On Bitcoin

I’ve generally been quiet about Bitcoin. Most of that is because it is a “cult” item. It tends to have defenders and detractors, and not a lot of people with a strong opinion who are in-between. There’s no reward for taking on something that has significance bordering on religious for some… even if it proves to be a bit of a “false god.”

I view Bitcoin as a method of payment, a collectible item, a commodity that is not fully fungible, and not a store of value. It is not a currency, and never will be, unless a government takes it over and adopts it.

In order for a tradable item to be a store of value, the amount of variation in value in the short- to intermediate-term versus other items that has to be limited. If there are other tradable items with greater stability toward the other items, those tradable items would be better stores of value. Thus Bitcoin is inferior as a store of value versus the US Dollar, the Euro, the Yen, etc. It is far more volatile versus goods and assets that one might want to buy, and goods and liabilities that one might want to fund.

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Now as an aside, the same thing happens in hyperinflationary economies. Merchants have to change their prices frequently, because the currency is weak. Often another currency will begin to replace the weak local currency, like the US Dollar or the Euro, even if that is not legal.

Fungibility implies that any Bitcoin is as good as any other Bitcoin. But with failures like Mt. Gox, a Bitcoin exchange that had Bitcoins under its care stolen from it, a Bitcoin under the care of Mt. Gox was not as valuable as one elsewhere. (Another aside: that happened in a minor way with the Euro when Euros in Cypriot banks were forced to have a “haircut,” while Euros elsewhere were unaffected.)

Bitcoin is a means of payment, a way of transferring value from one place/person to another. It seems Bitcoins move well, but they are less good at being safely stored.

The theft of Bitcoins points out the need for there to be a legal system to protect property rights. Licit participants in Bitcoins as a group have not been adequate to assure that the rightful owners might not lose them as the result of computer hacking. Contrast that with the protections that credit card holders have when false transactions are applied against credit card accounts. The credit card companies eat the losses, funded by profits from interest charged an interchange fees.

The libertarian vision of a currency that does not require a court, a government to protect it is misguided. Where there are thieves, there is a need for courts to try cases of theft, and deal with questions of equity if theft leads to an insolvency.

Now, governments can be less than fair with their own judicial systems. I think of Dennis Kozlowski, formerly CEO of Tyco, who was barred from using his own money in self-defense when the US Government brought him to trial. Much as you might like to have value protected from the clutches of the government, that is easier said than done, and there are thieves that will pick away at those who get value away from governments, because ultimately in an interconnected world, you have to trust other people at some points, and trust can be violated as much as the rights of a citizen can be violated. Repeat after me: THERE IS NO PERFECTLY SAFE PLACE ON EARTH TO STORE VALUE! That said, though, there are safer places than others, and so you have to live with the risks that you understand, and are prepared to take.

If you think that Bitcoin fits that bill, well, knock your socks off. Have at it. I will stick with US Dollars in banks, money market funds, bonds, and public and private stocks. Maybe I will even buy some gold that does nothing, just for the sake of diversification. But ultimately my store of value is in the bank of Heaven, as it says in Matthew 6:19-21:

“Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal; but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”

There is no perfect security on Earth, try as hard as you like. Bitcoins may keep value away from the government under some conditions, but who will protect your property rights in Bitcoins in the event of theft? You can’t have it both ways, so Bitcoins as property would either be taxed and regulated by governments, or be totally underground, which would diminish utility considerably.

One final note: Bitcoins can’t be used of themselves to produce something else. They are a fiat currency, and only has value to the degree that users place on it. I liken it to penny stocks, where traders can bounce the price around, because there is nothing to tether the price to. At least with gold, you have jewelers demanding it to turn it into jewelry, and a broader pool of people who are somewhat less jumpy about what the proper exchange rate between gold and dollars should be.

But, gold can be stolen… again, no Earthly store of value is perfect. All for now.