Bitcoinaren prezioaz

Sarrerako, ikus Kripto-monetak


Eric Tymoigne‏ @tymoignee


Does Bitcoin Disprove MMT? … NO: The Fair Price of a Bitcoin is Zero

2017 abe. 22

The Fair Price of a Bitcoin is Zero
By Eric Tymoigne

The virtual currency craze is on a tear, with new virtual currencies emerging every day. The New York Times just ran a series of articles about them last week. “Charles Ponzi would be so proud!” one person appropriately commented at the bottom of this article.

(i) Tresna monetarioak: finantza tresnak

Monetary instruments are financial instruments. Like all financial instruments, monetary instruments have an issuer who promises to do something in the future. There are one or two common promises embedded in monetary instruments. One is that they are convertible into something else, another is that the issuer will accept them as final means of payment from his debtors. Bank accounts contain both promises (conversion into cash on demand, and one can pay debts due to banks by using funds in a bank account). Federal Reserve notes currently only contain one promise, the government will take them in payment at anytime (either directly or through the banking system in case tractability and security of payments are required). Some Federal Reserve notes were convertible into gold coins in the past. Gold coins are also monetary instruments that contain only one promise, that of being accepted back by the issuer to settle debts due to him (usually a government). Gold coins have an extra feature, they are collateralized by the value of the gold content. Note that the gold content of the coin is not a monetary instrument, and it is not what makes the coin a monetary instrument. Gold bullions were never financial instruments (they contain no promise), they are real assets, i.e. commodities (payments made with them are payments in-kind).

Given the nature of monetary instruments, they have also other characteristics common to all financial instruments. First, all financial instruments are accounting creatures. They are the asset of the bearer and the liability of the issuer. Gold coins were the liability of, e.g., the King, Federal Reserve notes are liability of the Federal Reserve, and coins are the liability of the Treasury. Currency is their liability because they (at least) promise to take their currency from bearers in payments at any time; issuers owe that to the bearers.

(ii) Bitcoinak tresna monetario gisa eta finantza, aktibo errealak

Given that bitcoins are supposed to be monetary instruments, they must follow the preceding basic rules of finance. We clearly know who the bearers are (the lucky Easter egg hunters and the persons to whom they get sold) but who is the issuer? In other words who put the eggs in the forest and is willing to accept them in payments due to him or her. I can tell you the answer for Easter eggs: none of the persons who put them in the forest promised to accept them in payments. Therefore, they are not a liability, therefore they are not a financial asset, and therefore, they are not monetary instruments. They are real assets, commodities. The same applies to bitcoins. There are commodities and people are basically involved in trading a commodity on a world scale; with much of the craze coming from China (see here for a link to world map of current bitcoins transactions). Think of international bilateral trade of Easter eggs for other commodities; it is barter on a grand scale (remember people in the past who would sell their farm for a tulip…).

(iii) Bitcoinen bidezko prezioa zero da

We just established that bitcoins are not financial instrument (…) So their fair value as financial instrument is…A BIG FAT ZERO (you can use whatever unit of account you want). A BTC 1 coin should circulate at a 100% discount (BTC 0) if it was a monetary instrument, which means of course that it would not pass hands.

This would have been different if there had been an issuer who took back bitcoins at face value in payments. As bitcoins would have come back to the issuer, they would have been destroyed (like any pizza restaurant destroys free-pizza coupons that are returned to make sure they are not stolen and reused to get another pizza). Unfortunately, nobody issued them (and they are not edible like Easter eggs) and so we are stuck with them. This was actually a mistake made throughout history. Kings would issue coins and never promise to take back them in payment! Private banks issued notes that they would not accept in payments! Fair value fell and coins would disappear as people melted them down to extract the gold and sell it as bullion. Bitcoins have not intrinsic value so their fair value would dropped to zero.

The supply of monetary instruments needs to be elastic enough to change with the demand for them. They should be easy to create (bitcoins are) BUT ALSO easy to destroy if demand declines; that maintains the scarcity of the monetary instruments while making them responsive to the needs of the economy. Bitcoin supply fails on both sides, it is not demand driven; it is exogenous.

(iv) Bitcoinak salgai moduan

Currently, the only things that give bitcoins value as commodities is their utility and their scarcity. People love the beauty, spiritual meaning, and taste of Easter eggs and so are willing to pay for them. Is there anything to love about bitcoins? People involved in illegal activities and money laundering, who have a phobia of Big Brother or who just hate the federal government, find utility in this means of payment because bitcoins allow to access the anonymous payment system. Other people who loves gambling also find utility in bitcoins. Both categories of people will be willing to pay top dollar for them given their scarcity.

One may note that what gives value to bitcoins is not that there are redeemable in dollars. They are not redeemable (their quantity can’t be reduced by converting them into something else). What gives them value is that people are willing to pay a lot of dollars for them (or tulips if you see where I am going with this: people are trading virtual tulips that grow out of thin air and never die).

(v) Ordainketa sistema, produktu ilegalak eta zergak

The structure of the payment system, not bitcoins, is actually what makes the bitcoin project so successful. It is supposedly so secretive that you can trade a bunch of illegal stuff and evade taxes. Think Easter eggs (or tulips) for coke, Easter eggs for guns, Easter eggs for prostitutes, the sky is the limit and everything is priced in an Easter egg unit of account (EE). A pound of coke EE1000. Of course, there is a slippery slope. You can write contracts in a EE unit of account that promise to deliver Easter eggs, you can securitize these contracts, you can write contracts that bet on when the supply of Easter eggs will exactly run out. Heck! You can write any contract you want because there is no regulation. Contracts can have the most stupid (and hidden) clauses in them as long as someone will swallow them in expectation of huge returns. (You did not know? They love Easter eggs on Mars!)

So there is a fixed supply of a commodity and a demand for that commodity (is it downward sloping? Probably not because speculation can easily overwhelm the use of bitcoins as anonymous payment method). A perfectly inelastic supply curve with a volatile demand curve is a recipe for wide price fluctuations of bitcoins in USD. (…)

(vi) Aktibo espekulatiboak

Put simply, Bitcoins are purely speculative assets. There are websites that help calculate if mining bitcoins is expected to be profitable, but, as one website notes: “Extrapolating bitcoin difficulty or price is pure voodoo.”

Happy searching! You could make a lot of money in dollars by speculating on Easter egg value (you won’t get rich as an Easter egg picker, i.e. miner)! But don’t get lost in the woods! By the way, just for full disclosure, those who organized the hunt collected a bunch of eggs before the forest opened to the public. They made a killing as many people were waiting for them when they came out of the forest to buy the eggs at a steep dollar price. After all, who wants to go into this stinky wet forest…just give me the dammed eggs so I can go watch TV…or sell my drugs and guns, hopefully in total anonymity and security.

Footnote: Is all this consistent with MMT? Yes. MMT does not state that all monetary instruments are government issued or that every unit of account must have its origin in a government declaration. Monetary instruments can be created by anybody but their capacity to be widely used will vary with the capacity of the issuer to make others (willingly or forcefully) indebted to him. The state usually determines the major unit of account used and what the legal tender is but anyone can issue promises and use any unit of account they want (Easter Egg, Buckaroo, etc.).

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