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Bitcoin has its share of critics and skeptics, and opposition to the
emerging technology – especially among the intelligentsia – shows no
sign of abating.
Notable commentators on the topic range from author Jeffrey Robinson to finance blogger Karl Denninger, Boston University professor Mark Williams, rabid Keynesian Paul Krugman, Austrian economist Gary North and FT Alphaville's Izabella Kaminska.
Generously, I'm assuming that the pundits listed above have a
thorough and accurate understanding of the bitcoin protocol that
facilitates its native token's dual role of currency and commodity.
Typically, the arguments put forth by an elite group of critics like
this could be easily attributed to a lack of economic credentials or
real-world experience in sophisticated financial markets. But that is
simply not the case here – which makes it all the more puzzling to
comprehend. Since the various critiques fall short on any convincing
economic analysis, I suppose one could put it down to mere philosophical
differences on the origin and nature of money.
With the resilience of distributed peer-to-peer networks amplified by
powerful public key cryptography, we are all in new territory now; the
world stands on the precipice of a fundamental realignment in the
transfer of value. At its root, bitcoin is a value transfer protocol. We
may voluntarily choose to utilize it or not. Most importantly, there is
no coercion imposed through legal tender laws.
Value is subjective
Perhaps most disturbing to the bitcoin critics is the fundamental
myth that bitcoin exposes – the myth that the State confers value on
money and that we need 'kings' to coin our money.
We are constantly reminded by the critics that money can only be a legal creature of the State and that it is the "civil society system which puts the value into currency". Expounding on the thesis advanced by German economist Georg Friedrich Knapp in The State Theory of Money (1924), an exposé advocating the Chartalist
approach to monetary theory claiming that money must have no intrinsic
value and strictly be used as tokens issued by the government, these
modern-day chartalists promote the notion that only governments and sovereign issuers have the ability to confer legitimacy to money.
A belief in central banking is also a belief in the central planning
of an economy. Additionally, it represents central planning of the
highest order, because it interferes with the market's price discovery
process for money – the rate of interest.
As the antithesis of central planning in money, bitcoin gradually achieves more and more market-based legitimacy.
Institutional and government legitimacy are not required for bitcoin to
serve as store of value, medium of exchange and unit of account.
Kaminska's first piece
on bitcoin in early 2013 highlighted a fairly good interaction between
Chris Cook and an Austrian economist on the intrinsic value debate.
Here's more on subjective and intrinsic value with Willem Buiter, chief economist at Citi.
Volatility is a red herring
But wait, isn't all this volatility damaging bitcoin and its reliability as a store of value and medium of exchange?
As bitcoin grows and matures, multi-jurisdictional exchanges will emerge which also include specialized derivatives
products for hedging risk and this will have the effect of increasing
market capitalization and smoothing out price volatility. Bitcoin swaps are already being conducted over swap execution facilities.
Although important, the speculative volatility is actually a sideshow
to the main event of bitcoin establishing a footing in the financial
world. Even at a mere six years old, bitcoin exhibits no more volatility
than the luminary Swiss franc or North Sea Brent crude oil, with the latter losing more than 50% of its value in about six months.
Fear not deflation
But what about the hoarding of bitcoin? Isn't that bad for its use as money?
I prefer to call it savings and maybe it's time to unlearn all those lessons taught
in school. Savings and deflation are not bad for an economy. As Jörg
Guido Hülsmann once said: "We should not be afraid of deflation. We
should love it as much as our liberties."
Contrary to the central banking and political class insistence that deflation must be prevented at all costs, an economy with a monetary unit that increases
in value over time provides significant economic benefits such as
near-zero interest rates and increasing demand through lower prices.
Ultimately, the market will reach an equilibrium between investment
and savings because in the absence of an equilibrium the benefits of a
savings-only strategy would evaporate. Proper economic growth through
sound investments will lead to a productivity-driven deflation.
