The Bubble.

[Dylan Lawrence Moore]

New video up! Nima and I discuss the value of Bitcoin, cryptocurrency, and whether Bitcoin meets the criteria to be considered a currency. Is a bitcoin bubble about to burst? What exactly is going on that gives it any value in the first place? Viewing through the lens of modern monetary theory (MMT), can bitcoin be considered a currency? Watch and learn more.

 

I've been seeing a lot spazzticness on facebook recently about the "bitcoin bubble" which is about to burst. Nima and I discuss what exactly a bubble means, the general warning signs of it, and how saying there is a bitcoin bubble is like saying there is a gold bubble. A "bubble" occurs when credit gets overextended and there is no way to pay it back. The real estate bubble of 2008 is a perfect example of this. Real estate prices skyrocketed because mortgages were being handed out like candy to people who obviously would never be able to pay them back. When enough people defaulted on their loans, the bubble popped when the banks couldn't lend anymore to keep the prices rising. What analogous situation is occurring to bitcoin?

I've also heard the term "ponzi scheme" thrown around. A ponzi scheme is when future investors are paid with the money from prior investors, which eventually will crash when the ponzi scheme operator runs out of prior investors to pay future ones. Who is the guy paying out dividends from prior BTC investors? No one. Bitcoin technically can't fit the description of a ponzi scheme.

What makes bitcoin valuable, or even gives it the potential to be a form of currency? Nima made the argument in an article How the Fiat Money System Can Explain Bitcoin’s Value that because bitcoin miners demand bitcoin for services of accessing the bitcoin blockchain, bitcoin functions in a similar way to fiat money like the US dollar, which gains it's value because it is demanded by its issuer (the US government) for taxes. However, there is a major problem: it's too damn volatile for anyone to save it as a regular currency. What are the missing ingredients? It's hard to tell when we've only seen maybe 8 years of bitcoin--at least when we analyze money, we have 5000 years worth of examples to sift through. The prediction: as more and more people are discovering or simply bumping into bitcoin, the value is naturally going up as more and more people get involved. Because the interest is still relatively small, big investors can make huge differences by moving money in or out of bitcoin ("whale splashing" as Nima termed it). This effect should diminish and possibly even disappear until "everyone is using bitcoin".

We also discuss technical problems and technical solutions of cryptocurrencies and blockchains. Feedback is appreciated. Thanks!

 

[luxfelix]

I'd never heard of Tandem before. Are they able to back Bitcoins with US Dollars through some kind of options arrangement?

Is the hard cap to the production of Bitcoins subverted by the ability to infinitely divide a ("the" singular?) Bitcoin (is that how it works?)? Is there a risk of data corruption with each additional decimation? (Since Bitcoins eventually track physical goods, is that the ultimate limiting factor... along with the physical limits of current computing technology?)

Is the division of Bitcoin a feature to match an expanding economy? Is there a feature to match a contracting economy -- perhaps in industry or market-specific realms (or in an extreme case where each person issues their own alt-coin/credit)?

Is it true that major corporations such as Amazon and/or some governments will begin to accept Bitcoin by 2018?

 

[ofd]

Good stuff, looking forward to listening to it.

[Dylan Lawrence Moore]

On 12/19/2017 at 9:34 PM, luxfelix said:

I'd never heard of Tandem before. Are they able to back Bitcoins with US Dollars through some kind of options arrangement?

Good question for Nima. I dunno.

On 12/19/2017 at 9:34 PM, luxfelix said:

Is the hard cap to the production of Bitcoins subverted by the ability to infinitely divide a ("the" singular?) Bitcoin (is that how it works?)? Is there a risk of data corruption with each additional decimation? (Since Bitcoins eventually track physical goods, is that the ultimate limiting factor... along with the physical limits of current computing technology?)

Is the division of Bitcoin a feature to match an expanding economy? Is there a feature to match a contracting economy -- perhaps in industry or market-specific realms (or in an extreme case where each person issues their own alt-coin/credit)?

My amateur opinion: because there is a max number of potential BTC, it's deflationary by nature. It's a useful feature to be able to infinitely (and easily) divide it, but the way money is handled by modern governments is they make more of it when they spend. This is naturally inflationary (though the reasons why aren't immediately obvious). What this could potentially mean is that if BTC becomes more valuable (thus more deflationary), people would be willing to do more for less of it. Essentially this would put an extreme advantage for those who held BTC before the massive deflation, as people would be willing to work for less and less of it. For a currency to be viable, there has to be enough in the system that everyone can use it (in the case of fiat currency, there has to be enough that everyone can pay their taxes and save an amount they're comfortable with). If BTC became too deflationary... I don't see how this would be possible.

However, as Nima points out in the video, BTC can be seen as like the base layer of code where new currencies can be created on top of it. What does this mean? I don't know and I think no one knows, but the potential is incredible.

As for data corruption... I like the way Nima always answers these sort of questions: there are lots of problems, and there are a ton of people working on those problems all the time.

On 12/19/2017 at 9:34 PM, luxfelix said:

Is it true that major corporations such as Amazon and/or some governments will begin to accept Bitcoin by 2018?

I know overstock.com can been accepting BTC for quite awhile now, and I've heard that the Japanese government started accepting BTC in 2017. Looks like just a matter of time.

[Marshall B]

What would a nuclear war do to bitcoin? There's gotta be some sick bastards in Vegas taking action on that. 

On 12/19/2017 at 11:34 PM, luxfelix said:

Is it true that major corporations such as Amazon and/or some governments will begin to accept Bitcoin by 2018?

