Continuing Conversation... Gavin Andresen on the Present and Future of Bitcoin

EconTalk Extra
by Amy Willis
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Gavin Andresen on the Present ... Charles Marohn on Strong Towns...

This week's episode is all about Bitcoin- where it's been and where it may go. There's been a lot of interest in Bitcoin among our listeners, so we're more anxious than usual to hear what you have to say!

Questions below the fold
:

Check Your Knowledge:

1. Roberts and Andresen discuss the tremendous fluctuation in the value of Bitcoin. Why has its value been so volatile? Should we expect its volatility to decrease over time? Why?


Going Deeper:

2. When Roberts asks about the regulatory climate related to Bitcoin, Andresen says he's more worried about lawmakers than regulators. What does he mean by that, and to what extent do you think his concern is well-placed?

3. Why does Paul Krugman think Bitcoin is evil? How does Andresen respond to Krugman's accusation? Are there any elements of Krugman's critique that have merit? To what extent is Andresen's reply convincing?


Extra Credit:
4. In this Free Banking piece, George Selgin claims Bitcoins are not currency. What do Selgin's and Krugman's arguments have in common? And is Bitcoin properly considered a currency? Why?

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COMMENTS (9 to date)
Isaac Crawford writes:

I'm disappointed that you guys didn't talk about other uses of the blockchain. There have been plenty of articles talking about how the future of bitcoin may not involve its use as money. Voting, automatic contracts, domain name services, there's a whole world of possibilities using the underlying tech.

[broken url removed. Please check that your links work before posting.--Econlib Ed.]

Brendan writes:

1. The value of Bitcoin has been fluctuating for some time and with all the velocities I expect to decrease overtime if the people invested in it's success stay on it since as Anderson says people invested in it wan't there money's worth.

Mike Tolhurst writes:

3. Krugman echoes DeLong in saying that the ultimate guarantor of gold is that you can 'make pretty things with it.' Also the idea that what grounds the use value of the dollar is that I can pay my taxes in it isn't a reason for *me* to voluntarily choose to use the dollar... it is the government coercing me to use the dollar! As residents found out in Weimer Germany, there isn't that much anchoring fiat currency. You can use it for kindling and wallpaper which I do have to grant you can't use bitcoin for.

These are unconvincing explanations as to what grounds the value of money. Planet money had a very good podcast a few years back, talking about the stone money on the island of Yap where the value of the money was based on people's willingness to accept it as such. (you couldn't even 'exchange' the things! They're huge boulders!)

To accept DeLong's and Krugman's position ignores what the features of a 'currency' are that set it apart from other types of goods. Scotch and cigarettes are two commodities that are relatively stable in value, and if they lose their value they're much better at consoling you for your loss than making pretty things out of gold!

Honestly, I think Krugman's more honest objection is that he does not like the politics of bitcoin. He claims that he won't let that view tilt his view of bitcoin but I think that is, if he has a case to make, where he has to make it. Why doesn't he simply defend the value of central banks and the capacity of governments to control the money supply for the public good of smoothing out the business cycle? That's what he believes, so why not shout it from the rooftops? (I don't agree with Krugman, but a lot of people smarter than me do)

That's also the critique that Andressen responds to citing a very different image of how knowledge exists in society. Andressen says bitcoin allows the 'crowd' to set the value of the money through myriad individual exchanges, rather than central bankers and contests the Krugman view that we can rely on the wisdom of a wise group of economists. Obviously Andressen's position is weaker because as he admits we do not know for certain that this will work because we are in the middle of a grand experiment. For the cautious, this might be reason to accept Krugman's point. But I think Andressen is right that it is unfair to call uncertain new innovation 'evil.'

Larry Candell writes:

1. I would guess that bitcoin volatility will naturally decrease over time as more people become exposed to them. But more importantly, it is easy to imagine events that would make the bitcoin seem like the most stable commodity available.

For example, if confidence in US dollar were shaken causing hyperinflation, people would be eager to find other assets that could be used to conduct commerce that could not be arbitrarily created. Suddenly it would be dollars that would be constantly changing in value, and other assets would become the measuring stick for what the value for a dollar really is worth at any instant. If there are assets available that have all the desirable attributes of money (durable, divisible, portable, limited in quantity, etc), we will all marvel at how volatile the dollar is with respect to this new asset. Our wages and prices will quickly switch to the new currency.

Bitcoin will certainly be a very attractive option under a scenario like this. If nothing else, they would appear to be a great "antifragile" investment when considered in this light...very large upside potential in response to economic stress. If global wealth is roughly $200 Trillion, even 1% of that wealth held in Bitcoin would lead to Bitcoins being worth $100,000/coin ($2T/20M coins).

