Response to Doug Casey on Bitcoin and Currencies

This post was originally published at eleconomistaprudente.com on july 2, 2011

This is a response to Doug Casey interview on Bitcoins and currencies. I´ll try to follow the same order of the interview and try to reply his comments whenever I disagree with him.

1. On his first answer, he talks about a disastrous hack against Bitcoin. Well, it was not Bitcoins who was hacked, it was a particular private website where bitcoins can be exchanged for dollars. Bitcoins architecture was absolutely not compromised. As any other currency Bitcoins may be victim of theft, and that´s because they are valuable!!. Besides it is zillions of times cheaper triying to steal Bitcoins than trying to compromise its architecture, the same way that is much easier to steal gold than trying to syntethize it, or even mine it.
2. Regarding Bitcoins price unstability, well to make a fair comparison to gold we would have to know how much gold fluctuated when it first begun to be used as an economic good. The market does not discover the price of any good inmediatly, it is a process that takes time. Indeed, it is a dynamic process where a “final” or definitive price is never achieved.
3. Regarding durability. Bitcoins are scarce information, represented by bits. But the very nature of the bitcoins is cryptographic information, just as the economic nature of an mp3 file is the music (information) it contains, not the bits that represent that information. Information is definetly durable as long as civilization endures. Of course gold will outlive humankind, but trying to guess the value of anything after humankind is destroyed, is obviously pointless. Durability of Bitcoins versus gold is only relevant if civilization collapses very badly (nuclear disaster, strong political totalitarism or similar). Only in that case and for that reason physical gold´s durability is superior than that of Bitcoin.
4. When the hackers stole bitcoins at Mtgox, they sold them “any price” and price reached $0,01, but those trades were inmediately canceled.
5. “Bitcoins are ledger entries”. Absolutely not (like a bank ledger). They are cryptographic information bundled in a computer file, whose property is anonimuosly recorded in a distributed property registry. They are divisible because their design allows them to be.
6. Do bitcoins have value themselves? Here is the big issue. No economic good has value by itself or intrinsic value. As Carl Menger demonstrated all values are subjective and always depend on the perceived utility of the economic good. Bitcoins render utility as a medium of exchange because they have good monetary properties (durable, relatively scarce, difficult to fake, divisible, easy to identify, easy to transport, etc.). This is not counting other utilities that the market might discover (or not) for Bitcoins (i.e. Namecoins). Besides, what would be the value of gold if for whatever reason it becomes completely useless as medium of exchange or store of value? Maybe a 20% or 30% of its current value? Is that satisfactory? But, what kind of event would make gold lose its utility as a medium of exchange? Wouldn´t it be because one or some of its monetary properties (scarcity, durability, divisibility, etc.) fails?
7. egold is a form of regular credit, you depend on some entity honoring its liabilities or its custodian services. Bitcoins, just as gold or silver physical bullion, are not anyone else´s liability. You own them, with egold you have a claim for gold. It is not the same thing. Here the main difference is that gold is tangible while Bitcoins are not. That´s why physical gold can´t be transferred electronically and then you need to use claims or ledger entries to achieve maximum portability. Bitcoin is intanglibe itself, but careful, being intangible does not mean less valuable. Software or trademarks are intangible and they can be very valuable.
8. Regarding government shutdown, that´s definetly an important threat for Bitcoins. But shutting down Bitcoin is much more difficult than shutting down e-gold, becuase of its completely decentraliced architecture. What the governments can perfectly do is to declare it illegal, as Roosevelt did with gold in the 30′s. Trying to shut down Bitcoins would be a very similar story to that of emule, bitorrent and the like. For the moment governments have proven impotent with those systems. In fact, these p2p systems have forced a deep change on the music industry. Will the monetary industry follow the same pace? It seems to me that the monetary battle would be way much harder.

Finally both interviewer and interviewed make an assesment about the value of dollars in the future. Well, their assesment might be right in the long term, but I think they are not considering that the main currency of the world is not dollars but credit used as medium of exchange, and that credit is denominated mainly in dollars.

This is an important difference because one of the very possible outcomes of this crisis is a great credit crunch or margin call, and paradoxically that would make the value of the dollar to skyrocket before collapsing, because if all debts are denominated in dollars, people will need to sell evertything (including gold, silver and bitcoins) to get dollars to pay those debts, and neither the governement or the Fed will get indebted ad infinitum to allow that old debts are paid with newly issued debt (this might look as an endless game, but it is not, just watch Greece, Ireland, Iceland, Argentina or Portugal).

Indeed, both the Government and the Fed are very close to their leverage limit, and if they get too indebted, they will also be called for margin by the market.

Manuel Polavieja.

Originally published at eleconomistaprudente.com on july 2, 2011