BITCOIN IS NOT A CURRENCY, IT’S A WOEBEGONE DELUSION

(c) Jeffrey Robinson 2014, 2023

?As Excerpted From BitCon–The Naked Truth About Bitcoin

----------------------------------------------------------------------

A man who owns a cow needs some lumber. If he cannot find someone with lumber who needs a cow – which is called the “coincidence of wants” – then he’s not going to get his lumber. Unless he can give his cow to someone who will, in turn, give him something that the man with lumber will accept.

That’s what currency does.

A medium of exchange that facilitates barter, at various times and places in history, currency has been shells, cocoa beans, rum and even junk jewelry - $24-worth paid for Manhattan Island. In prison, cigarettes and drugs are currency. But the most widely accepted form is known as “fiat,” derived from the Latin, “let it be done” or “it shall be,” which is money issued by governments.

Think of fiat as “public” currency, because there is also something called “private” currency, which is a currency substitute, like a voucher. Like American Express Travelers Checks, Amazon gift certificates, Disney Dollars, American Airlines frequent flier miles and casino chips.

The reason why a $1000 chip at the Bellagio in Las Vegas is worth $1000, is because the Bellagio stands behind it. You can use it to bet on black-jack, to tip a waitress or to turn it back into dollars. However, the minute you take it down the block to Caesar’s Palace and try to buy a meal with it, for all intents and purposes, it’s worthless.

A critical difference between public and private currencies is “circular flow of income.” Public currencies create an economy. Private currencies are used once.

Say you earn a living making widgets. After your boss pays you, $5 of what you’ve earned goes to the grocer who sells you bread. In turn, the grocer takes $4 and pays his supplier. The supplier takes $3 and pays the bakery. The baker takes $2 and pays the farmer who grew the grain that goes into the bread. The farmer buys a widget.

Now put bitcoin into the equation.

This time the baker puts his $2 into bitcoins and pays the farmer that way. But, in order to buy his widget, the farmer has to sell the bitcoins and go back to dollars.

Unless there’s a circular flow of income – which there isn’t - every purchase with bitcoins simply becomes a sale of bitcoins.

It’s one of the reasons why Bitcoin doesn’t satisfy any of the three basic characteristics of a public currency.

* A medium of exchange: People must accept it in the middle of a barter transaction. But almost nothing is priced in bitcoins and the businesses willing to actually accept them – to put bitcoins on their books - are so few as to be almost non-existent. What’s more, the bitcoin market is so thin, posing serious questions about liquidity, in addition to making the market easy to manipulate. All of those things rule out bitcoin as a suitable medium of exchange.

* A unit of account: Here, too, it’s a question of “circular flow.” Additionally, a currency must dominate long-term financial commitments. To manage that, it must be a numerical measurement of the value of goods and services. In exchange for mowing my lawn, I will pay you $22.75. The service has been numerically valued and the amount, in dollars, has been accepted for the IOU.

Bitcoin falls short in several important areas.

It is too volatile to be suitable for long term financial commitments. No one – lender, borrower, saver, employer, employee, no one – should be asked to take the risk that their liabilities will be worth 10% more, or 15% less in no time. It would be financial suicide not to know, hour by hour, what your debt is.

There is also no getting around the fact that, with the maximum number of bitcoins fixed at 21 million, it is an inelastic money supply.

Finally, there is the matter of fungibility. That means, one unit has to be exactly the same as any other unit. Serial numbers not withstanding, the only difference between a $10 bill in your pocket and a $10 bill in mine, is the pocket. But in the US, the Internal Revenue Service (IRS) has ruled that, for their purposes, bitcoin is not currency but rather property. Other countries have subjected bitcoin to similar status.

Consequently, the buying and selling of property – a house, a painting, a horse, an autographed hockey puck or a bitcoin – is subject to capital gains tax. What you pay for it when you purchase it and what benefit you derive from it when you sell it matters.

If you bought your first bitcoin at $10, and you bought your second bitcoin at $500, the two are not the same. You have to think about which one you’re going to spend. If the purchase price of something is 1 btc, which at the time is worth $500, and you use your second bitcoin, there is no taxable gain. But if you pay for the purchase with your first bitcoin, then you have received a $490 taxable gain. Even more day to day, imagine paying capital gains tax every time you buy an ice cream cone. Because your first and second bitcoins are not the same, they are not fungible which further supports the claim that bitcoins are not a genuine public currency.

* A store of value: Currency must be “predictably useful.” Here, bitcoin fails miserably. As it is anything but stable, it is anything but predictably useful. Tomorrow it can be worth half as much as it is today, or twice as much as it was the day before. Such swings make it unsuitable for saving it, storing it or depending on it.

