Response to Joe Weisenthal’s (Business Insider) “Bitcoin is a Joke” article
Joe Weisenthal of Business Insider wrote “Bitcoin is a Joke“, and I’m now going to clear up some misconceptions he has about what Bitcoin is and explain why it really is useful and revolutionary. Let’s see what he says:
Now first of all, I find the premise of Lee’s post to be hilarious. The currency has been surging several per cent every day lately, and that’s evidence that it’s not in a bubble?
The value of it might be climbing extremely quickly, but would we not expect very high user adoption rate and for this user adoption to come in waves? The main way people can join and become a part of the bitcoin economy is by buying bitcoin, which will have an upwards effect on the price. See graph below about new technology adoption for some good examples.
Before going on, I want to be clear that saying something is a bubble is not saying it will go down. It could go to $US500 or $US1000 or $US10,000. That’s the nature of manias.
Even with government fiat money, it does not last forever. I could just as easily argue that the world is in a long term ‘USD mania’. Still think reserve currency status lasts forever?
“Of the 775 fiat currencies that have existed, 599 are no longer in circulation. The median life expectancy for the defunct currencies? Fifteen years. Perhaps the author was being unfair by focusing solely on the failures. Sadly no, the average life expectancy of all fiat currency is running at a truly underwhelming 34 years.” – Experience is the Teacher of Fools by Stephen Johnston. So what about the currencies of the big political/economic powers like the US or the UK? Well, even those are horrible at performing money’s ‘store of value’ function. The US dollar has lost approximately 98% of its value since the creation of the US Federal Reserve in 1913, and the British Pound has lost over 99.5% of its value since the Bank of England started in 1694. So really, they’re still failing – just in slow motion.
But make no mistake, Bitcoin is not the currency of the future. It has no intrinsic value.
This is a misconception, there is no intrinsic value to money (i.e. What is the USD backed by? What is gold backed by?) – there’s only subjective value. Money is kind of like air guitar – it’s only there if everyone agrees that it is there. It’s socially created value, and the notion that government is the only one able to create this value is also a misconception. There’s no economic reason why society (as opposed to government) could not socially find value in bitcoin, and this is exactly what society did with gold for thousands of years.
Now this idea of “intrinsic value” when it comes to currency bothers people, and Bitcoin Bugs will immediately ask why the U.S. dollar has intrinsic value. There’s an answer to that. The U.S. Dollar has intrinsic value because the U.S. government which sets the laws of doing business in the United States says it has intrinsic value.
- The USA is not the only country in the world
- That doesn’t explain how hyperinflation occurred in countries like Zimbabwe and the Weimar republic. Surely those governments also ‘set the laws of doing business’.
There’s more to it than just that – money came about because it served a useful purpose. That purpose or the item socially chosen by a group/society may seem odd to an outside observer, but there is a purpose. As examples, people have traded using shell beads and shiny metals in the past – as a way of storing value over long periods, transferring among generations, using it in larger trades or to seal pacts. People say that gold’s value from a purely industrial perspective and for making jewellery should only be around $200/USD, but in reality the price is up around $1,300/USD – perhaps the reason for this gap is that the rest of the value is ‘socially created’ in a sense, because of gold’s use as money. While this is mainly because money must be scarce, but also because it typically has other characteristics: durability, divisible, portable, interchangeable.
“With the extension of traffic in space and with the expansion over ever longer intervals of time of provision for satisfying material needs, each individual would learn, from his own economic interests, to take good heed that he bartered his less saleable goods for those special commodities which displayed, beside the attraction of being highly saleable in the particular locality, a wide range of saleableness both in time and place. These wares would be qualified by their costliness, easy transportability, and fitness for preservation… to ensure to the possessor a power, not only “here” and “now” but as nearly as possible unlimited in space and time generally, over all other market goods – Carl Menger, 1892″
I would strongly recommend reading Konrad Graf’s “On the Origins of Bitcoin“, see Section 8: 120,000 years of “mere” collectibles for further explanation of this point.
Bitcoin? Nada. There’s nothing keeping it being a thing. If people lose faith in it, it’s over.
Just like if people lost faith in the ability of the US government to repay its debts , it’s over. Also, it goes without saying that I mean this in a real (inflation adjusted) sense, not just in a nominal sense because obviously they could easily print the money but that would only serve to devalue each individual USD.
But mostly Bitcoin is a speculative vehicle. And really, you’d be insane to actually conduct a sizable amount of commerce in bitcoins. That’s because the price swings so wildly, that the next day, there’s a good chance that one of the parties will have gotten royally screwed. Either the purchaser of the good will have ended up totally blowing a huge opportunity (by not holding longer) or the seller will be totally screwed (if Bitcoin instantly plunges). The very volatility that excited people to want to play the Bitcoin game is death when it comes to real transactions in the real world.
Sure, you’ll hear no argument from me on bitcoin’s price being very volatile. However, this should change over time – the basic point is this: it’s easier to move a $2B market than it is to move a $2T market. So as the market expands, the volatility of bitcoin prices will eventually decrease. Also, there are already payment processors such as Bitpay or Coinbase or BIPS who will handle the currency conversion for merchants for an absolutely tiny fee, and they remove the exchange rate risk to the merchant. e.g. the merchant gets exactly the amount of USD of they were expecting to get, with zero chargeback risk. So yes there are risks now, but they are not insurmountable and they will be reduced over time.
Lastly, overly focusing on bitcoin’s price is a mistake. Why? Because it is not just a currency, it is a payment network and it is decentralised, programmable money which brings improved functionality. Focusing on price is focusing on the wrong thing. It would be like trying to quantify the value of the internet based on the cost of DSL/cable modems and monthly access prices. Here are a few relevant examples:
- In the same way that email was not just ‘a faster way to send snail mail’, bitcoin is not just ‘another currency’ – it represents entirely new functionality. Some examples include: Smart property, Escrow (used directly inside the protocol), Assurance contracts and micropayments to name a few.
- It is provably faster and cheaper for international remittance, see video: “Why Bitcoin is a better way to do international money transfers”. Bitcoin’s current market cap is in the $3B range, but the annual market in international remittance is close to $500B.
- There are 2.5 billion ‘unbanked’ people in this world, and bitcoin is extremely easy to set up. This provides them a chance to participate in the global economy and join in its benefits, rather than being excluded because of protectionist policies or oppression and tyranny in their home country.
- It is much cheaper, even for non-international transactions. Bitcoin fees are much cheaper than Paypal or credit cards with their 3% fees per transaction. The ability to send money anywhere, anytime in the world for free (or almost free) is revolutionary – even if people only used bitcoin as an intermediary.
- Bitcoin’s coloured coins functionality could also become revolutionary in setting up bitcoin as not just a currency and payment system, but also as a globally distributed asset register. See blog post by Richard Brown, IBM Executive Architect, Industry Innovation for Banking and Financial Markets on this here.
I’m not suggesting bitcoin is infallible, I’m just suggesting that maybe you’re focusing on the wrong thing. So if there’s one thing you take away from this, it’s this: Don’t think so much about the price of bitcoin, think about the underlying functional improvements it represents.