Sunday, April 28, 2013

Max Keiser: What If All the Bitcoin Exchanges Were Shut Down?

Max Keiser is out with a thoughtful essay about the very real weakness in bitcoins, the possibility of bitcon exchanges being shutdown by government. He writes:

Here’s a thought exercise. What if all bitcoin exchanges were shut down by various governments? What would the current value of a bitcoin be? 
This is an important question because of the implied outcome of the current trend by governments to shut down - or prevent the creation of - bitcoin exchanges.
He then poses the problem with the shutdown this way:
The mining of bitcoin would continue but transferring them and spending them becomes a problem since there would be no quoted price. 
I'm not sure this would be the problem. There would likely be a black market price, but since it would be a black market price it would likely be very low, with a huge spread between the bid and ask.

Keiser's solution, then does not get to the heart of the problem. He proposes:

For this reason, I have suggested that some entity, possibly the Bitcoin Foundation (and this can be done on a non-profit basis), make a market in bitcoin and broadcast a current price for bitcoin (a peg) that various exchanges and merchants can use as a benchmark. 
This market making activity should be done completely out of reach of regulators. Honesty on the part of the ‘peg’ maintainers would come by way of interacting with various exchanges (that are open) since maintaining this peg would require lots of buying and selling on the various exchanges to maintain an inventory (of bitcoin) that is necessary to maintain a peg and any resultant price gaps or arbitrage would be quickly closed by savvy traders. (By the way, if the VC community is serious about funding bitcoin start-ups they should pool their capital to fund such a mechanism). 
With this added layer of price discovery in the bitcoin’s existence as a currency, the possibility of scaling up to the multi-hundred billion valuations necessary to get it on the first rung of the global currency market becomes a possibility. Without it, we’re talking about beaver pelts.

The first problem with this "foundation peg" is that it would not be a real price. If one can not exchange back and forth between bitcoins and currencies, then in what way is this "foundation peg" a real market price? It is not. Market prices are set, well, in the market. There either is a market or there isn't. Even with a government crackdown there would possibly still be a market price, the black market price. Thus, a market price wouldn't be the problem, there still would be one.

The bigger problem is that after anaggrressive government crackdown, bitcoins would only be operating in a black market, they would not be money, that is, the most liquid commodity. You wouldn't be able to buy your Starbucks coffee with them, your gasoline or most of the other items that are bought on a daily basis. It would be too dangerous for most businesses to  accept bitcoins, if there was an aggressive government crackdown against them. Bitcoins would, thus, be relegated to the underground market. Only if the government somehow loses enforcement capabilities, and Starbucks didn't fear a government crackdown on bitcoin transactions, would bitcoins have a chance of becoming a real money. That's not going to occur anytime in the near future.

Thus, Keiser's proposal misses the point of the complication of government crackdown on bitcoins, the problem is not the exchange price, that will exist, the problem is who will accept bitcoins under conditions of an aggressive government crackdown?


  1. If one government cracks down on bit coins that will mean a lot of capital flight to other countries. So they pretty much all have to act together to kill bit coin. But intergovernmental cooperation on economic matters is not at it's highest point right now.

    But suppose that they kill bit coin because bit coin exchanges are in vulnerable fixed locations, what's to keep the free-market community from inventing exchanges that are distributed just like the bit coin itself?

  2. Of note: You currently cannot buy gas or Starbucks with gold either.

    You would still be able to buy Starbucks and gas with bitcoins - but it would be an indirect exchange. You would need to buy pre-paid gift cards or cash (national currencies) on private, online marketplaces like Silk Road which can then be used to buy products and services from any merchant.

    I would argue that Bitcoin still has a major advantage over gold in that it is portable, easy to hide (protect), and easier to transfer across borders.