After describing bitcoin as, “A very fast money order,” Warren Buffett told CNBC, “It's not a currency. It does not meet the test of a currency. I wouldn’t be surprised if it wasn't around in the next ten or twenty years. People say, I will sell you goods in bitcoins but they change the price of those goods every time the price of the dollar changes in relation to bitcoins. They’re pricing off the dollar. They could say, I will sell them to you in barrels of oil and then every time the price of oil changes they change the number of barrels you have to have. Your oil is not the currency. It is not a durable means of exchange. It's not a storer of value. It's been a very speculative, a kind of Buck Rogers type thing. People buy and sell them because they hope they go up or down, just like they did with tulip bulbs a long time ago.”????

Lawrence Kudlow on CNBC is on the same page. “Bitcoin is not real money. It is not a reliable medium of exchange, nor is it a reliable store of value. It has no central bank regulation, network operations or even centralized issuance. And because of its wild price fluctuations, bitcoin can never be a reliable payment system.”

So is Professor Robert Shiller, Yale University’s Nobel Prize winning economist. “The bitcoin phenomenon seems to fit the basic definition of a speculative bubble — that is, a special kind of fad, a mania for holding an asset in expectation of its appreciation... it doesn’t really solve any sensible economic problem.”

And so is Steve Forbes, publisher of Forbes Magazine, which has often been very positive in its pages about bitcoin. “Whatever it is, it's not money!”

*****????

Despite The Faithful’s desire to sledge-hammer a “yes it is currency” square peg into those three specific round holes, bitcoin simply doesn’t do what they say it does.

Dr Yanis Varoufakis, a political economist at the University of Texas and the University of Athens, says speculative demand for bitcoin outstrips transactional demand, “By a long mile. Bitcoin transactions don’t go beyond the first transaction. The people who have accepted bitcoins don’t use them to buy something else. It gets back to the circular flow of income. When Starbucks not only accepts bitcoins but pays their workers in bitcoins and pays their suppliers in bitcoins, when you go back four of five stages of productions using bitcoin, then bitcoin will have made it. But that isn’t happening now and I don’t think that will happen.”

Because it isn’t happening now, he continues, and because so many more people are speculating on bitcoin rather than transacting with it, “Volatility will remain huge and will deter those who might have wanted to enter the bitcoin economy as users, as opposed to speculators. Thus, just as bad money drives out good money, Gresham’s famous law, speculative demand for bitcoins drives out transactional demand for it.”

Making bitcoin even less suitable as currency, because prices are always quoted in terms in other currencies, paying for something with bitcoins is fundamentally clumsy. It requires multiplication and division.

And, if there’s one thing people don’t like to do when they’re trying to spend money, it’s multiplication and division.

Seriously, think what you go through when you’re abroad and have to deal with foreign currencies. Every transaction needs to be converted. You need to multiply and divide back to your own currency. ????

Some are easier than others. If you take the 10 most used currencies in the world – US dollar, Euro, Pound, Yen, Canadian dollar, Australian dollar, Yuan, Swiss Franc, Singapore dollar and Hong Kong dollar - nine are within one order of magnitude of each other. Only the Yen is within two. So when ￡1 = €1.25, most people have no problem arriving at ￡2 = €2.50. It’s slightly more of a chore when you’re going from AUS$1 = HK$7.21 and have to work out AUS$2.50 = HK$18.04.?

But bitcoin is three orders of magnitude away, which means you’re juggling three zeros. And then, it’s divisible to eight decimal points.

So... quick, in your head...

How much is something worth in real money if one bitcoin is trading at $20,003.53 and the bitcoin price of what you’re buying is 0.00064387?

*****

The Faithful are fast to point out how criticism of bitcoin today is the same as criticism of the Internet when that phenomenon was just beginning.

Everyone old enough to remember knows that in the 1980s, the Internet was a confusing, complicated and ungainly place. The only way you could get there was by flying AOL, Compuserve, Delphi, Prodigy and a few others. They were expensive and relatively unfriendly. Once you fought your way past those barriers, you were buried head first in text-based applications which could be very discouraging. It wasn’t until the 1990s, with the arrival of the World Wide Web and graphic interfaces, that the Net began to radically change our lives.

The Faithful maintain that bitcoin is the same thing.

Here’s their syllogism: Bitcoins and the Internet were both, once, newborn technologies that only a few people could believe in. The rest of the world was wrong not to believe in the Internet, which went on to reshape the planet. Therefore, the rest of the world is wrong not to believe in bitcoins which will go on to reshape the planet.

Now here’s my syllogism: Bitcoin and Sea Monkeys were both once fads that amused people for a limited amount of time. Like all fads, Sea Monkeys faded away. Therefore, like all fads, bitcoin will fade away.

What’s wrong with mine? The same thing that’s wrong with theirs. It’s idle comparison that conveniently fits an argument, but has no basis in logic. Just because one thing is criticized or praised, then succeeds or fails, there is no reason to believe that a totally unrelated thing will have the same outcome.

