Skepticism of Bitcoin usually begins, quite reasonably, by citing its lack of intrinsic value. In this regard, it compares unfavorably to gold, as discussed recently by Patrik Korda on Mises.org.
The second reason for recent Bitcoin skepticism is its meteoric (some would say bubble-like rise), which indeed experienced a sharp correction the day after Parik’s article. Time will surely tell, but for the impatient, the philosophers and the gamblers, I offer these reasons for measured optimism in everything but the very-long term.
Gresham’s Law is often misstated simply as “bad money pushes out good.” What’s left out is that this only happens when people are forced to accept bad and good money at a comparable exchange rate. When people are not (or CANNOT) be forced to accept a nonsensical exchange rate then quite the opposite happens – good money pushes out bad.
Gold unquestioningly has superior intrinsic value to Bitcoin,which have none aside from their value as a medium of exchange and wealth delivery.
The other characteristics of good money are:
Bitcoin seems to win on all or almost all of these characteristics.
Acceptability – While the gold market is significantly bigger than the current Bitcoin market, it is a market for relatively privileged people, relegated to wealth preservation, and it requires intermediary brokers. The sale of consumer goods already happens in Bitcoin, and the huge e-commerce sector seems primed for a very low-cost transition to Bitcoin. It would save them considerable transaction costs, namely the percentage of each transaction paid to credit card companies or Paypal.
Durability – The advantage seems to lie with Bitcoin which is immune to physical harm.
Portability – Clearly, this is Bitcoin’s biggest advantage. Anyone can send fifty cents worth of Bitcoin to an Asian online casino almost instantly with zero transaction cost. The rules for the transport of gold across international borders are vague and varied. The cost of wire transfers make such a small transaction unlikely.
Scarcity – Though it is still early to call Bitcoin non-counterfeitable, the advantage seems to lie with them. Also, there are no Bitcoin rich meteors floating through space.
Divisibility – Though technically gold may be divisible into smaller units (a very technical question) the cost of performing such a division, plus the transaction cost of verifying such a minuscule payment of gold gives the advantage to Bitcoin.
Cognizability – Again, it is still early in the life of this new technology, but the advantage seems to belong to Bitcoin. Gold does get counterfeited, whether explicitly through debasement or through the sale of paper certificates for non-existent gold.
Malleability & Uniformity – These aren’t even issues with Bitcoin, whereas the verification of uniformity places a heavy transaction cost on all deals involving gold.
Curiously, state barriers to the emergence and use of rival currencies accentuate Bitcoin’s advantage. Customs laws which are too slow and stupid for Bitcoin only ensnare gold. The gold market is fraught with regulations. Mints have been raided. Owners, like Bernard von NotHaus have been convicted of counterfeit, even though Liberty Dollars looked nothing like Federal Reserve notes. By many accounts, the price of gold is actively suppressed by the orchestrated sale of gold which doesn’t actually exist.
All this gives Bitcoin an edge in today’s world. However, it may very well be that Bitcoin carries the seed of its own demise. If they do elude the fiat system and help speed its withering away, many barriers to gold will wither away with it.
Bitcoin is a jailbreak
Not only are the advantages of Bitcoin over gold accentuated by the restrictions which entrench the world’s fiat systems, it is likely that Bitcoin’s emergence is a reaction to those restrictions.
It is hard to imagine their development in a completely free market where successful banking is based on service and competition instead of the political privilege which licenses select institutions to counterfeit, where regulatory burdens would be very low and tending toward increased efficiency, where, rather than restricting the flow of commerce across borders, major institutions would be dedicated to enabling it, where we could instantly transfer fractions of a commodity money to anyone in the world.
In such a free market, there would simply be no need for a crypto-currency without a commodity backing.
So what is Bitcoin’s value? It is a means of escaping the enforcement of the world’s currency monopolies, a jailbreak. It is a service, like Western Union, only cheaper, easier and faster. Bitcoin is a vehicle. Bitcoin HAS an intrinsic value as a wealth delivery service with the peculiar feature that wealth needs to transform into Bitcoin before it can be exchanged.
