Remember bitcoins? We have not heard about them lately.
We hear about the dollar. We use dollars every day. We pay bills in dollars. We see prices listed in dollars.
Every nation's population has a similar experience with its currency unit.
But bitcoins? "Oh, yeah. I think I heard about that. I don't know anything about it, except that people lost a lot of money."
FAMILIARITY PRODUCES TRUST
I don't like central banking, but I trust the banking system. So do you. So do most people on earth. I keep money in banks. So do you. So do most people in the First World and Second World. If we did not trust banks, we would not use them. We use them.
I don't use paper money. Not many people do, north of the equator. Paper U.S. dollars are used in Second World countries that are run by socialists or military dictators. These mostly are Spanish-speaking countries. These countries are on the fringes of the world economy.
I don't use bitcoins (I do not capitalize the word.) Neither do you. That's because we cannot buy things we want with bitcoins. We do not go shopping at stores that offer things in exchange for bitcoins. The search costs of finding a store that uses bitcoins are too high to be worth the effort.
Your relatives have not used bitcoins.
Your employer does not use bitcoins.
You pay your taxes in the currency unit of your nation. You cannot escape this. Governments determine the currency unit in which citizens must pay taxes. This guarantees that fiat money will be used by all retail, legal businesses, and 99% of the people who file income tax forms.
In the USA, Social Security checks are paid in U.S. dollars. Do you think granny will issue this ultimatum? "I want payment in bitcoins or nothing."
You don't know how to buy bitcoins. The learning curve is high for bitcoins. The benefits are low . . . basically nonexistent.
You know how to use a credit card. The learning costs are low.
There is nothing that bitcoins offer to users that is unique. (Keep reading.)
Bottom line: I can buy anything I want without bitcoins. So can you. I cannot buy anything I want with bitcoins. Neither can you.
There is almost no demand for them. This is the key fact.
That for which there is no measurable demand is not money.
If bitcoins cannot overcome public indifference, they will not become money.
The economic case for bitcoins must be based on the benefits bitcoins offer, in comparison to the existing banking system.
I can't think of any. Neither can you . . . unless you're a libertarian computer programmer.
Now let's go into greater detail.
BITCOINS VS. AUSTRIAN MONETARY THEORY
First, the free market has already determined that virtually nobody wants them. Almost nobody knows what they are. The vast majority of people who have a bank account have never used bitcoins and have no interest in them.
Second, the fundamental fact of money is this: it is the most marketable commodity. That was Carl Menger's definition in 1892, and it was Mises's definition in 1912. It still is the best definition of money. Money has value because people want it. Everything has value because people want it. Nobody -- or nobody outside of the world of computer programmers, who have almost no money -- wants bitcoins. People don't need bitcoins, as far as they're concerned.
Those who say that bitcoins are going to take off as the world's alternative money have a lot of responsibility to explain why it is that nobody is interested in bitcoins. Nobody is using bitcoins as a currency, because it is not a currency. It is a cheap system of digital ownership transfers, with real money at each end of the transaction. When you are talking about all the people who have bank accounts in the world, and then you add all the people who use government-issued paper money, you are talking, in round numbers, of about 90% of the world's households. The number of households that use bitcoins is a couple of million. These people don't have much money.
This is a tiny market. Walk into any store. You have not seen a store that advertises that it accepts bitcoins. There is a reason for this. Nobody knows what they are, including the people who run the stores.
Third, most people trust the national government with respect to two things: the stability of money's purchasing power and the stability of the banking system. Since 1934, there has been no Western nation that has suffered a collapse of its banking system. Every national government has successfully intervened to save in which the banking system was at risk. No Western nation's banking system ever went bankrupt.
There is no threat to national banking systems in the West, which is where 90% of the world's money is deposited. Here is why. You can't get out of digital money if you are already in digital money, except at an ATM -- a few hundred dollars. As long as the government will not allow hedge funds and money market funds to go down to their bank and withdraw all of their digital money in paper money, the banking system cannot fail. An individual bank can fail, but the banking system cannot fail. Why is this? Because in order to get out of bank A, you have to get into bank B. The only way to get out of digital money, except for a tiny number of personal transactions at an ATM, is to exchange one digital bank account for another digital bank account. So, if you want to get your money out of bank A, then you have to use bank B to transfer your money into. The investment assets sold by bank A will probably be purchased simultaneously by bank B. The market for the assets that bank A is selling will probably be sustained.
Maybe some big bank will go under. But then another big bank will buy up all of the failed bank's assets. If not, the FED will intervene. In other words, there is no threat to the banking system.
Fourth, most people have long since given up on banking privacy. They really do not care. To think that they care about privacy in general is naïve. Everybody knows what the NSA is, but Congress doesn't do anything to stop it. The public doesn't care. The public doesn't care about the CIA, the FBI, Guantánamo, or anything else in their own countries. Leaders in countries around the world know that the NSA monitors them. They shrug it off, and they move forward. This is wise. We should not get too upset about things over which we have no control.
