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    The future of electronic currency

    With all the stories in the news lately about bitcoins, and with our recent discussions of the role of central banks in creating money, I thought I would post two recent articles/blog posts that I think provide a good analysis of the present situation as well as some good proposals for what the future of electronic currency really ought to look like.

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    The first argues that bitcoins are mostly designed to solve problems that only exist in the minds of right-wing conspiracy theorists.    And the second one outlines the real problems that a genuine electronic currency ought to solve–and how one could do it.

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    8 responses to “The future of electronic currency”

    1. Mark Lance Avatar
      Mark Lance

      I have nothing intelligent to add, but that second article was really interesting.

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    2. RCB Avatar
      RCB

      My two Satoshi. The first article attempts to savage a series of strawmen. Its main flaw is to identify XBT way too closely with the politics of some of the early adopters. This is wrong on two counts; the last survey I recall indicated that most people who own XBT are not libertarians and, more importantly, the author thinks that XBT can only be of service to libertarian political interests.
      One example concerning the latter. One major plus of XBT, should it succeed, would be to reduce the transaction costs of anyone who buys goods denominated in a foreign currency. Consider someone who does not earn USD, but buys a USD denominated product online. Currently this person is paying a credit card fee and a currency exchange fee. With XBT the fees are a trivial transaction fee and a fee for converting fiat to XBT. Even at this early stage of XBT adoption this is already cheaper than paying via credit card in several countries, including my own. (Note that volatility does not matter here as parties can transact using bitpay.)
      The above use if of particular benefit to those outside the economic mainstream who currently pay exorbitant fees. Here the marginalised win most. Of particular interest is the matter of international remittances. Kenyans, for example, send home 1.2 Billion USD per year. Western union charges 10 – 17 USD to send 200 USD to Kenya and the transaction can take up to five days. BitPesa, a new company that does this using XBT, charges 6 USD and it takes one day. Note that this price can fall dramatically if it takes off and the market becomes competitive.
      The author would have been better off forgetting the libertarian stuff and just considering on the technology as a way of lowering transaction fees. XBT is competing with Paypal and Western Union, not USD.
      The second article is interesting, but has little to do with bitcoin.

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    3. RCB Avatar
      RCB

      In all fairness, the author does, even if somewhat grudgingly, acknowledge the issue of a global system of payments towards the end of the article.

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    4. Eric Winsberg Avatar
      Eric Winsberg

      RCB: I’m fairly skeptical that bitcoins are being bought by people who are genuinely interested in investing in a system of payments. A few reasons:
      1. Why should the units of account in a system of payments have value? In other words, suppose bitcoins are going to replace paypal, by being cheaper. What does this make them worth? Paypal, the company (or ebay) is worth something because when you own the company, you own a future stream of cash flow. Why do you own when you own bitcoins?
      2. In the few hours since you posted the above, bitcoins have gone up by 5% in value or so. It takes 10 minutes for a bitcoin transaction to verify. How is that an efficient system of payments? I may get 5% less money than I wanted. But if bitcoins stop fluctuating in value and stabilize, who will want to own them? The whole reason the people want to own bitcoins is to speculate on their value. Therefore, I don’t believe you can simultaneously think that bitcoins are a good investment to own, and think that they are going to be a good system of payments.
      3. In other for bitcoins to be a good system of payments, I have to be able to trade them into my local currency without worrying that I am going to get “GOXed”. But all the things people take to be virtues of bitcoins make future GOX situations difficult to prevent. Sure, we can improve security and hope that no future exchange gets robbed like GOX did. But how do you ever put trust in an exchange with real money when the things you are trading are instrinsically unregulated by goverment. Do you think pension funds would invest in stocks if there were no SEC, no way to gaurantee that your broker wasnt going to walk away with all your shares and all your money one day?

