Tag Archives: inflation

Bitcoin electronic currency

The Bitcoin mirage

This post is an edited collection of my responses to James Corbett’s interview of Ken Shishido on Bitcoin.

Bitcoin was an interesting experiment in digital currency, and there will be many more, with improvements. It is definitely not a real currency though. The recent Bitfinex hack, wiping out 36% of account balances, on top of many previous hacks, show it’s less safe than even a fiat bank account.

Ken Shishido’s recommendation to put into Bitcoin “what you can afford to lose” is a reminder that it’s a speculation, not money. Still, it’s definitely worth keeping an eye on developments with blockchain technology and new Bitcoin-like instruments that perhaps address the past issues with Bitcoin.

Bitcoin, exchanges, and security

Hacker in hoodieSome make the distinction that hacks have targeted exchanges or warehouses, not Bitcoin itself.  While the distinction between Bitcoin itself and exchanges or warehousers is important, the average person trying it out won’t necessarily understand this or its security implications. To them, the end-to-end process constitutes the solution, and most likely that will include an exchange.

You can get Bitcoin either by mining or by buying them on an exchange. Since mining is now incredibly expensive and technically challenging, the vast majority will buy on exchanges, which is a security risk, even if you don’t warehouse your bitcoin. In addition, most retail merchants accepting Bitcoin immediately liquidate receipts into dollars, making much of the market value of Bitcoin dependent on exchanges.

Even if you avoid exchanges altogether, you are still affected by these hacks. Since Bitcoin’s value depends so heavily on exchanges, a loss of confidence leads to a massive loss of value in the currency itself. This indeed happened after the Bitfinex hack.

There are also issues with the security of storing Bitcoin yourself, of transmitting them, the questionable privacy of a public transaction ledger (blockchain), and many other issues that the average person frankly will not understand or have the time to study. For the average person, the most secure currency is paper dollars, or gold/silver as a small inflation hedge.

There’s a lot of potential in cryptocurrency, both on the central bank side and the peer to peer side. I just don’t think Bitcoin is a particularly good solution, except maybe in certain use cases like international money transfers, that are plagued by high fees. But it’s a lot less than its hype.

Inflation Hedge vs Paper Money

One hundred billion mark note, Weimar Republic

One hundred billion mark note, Weimar Republic

In comparing Bitcoin to fiat or paper currency, Bitcoin advocates point to the inflationary history of paper money and its control by central banks. However, most modern currencies do not hyperinflate. Zimbabwe, Venezuela, the Weimar Republic, etc. are outliers due to unique political circumstances. Of course, that may change and eventually the US dollar will hyperinflate and collapse. But the key word is “eventually” – it may not happen for a very long time (or it may happen next year).

There are three things working against a dollar collapse, no matter how much they try to destroy it: 1. the oil market is priced in dollars, 2. it is required to pay US gov’t, fed./state/local taxes, 3. it is legal tender for the private US economy. So we’re talking about a backstop of many trillions of (current) dollars in value, something no other currency or country can match. So it’s unlikely to “collapse” anytime soon.

If we talk about collapse, Bitcoin lost 80% of its value in 2015, then recovered a bit, then recently lost 25% of its value. That’s a much bigger loss of value than is likely in the dollar, whose deprecitation is pretty stable over time. Bitcoin’s price may stabilize later on, but it’s not ready for prime time and definitely not a stable store of value.

Anyway, let’s be real. For most people these currency hedges don’t matter, because they don’t have much money to begin with. Liquidity is more important, to pay the bills, so dollars (or your local currency) are best. If you do have a lot of money, then sure, have some small hedges with precious metals, a little with Bitcoin, maybe some art, etc. They all carry their own risks. There is no such thing as a risk-free store of value.

UPDATE 08/19/2016: Bitcoin.org has warned that the code for Bitcoin itself may be hacked by government agents.  Not even the currency itself is entirely secure!

A Hungarian man sweeps paper money out of the gutter

Answers To: “The problem with the Fed is that it’s private”

I hear this argument in most critiques of the Federal Reserve, so it definitely needs to be addressed.

Talking to an anti-Fed person, you may have heard something like “The Fed is terrible, it controls all our money.  And did you know it’s private?!”

The implied or stated proposal being that government should take over the money-printing.  But it’s not the fact that the Fed is partially private that’s the problem – it’s the fact that it’s partially government!  What’s bad about it is that we’re all forced by law to use their currency.  It is a legal monopoly on money, for which there is no ethical justification.

From a voluntary ethics standpoint, no one should be forced to use or not use any money, or prohibited or compelled to issue money.  But even from a utilitarian view, a government takeover of money would not be a very good safeguard against monetary inflation.  Historically, governments have debased their currencies as a means to finance their grand schemes, variations of bombs or bread.  Can you imagine what Congress would do without the admittedly weak restraint of the Fed?  They’d spend into oblivion, even more than now, and destroy the dollar in the process!

The real answer is – eliminate the Fed’s legal monopoly on money.  Let them be a private bank competing in a free market.  Of course, they probably would go out of business, but hey, that’s free market capitalism!