1/OK, a thread about Bitcoin.
(but really about nominal vs. real quantities)
(but really about nominal vs. real quantities)
2/Though some blockchain apps may create real value, Bitcoin does not create (much) real value. In fact, because it sucks electricity, it probably destroys value. Traditional payment methods are much cheaper and easier.
3/Yes yes, it can create real value to sell drugs (if addiction harm doesn't outweigh the utility of drugs), to evade capital controls, and to do unregulated finance (if financial regulation is over-burdensome).
Let's put that aside for the moment.
Let's put that aside for the moment.
4/Bitcoin doesn't create real value because fiat money, and the associated payment system, already works really damn well.
This is true even if your Bitcoin investment pays off handsomely.
This is true even if your Bitcoin investment pays off handsomely.
5/Money is a coordination game; it has value because we all agree to use the same type of money.
So if the world switches from fiat currencies to Bitcoin, as many Bitcoin boosters expect, people who held Bitcoin early will be much wealthier than before.
So if the world switches from fiat currencies to Bitcoin, as many Bitcoin boosters expect, people who held Bitcoin early will be much wealthier than before.
6/But this doesn't represent a creation of real value. It's just a reshuffling of wealth. It's redistribution.
In the "Bitcoin conquers fiat money" scenario, early Bitcoin holders simply take wealth from everyone else.
In the "Bitcoin conquers fiat money" scenario, early Bitcoin holders simply take wealth from everyone else.
7/The "Bitcoin conquers fiat money" scenario would entail a radical redistribution of all the claims to real value that exist on this planet. The fiat-rich would become impoverished, while early Bitcoin holders became the new super-rich.
8/The world would have the same amount of stuff, but now that stuff would be owned (or easily ownable) mainly by early Bitcoin holders. Everyone else - Mark Zuckerberg, Vladimir Putin, the Sultan of Brunei - would become beggars (unless they were early BTC holders).
9/Obviously, Bitcoin boosters are hoping for this to happen.
Everyone would like to just take Mark Zuckerberg's wealth and put it in their own pocket, would they not?
Everyone would like to just take Mark Zuckerberg's wealth and put it in their own pocket, would they not?
10/Now, personally, I feel like in this scenario, the Powers That Be would not allow a handful of coders, online asset hucksters, and lucky speculators to suddenly appropriate all the real material wealth in the world - the houses, the hamburgers, the Teslas, the robot strippers.
11/I suspect that if a handful of people managed to lay claim to most of the world's physical wealth by nudging the world into a new money-coordination equilibrium, the Powers That Be would deploy military force of some sort.
12/But that takes us too far afield. Let's come back to reality.
Suppose Bitcoin doesn't replace fiat money. What, then, are you investing in?
Suppose Bitcoin doesn't replace fiat money. What, then, are you investing in?
13/You are investing in the likelihood that other people after you will buy more Bitcoin, increasing demand and raising its price, thus allowing you to sell your Bitcoin for more fiat money, with which to buy things like hamburgers.
14/In other words, you are betting that other people will voluntarily redistribute their real wealth into your hands.
You are betting that human nature and the workings of financial markets will effect a redistribution from other investors to you.
You are betting that human nature and the workings of financial markets will effect a redistribution from other investors to you.
16/But just because something is a bubble doesn't mean it can't make you lots of money!
It just means that it's a zero-sum game - your gain comes entirely from someone else's loss, since no capital is being allocated to real, productive assets.
It just means that it's a zero-sum game - your gain comes entirely from someone else's loss, since no capital is being allocated to real, productive assets.
17/Now, is Bitcoin a bubble, or not?
Answer: I don't know. I believe in the final "equilibrium" (whatever that means), it WILL have an ongoing use as a means of purchasing illegal goods, evading capital controls, and evading financial regulations.
Answer: I don't know. I believe in the final "equilibrium" (whatever that means), it WILL have an ongoing use as a means of purchasing illegal goods, evading capital controls, and evading financial regulations.
18/When it settles down to that long-run "equilibrium", its price may be greater than now, or less than now.
So, sorry, I can't tell you whether to buy or sell Bitcoin.
So, sorry, I can't tell you whether to buy or sell Bitcoin.
19/But if you're going to think about Bitcoin, it definitely helps to think in terms of real value. And to realize how little real value this whole crazy episode is actually creating.
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Addendum: Please don't interpret this thread as saying "Bitcoin is worthless!". I'm still long Bitcoin myself (and some other cryptocurrencies). So there you go! :-)
