I've been putting some more thought into bitcoin. In a previous post, I explain that bitcoins do not have intrinsic value nor do they represent someone's obligation. Bitcoins are nothing more than speculative money. Accordingly, their value depends entirely on trust, and the inflow of new bitcoin believers.
That is not to say that building a digital medium of exchange is bad idea. Quite the contrary. The bitcoin protocol provides the infrastructure that could enable the flow of true digital currency, which can have profound implications on our economic lives. I am not a technical expert and cannot speak to the design and efficiency of the protocol, but the idea itself has significant merit.
What a digital medium of exchange needs is a true digital currency. As I discuss in the previous post, the source of intrinsic value is work which creates utility. When people trade, they attempt to exchange equal amounts of intrinsic value. This presents a problem for fiduciary money (such as bitcoin) because it has no intrinsic value of its own. When sellers accept bitcoins, they are basically making a bet that someone else will be willing to take those bitcoins from them. Until this speculative nature persists, bitcoins will not fulfill the transformative potential of a peer-to-peer medium of exchange.
Understanding the role of money as the source of the business cycle, inflation and asset booms and busts.
Showing posts with label true nature of money. Show all posts
Showing posts with label true nature of money. Show all posts
Wednesday, December 11, 2013
Friday, December 6, 2013
The true nature of money and why the bitcoin is a pyramid scheme.
Great article by the St Louis Fed on bitcoins. The key question, which remains unanswered, is whether bitcoins have intrinsic value.
The answer is a resounding No! While computing work does go into solving the crypto-puzzles required for the issuance of new bitcoins, work alone, while a required condition, is not sufficient. The other side of the coin, pardon my pun, is utility. The source of intrinsic value is work that creates utility. For example, a bridge to nowhere in Alaska has no intrinsic value because nobody is using it despite the tremendous amount of work and resources that went into its construction. Regardless of how difficult the crypto-puzzle is and how much computing resources went into its solution, the fact remains that the puzzle itself serves no useful purpose. If it did serve an actual purpose, such as solving a math problem that has real-life application, the value of the bitcoin would be inextricably linked to such application and would not be subject to huge swings in value.
The answer is a resounding No! While computing work does go into solving the crypto-puzzles required for the issuance of new bitcoins, work alone, while a required condition, is not sufficient. The other side of the coin, pardon my pun, is utility. The source of intrinsic value is work that creates utility. For example, a bridge to nowhere in Alaska has no intrinsic value because nobody is using it despite the tremendous amount of work and resources that went into its construction. Regardless of how difficult the crypto-puzzle is and how much computing resources went into its solution, the fact remains that the puzzle itself serves no useful purpose. If it did serve an actual purpose, such as solving a math problem that has real-life application, the value of the bitcoin would be inextricably linked to such application and would not be subject to huge swings in value.
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