The Contentious Otter writes:

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Arde writes:

Question 3.
Krugman thinks that Bitcoin is evil because it is designed as a weapon to damage central banking and to damage states ability to collect taxes and monitor their citizens' financial transactions. This was not in Krugman's piece, but I guess he thinks that taxation and central banking are very important elements of a civilized society. Damaging these elements is a threat to civilized society.

Adresen responds that technologies cannot be evil. Only people can be evil and they can use technology for evil purposes but technology itself is value neutral. Regarding Krugman's concern about bitcoin replacing central banking, Andressen says that it is possible but it is not a bad thing. Andresen thinks that people would be better off in a completely predictable, deterministic and fixed monetary system compared to current situation when bankers try to anticipate demand and manipulate supply.
Andresen's response addressed Krugman's concerns only partially. The part on central banking was well addressed and is convincing (at least to me). The part that technologies cannot be evil did not address Krugman's conern (this is not what Krugman was worried about). Adresen did not respond to taxation part.
I think that Krugman's worry about bitcoin's impact on government's ability to collect taxation and what implications it will have for society and economy is a reasonable concern and worth discussing. If really bitcoin can damage taxation, then assessing this as evil or not depends on our values. Those, who do not like taxation like Keith Weiner (see below), thinks that damaging ability to tax is a good thing. Those, who belive in taxation, can agree with Krugman.
http://www.forbes.com/sites/realspin/2013/12/30/paul-krugman-is-wrong-bitcoin-isnt-evil-but-monetary-stimulus-is/

bogwood writes:

I have been curious about bitcoin enough to dabble in a fractional way. It looks like 200 basis points cost per transaction,at least at the small transaction level. As a store of value, volatility aside, it depends on the internet and by extension the grid, and by further extension the government.

The bid/ask on gold and silver is also high but there are conditions in which this would be a positive. But an asset someone can print up has the least intergenerational appeal.

Daniel Barkalow writes:

I think that, if you have a constant M1 and increasing production value, you either have to have deflation (which makes it hard for economic activity to compete with sitting on cash) or bubbles in things of direct value (as compared to cash, which is more scarce than anyone believes) or an inability to perform transactions because the people with stuff to exchange can't find money to perform the transaction. (And which happens when depends on the economy's lending policies.)

I think the market solution in bitcoin's case will be to avoid denominating prices in bitcoin, but do transactions in it; nobody will want to spend the bitcoin they have, but they'll be able to perform transactions by borrowing some fraction of the tiny amount of liquid bitcoin for only as long as it takes to transfer money between buyer and seller.

For that matter, I suspect that, after bitcoin works out the technological issues and all the software and process is in place for it, someone will come up with an alternative with a better M1 calculation, and that will actually be a plausible replacement for the dollar in global exchange.

Ralph Casale writes:

The inability of bitcoin to maintain a stable value will be its undoing. A currency needs to have a relatively stable (at least slow changing, and perhaps ideally slowly eroding) value for it to be adopted as a facilitator for exchange of goods and services. The idea that 'fixed or limited' quantity of an item conveys stable value is flawed, both for gold and bitcoin. Fixed quantity always encourages hoarding over utilization for exchange.

It doesn't have to be that way, especially in the era of big data. One could easily see an electronic means of measuring the value of a basket of goods and services and 'fixing' a value based on it. An inverted 'MIT billion prices project' (http://bpp.mit.edu/usa/) would serve this function (overkill?). Having a bitcoin be worth a stable exchange value e.g. a 'single haircut' today, tomorrow, and 5 years from now would go a long way toward it being used for just that, and having a stable value (in terms of goods and services) removes any incentive to hold/hoard.

That would leave the problem of providing incentive for transaction processing, currently solved by 'mining' additional bitcoin. But perhaps a limited-participant arbitrage scheme could be engineered. Having a 'bitcoin' represent a basket of stable value likely requires creation and destruction of bitcoin. This would be similar to how index tracking ETFs create and destroy shares via arbitrage against the actual basket of stocks. Arbitrage against 'goods and services' is likely impractical, but a large liquid pool, such as government debt, might serve well as proxy.

In the end, it may be that governments will have to 'back' a bitcoin-like currency for widespread adoption. Perhaps the federal reserve branches can transition to become the only licensed arbitragers of bitcoin (that was joke, I hope). Governments should adopt it, as the ability to track all transactions enables far more efficient taxation than the current currency scheme provides.

I hope the upcoming podcast on the subject can discuss the 'fixed quantity' vs. 'fixed value' question more.

Always a pleasure to listen Russ, and be encouraged to think. Thanks

Ralph Casale

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