4 ms·

What about Bitcoin? Is it not equity based money rather than debt based money?

trashtester 8y ago
Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).
- hndamien 8y ago
  Why should a store of value require debt backing? All that it requires is that it can have the same or more purchasing power (via exchange) in the future. Buying a house in a popular growing city without debt would likely fulfill this SoV requirement.
  - trashtester 8y ago
    3 reasons (covering only Bitcoin as a store of value, not other aspects as qualifying as money): 1) Generally it is difficult to make sure that anything maintains its purchasing power. Physical objects and materials will likely have some value in the future based in its utility (even if that value is very unpredictable). Immaterial items, such as traditional currencies or Bitcoin have no intrinsic value. All the value is the one attributed to it via social conventions. Bitcoin has the added disadvantage that it is not backed by a government, which means that the value can suddenly go away, and more easily than currencies. 2) Savings in Bitcoin yield no interest rate. In fact, unless you do all the work yourself, you have to pay for the storage. (And currently, even a risk of theft.) Of course, you may hope that the price goes up, but that is pure speculation, and it is also a zero-sum game at best, and a ponzi scheme at worst. 3) Some amount of lending is actually good for the economy as well as for individuals. Young people and people who want to start a business can have a net benefit from some lending/borrowing, even if they pay some interest. Combined with the previous point, this makes debt backed money a potential win/win solution. In sum, storing value through lending, if implemented correctly, reduces volatility and provides additional utility to both the lender and the borrower. Of course there are other good ways to postpone consumption, most importantly stocks and real estate. These are more volatile in the short term, but have some advantages in the long term, particularly if the demand for loans is low. But for your example, putting all your money into a single house can be more risky than you think. In 1968, Detroit was precisely a popular growing city. If you'd bought a house there then, all the value (+ taxes) would be lost now. It is really hard to predict what locations will be popular 30 years from now, and for the house itself, it will trigger property tax (in most places), it will maintenance, and 30 years from now it could be obsoleted by new construction methods, materials, etc. Personally, I split my saving about equally between my mortgage, the global stock index fund, while the pension savings from my employer goes mostly into bonds.
    - hndamien 8y ago
      I agree on you point about housing. I was just trying to pick something without debt as a store of value. Something more fungible with less volatility perhaps is gold (but again it is not yield producing). Ideally, you want something that is constantly giving a yield. I think Bitcoin actually does do this in a very subversive way - but it does not to the letter produce a yield. I think it is similar to the way a stock buy back works in having dividends "distributed" to shareholders. Nothing takes place from a taxable event standpoint, but the reduced supply increases the price for the same demand. Bitcoin similarly (and historically) produces a yield that has outperformed savings accounts on average. This may not be true into the future, but I expect that it will be so long as at least the same amount of real world trade occurs using it as a currency.
      - trashtester 8y ago
        Well, if we actually use BC as a leading currency, not just a store of value, it may end up increasing in value (ie it will cause deflation). But this is one of the biggest reasons we would not want to use it as a measure of value or standard for deferred payment. Who wants to commit to future payments in a deflationary currency? Salaries in a deflationary currency leads to unemployment (or one has to allow employers to unilaterally decrease wages at will). Pensions and other government payments in a deflationary currency leads to bankrupt governments. Also, consumption (and thereby the economy as a whole) will tank as delayed consumption will be a guaranteed win. Finally, the super rich will be able to profit maximally if bitcoin replaces national currencies, as a deflationary currency inherently favors the already rich.
        hndamien 8y ago
        For salaries people would certainly have to adjust, but I think it is more likely that payments would remain in a fiat currency to remove that psychological hurdle. I can see that it may not be such a large burden though even if people were accepting payment in BTC and then revising downward based on increasing purchasing power. Pensions and government payments would not start with commitments in a deflationary currency, and as a result, any commitments made there would be done with full appreciation of the realities of a deflationary money standard. This just means tighter credit and better fiduciary responsibility. Consumption decreasing is a misnomer, as people are still required to live. Delayed gratification is generally a win, as it is today, and the economy doesn't tank. If it is saved or invested, it works out the same. Saved you reduce supply which benefits all other savers, who are technically getting a paper rate of return. If they can invest this with expectation of a greater rate of return (by creating value faster than that of saving) then they should do this. With enough saved funds, the risk tolerance increases. There is nno reason that doing this with money you don't have makes the scenario any better. And the super-rich will benefit from being rich. This is not news. What is news is that they won't also benefit from seigniorage and the Lindy effect. I'd call that a win.

Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).

hndamien 8y ago
Why should a store of value require debt backing? All that it requires is that it can have the same or more purchasing power (via exchange) in the future. Buying a house in a popular growing city without debt would likely fulfill this SoV requirement.
- trashtester 8y ago
  3 reasons (covering only Bitcoin as a store of value, not other aspects as qualifying as money): 1) Generally it is difficult to make sure that anything maintains its purchasing power. Physical objects and materials will likely have some value in the future based in its utility (even if that value is very unpredictable). Immaterial items, such as traditional currencies or Bitcoin have no intrinsic value. All the value is the one attributed to it via social conventions. Bitcoin has the added disadvantage that it is not backed by a government, which means that the value can suddenly go away, and more easily than currencies. 2) Savings in Bitcoin yield no interest rate. In fact, unless you do all the work yourself, you have to pay for the storage. (And currently, even a risk of theft.) Of course, you may hope that the price goes up, but that is pure speculation, and it is also a zero-sum game at best, and a ponzi scheme at worst. 3) Some amount of lending is actually good for the economy as well as for individuals. Young people and people who want to start a business can have a net benefit from some lending/borrowing, even if they pay some interest. Combined with the previous point, this makes debt backed money a potential win/win solution. In sum, storing value through lending, if implemented correctly, reduces volatility and provides additional utility to both the lender and the borrower. Of course there are other good ways to postpone consumption, most importantly stocks and real estate. These are more volatile in the short term, but have some advantages in the long term, particularly if the demand for loans is low. But for your example, putting all your money into a single house can be more risky than you think. In 1968, Detroit was precisely a popular growing city. If you'd bought a house there then, all the value (+ taxes) would be lost now. It is really hard to predict what locations will be popular 30 years from now, and for the house itself, it will trigger property tax (in most places), it will maintenance, and 30 years from now it could be obsoleted by new construction methods, materials, etc. Personally, I split my saving about equally between my mortgage, the global stock index fund, while the pension savings from my employer goes mostly into bonds.
  - hndamien 8y ago
    I agree on you point about housing. I was just trying to pick something without debt as a store of value. Something more fungible with less volatility perhaps is gold (but again it is not yield producing). Ideally, you want something that is constantly giving a yield. I think Bitcoin actually does do this in a very subversive way - but it does not to the letter produce a yield. I think it is similar to the way a stock buy back works in having dividends "distributed" to shareholders. Nothing takes place from a taxable event standpoint, but the reduced supply increases the price for the same demand. Bitcoin similarly (and historically) produces a yield that has outperformed savings accounts on average. This may not be true into the future, but I expect that it will be so long as at least the same amount of real world trade occurs using it as a currency.
    - trashtester 8y ago
      Well, if we actually use BC as a leading currency, not just a store of value, it may end up increasing in value (ie it will cause deflation). But this is one of the biggest reasons we would not want to use it as a measure of value or standard for deferred payment. Who wants to commit to future payments in a deflationary currency? Salaries in a deflationary currency leads to unemployment (or one has to allow employers to unilaterally decrease wages at will). Pensions and other government payments in a deflationary currency leads to bankrupt governments. Also, consumption (and thereby the economy as a whole) will tank as delayed consumption will be a guaranteed win. Finally, the super rich will be able to profit maximally if bitcoin replaces national currencies, as a deflationary currency inherently favors the already rich.
      - hndamien 8y ago
        For salaries people would certainly have to adjust, but I think it is more likely that payments would remain in a fiat currency to remove that psychological hurdle. I can see that it may not be such a large burden though even if people were accepting payment in BTC and then revising downward based on increasing purchasing power. Pensions and government payments would not start with commitments in a deflationary currency, and as a result, any commitments made there would be done with full appreciation of the realities of a deflationary money standard. This just means tighter credit and better fiduciary responsibility. Consumption decreasing is a misnomer, as people are still required to live. Delayed gratification is generally a win, as it is today, and the economy doesn't tank. If it is saved or invested, it works out the same. Saved you reduce supply which benefits all other savers, who are technically getting a paper rate of return. If they can invest this with expectation of a greater rate of return (by creating value faster than that of saving) then they should do this. With enough saved funds, the risk tolerance increases. There is nno reason that doing this with money you don't have makes the scenario any better. And the super-rich will benefit from being rich. This is not news. What is news is that they won't also benefit from seigniorage and the Lindy effect. I'd call that a win.