BANKING AND BITCOINS
So, what's the motivation to use bitcoins? People don't care about privacy. There is no threat to the banking system. There has been no case of any nation since 1934 in which large numbers of banks have gone down. Even in the case of the United States in 1930 through 1934, when 9,000 banks went under, all of them were small. Not one large bank went under. The FED saw to that. The small banks disappeared. They were mostly rural banks. The failed banks shrank the money supply by a third, but as soon as the government intervened by setting up the FDIC, bank failures ceased. This did not just stop in the United States; it stopped all over the world.
Today, people know that the banks will stay open. There is no fear of a collapse of banking in the West, because a Western banking system cannot collapse. So, why should people worry about what cannot happen? It's not just that it won't happen; it cannot happen.
The government always bails out the banks. The central banks bail out the banks. The public has learned, since 1934, that their money is safe. There has been no threat to anybody's money for two generations. There has been the threat of monetary debasement, but that has only taken place in non-Western countries, with the exception of Israel in 1985. So there has been no mass deflation anywhere in the world; there has been no mass inflation anywhere in a large Western nation. Nobody in Latin America needs to use bitcoins, because if people want an alternative currency, they can use paper dollars. This is exactly what they've done since the end of world war II.
So, what is the motivation for people to use bitcoins? There isn't much. It's just a curiosity that was been invented by some techies -- no one knows who. The only people who use bitcoins are techies, and techies don't have much money.
No legal business is dependent upon bitcoins. Every business is dependent on the banking system.
People trust the banking system, and they should trust the banking system. The banking system has proven to be a stable system that has maintained the year-to-year price stability in every Western nation. There have been declines in purchasing power, but the public really doesn't care. In fact, the public likes it. The public likes a little inflation, because with a little inflation, you get to pay off your creditors with less valuable money. The public has always liked a little inflation.
A little inflation is all the public has had to put up with. There hasn't been any hyperinflation.
The promoters of bitcoins are dealing with a population that trusts the government, trusts the banking system, and has perfectly good reasons for trusting both with respect to the monetary system. This trust has not been betrayed. The bankers know what is good for them, and the existing system favors them. The public really doesn't care. As long as the public doesn't get a banking collapse, and as long as the public doesn't get hyperinflation, the public is content with the system.
If there isn't any demand for something, then it's not going to replace something for which there is an enormous demand. People around the world like the monetary system. There is no political movement against the monetary system. The monetary system has provided basic stability since 1934, as long as a nation did not lose a world war. Germany lost. Austria lost. But even in those cases, they did not get hyperinflation. They got controlled inflation, with price controls and rationing. This ended in 1948.
People who buy bitcoins dream of getting rich. That should not the motivation for going into a monetary system. Money ought to be stable in value, and bitcoins are anything but stable in value. Bitcoins are not a store of value; they are a crapshoot for a bunch of techies who don't have much money.
TECHIE BABBLE.
Techies don't know how to sell the idea of bitcoins. They try to explain what bitcoins are, and they spout techie babble. Nobody can understand them. I don't think they understand themselves. Here is an example. It is from the bitcoin wiki, a site set up by bitcoin advocates to explain things to laymen.
We are told that the central benefit of bitcoins is something called a block chain. What is a block chain?
A block chain is a transaction database shared by all nodes participating in a system based on the Bitcoin protocol. A full copy of a currency's block chain contains every transaction ever executed in the currency. With this information, one can find out how much value belonged to each address at any point in history.Every block contains a hash of the previous block. This has the effect of creating a chain of blocks from the genesis block to the current block. Each block is guaranteed to come after the previous block chronologically because the previous block's hash would otherwise not be known. Each block is also computationally impractical to modify once it has been in the chain for a while because every block after it would also have to be regenerated. These properties are what make double-spending of bitcoins very difficult. The block chain is the main innovation of Bitcoin.
Honest generators only build onto a block (by referencing it in blocks they create) if it is the latest block in the longest valid chain. "Length" is calculated as total combined difficulty of that chain, not number of blocks, though this distinction is only important in the context of a few potential attacks. A chain is valid if all of the blocks and transactions within it are valid, and only if it starts with the genesis block.
For any block on the chain, there is only one path to the genesis block. Coming from the genesis block, however, there can be forks. One-block forks are created from time to time when two blocks are created just a few seconds apart. When that happens, generating nodes build onto whichever one of the blocks they received first. Whichever block ends up being included in the next block becomes part of the main chain because that chain is longer. More serious forks have occurred after fixing bugs that required backward-incompatible changes.
Blocks in shorter chains (or invalid chains) are not used for anything. When the bitcoin client switches to another, longer chain, all valid transactions of the blocks inside the shorter chain are re-added to the pool of queued transactions and will be included in another block. The reward for the blocks on the shorter chain will not be present in the longest chain, so they will be practically lost, which is why a network-enforced 100-block maturation time for generations exists.
These blocks on the shorter chains are often called "orphan" blocks. This is because the generation transactions do not have a parent block in the longest chain, so these generation transactions show up as orphan in the listtransactions RPC call. Several pools have misinterpreted these messages and started calling their blocks "orphans". In reality, these blocks have a parent block, and might even have children.