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    5. RCB Avatar
      RCB

      While I am sure that some people are buying in the hope of finding greater fools, the issues most discussed on the online boards do tend to concern XBT as a payment system especially suited to the internet. The general hope seem to be that we are in the run-up phase where great profits are to be made. But eventually we will reach saturation, i.e. where most people with a legitimate need for XBT will own XBT and the price will level off, leaving an excellent payment system and a mediocre investment. (I am ignoring other uses of XBT in my answer.) The guiding idea is that XBT’s intrinsic virtue as a payment system will give it a non-zero value.
      1. I am not sure I understand the question. The hope is that, if XBT is a better mouse-trap, i.e. cheaper payment system, then people who wish to transact in XBT to save money will buy XBT in order to do so. Then the price of XBT will be a function of the amount of money people wish to move around in this manner.
      The idea is that those who own XBT will own an excellent payment device, with its value being partly in virtue of something like a convention and partly in virtue of its ability to lower transaction costs. (But I am not quite sure I fully understand what you are asking.)
      2. The first horn of the dilemma: Volatility has been decreasing, and should keep doing so as the market matures. Until then, people can use companies like bitpay, who lock in the exchange rate on both sides, effectively swallowing the risk, in exchange for a small (1% or less) fee. The second horn of the dilemma: Once the market matures the situation should be equivalent to fiat, i.e. people should hold as little XBT as they can as it will be a mediocre investment. Those who do hold it will, as is the case with fiat, hold it in order to transact at a reduced cost.
      3. I don’t see how XBT is intrinsically unregulated. Exchanges in the US already have to register with Fincen and act in accordance with anti-money laundering laws, etc. Concerning being Goxed: Nothing stops exchanges from insuring deposits and nothing stops governments from regulating such exchanges in order to protect their users. So I don’t see how bitcoin makes Gox-type situations especially difficult to prevent. (In the long run I am not worried about the exchanges. I am more worried about the amount of expertise users need in order to secure their coins. This part of the user-experience needs to be dramatically improved. Doing so would also stop people from treating exchanges as if they are banks, hence diminishing the fall-out from Goxing.)
      I have no firm opinion on whether XBT will eventually graduate to being a frequently used payment system. I hope it does, though my guess is that it probably won’t. I do suspect that future systems of payment will incorporate various aspects of bitcoin though.

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    6. Eric Winsberg Avatar
      Eric Winsberg

      Then the price of XBT will be a function of the amount of money people wish to move around in this manner.
      1. I am asking why you think this is the case. you say: “The idea is that those who own XBT will own an excellent payment device” but they do not own the device. they own the units in the ledger system. no one owns the device, and the device, unlike paypal, does not generate revenues or profits. I know the correct formula for the total value of paypal: it is the present discounted value of the future stream of revenues minus costs. (though there are of course three unknowns in that equation–I know the correct equation and the unknowns are values that have some degree of predictibility based on arguments) What is the formula for the value of a bitcoin? Suppose I know that in 2025, there will be $10B worth of bitcoin transactions/day. What does that make a bitcoin worth? give me a formula and justify it (and don’t put the number of bitcoins transacted per day in your formula–that begs the question. the point is that number could be any arbitrary value you like.)
      2. If you give me an answer to 1, I will be satisfied with your answer to 2. But until I get an answer to 1, I dont see why bitcoins will ever have intrinsic value. And if they dont have instrisic value, who will want to own them if there is no volatility to gamble on?
      3. currencies require trusted institutions. much of the rhetoric around bitcoins is that they free us from those. OK, you dont share that rhetoric–you see them as just a payment system. But I dont think they have value on that basis.

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    7. RCB Avatar
      RCB

      There is a discussion on this right now at r/bitcoinmarkets. (Hilariously, the one linked article arrives at a price of 60 USD, the other at a price of 27 000 USD.) The basic approach, if not the actual numbers sounds right to me, at least as concerns the method of payment use.
      “[I]nstitutions who were only interested in using it for payments (and not stored value) would have as little as possible on hand at all times. Eventually it’s likely users of bitcoin would buy and sell it in realtime on efficient exchanges to meet transaction demand. This suggests that the long-term price will be a function of realtime demand. If this is the case, the price of bitcoin will ultimately settle at the value of fiat currency (C) that needs to move somewhere per minute, multiplied by the average number of minutes needed to clear a transaction (M), over the average number of bitcoins available for trading (A). That’s: C*M/A.”
      From here:
      http://www.reddit.com/r/BitcoinMarkets/comments/1zflvb/marc_andreessen_tweeted_this_article_this_still/
      This does put the number of XBT transacted into the formula, but I don’t see how that would be cheating. (I can see how the number is arbitrary inasmuch as the initial number chosen by Satoshi is arbitrary, but I don’t see any arbitrariness beyond that. Given that the amount of XBT is fixed, the rest of the calculation seem to be just supply and demand.)
      I agree that currencies will inevitably require institutions. Or, at least, will require them to function well. With the qualification that I do share at least some of the rhetoric. While currencies do require institutions, some of what some of the institutions accomplish can also be accomplished by technical means, hence making some of the institutions less important or even redundant. Case in point being the blockchain which makes trusted third parties redundant for at least one part of a financial exchange. (I don’t mean to imply that you dispute this. I just want to highlight that, while XBT is not the stuff of libertarian fantasy, it is at least a little awesome.)

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    8. Studying Currency Avatar
      Studying Currency

      Great post! Been reading a lot about the future of currency. Thanks for the info here!

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