Sunday, December 15, 2013

A Note On the Intrinsic Value of Gold versus the Lack of Such for Bitcoin

Bob Murphy has a post up discussing  Bitcoin and opposing views. He doesn't name names, so it is not clear if he is referring to me at all. Some of it appears to reference Gary North arguments, but the intrinsic value part of his post could be referring to my discussion on the intrinsic value of gold versus the lack of such for Bitcoin. If he is referring to my comments, he is greatly misunderstading them.

Here's what he writes:
 I am hearing a lot of self-described Misesians make argumentsagainst Bitcoin that prove far too much. So in this post, I’m going to go over the following representative version of a very popular example of what I mean:
TYPICAL ARGUMENT AGAINST BITCOIN: Bitcoin is just a giant bubble; it’s tulip mania all over again. Since it’s essentially a private fiat currency, it has no fundamental value at all; any value it has is due to the speculative motive. People are only accepting it because they think they can unload it down the road to the bigger fool, for more money. This might last for a while, even years, but it’s built on sand and can collapse at any moment. In contrast, a commodity money like gold or silver is based on the fact that it’s genuinely useful in non-monetary outlets. So there is a floor holding up its exchange value.
OK, so the wording might vary from person to person, but during the last two years, I have definitely seen plenty of arguments similar to the above. Here’s my problem with it: This argument comes dangerously close to saying thatall money, even commodity money, is always in a bubble, unless it ceases to be money.
It is standard Misesian monetary theory to say that a commodity (such as gold) gains in exchange value as it turns from a mere commodity into a medium of exchange and finally into money. This should be obvious: Originally, in a state of direct exchange, gold had a certain exchange value against other goods and services because of its direct uses (jewelry etc.). But then if people wanted to start holding it as a medium of exchange, this would increase the demand for gold, and hence drive up its “price” (i.e. how much it could fetch in the market in terms of other goods). Therefore, if a goldbug is arguing that having an exchange value above the “commodity value” (which in the case of Bitcoin is zero) makes something a bubble, then all money–including gold money–isalways in a bubble.
Let me restate the argument like this: There are people claiming that Bitcoin’s non-monetary price is zero, and hence if it’s trading for anything at all, it is in a bubble. But by that logic, gold’s non-monetary price might be (say) $250, and so if it’s trading right now for $1,250, then $1,000 of that is clearly just due to a self-fulfilling prophecy, where people are willing to pay $1,250 for gold because they think that’s how much (at least) it will be worth in the future. If something were to shatter that expectation, then the price of gold would plummet back down to its fundamental value of $250. Thus, if we accept this line of reasoning, the only real difference between Bitcoin and gold is that Bitcoin has a floor of $0 while gold has a floor of (say) $250.
Last thing: One way out of this apparent bog is to make a distinction between holding commodity money for speculative purposes, versus holding it for exchange purposes. In other words, someone could accept a gold coin today not because he expects to unload it off on a “greater fool” tomorrow, but because he wants a more liquid form of wealth to make his purchases easier. (Indeed, we see that people hold paper money even knowing it willfall in purchasing power.) But if that’s the route one takes, then why can’t we say the same thing for Bitcoin? Sure, when it’s zooming up in price daily, people might be jumping on board primarily for speculative reasons, but in general how can we rule out a priori the possibility of a long-run equilibrium, in which Bitcoin is valuable preciselybecause it is a good medium of exchange that has an established purchasing power?
Again, it is difficult to know who Murphy is arguing is making these points, if he has me in mind with regard to intrinsic value, he is dead wrong. The only point I have made with regard to intrinsic value is that gold has intrinsic value (that is, it has value outside of being an alternative medium of exchange) and that Bitcoin has no use value outside being a medium of exchange. I have personally never made the argument that because Bitcoin has no intrinsic value, it can not become a medium of exchange. And I have never argued that any value above intrinsic value in a medium of exchange means a bubble exists. However, if Bitcoin is no longer viewed as a medium of exchange is does have the potential to drop to zero, because it has no other use. This, however, is not my argument against Bitcoin. My argument has nothing to do with intrinsic value. I only commented on intrinsic value because I wanted to explore what Peter Schiff  might have had in mind when he brought up intrinsic value.

My argument against Bitcoin is based on the fact that it brings noting to the table. Despite continued commentary that it is an anonymous currency, it is not. It is more trackable than paper money or gold. I expect the tumblers which  purport to make bitcoins anonymous eventually banned by the USG as money laundering operations. I also expect third party Bitcoin payment operators to eventually be required by USG to accept chargebacks, This will eliminate any edge they currently have as far as charging nearly zero to retailers in fees for transactions processed.

In short, Bitcoin has no sustainable edge and will collapse because of this.

As far as Bitcoin being in a bubble, my view is entirely based on the fact that I see no edge for Bitcoin and thus no reason for it to be in demand. I expect this to become more obvious over time to all, which I expect will then cause the price of Bitcoin to collapse.

