In this Guest Post, Paul Van Dinther invites your best arguments against the new digital currency Bitcoins.
At the moment I am tentatively for Bitcoins, but I am very keen to hear a good argument against. Here is my own take at present.
I have not yet heard what I consider a solid argument against Bitcoins. One of the video bloggers I enjoy listening to is Peter Schiff. He appears a man with great insights and I tend to agree with many of his views. Recently however Peter and many others have taken to criticising Bitcoin, offering a range of arguments against the new digital currency that I find largely unpersuasive. I want to counter them here. (Full disclosure: I do not own Bitcoin, or gold, or gold stocks.)
Mr Schiff's main argument against digital currency is that it is not gold. Granted that for many reasons gold has proven over time to be a solid form of money. Only so much of it has ben dig up, and it’s damned hard to dig up quickly. Gold is an element, so what there is of it is not going away. Gold is both fungible and easily divisible. Gold has industrial uses, so will never lose value completely. Many alchemists have attempted to create gold and despite all the efforts, none have succeeded—it is not easily replicated. Mr Schiff’s main argument for gold is that it has this (what he calls) ‘intrinsic value.’ What exactly is this intrinsic value however?
Let's take a non-perishable item, such as a timber log. It has ‘intrinsic value.’ You can use it to make a fire or you can make things with the timber. If you have the need to cook a meal over a fire, the value of the log is the energy it contains. If you need to make a table, its intrinsic value (in the sense meant by Mr Schiff) would include its strength and beauty.
Would the intrinsic value of that log diminish if you have a big pile of logs behind the house? I argue that it doesn't. Its economic value would diminish, but not its ‘intrinsic value.’ You still need that one log for your fire needs, and the log is valued for its ability to burn for a certain amount of time.
So we might say that "intrinsic value is value in its own right"
Back to gold. Great stuff. It won't corrode, it’s a good conductor of electricity, it’s great for jewellery, and it has these other industrial uses. Gold is a pretty crap metal however in many respects--you would not want your car's transmission to be made of it, or any beams in your house. But yes, gold does have some specific intrinsic value.
But I argue that the intrinsic value of gold doesn't even get close to it's $1200 price. Yes gold is still used in manufacturing but enhanced production techniques ensure a little gold goes a longer way, at least until alternatives are found in new nano materials.
Therefore I argue that the price of gold does not represent intrinsic value at all. Instead it is a token for real world value for all the reasons so well documented. In a nutshell, gold lasts and it is rare.
The other argument against Bitcoin is that anyone could dream up a new digital currency and therefore digital currency is potential part of an unlimited supply, and no better therefore then paying with dried maple leaves. Let's see how this plays out:
I work 40 hours. I value my time and I wish to be rewarded for that time. The reward needs to be in a format that I find acceptable, and agreed on in advance of doing the work. I could choose to be paid in chickens, in gold, in dried maple leaves—or, slightly better, in US dollars, or in some new digital currency in whose continuing value I trust. If I choose to be paid in Bitcoins, then I have just placed my trust in that currency.
Now Joe Bloggs may be doing the same with a different digital currency, but the two are not directly connected. Therefore trade between me and Joe is going to be difficult. It should be clear that eventually either Joe or me will choose a different form in which to store value. Eventually, one particular digital format will leave the other formats for dead, just as VHS left Betamax dead all those years ago.
Obviously the format most secure and least inflatable will win, if not meddled with by governments.
Forget about the intrinsic value of gold for the reason already given. Why would gold not fall out of grace? It is heavy, you can't send it around electronically and, unless you are an expert, you'd have trouble to identify gold on it's pureness. Are we going to bite on coins again?
Another argument is that the Bitcoin value is very volatile. And so they are. And so too is gold. Gold doubled in value over a very short time, and now in an equally short time has all but halved from its peak. Any format of trade is subject to speculation and with that comes a certain amount of volatility. Opponents of digital currency like to gloat about how some speculator is going to lose a lot of value when the Bitcoin bubble bursts, and I agree that this is a possible scenario, but it’s no different from the poor sod that bought gold at $2000 and then saw 40% of the "investment" wiped out to the price it is today.
Bitcoin is currently a tiny player. The number of goods that are traded using Bitcoins is steadily increasing and I expect it's value to stabilise once the current speculation bubble either bursts or deflates.
There appears a lot of confusion about investment and currency. Bitcoin is supposed to be money rather than a speculative investment. Bitcoin is a vehicle to store and transfer value between it's users. Ideally, its value is stable, and that is certainly a criterion for me before I would choose to store my value that way.
To me, the bottom line is simple. The market decides what is a suitable form of currency. That is not reflected in the speculative value of the currency, but the number of traders willing to store or trade their value in that format.
There is one reason only why I remain reluctant to use Bitcoin. It is called unhackable but that is not enough to convince me. It seems to me inevitable that at some point someone will find a way either to hack it, or to mine it more efficiently. However a solid track record of several decades could sway my view on that.
So, what are your views?
Paul van Dinther is a software developer and part-time Libertarian who likes the underdogs. Despite his mature age, he still asks "Why" all the time.