Tuesday, 9 April 2013

Another interview with me, and my reaction to the recent media hysteria

The Slovak bitcoin Blog "bicoiner.sk" published a brief interview with me (I'll translate it when I have a bit more time): http://bitcoiner.sk/bitcoinova-horucka-kurz-presiahol-220-co-na-to-odbornik/.

However, there is an important thing that I want to get off my chest, because I don't think I've concisely addressed it yet. As far as I can remember, I have been refusing to give predictions about the future price of Bitcoin, I only indirectly explained how and why it will be influenced. In my master's thesis, I explained the mechanisms  influencing the demand for Bitcoin and what it means for the future of Bitcoin. Here I'll summarise it here very briefly.

For the foreseeable future, I expect the price of Bitcoin to be subject to fluctuations, just like it has been behaving until now, because the market isn't sufficiently liquid. It may currently be in a bubble phase, or not. I don't know. But it is also irrelevant for the future of Bitcoin, because a medium of exchange on the market gains market share through its reduction of transaction costs against competitors, not through its price stability. Indeed, in A case for a genuine gold dollar, Rothbard criticised Hayek's Denationalisation of Money for precisely the same point: that price stability is not a valid reason for people to choose one medium of exchange in preference for another. Rothbard invoked, from the point of view of the network effect, the argument of critical mass: the competitor wouldn't be able to compete with something people are accustomed to. But other factors are unmentioned by Rothbard, in particular the reduction of transaction costs. This is because until Bitcoin, Austrians (with the exception of Lawrence White, whom I quoted several times) assume that money substitutes have lower transaction costs than money in the narrower sense. Bitcoin exposes this as an implicit assumption which is actually an empirical factor, and leaves most of the Austrians dead in the water, not understanding what's happening.

Will Bitcoin ever become money? I don't know, and while that would be terrific, it's also not relevant for the broad question of the future of Bitcoin, because of the "money or nothing fallacy" (which is a false dichotomy that many critics, Austrian or not, of Bitcoin, invoke, arguing that if we can refute that Bitcoin is or will be money, it follows that it is nothing). But that's bogus. As long as it provides an significant advantage in transaction costs, it will be here and compete, even if it never becomes money (whether that's due to too much leverage the states have over fiat money, or due to inertia, or even if we admit all the arguments of Gertchevs and Kordas about impracticality of electronic money, even though 31% of Kenya's GDP is now being spent through mobile phones, i.e. if we accept whatever assumptions they make up on the fly). Non-Austrians have called such a medium of exchange "metacurrency", for example, Krugman (who is critical of Bitcoin, but missing that it confirm his own 30 year old papers) calls it "vehicle currency". Austrians also have a name suitable for such class of media of exchange, for example "secondary media of exchange" (Mises) or "quasi monies" (Rothbard). But whatever our classification of Bitcoin may be, from economic point of view it is an immaterial good with ultra low transaction costs and an inelastic supply, a perfect fit for a reform of payment mechanisms and the financial sector, irrespective of whether it also sucks up all the "moneyness" from fiat, whether it "monetises" or not, and irrespective of what people argue about it. In order to pull this off, Bitcoin does not have to be perfect, it just needs to provide a significant comparative advantage over competitors. This it has, and I expect it to stay that way for the foreseeable future.

Bitcoin may fail for one reason or another, but it won't be because its price is susceptible to bubbles, because we argue how to classify it, because of low barriers to entry, because economists or pundits don't understand it and have to hastily make things up to patch the holes in their arguments. It will be because it will stop having a comparative advantage in transaction costs, i.e. it will be replaced by something which provides better utility for the users.

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