Because a block can only reference one previous block, it is impossible for two forked chains to merge.
It's possible to use the block chain algorithm for non-financial purposes: see Alternative chain.
The block chain is broadcast to all nodes on the networking using a flood protocol.
These kids -- for they are mostly kids -- want us to trust Western civilization's division of labor to them, because they have got us covered. How do we know this? Because of block chains.
If block chain technology works, it can be used in many other fields. Let other fields adopt this new technology, as this author recommends. Let the market test it in multiple areas of the economy. But to ask the world to run the initial test on the central economic institution -- money -- is ridiculous.
Bank depositors are not going to turn over their bank accounts to a system they do not understand, a system that has no track record, other than an 85% price decline, December 2013 ($1,240) to February 2015 ($190). It offers no government support, including access to the courts. People don't know how the system works, and they never will. They don't trust the system. They don't want to study the system. They get everything they want in the banking system, other than privacy. But bitcoins offer little privacy. They leave a digital trail into and out of bitcoins. If people want paper currency, they can get it at an ATM.
The banking system isn't going to fail, whether in the United States or anywhere else in the West or Asia. The monetary systems are going to provide basic stability of purchasing power, compared to bitcoins, which have been insanely volatile. There is therefore no demand for the supposed advantages of bitcoins as money, unless somebody is involved in illegal activities.
Ideologists want privacy. I would like it, too, but only at a minimal cost. The cost of learning how to use bitcoins is enormous. The cost of finding anybody who will sell me anything for bitcoins is even high. The search costs of finding one store that is set up to accept a bitcoins is high. I don't have any trouble getting some store to sell me whatever I want for a credit card. I would have enormous difficulty for finding anybody, anywhere, who would sell me anything I would want for bitcoins.
The public has spoken. The public doesn't care about bitcoins. In matters monetary, the public is sovereign. The public gets to decide what it wants to use for money. It doesn't want to use bitcoins. Bitcoins don't bring anything to the table that the public wants something that would justify getting into a crapshoot investment like bitcoins. The suckers who got in at the top have lost 78% of their money if they held on.
Bitcoins cannot become a rival currency, because bitcoins are tied to the banking system. To buy bitcoins, you have to have a bank account. To buy anything with bitcoins is virtually impossible. Nobody wants to sell anything for bitcoins. For anybody who sells a physical product, he has to repurchase whatever it was that he sold in order to sell more items again, and to do this, he has to sell the bitcoins for real money, which is a taxable transaction, in order to get real money into his bank account. Then he can replenish whatever it is that he sold.
So, bitcoins are completely tied to the banking system. There is no escape from digital banking with bitcoins, except if you want to buy computer programming from some unknown programmer. If you want to buy digital stuff, you can occasionally use bitcoins, but there isn't anything you want to buy that is available only with bitcoins.
If you buy programming in money, you can deduct this as a business expense. You lose this deduction when you use bitcoins. The marginal cost of using bitcoins for business transactions is enormous. As a businessman, if I want my tax deduction, I must prove that I paid for a business-related service or tool. I therefore require every seller to supply an invoice. Thus, bitcoins cannot offer any privacy in business transactions. If I want to use bitcoins exclusively, I lose all of my tax benefits. The marginal cost of every business-to-business purchase in bitcoins rises to as much as 40%. This single fact will keep bitcoins from becoming money in any society with business taxes.
You have probably never used bitcoins. You don't want to learn about having to learn how to use bitcoins. So, you don't have any motivation for using them, yet you are a free market kind of person. Why do you think Joe Lunchbucket is going to use bitcoins? He isn't.
Why do you think Citicorp will use bitcoins as an alternative to money -- a money system that Citicorp and its cronies control?
AUSTRIAN MONETARY THEORY
If you take seriously Austrian monetary theory, bitcoins do not qualify as an alternative currency. Nobody imputes value to them, other than a handful of techies. Nobody wants them. Nobody needs them. The supposed advantages that they give are of such low priority in the lives of 7 billion people that there is no incentive to switch over.
Unless everybody switches over, you still have to stay in the banking system. But if you have to stay in the banking system, and everything is a tax-reportable event, then what's the advantage of bitcoins? There isn't any. There is also a high learning curve. You have to trust them. Nobody understands them. And we have to use the banks anyway.
You can't get out of your bank account without leaving a record. The person who takes your bitcoins cannot get back into the banking system without leaving a record. So no one gets meaningful privacy by using bitcoins. You're going to have to use your bank. But if you have to use your bank, then what's advantage of using bitcoins?
We don't hear much about bitcoins these days. They were a flash in the pan. They have not had any effect on the economy. Bitcoins are not stable in terms of purchasing power. They don't give you bank privacy in your business.
I've talked about all this before, but I know there are dreamers of great dreams, hoping for real privacy, hoping for an alternative to the banking system, hoping for libertarian victories in the field of money. The bitcoin believers don't believe in the restoration of a gold coin standard with digital receipts. They don't believe in silver coins. What they believe in is technical jargon.
Bitcoins are not going to replace your bank. They are an appendage to the banking system.
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