Ironically, it's the store of value function for bitcoin which enables and reinforces its use as a medium of exchange. According
to Daniel Krawisz of the Satoshi Nakamoto Institute, hoarders give
bitcoin value and he states that "the initial price of bitcoin was
caused by people who wanted to hold it, not people who wanted to spend
it. Furthermore, each subsequent step in bitcoin’s advance must begin
with more holders, not more spenders."
No naked shorts, so far
I am continually amazed by those who shout "market manipulation" yet
fail to see the very blatant manipulation they abhor present in the naked short selling of precious metals and in the Plunge Protection Team. We all know the world's most important trading desk sits on the 9th floor of 33 Liberty Street.
Kaminska writes:
"Bitcoin markets are a hotbed for unscrupulous market practices.
Everything from HFT, front-running, rebating, preferential order flow,
poor margining, naked shorting, and now the truly popular one – active
'collusion' by big players. It’s all there."
In reading this, you would be forgiven in thinking that Kaminska
might also be referring to highly-regulated markets populated by the
likes of MF Global and the interest rate rigging cartel
of RBS, Citigroup and JP Morgan. She is not. Certainly Kaminska doesn't
condone that type of market activity, but that's not really the point.
The point is that we have a brand new marketplace, for a digital
bearer instrument no less, germinating in parallel to the entrenched incumbents
and along the way battling the retail and wholesale payments oligarchy
as well as the vested interests of legal tender threatening bans.
Of course, the bitcoin exchange markets experience illiquidity, lack of
market depth, and a few bad actors willing to exploit such conditions.
They are in the vanguard of cryptographic security architecture for
dynamically-connected bearer wallets.
Fraud on any level, whether State-sponsored or from malicious
principals, has no excuse and should not be tolerated. The solution is
not to ensconce the new exchanges in the straight-jacket of
the perceived level playing field with too-big-to-fail benefits and
socialized losses, but to encourage multiple competitive exchanges
across multiple jurisdictions. We wouldn't have the COMEX tail wagging
the spot market dog if we had robust precious metals derivatives markets
on every continent.
With bitcoin and exchanges, it's all about jurisdictional arbitrage.
Should we really believe that the two young founders of Bitstamp match the antics of Jon Corzine? After all, episodes like Bitstamp are not due to an orchestrated crisis of liquidity.
But who will protect the people?
The European Banking Authority published their report on virtual currencies complete with a risk drivers chart of 70 bitcoin risks, which was promptly hailed by the FT Bitcoinmania crowd.
For a sane and thoughtful response,
we turn to Ken Tindell, who believes that the "EBA’s considered opinion
is that European financial institutions should shun bitcoin like a dead
skunk and go nowhere near it until the 'scheme operators' are persuaded
to change bitcoin to be managed by a wise and omniscient regulator." He
concludes that the EBA doesn't really understand bitcoin and they
exaggerate the risks to support a mandate which deters financial
innovation unless it fits into their limited construct.
In the United States, the Consumer Financial Protection Bureau did
the same thing with the publishing of its advisory warning to consumers
about the risks of virtual currencies.
To better assist consumers, I described some of bitcoin's superior attributes in the area of financial protection,
because when the words 'financial protection' are in your agency's
official name, it appears disingenuous to omit features from what may be
one of the world's most protective financial instruments ever designed.
In no particular order, bitcoin provides protection from counterfeit
bank notes, protection from financial surveillance, protection from
identity theft, protection from physical loss of assets, protection from
cross-border restrictions and excessive fees, protection from payments
blockades, protection from government-sponsored inflation, and
protection from confiscation. Can your currency do all that?
Furthermore, without a central bank and without taxpayer-funded
deposit insurance, it is somewhat comforting to know that bitcoin's
lender of last resort is the same as the lender of last resort for gold –
those silly believers of subjective value.
In the province of financial journalism, bitcoin unmasks the Statists.
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