In an environment of extreme Bitcoin skepticism, a transaction would look as follows: wealth transforms into Bitcoin, zips instantly to anyone in the world (or beyond, so long as they have internet access), and then transforms out of Bitcoin.
People would be willing to thus transform their wealth so long as they are saving money, time or convenience over rival money transfer systems like conventional bank-wires, credit card purchases, or Western Union.
In the skeptical environment, the amount of wealth people leave in the form of Bitcoin would reflect the fees associated with changing wealth into and out of Bitcoin (for example, the fees charged by btc-e.com or mtgox.com).
I think this kernel of value as a wealth delivery vehicle in our fiat world is sufficient for Bitcoin to survive. The modicum of value establishes enough confidence that when people need a quick, easy store of value they will turn to Bitcoin. It will be readily available every time a fiat system enters into its death throes, and it will be a commodity available for speculation.
Just because the value of something goes up, doesn’t mean it will crash down to nothing. It’s telling that the video linked in Patrik Korda’s essay discusses the possibility of a Bitcoin bubble at a time when they were $18 each. Cellular technology saw a meteoric rise. E-commerce, despite also being fueled by an artificial liquidity bubble, also had a dramatic rise. It was a bubble, but it wasn’t just a bubble.
Companies who raised millions of dollars to sell dog food over the internet went bust. Companies that effectively indexed and made searchable the greatest catalog of human knowledge ever did not. They thrived.
Coincidentally, I opened a bank account just a day after gifting to a friend his first fraction of a bitcoin. He didn’t have to leave his home to open an account. It took seconds. The only delay was downloading the blockchain, but that happens with no effort on his part besides patience.
By contrast, I had to make two trips to the bank because the first time I forgot to bring a proof of address. I rode buses. I signed my name at least a half-dozen times. I showed a photo ID. I had to dress myself before beginning the trip.
Returning from the light-speed world of Bitcoin finance to standard banking is like giving up email and writing letters to people and putting them in boxes for pick-up the following morning. It’s like wanting to call someone and instead of reaching into your pocket, going somewhere and standing next to a rotary telephone on the wall and listening to it ring and ring while you measure the opportunity cost of making another trip a half hour later.
Once you’ve seen the smart way of doing something, it’s hard to stop noticing the inefficiency of the past mechanisms. There’s also the unlikelihood of paying a $35 wire fee because you want to place a fifty cent bet in an online Asian casino. There’s also the huge potential for all e-commerce to lower their transaction costs.
As a final bit of skepticism, the essay called into question the anonymity of Bitcoin. Maybe it’s true, maybe it’s not, but the world is a checkerboard of jurisdictions and there do exist government in the world which do not care whether their citizens fling these obscure bundles of electrons back and forth. And even within the control-obsessed jurisdictions of the US and EU, people can almost instantly create as many accounts as they want.
Even if they were 100% traceable, so what? The wind is likewise traceable, but tracing it and stopping it are two very different matters.
Daily Anarchist readers will likely agree firstly that their needs to be competition, and secondly that the market is the best mechanism for selecting a medium of exchange. Bitcoin has many advantages over gold and one considerable disadvantage: the lack of obvious intrinsic value. Its value lies in its utility as a wealth-transfer vehicle.
Not only do the attempts of states to entrench their monopolistic fiat systems accentuate Bitcoin’s advantages over gold, they are likely the reason for the emergence of Bitcoins in the first place.
Barring any technological sabotage (so far, the system seems resilient), the greatest threat to Bitcoin will come after commodity money is re-established and after (God willing) capitalism returns to the banking industry.
Once financial entrepreneurs offer the service of safe, secure, perhaps anonymous, low cost, high speed, anywhere-in-the-world wealth transfers in a form that has commodity backing, I’ll sell every last one of my Bitcoins. Until then, I’m hanging on and trying to enjoy the roller-coaster.