The Faithful shrug it off with the classic Mahatma Gandhi quote, “First they ignore you, then they laugh at you, then they fight you, then you win.”

In spite of their vehemence, that quote does not reflect any law of nature. Besides, these days it is all too often, “First they ignore you, then they laugh at you, then they fight you, then they wipe you out.”

The Dot-Com boom, and subsequent bust, of the 1990s rewrote that script. So did Betamax, mood rings, semi-automatic transmissions, floppy disks, 8-Track, Amphicars, Apple Lisa, WebTV, IBM PCjr, Zune, and the Segway. Not to mention Flooz and Beenz, both of which were “Internet currencies” that were absolutely, without any doubt, utterly guaranteed to reshape the planet.

This time, The Faithful promise, it will be different.

Not only are those famous last words, they’re the tombstone epitaph of every bankrupt Las Vegas gambler.

Writing about bitcoin in New York Magazine, journalist Kevin Reese made this observation: “The uncomfortable fact for bitcoin believers is that every major prediction they’ve made has yet to come true. And as time passes and the inevitable fizzle-out of bitcoin becomes visible, those believers will splinter. More will drop out of the cult. And the ones who remain will only grow more convinced, more zealous, more eager to share the good news.”

Five years after bitcoin was invented, the only notable market for it was Silk Road. Bitcoin has not found its way into the established global network of international payments which, in turn, would allow businesses to create successful risk management tactics. Hedging and margin trading is slowly starting to happen. But that doesn’t mean it will work. Margin trading will become the playground of the speculators, adding to bitcoin’s volatility and creating more price instability, which is precisely what no one playing with bitcoins - except gamblers – wants or needs.

Furthermore, given bitcoin’s limited liquidity, plus the high hurdle of always finding buyers and sellers when there are very few, hedging bitcoins smells too much like hedging a small cap stock. And hedging small cap stocks hardly ever works.

I seriously doubt if this will either: Typical of bitcoin scams, a company based in Hong Kong and Canada came up with a hedging scheme that also offered a bitcoin savings account with a guaranteed 5% minimum interest rate. This at a time when anyone would be hard pressed to find a government insured savings scheme that pays even half that.

According to their press release, you open two accounts, one with bitcoins and a matching one with fiat. Interest is paid on both, with the rate “dynamically adjusted” nightly.

“Dynamically adjusted” being one of the company’s selling points, without any explanation of what that means.

Banks make money paying interest to savers and then lend savers’ money to borrowers at a higher rate. This bunch says they’re taking the money in these interest bearing accounts and lending them to clients who are trading bitcoins against fiat on margin.

To me, this doesn’t sound like banking. It sounds like a Macau casino craps table.

Some guy who wants to gamble on bitcoins puts up, say $10,000, as a margin deposit, and is given 10 times that much leverage, which is supposedly covered by the savings accounts. Except there’s no leverage on his savings accounts.

Supposedly to protect savers, when the trader’s numbers go upside down, the company says they will automatically execute a margin call, cashing him out of his margin deposit. But what if he’s only put up 10 grand and is 100 grand in the hole? Where does that money come from? The company promises to cover losses with its own reserve funds.

They will manage that, they claim, by only accepting deposits to the extent that they have bitcoin and fiat funds to match their reserves. Sounds great. Except that it ignores the leveraged losses.

The way you get in on this is “by invitation only” – Madoff used the same stunt - and then, the initial deposit must be in bitcoins. None of which explains how anyone can guarantee 5% interest.

I wonder if it’s too late to elect P.T. Barnum patron saint of bitcoin?

*****

As long as bitcoin remains disconnected from regular banking and international payment systems, it doesn’t seem to serve a real purpose in global business.

The Faithful argue that bitcoin, by design, must stay out of regular banking, because bitcoin is its own banking and payment system.

Welcome back to the confusion between bitcoin the pretend-currency and bitcoin, the blockchain technology. Neither is a bank. The technology is the payment system and the pretend-currency is a pretend-currency.

Not that The Faithful have any intention of getting in step with the rest of the world. As far as they’re concerned, bitcoin is already transforming life, business and the global economy. ?

To wit, these comments from online forums:

“How much money (have) you lost by attacking bitcoin with arguments from ignorance instead of learning how it works and getting on board?”

And, “I hope you enjoy being robbed of 40% of what you make every year, by the organized criminals who do business under the name ‘government,’ and seeing half of that money be used to bomb brown children you've never met?”

And, “We all agree that fiat money is going to collapse sooner or later. There is no doubt. Of course if fiat collapse #bitcoin could reach $1 million, $10 trillion or infinite each.”

That the emperor has no clothes is no longer the issue. None of them have any clothes.

*****

Excerpted from BitCon-The Naked Truth About Bitcoin