What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.
This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.
Volatility. An ideal currency is immune to supply and demand and is simply a medium of exchange for actual commodities (which can be burned/eaten/used to manufacture things). Of course no currency can meet this ideal, but maintaining stability is a key task of a central bank.
I'd like to add that being useful isn't a negative for something's properties as a currency - for example, the reason cigarettes become a currency in a lot of jail/P.O.W. situations is because they are always liquid due to smokers needing to smoke.
Often in those situations, cigarettes come into the economy as a ration (or a purchase limit) that people get whether or not they are smokers, and the economy revolves around getting this commodity that everyone gets to the minority that need it. Pretty quickly, you end up with non-smokers trading cigarettes with each other, because you can always get whatever you want through paying a smoker in cigarettes.
Bitcoin could benefit from that if it encouraged a very large drug market, because people need their drugs. If an easy, comfortable bitcoin drug market could get a lot of volume, it would become a lot easier to buy a cup of coffee or a car with it, and the prices would rise and fall based on the relationship of the ease of purchasing drugs with bitcoin vs. the ease of purchasing drugs in dollars. Maybe money laundering could keep bitcoin stable, too. In any case, to be successful, IMO bitcoin will have to be driven by something other than belief in bitcoin.
The use of the USD? It can be used to pay US taxes.
"A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market... Examples are petroleum and copper. The price of copper is universal, and fluctuates daily based on global supply and demand."
You could say a commodity is like a currency many people can produce.
Considering how commodities are often produced, the term "Bitcoin mining" is shockingly apt.
Post is being downvoted, but it's a valid point. Lots of things have been used as currencies. WW2 POWs used cigarettes; some Pacific islanders used huge, immovable rocks. If anything, BitCoin is much more like a currency, because, unlike commodities, it has no other use.
Yes, that's why I chose that example. The thing is, currencies are and have always been a commodity with many traders. Bitcoin being treated as a commodity does not prevent it from being a currency.
The reason I cited those examples is that once currencies cross a certain commodity-threshold, they become much less useful as currencies.
cube13's characterization is a simplification, but I think it still captures their intended uses. Bitcoin's deflation, and the Swiss franc's high value compared to other currencies, harm their ability to act as they were intended to. Right now, I agree with Duffy's original point, which is that bitcoin is more of a commodity than a currency.
Intrinsic value is set by the marketplace. Right now, the market perception is that prime numbers (or whatever bitcoins are) are scarce, valuable resources.
Bitcoins are not simply prime numbers. They are account balances in a system that distributes the validation of account balances in such a way that is cryptographically secure, trustable, and decentralized. Provably correct, tamper-proof accounting balance sheets are nothing to sneeze at and it was really a stroke of genius to discover the algorithmic means to create such a thing that is the cool thing about Bitcoin.
I personally believe that it will never achieve anything other than niche status as a currency for trading illegal goods; it will be used for other types of transactions, but it will be a very small number of transactions when compared to contemporary financial transaction systems like, e.g. credit cards, or paypal. I say this only because in practical terms it is not very easy to use, and furthermore, its benefit of being pseudoanonymous is also is downfall; very safe for the recipient to receive bitcoins but very risky for the sender to send them since the sender has absolutely no insurance or any recourse in the transaction. There is no authority to appeal to for transactions gone bad, and even if you could sue over bitcoin transactions and the courts would understand them, the pseudoanonymity would make it very difficult to know who to sue.
I don't think Bitcoins will achieve prime status either, but not for the reasons you listed:
- Easy of use: this is mostly a matter of software, and I see no reason to believe it has to be difficult to use. With current proposals such as specific tags for websites and such, sending money can be made as easy as inserting someone's email address, the amount and hit "send."
- Unsafe for the sender: nothing in the design of bitcoin prevents the creation of escrow services. It's simply not an issue to be fixed by the currency but by higher level services, just like with other currencies.
- Pseudoanonymity: it's mostly a red herring. When I'm buying from a random Chinese 'shop' through Ebay I won't be able to sue him either. When I'm buying from a reputed shop in my country, I don't need to ask its bank to know who I need to sue.
A currency that people are hoarding because they feel that the faith and credit of Switzerland is proportionally better than other currencies, especially the Euro.
What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.
By that logic the best money will be hot potatoes.
As long some commodity (X) gains monetary value (demand for X is demand for a medium of exchange) it no longer needs any other value to function.
Still I doubt that cans of mackerel have no other use than monetary in prisons. Not many McDonalds around, beside if those were never consumed their supply would be grow continually which will to "mack" inflation.
If Bitcoin ever becomes a successful, liquid currency, it will have been partly thanks to the current speculators. They're the ones "mining" the bitcoins. They're taking the risk. In a way, it's similar to gold miners of old. They would invest money in digging and mining for the chance of finding gold. They were in it for the profit. Still, it did benefit other people since there was more gold available for both utilitarian and liquidity purposes.
I think the point isn't about speculators, it's about hoarders. If it becomes a successful, liquid currency, it will be in spite of those hoarding.
Coincidentally, with the market looking like it does, at an individual level it's absolutely the right thing to do to hold them, or at best to slowly diversify out, while still not using it for much purchasing. As long as it seems like the right move to hoard them, and their transactional use is a tiny fraction of the amount hoarded, they're not going to be a successful currency as he defines "successful". Closer to a ponzi scheme and/or asset bubble IMO.
