24 February 2014

Bitcoin and Modern Money Theory

Happy Presidents’ Day, Idiots!


I was going to skip the Bit today as it’s a bank holiday, but then I remembered: Bitcoin doesn’t operate on a banking schedule.


I’ve spent the long weekend reading up on Modern Money Theory (riveting, I know), and I’m trying to see where Bitcoin fits into the whole thing. I have a bunch of ideas that I’m still trying to organize.


The short summary of MMT, though, is that it stipulates all money must be issued from a sovereign nation and that it must be debt. Logically, all money must be some form of government debt.


Yet that doesn’t necessarily mean that citizens within a certain nation only use that nation’s money in commerce. In fact, it is true that dollars and euros continue to be widely held and valued reserve currencies globally. And there are instances (like the Euro), where the monetary supply is managed independently of the governments of its participating nations. So it’s an interesting question as to whether Bitcoin can ever be treated like a currency under MMT. It isn’t debt, and it isn’t issued from a sovereignty. Yet it does act like a global reserve.


This is what makes bitcoin so special to libertarians and crypto-anarchists. For those who wish to neuter the state when it comes to monetary policy, Bitcoin is a silver bullet. Take away a government’s absolute power over the money supply and suddenly you remove a large chunk of its power. You might even force its leaders to make more responsible choices. (But probably not.)


Under MMT, the ultimate reason that money exists is to allow sovereignties to collect taxes in their currency. The power to tax requires that citizens hold at least as much of the domestic currency as they need to pay their taxes. In reality, the currency units in circulation tend to eclipse that which is needed to pay taxes for the simple reason that many people, businesses and governments will want to hold reserves, whether for commerce (if the currency is widely accepted as legal tender), or centralized savings (for investment purposes, such as Chinese investments in interest-bearing US Treasuries).


In that respect, Bitcoin is a huge threat to nation’s who enjoy “reserve currency” status, such as the US. People might always have to pay their taxes in dollars, but if Bitcoin starts to emerge as an alternative international reserve currency, it starts to limit the power of reserve currency nations to print more money. (If demand drops for dollars, the US will have a serious inflation problem as the Treasury prints more money.) So the Bitcoin protocol starts to act like a global central bank with bitcoin as its currency, not unlike what the IMF proposed recently with SDRs, or what Keynes himself proposed in the 1940’s with his conceptual supranational currency, bancor.


Fascinating stuff, and I’m still trying to wrap my head around it as a relative idiot and non-academic. Would love to hear your feedback and questions if you want to learn more, or, better yet, if you are able to teach me more.




*Sloppy report coming out of MIT, in which the researchers claim that Bitcoin is increasingly being spent rather than hoarded. The authors looked at newly mined coins and reviewed how long it took them to be sent from their initial address to a new address. It was grossly inaccurate to characterize those flows as “spending” given that most of the transactions are simple transfers from mining pool wallets to personal wallets. It should have been a red flag to notice only 2-3% of bitcoins were held for longer than a week in 2012 and 2013, according to the researchers.


All of that said, the report did inadvertently uncover some other interesting data: how much bitcoin has remained “unspent”. I’m guessing that a sizable percentage of those “unspent” coins are lost forever. That’s my new lower bound for “dead wallets”.


*I’ve seen really smart people betting bitcoin skeptics such as Mark Williams that “bitcoin will never fall below [x].” They better hope he doesn’t accept such an easy bet.


I’m a bitcoin believer and I’d still take that bet all day long. That’s how bad it is. I’d simply buy the same amount of bitcoin that I was betting against to essentially get a free option on bitcoin’s upside. Many of us believe Bitcoin will either be $100k or near $0 some day. So if I win the bet (bitcoin is worthless), I’d recoup my initial bitcoin investment with my gambling wins. If I lose the bet (bitcoin goes to the moon), I essentially pay my principal to settle up, and still sit on an asset that has appreciated 50-100x or more. The flip side means you’ve got to put money at risk that would have been better off invested in more bitcoin.


Moral of the story: don’t let trolls bait you into making bets you can’t win. It’s foolish.




Now for Today’s Tid Bits:


ICYMI: My latest post this weekend was an awesome, candid interview with Roger Ver

ow.ly/tHJqH


Much problem. So serious. Wow. (Dogecoin has forked.)

ow.ly/tHJe6


Bitstamp resumes withdrawals - with less downtime than the NYSE over President’s Day weekend.

http://ow.ly/tHJPW


Bitcoin: it’s the platform, not the currency, stupid! Long, but good article.

http://ow.ly/tHKgX


BitPay Unveils Bitcore, its Open-Source Project for App Developers

http://ow.ly/tHKoT


The Mysterious Case of 1 Satoshi Transactions Clogging Up Bitcoin Wallets - The Mac Observer

http://ow.ly/tHLoJ


Bitcoin Woman Magazine and its resources could be hugely beneficial to the community

http://ow.ly/tHLyu




Enjoy the day off (if you have it). Otherwise, happy Monday!


Cheers,

TBI


February 18, 2014 at 01:16AM