearly an investment. It is in a mania stage. He can close his eyes, clap his hands, and say "Tinkerbell is not an investment," but she is.
I and many others have been saying that Bitcoin is a crypto-currency, not an investment. We've also warned incessantly that it is new and has enemies. In a How to Use Bitcoin report we issued just last week, we said "This is not a place for the timid," and, "There are no guarantees."
Mr. Rosenberg calls himself a cryptohippie. He runs a cryptography service called Cryptohippie (www.cryptohippie.com). My assessment: its name targets a narrow audience: hippies who are interested in crytography and privacy. This is not the average Joe.
If the average Joe does not use a supposed currency to buy most of the things he buys, then it is not a currency. This is Austrian school monetary theory. Accept no substitutes!
Bitcoin is not important because its price is rising -- it's important because it takes the control of money away from the cartel.
Concern with the dollar equivalent is a fetish, a distraction. The purpose of Bitcoin -- the intent of Satoshi -- is not to play price games, but to dis-empower the fiat cartel.
He also writes: "The purpose of Bitcoin -- the intent [of] Satoshi -- is not to play games, but to dis-empower the fiat cartel."
The intent of Satoshi Nakamoto, who Rosenberg says has disappeared, is economically irrelevant. Only geeks have heard of him. The crucial economic issue is the imputation of value by investors and owners of Bitcoins. What motivates them? A fast buck! A lot of fast bucks! Bucks are money. Bitcoins aren't.
We know this from its volatility: the desire to own an investment asset class that promises to vastly outperform any other asset class.
The programmers and cryptographers are on the sidelines, telling us that this is all about this or that or the other. But the markets tell a different story. This is a mania. Bitcoins did not go from a price of $50 for 10,000 in 2009 to the price of an ounce of gold in late November 2013 based on what the mysterious Mr. Nakamoto thought he was doing.
To the cryptographers who want to be Austrian school economists, I say this: begin with Menger and Mises on the origin of money. Do not begin with Mr. Nakamoto.
Note: he is now a billionaire -- in dollars. Bitcoins have been very, very good for him.