I have further made the charge that Bitcoin is somewhat of a pump and dump scheme. This is based on some of the Wall Street operators that I have noticed that are involved with Bitcoin. A lot of the classic things you see in pump and dump schemes (Read: Street Fighting at Wall and Broad: An Insider's Tale of Stock Manipulation) are occurring with Bitcoin.

Whether there is a pump and dump scheme going on, I expect Bitcoin to collapse because I expect the USG to crush any edge Bitcoin has and I fully believe that they have the capability to do such.

11 comments:

  1. I think we can see which way the global economy is going from Iran's pushing of Petrogold to replace the Petrodollar and China's initiativle to settle trades in the currency of the vendor nation rather than the traditional US$

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  2. I am not taking a pro or anti BitCoin stance here, but I would like to point something out. If you look at the original Satoshi paper (http://bitcoin.org/bitcoin.pdf), you will see that anonymity was not really a major concern when designing BitCoin. In fact, the main concerns were elimination of a third party verifier and an irreversible transaction. I don't hear much about this aspect of BitCoin, but the irreversibility of transactions is really one of the main features of BitCoin. This protects sellers from fraud.

    "With the possibility of reversal, the need for trust spreads. Merchants must
    be wary of their customers, hassling them for more information than they would otherwise need.
    A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties
    can be avoided in person by using physical currency, but no mechanism exists to make payments
    over a communications channel without a trusted party"

    So we should also be asking whether these features of BitCoin offer an advantage over other payment methods.

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    1. Duh, aren't you following the debate? Wenzel has repeatedly argued that government will outlaw this feature of Bitcoin, by making middlemen, such as Bitpay,allow for chargebacks.

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  3. Your argument has been reduced to Bitcoin has no edge over other currencies, but you neglect to mention that Bitcoin is not controlled by a central bank (which is the whole f***ing point). Tip your king Robert.

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    Replies
    1. Duh, if Bitcoin has no edge, what does it matter that it is not controlled by a central bank. Neither is your dump, that doesn't make it valuable.

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    2. Your dump is inflationary, not very well divisible, and won't last very well over time, making it a lousy store of value. Then there is the smell. Must I keep going as to why that wouldn't work as currency. Though your idea is not as ridiculous as you intended it to be. The Romans fought heavily over the urine produced in Rome, as it was used in many productive enterprises.

      The point is that Bitcoin possesses most, if not all the necessary qualities of money, AND it is not controlled by a central bank, which does give it value above all of choices. People could choose your excrement if they so pleased, but so far not many takers. Bitcoin is steadily being chosen by the market, something Wenzel is supposed to favor. His arguments are all weak, weakening, or completely dead and have been reduced to this drivel above. He needs to give up before checkmate.

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  4. The correct view of the value of anything is that it's all subjective. There is no such thing as intrinsic value for anything, not even gold. Insisting on intrinsic value tries to take economics back to a time when economists insisted on objective value for everything and pushed the labor theory of value. Take iron for example. It has no currency value, but it has no intrinsic value either. Its value of totally subjective based on the uses consumers find for it.

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    1. I agree. It would be far more clear to stop using the term "intrinsic value" in the bitcoin debate. Mises never uses it. The correct term to reference a good's non-monetary value is its "commodity value" or simply, its "value other than as a medium of exchange," which is more cumbersome than just using "commodity value."

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  5. Zimbabwe To Ban Private Gold Trading, Mugabe Says

    Zimbabwean President Robert Mugabe said on Friday his government would soon ban private trade in gold, and require producers to sell the mineral through a state company.

    But Mugabe said the government would soon require producers to sell through the state-owned Fidelity company, a central bank firm which used to enjoy this monopoly.

    “We would want to centralise that. There is a lot of illicit dealing in gold, there is a lot of externalisation of earnings, and that has to stop,” he said.

    “To the miners, they should sell to Fidelity only.”

    http://www.zimeye.org/zimbabwe-to-ban-private-gold-trading-mugabe-says/

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  6. Anyone who leans toward the Bitcoin-as-viable-money theory need only remember Bernard von Nothaus.

    The currency's viability has nothing to do with if it's a money. Of course it is. Viability, stability, staying power, that's the key. And it has none, because the FED and the USG will crush it just like the Liberty Dollar.

    The difference is, if you bought LD's, you'd still have the silver...

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  7. Regarding bitcoin's intrinsic value.
    So let's say I have a couple of billion dollars and I decide to setup a bitcoin/gold exchange and whenever the price of a bitcoin falls below the price of one ounce of gold I start buying bitcoins and when the price of bitcoin trades above an ounce of gold I'll sell bitcoins. For marketing purposes I might create a one ounce gold coin with a Bitcoin symbol. I might have minimum trade of 100 bitcoins. I'd allow for 3% hysterisis in the pricing triggers. And work a deal with a gold ETF so the transactions are all bits. The theory is I could establish a stable value for a bitcoin. The intent would be to put a floor under the value of a bitcoin. Under some set of conditions the bitcoin to gold ratio would be allowed to appreciate.

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