Also curious...

[Dylan Lawrence Moore]

On 12/22/2017 at 9:17 PM, Marshall B said:

What would a nuclear war do to bitcoin? There's gotta be some sick bastards in Vegas taking action on that. 

 

The rovin' gambler he was very bored
Trying to create a next world war
He found a promoter
Who nearly fell off the floor, he said,
"I've never engaged in this kind of thing before
But yes, I think it can be very easily done."

"We'll just put some bleachers out in the sun
and have it on Highway 61."

 

[Dylan Lawrence Moore]

I wrote up an article about this over on Steemit: https://steemit.com/bitcoin/@volsci/taxes-explain-the-value-of-bitcoin-what

Including the text here:

 

Taxes Explain the Value of Bitcoin! WHAT?!

What gives bitcoin its value? Its backed by nothing. Well, can't you say the same thing about the US dollar?

Bitcoin Creates its Own Demand Analogous to Taxation

(Image from Bitcoin Taxes on Twitter: https://twitter.com/bitcointax)

 

In this video, Dylan Moore of the Volitional Science Network and Nima Mahjour of www.economicsjunkie.com continue our series on Modern Monetary Theory around the subject of bitcoin. We've all been hearing from every FUD-corner of the earth that bitcoin is in a bubble that's about to pop. In some sense this may be true--bitcoin has gone through several popped bubbles, but always comes back to rally even stronger. But is there a greater bubble that will pop and send bitcoin down to zero to stay there forever? After all, there is nothing backing up the value of it.

 

Modern Monetary Theory and the Value of Money

Modern Monetary Theory (MMT) is an economic theory developed in previous decades by economist, entrepreneur, and banker Warren Mosler, previously called soft currency economics. MMT asserts that the value of money is derived from the demand of the state. That is to say, money is valuable because the state taxes it.

 

This sounded absolutely bizarre the first time I heard it. Why would the state want something if it wasn't valuable to begin with? The economic story I remember hearing, is that the state taxed the valuable labor and goods of people that they already had in order to fund its spending. How else could it happen? Just like I need to earn money first before I can spend it, the state must need to tax money first in order to spend.

 

Turns out this equation is backwards. In his book Debt: The First 5000 Years, David Graeber describes that there is no archaeological evidence that the state taxes before it spends. It actually spends before it taxes.

 

...what?

 

The Story of Taxation and Money

 

This is how the story plays out: a tribal leader, whether its a chief, king, emperor, khan, or president, demands a tax in a specific token. This token can be anything: gold, silver, paper notes, tools, tally sticks*, iron dipped in vinegar, digital bank ledgers, cryptocurrency--anything. Typically, it must be either something scarce or something that only the tribal chief can create. Once this occurs, immediately everyone within the tribal chief's jurisdiction become unemployed. Unemployment is an effect of taxation. People want employment because it pays in the currency that they are able to pay their taxes with. If no one is demanding that currency for tax, there is no reason to work for it. For the sake of this article, let's say that the tax demanded is a dylannor, a currency only I can create. Counterfeiting carries the penalty of death.

 

Tally Sticks
*Tally sticks are an example of a tax system used in medieval Europe (image source: https://en.wikipedia.org/wiki/Tally_stick )

 

The people, now unemployed and not willing to counterfeit, ask, "What the heck is a dylannor and how do I get them?"

To which my chieftain response is: "If you work for me, I will pay you in dylannors."

 

Voila. I have just created public spending. The only thing that limits my ability to spend is my ability to create dylannors. If I make them out of gold, spending requires gold mining and gold taxation. If I make them out of paper or digital ledgers in central banks, my imagination is the only limit.

 

Especially in the latter case, I don't need the money in order to spend, I simply need to demand the money in order to make it valuable to begin with. The violence of the state is what gives money its value. Pay your taxes, or else. In effect, a nation's currency can simply be viewed as tax tokens that can be exchanged for safety from harassment of the state. The state gives value to an otherwise worthless item (paper notes, digital ledgers, etc.) through the demand of this value in taxes.

 

What does this have to do with bitcoin?

Nima Mahjour has been the first to argue this (article below): bitcoin's value is derived from the demand of bitcoin miners. In the same way that the state demands taxes in order to give value to its money, bitcoin miners demand bitcoin in order to access the bitcoin blockchain. They create their own demand. The blockchain is a valuable tool as a ledger that cannot be destroyed, as any bitcoin-fan knows, and the only way to get access to that ledger is by exchanging an otherwise worthless digital token called bitcoin.

 

*Nima Mahjour of economicsjunkie.com

 

The implications of this are staggering. Many MMTers argue that the state is necessary to create a currency, because the violence of taxation is what has given money value throughout its history. However, is violence the only thing that can give value to a currency? I argue no. Bitcoin is showing us this right before our eyes. I think we're still a ways before cryptocurrency replaces fiat, but the omens are becoming more and more clear: fiat better watch out.

 

So is bitcoin in a bubble that's going to pop when the fad is up? I seriously, seriously doubt it.

 

Nima's Article on the Value of Bitcoin: https://beinglibertarian.com/fiat-money-system-can-explain-bitcoins-value/

Warren Mosler's website: http://moslereconomics.com/

Debt: The First 5000 Years by David Graeber: https://www.amazon.com/Debt-Updated-Expanded-First-Years/dp/1612194192/ref=sr_1_1?ie=UTF8&qid=1516823472&sr=8-1&keywords=david+graeber