Hoarders are also speculators! They're betting bitcoin will go up in value.
By the way, "hoarder" is a loaded term. One man's "hoarder" is another man's "saver". Without people who save, there's no way people can borrow, and so on.
What risk? All the Bitcoin miners I know are patting each other on the back on how much mining their fancy GPU is doing. Risk: one or more graphics cards (that are also used to play videogames) and a slightly elevated electricity bill from leaving the computer on all day and night. There isn't a lot of effort or ingenuity going on here, just an information asymmetry.
There's exchange risk as with any currency. If you exchange US dollars for Mexican pesos, there's a risk that the pesos will lose value relative to the dollar. Of course, the risk of keeping bitcoins is much higher than that of Mexican pesos.
By the way, you seem misinformed about the way people are mining bitcoins. Nowadays it's done mostly by professionals running rigs with tons of GPUs, not by individuals who put an extra graphic card on their gaming PCs.
But won't it also encourage people to be wiser with their money, and not waste them on unimportant stuff? If what you're buying has higher value to you than holding the money, then you'll buy it. Isn't overspending what got us into this financial mess in the first place? And getting into too much debt, whether it's the Government itself or the people.
Also the deflation effect should only be this great in the early years of the currency. Once it becomes a solid popular currency (like say the euro or the dollar), and it has reached its maximum of 21 million bitcoins, the deflation should be a lot smaller and insignificant to people who would want to "invest" in keeping bitcoins to themselves, because there won't be an avalanche of people wanting bitcoins anymore, so the value of the currency won't surge so much from that point forward. The currency would become more stable and with a more steady growth as it also becomes affected by the law of big numbers.
People kept spending because there were investments available (housing) which outperformed bank interest rates, 401k's, and pretty much everything else. There was no incentive to save because they were saving merely by owning their homes. This happens when there are bubbles. I don't see how the Bitcoin economy is immune to them, so you wouldn't have actually avoided what happened merely by using a different currency.
Let's say the total value of Bitcoin's in the world in 15 years is the same as the total value of Australian dollar's (AUD) in the world. Based on the rate of production it's going to take a massive amount of deflation to get there. That might make Bitcoins a good investment but it also makes them a terrible currency. (~261 billion AUD * 1.1USD/AUD / 21 million bitcoins = 13,600$/bitcoin.)
All of which is beside the point, unlike banking transactions each bitcoin computer needs to be connected to the internet so you can't create a truly secure network. If the average American had 10+$ in bitcoins on their computer a significant number of them would get hacked on a regular basis and simply lose all that money. Which means for the average consumer they need to deposit that money into some sort of bank and there is no FDIC for bitcoins so when that bank is hacked all that 'money' goes up in smoke. I think we may end up with a pure digital currency sometime soon but bitcoin’s don’t really work (yet). If you want secure anonymous transactions we already have cash and several digital equivalents based on cash, but if you want stability commodity bubbles demonstrate that finite quantities does prevent bubbles and their associated crashes.
I'm not sure I see the value of a pure digital currency, anyway. My dollars are digital when I want them digital (paycheques, moving between accounts, bill payments), and physical when I them physical (ATM withdrawal, quick cash IRL transactions).
The organizations holding them for me are chartered banks regulated by the government of my country, if they decide to allow freezing the amount I have larger problems.
As it happens I consider the need for a private third-party money transferring organization to be one of the larger failures of North American consumer banking systems, but I digress. It's slowly improving in Canada, I can now do inter-bank digital transfers between my accounts without shelling out $50 for a wire. Maybe in another decade or two we'll get to SEPA level.
Currencies are goods like any other goods and the people who own them have divergent purposes. When Krugman writes "we want [a monetary system] to facilitate transactions and make the economy as a whole rich", he's assuming a lot. Obviously, some of the people who own bitcoins right now are not interested in facilitating financial transactions to the detriment of their net worth. So, for people who want that facilitation, bitcoin isn't getting the job done, but the people who are using bitcoin as an investment are getting just what they want. Those two conditions could flip fairly quickly down the line, but that's how these things go. But for Krugman to just assume that only one of these is an acceptable condition just begs the question.
Currencies are not goods and should not be thought of as goods. They are mediums of exchange[1]. They may be backed by goods (such as gold), but currency itself should have no inherent value (otherwise, it's a terrible medium of exchange).
What you're talking about are securities[2]. There is a distinct difference. Bitcoins are ostensibly a security masquerading as a currency.
No, I think I am correct. Currency exchange rates are prices and in that sense a currency is a good. The typical use of a currency is as a medium of exchange, but people use goods for different reasons. That was my point originally.
I don't think it's just an assumption - I think it is fair to state that a currency whose primary mission is not to facilitate transactions will fail to catch on. So far BitCoin has failed to catch on.
Part of my original point was that currencies don't have "missions", people do. A person may or may not wish to own a bitcoin in order to facilitate transactions. A person might also wish to own one as a speculative investment. Neither "mission" is necessarily better than the other. Krugman just assumes otherwise.
What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich.
This is where I think Bitcoin fails as a currency. While some people invest in currencies, the point of currencies is to allow goods and services to flow through the economy. Currency is and should not be primarily an investment vehicle.