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?

Reserve Currency Status does not last forever

Source: JP Morgan report

“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.

  1. The USA is not the only country in the world
  2. 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.

10 comments

  1. Lutz Hausmann · · Reply

    Excellent article!

  2. Daniel Moerner · · Reply

    1. Your first graph looks at market penetration by percent. Every single one of those goods became cheaper as it became more popular, due to shifts in the supply curve from productivity gains and economies of scale. I have no idea what this has to do with Bitcoins, which involve no such shift.

    2. He says that Bitcoin prices will not go down. You reply that reserve currencies don’t last forever. And then you say that fiat currencies die out. This is a complete non sequitur. You yourself argue that the value of fiat currencies is falling, not rising. And fiat and reserve currencies are different, why do you mix a graph of one with a discussion of the other? Are you claiming that if the USD crashes as the reserve currency, Bitcoin prices will decrease? None of this follows.

    3. Your statistics about the USD losing 98% of its value are meaningless, you want to look at growth in GDP per capita or growth in living standards or growth in income correlated with inflation over that time.

    4. ‘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.’ This is an empirical claim. It is misleading or false. First, do you think that gold’s use as money has really fallen by 40-50% over the past couple of years? No, gold’s price is a function of people’s expectations of its use as money because they have irrational fears about QE, etc. The same is true of Bitcoin.

    5. ‘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.’ You seem to know nothing about the dual history of silver and gold as carriers of value, and the long periods of time when silver was dominant. This dominance was a function of government policy, particularly in the Far East and amongst the bankers in Genoa.

    6. You seem to miss the point of the entire article. Weisenthal does make heavy weather of temporary technical problems, but the deeper issue is that, with a finite supply of BC, it will always be better to hoard them than to spend them, and this is the reason why they are vehicles for speculation. Such a problem is inevitable without a central bank planning for future inflation.

    1. lets talk · · Reply

      “Your statistics about the USD losing 98% of its value are meaningless, you want to look at growth in GDP per capita or growth in living standards or growth in income correlated with inflation over that time.”

      One is comparing the value of the currency versus the size of the economy. That is not the same thing. If I had a $1 bill from the 1920s it’s purchasing power is now a fraction of what it once was. You saying, “But the economy got bigger” wouldn’t really console me, since I used to be able to buy a movie ticket, popcorn, a drink, food and all that good stuff, but now that $1 bill won’t get me any of those.

      “You seem to know nothing about the dual history of silver and gold as carriers of value, and the long periods of time when silver was dominant. This dominance was a function of government policy, particularly in the Far East and amongst the bankers in Genoa.”

      You seem to know nothing about what he’s trying to say. What he is saying is that there has been a gap between what the intrinsic value of gold/silver is and the price society pays for it. It had added value which society placed on it.

      “He says that Bitcoin prices will not go down. You reply that reserve currencies don’t last forever. And then you say that fiat currencies die out.”

      No, re-read the article. He says that bitcoin will die and cease to exist. The authors response is so does fiat, so how is that a valid point.

    2. Speaking of non sequiturs, you make a stunning example in just about every one of your points.

      “Are you claiming that if the USD crashes as the reserve currency, Bitcoin prices will decrease?”
      He is making no such claim, or even anything to do with such a scenario. He’s merely stating that the mere possibility of a future crash is *not* an indictment of a currency, since the exact same thing applies to the US dollar.

      Point 4.
      ” No, gold’s price is a function of people’s expectations of its use as money because they have irrational fears about QE, etc. The same is true of Bitcoin.”
      EXACTLY. Do you not realise you’re making the same argument he is? Stephan is responding to the original article’s claim that Bitcoin has no intrinsic value, by saying that no currency or commodity has any intrinsic value *besides the social value we attribute to it*. This includes Gold, the Dollar, and yes, Bitcoin. The argument is moot.

      Point 6.
      I think it’s fair to say that you miss the point of THIS article, by misinterpreting the arguments from the original article that Stephan was disputing.

  3. Anonymous coward · · Reply

    It’s a shame writers as good as you cannot be found in larger publications. Instead we have people like Joe Weisenthal telling people what’s good and what’s bad…

  4. Thanks for taking the time to write this, I’m glad someone took on that article, which was full of ****

  5. lanzera08@gmail.com · · Reply

    Nice work, I’ve been reading Joe for years and he’s always laughably ignorant, plain wrong or just waving the USA exceptionalism flag. He’s just trying to get himself in the news by muckraking. Still believe Joe? I’ve sent this link to tons of people, pass it along and maybe Joe will eventually do some research and read it. https://en.bitcoin.it/wiki/Myths

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