Wednesday, April 03, 2013

Playing Catchup on Bitcoin

If you still haven't gotten the memo on Bitcoin, Felix Salmon (of course) offers a great starter.  I picked it up in a link from Tyler Cowen whose comment thread tells you what you might have expected--that a Bitcom comment thread sounds a lot like a call-in show presided over by Glen Beck.   But I did like the imagination of the people trying to figure out how to short the stuff.

And let me add a couple of afterthoughts.  One, part of the supposed appeal for Bitcoin is that it has no history, no past: you don't know where it came from and you don't have to worry: Bitcoin is itself.  But isn't this the whole point of like, you know, money: that it passes "in currency," in the phrase of the great Lord Mansfield.  Or more practically: I don't have to worry about whether the guy who passes me the $20 acquired it when he ripped the purse of the arm of an old lady.   It is, as one might say, a "courier without luggage."  Ask yourself: how often has the clerk at the convenience store asked to see two forms of identification before he palms the green?  Or as they say down at the law school: "you can't take good title from a thief," except that when it is cash, you can take good title from a thief.

[Yes, I know there are all kinds of objections to what I just said, but they're details.  I mean--sure, the Feds may find some way to trace the drug dollars into the hands of the lawyer who represents the defendant ("wake up and smell the cocaine!").  But that's not enough of a concern to spoil the generalization. ]

So the real point about Bitcoin is not that it's different from "money" but that it's different from bank money, where a prosecutor with a subpoena can follow a paper digital trail.

Also: some of the commentary on Bitcoin addresses the "currency versus commodity" issue--whether an item can function as a currency when it is also a commodity, coupled with the inevitable response that "hey, it works for gold."  I tend to agree with those who believe that you can't serve both functions at once.  But try this: could it be the enthusiasts want Bitcoin (or gold) precisely because of its dual identity?    Talk to gold bugs (once in a while, I do) and you quickly learn that one of the problems with paper is that it is like, yech, paper.  They want money that jingles, money you can trip over in the dark..  It's a touching weakness, and it's ironic that they'd attach the same kind of enthusiasm to a  kind of non-money money whose notable characteristic is that it has no physical manifestation whatever?

Final thought:   I probably ought to count myself a Bitcoin skeptic, but with one important limitation: I fully accept the proposition that money is anything people think is money.  If the world wants to  be a Bitcoin world, why then a Bitcoin world it will be.

Bonus extra: Gary Gorton offers up a nice definition of what you need to make transactions work:
Markets are liquid when all parties to a transaction know that there are probably not any secrets to be known: no one knows anything about the collateral value and everyone knows that no one knows anything.  In that situation it is very easy to transact.  The situation where there is nothing to know or nothing worth knowing--no secrets--is desirable and allows for efficient transactions.
 Gary Gorton, Misunderstanding Financial Crises, Kindle Edition line 929 (2012). 

Update:  I assume he is talking about Bitcoin?



Ken Houghton said...

I still don't understand bitcoin, but at this point that's a conscious decision, so whenever Felix types the word I mentally substitute "pet rocks" or "'collectors edition' magazines" or "Second Life tokens."

From what I can tell, I lose no value in the sentences that way.

But I do have a quibble:

'whether an item can function as a currency when it is also a commodity, coupled with the inevitable response that "hey, it works for gold."'

Uh, no, except in gold mining towns of legend, which were not exactly what you would call Industrial Age.

Even in the days before 15 August 1971--thank you, Richard Nixon, for doing one thing right that didn't require sacrificing two countries--currency was backed by gold. You couldn't actually take $35 to Philadelphia or Denver or San Francisco or wherever and say, "Please give me my ounce of gold."

Yes, gold was transferred from state to state, but it was not used on any large scale in modern culture. (Gold coinage in curculation, as you well know, was regularly devalued as pieces were trimmed off either as payment or theft.)

And, yes, I still have a Silver Certificate or two lying around the house. But I doubt I can swap those out, either.

Short version: gold itself has not been used as "currency" since specie was something that was in common circulation. Macro transference, yes; microprocessing, no.

Buce said...

Point taken. I think the assertion that "it works for gold" was meant to mean that gold can function both as a commodity and as a currency. Questionable whether that is true too, of course.