Bitcoin

Peter Schiff covered it as well the other day, or better, than I could in a post on here. In particular, he covers what Buffett has wrong -- gold has intrinsic value. For thousands of years, people have actually WANTED gold, just for itself.

I'll expand on one thing he said. To be an effective currency, you need stability, or an assurance that your currency is going to be a store of value. Bitcoins have no stability because the value relative to anything you want to trade it in has been all over the place. It's a speculative vehicle right now. Most of the people who are buying bitcoins are buying in the hope that it appreciates in value. So there is a disincentive to spend it. If you thought you might wake up tomorrow and your dollar would have appreciated in value by 30 percent, you would not spend your dollars. And the dollar would fail -- even as a fiat currency.

For bitcoins to work as a currency, you need a widespread swath of people who accept it as currency and see it as relatively stable. Without intrinsic value, I can't see how that will happen. What is the store of value in a bitcoin, in and of itself?

 

I agree with you. If you don't have faith in how much of something can be created out of thin air, then all you have is a fiat currency. And fiat currencies have always failed -- because the temptation for those who control it (usually the King and Queen historically, today central banks at the behest of politicians) is to debase it. Since 2008, the U.S. has debased the dollar by more than 60 percent, and it continues. It is a looming disaster that has not played out to its conclusion yet.

That is the allure of the bitcoin. It can only be produced up to a fixed amount (I believe it is 21 million bitcoins, without looking). It is algorithmic and can only be mined (they use gold terminology to give you the sense of its scarcity) by people setting up powerful computers that can perform complex calculations.

In theory, it sounds great, because unlike a fiat currency, it should be fixed.

The problems I would worry about are the ones I think you are getting at. First, there was a paper recently (think it was some computer scientists out of Cornell) that demonstrated how the market for bitcoins could be cornered. I didn't understand the technology behind it, but I can understand how that could be disastrous for any market. And then there are some problems with how bitcoins can get used in practice. There have already been bitcoin bank robberies, believe it or not. One guy claimed his bitcoin bank was robbed of more than $1 million. Who do you call when that happens? And since the whole idea behind the currency is that transactions can't be traced, how do you catch the perpetrator. Also, in practice, that anonymity is hard to protect, because, let's say you are walking around with bitcoins ready to be spent on your phone. Lose your phone and your bitcoins are gone -- and untraceable.

Again, it's something I have followed really closely the last few years, but my posts on it would just get the same bullshit. I don't have strong feelings about bitcoins either way. I think it really is tulipmania (although even tulipmania wasn't tulipmania, apparently). So I wouldn't touch it -- the same way I don't touch a lot of things I see trading in mania-like market conditions because of all the debasement of currencies worldwide and how all of that added liquidity has created a bunch of bubbles. But the one place that bitcoin apparently has potential is as a payment system. And in that regard, it could be an interesting technology -- I am sure Visa, Mastercard, AMEX, etc. are watching it very closely and with a bit of trepidation. But as a currency? I saw Richard Branson being interviewed recently. Virgin Atlantic started accepting bitcoin payments for flights. The interviewer asked him about the volatility, and Branson admitted that they just take the bitcoin and immediately trade them in for dollars. The dollar is the real currency that Virgin can trust. The bitcoin is just a payment system.

 

Presumably if you are a drug or arms dealer, you are careful about the trail you leave.

I don't think this has legs as a currency -- and even if it did, the world's sovereigns would tear it down. There is a reason why it is illegal to pay your taxes and conduct certain kinds of commerce in anything except dollars in the U.S. They need to force it on us to keep faith in it. Otherwise, people would realize a dollar isn't worth the paper it is printed on.

What has interested me most about bitcoins is if it is possible to trade them for profit -- speculate.

I earn most of my living trading. I'd trade cow turds if there was an orderly market for it and I could come up with some kind of swing trading methodology or momentum-based trading strategy that I found was reliable more often than not. If I can potentially make money in a risk-adjusted way doing it, I am usually all over it.

I can't trade bitcoins, though. Yeah, there has been a lot of momentum in the market, but the liquidity really sucks. And the swings have been wild. I followed a couple of the "exchanges" for a week, and it was a waste of my time. I walked away and really just saw a mania not following any kind of orderly pattern. To step in there -- even as a short-term trader, I don't see how you are doing anything except gambling without being able to have any sense of what your downside risk is. Good on anyone who is making money that way, but I know it is not for me.

 

Go back 4,000 years ago when gold or silver was being minted into coins, DQ, and it had nothing to do with its industrial or ornamental value. That is just an arbitrary way to decide the instrinsic value of something.

"Intrinsic value" simply means whether something is valued for itself. Nothing more, nothing less. Which is why Murphy misses the point that the exchange value -- or gold's use as money itself -- is exactly WHAT gives it its intrinsic value. If there is any evidence that people want a bitcoin simply for the utility they derive from having a bitcoin, then bitcoins have intrinsic value, too. I am skeptical of that ever happening.

In the case of gold and silver, we have thousands of years of history that demonstrate that it does provide utility -- which is what determines the instrinsic value of something. Specifically, its utility is as money. People needed something to trade in and they needed assurances that that medium of trade couldn't be devalued through making more of it. Gold and silver, because of how difficult they are to mine, took on that role. And it is the fabric that has held together every stable currency we have seen (among a sea of failed fiat currencies).

Its intrinsic value is as money, and that value is derived from the properties it has -- scarcity; can be melted and meted out in divisible increments.

That is where Murphy (and Warren Buffett, too) just get it wrong. It's where Buffett is consistently wrong. He will tell you that "gold has no utility."

You know very well (I know this from your posts) that utility is personal. Who is Warren Buffett to determine that something has no utility, when 4,000 + years of human behavior demonstrate otherwise?

It's where he always loses me. He has done that too, when it comes to Bill Gates 'giving pledge. I have seen Buffett try to shame the billionaires he calls on into donating away their fortune by talking about how another $500 million doesn't provide them any "utility."

How does he know what they derive utility from? What I derive utility from doesn't equal what you derive utility from doesn't equal what Warren Buffett derives utility from.

Intrinsic value is simply a measure of the utility that people in the aggregate get from something. It's not someone subjectively deciding that intrinsic value has to be determined by industrial use. In the case of gold, it has always functioned as money -- which is its intrinsic value. It still does. Warren Buffett (or Robert Murphy) telling us that it has no intrinsic value doesn't override the value everyone has historically put on it as a store of value in a world of fiat currencies (for reasons they may not understand), or the value people still put on it for those same exact reasons.

I can give endless examples of actual human behavior demonstrating the instrinsic value of gold. Every Central Bank has been holding onto its gold (Italy wouldn't consider selling its really large holdings, even to fix its debt problem) -- and in the case of China and Russia, frantically trying to buy up whatever gold they can get their hands on to catch up to the reserves that the U.S. and Europe hold. If it has no intrinsic value, why would they be doing that?

They know their dollar reserves are doomed; they see the worldwide currency war that is in full rage and they don't want to be stuck holding dollars when the dollar collapses. They apparently find intrinsic value in gold, as an alternative currency that can't be debased.